Spring 2003 Final Exam

1. Toys, in general, are considered normal goods.  Ceteris paribus, which of the following would tend to increase the equilibrium quantity of toys and decrease the equilibrium price of toys?

a. Consumers get larger than expected Christmas bonuses. b. An influenza outbreak reduces work time and consumer income. c. The price of plastic, an input in toy manufacturing, decreases. d. Wages for employees in toy manufacturing increase.e. The price of batteries increases.

Question 2 refers to the following diagram.

Quantity of G

ood y

Quantity of Good x

•W

Budget Line: Year 2002

Budget Line:Year 2003

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2. The above figure shows a consumer’s budget line in 2002. As a result of income and price changes, the consumer faces a new line in 2003. Assume that preferences are unchanged from 2002 to 2003. If the consumer’s consumption bundle in 2002 was represented by point W, then in 2003 the consumer:a is definitely better off.b is definitely worse off. c is just as well off, but not any better off. d is at least as well off, perhaps better off. e could be better off, worse off, or just as well off. The answer is indeterminate.

3. If a market is efficient, thena the market allocates output to the buyers that the value it the most.b the market allocates buyers to the sellers who can produce the good at least cost.c The quantity produced in the market maximizes the sum of consumer and producer

surplus.d All of the above.e None of the above.

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For questions 4- 5, use the accompanying table.Labor Hours needed to make one unit of: Amount produced in 120 hours:

Perfume Cloth Perfume Cloth(bottles) (yards) (bottles) (yards)

Nancy 6 8 20 15Roger 5 10 24 12

4. Refer to the tables shown. The opportunity cost of 1 bottle of perfume for Nancy isa 4/3 yards of cloth.b 2 yard of clothc 1 yard of cloth.d 1/4 yard of cloth.e 3/4 yard of cloth.

5. Refer to the tables shown. For Roger the opportunity cost of 1 yard of cloth isa. 3/2 bottles of perfume.b. 2 bottles of perfume.c. 1/2 bottle of perfume.d. 1 bottles of perfume.e. 1/4 bottle of perfume.

6. Let η represents the income elasticity, which of the following statement is correct: a -∞ ≤ η < 0 ↔ Normal Good.b +∞ ≥ η ≥ 0 ↔ Normal Goodc +∞ ≥ η > 1 ↔ Necessity Good.d 1 ≥ η ≥ 0 ↔ Inferior Good. e 1 ≥ η ≥ 0 ↔ Luxury Good.

7. When the price of a good decreases, ceteris paribus, the lower pricea. generally encourages the consumption of inferior goods.b. leads to a parallel shift of the linear budget constraint.c. will necessarily lead to a decrease in the consumption of goods whose price did not

change.d. expands the consumer's set of buying opportunities.e. Leads to a loss in well-being since they can no longer purchase the same bundle that

they had previously.

8. If the total cost function is given by: Total Cost = 75 + 14*Q – 6*Q2 + Q3, then the average total cost isa. 75b. 75+ 14Qc. 14 – 6Q + Q2

d. 75/Q + 14 – 6Q + Q2

e. 75 + 14*Q – 6*Q2

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Use the following table of numbers to answer questions 9-12

Total Average MarginalQuantity Price Revenue Revenue Revenue

1 35 352 64 32 293 294 175 23 116 1207 17 -18 -79 99 11 -1310 8 80

9. If the monopolist sells 8 units of its product, how much revenue will it receive from the sale?a. -56b. 40c. 60d. 112e. Can't tell from the information provided.

10. If the monopolist wants to maximize its revenue, how many units of its product should it sell?a. 5b. 6c. 7d. 9e. 10

11. What is the average revenue received from selling 4 units of the monopolist's product?a. 17b. 23c. 25d. 26e. 29

12. What is the marginal revenue for the monopolist for the sixth unit sold?a. 5b. 11c. 14d. 17e. 20

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13. Consider the diagram above. The consumer’s initial position is A. After the decline in the price of good x, the consumer selects consumption bundle B. From the graphical decomposition of the price effect, we can conclude that:a. Good x is a normal good over the relevant range and that the substitution effect and

income effect reinforce each other. Therefore, the ordinary demand curve for good x is downward sloping.

b. Good x is an inferior good over the relevant range and that the income effect only partially offsets the substitution effect. Therefore, the ordinary demand curve for good x is downward sloping.

c. Good x is an inferior good over the relevant range and that the income effect completely overwhelms the substitution effect. Therefore, the ordinary demand curve for good x is upward sloping, over the relevant range.

d. Good x is Giffen good.e. Both answers (c) and (d) are correct.

14. Monopolistic competition is characterized by which of the following attributes?(i) many sellers(ii) product Differentiation(iii) barriers to entrya (i) and (iii) only.b (i) and (ii) only.c (ii) and (iii) only.c (i) only.e (i) (ii) and (iii).

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15. A profit maximizing firm's short-run shut down criterion isa. Average Revenue > Marginal Cost.b. Price < Average Variable Cost.c. Price < Average Total Cost.d. Average Revenue > Average Fixed Cost.e. Average Revenue > Average Variable Cost.

Use the following diagram to answer questions 16-17.

16. After the imposition of a per-unit tax in the above market, the area representing consumer surplus is _____. a. Ab. A + Bc. A + B + C + Dd. De. There is no consumer surplus.

17. After the imposition of a per-unit tax in the above market, the area representing deadweight loss is _____. a. Ab. A + B c. A + B + C + Dd. Ce. There is no deadweight loss.

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Use the following table to answer questions 18 through 22.

Number of Workers Output

Marginal Product of Labor

Value of Marginal Product of Labor Wage Marginal Profit

0 0 ---- ---- ---- ----1 100 $1000 $500 $5002 80 $800 $5003 60 $500 $1004 280 $400 $5005 20 $500

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18. What is the market price of the final good?a. $5.b. $10.c. $15.d. $20.e. $25.

19. If the firm hires two workers, the two workers together producea. 80 units.b. 90 units.c. 100 units.d. 120 units.e. 180 units.

20. What is the marginal product of the fourth worker?a. 40.b. 80.c. 100.d. 180.e. 280.

21. When the third worker is hired, what is the change in profit?a. $600.b. $400.c. $300.d. $100.e. $0.

22. A profit-maximizing firm will hire workers as long as the value of the marginal product of labor equals or exceedsa. $500.b. $400.c. $300.d. $200.e. $100.

The figure below depicts the demand, marginal revenue and marginal cost curves of a profit-maximizing monopolist. Use the figure to answer questions 23-26

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23. If the monopoly firm perfectly discriminates, what will the consumer surplus be?a. A + B.b. A + B + E + F + G.c. G.d. A + E.e. Consumer surplus will equal to zero.

24. What is the deadweight loss equal to when the monopolists does NOT price discriminate?a. A + B.b. A + B + E + F + G.c. G.d. A + E.e. Deadweight loss will equal to zero.

25. Monopoly profit without price discrimination equalsa. A + B.b. E + F.c. A + B + E + F.d. A + B + E + F + G.e. A + B + E + F + G + H + I + K.

26. In a two-person repeated game, a tit-for-tat strategy starts witha. noncooperation and then each player pursues his or her own self-interest.b. cooperation and then each player is unresponsive to the strategic moves of the other

player.c. noncooperation and then each player cooperates when the other player demonstrates a

desire for the cooperative solution.d. noncooperation and then each player mimics the other player's last move.e. cooperation and then each player mimics the other player's last move.

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Questions 27-28 refer to the following diagrams of budget lines

27. Which of the graphs shown reflects a decrease in the price of good X only?a. panel Ab. panel Bc. panel Cd. panel De. panel B & D

28. Which of the graphs shown reflects an increase in the price of good Y?a. panel Ab. panel Bc. panel Cd. panel De. None of above

29. An externality exists whena. the government intercedes in the operation of private markets by forcing the market

to adjust to the balance of supply and demand.b. markets are not able to reach equilibrium.c. a firm sells its product in a foreign market.d. a person engages in an activity that influences the well-being of a bystander and yet

neither pays nor receives payment for that effect.e. All of above are correct.

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Questions 30-31 refer to the following diagram.

30. If the consumer is currently at point A on the graph shown, a change to point B as a result of a decrease in the price of potato chips would show thea. price effect.b. budget effect.c. substitution effect.d. income effect.e. substitution effect + income effect.

31. If the consumer is currently at point B on the graph shown, a change to point C as a result of a decrease in the price of potato chips would show thea. price effect.b. budget effect.c. substitution effect.d. income effect.e. substitution effect + income effect

32. The Federal Government attempts to resolve negative externalities caused by automobile exhaust by

(i) taxing gasoline to reduce the amount that people drive.(ii) building safer highways.(iii) setting emission standards for automobiles.

a. (i), (ii) and (iii) are all used to reduce emissions.b. Only (i) and (iii) are used to reduce emissions.c. Only (ii) and (iii) are used to reduce emissions.d. Only (i) is used to reduce emissions.e. Only (i) and (ii) are used to reduce emissions.

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The figure below depicts average total cost functions for a firm that produces automobiles. Use the figure to answer questions 33.

33. Assuming the firm is currently operating on ATCB, what options does it have if it wants to change its level of automobile production over the next couple of weeks?a. It can operate at any level of output as long as it stays on ATCB.b. It can operate at any level of output between points M and N.c. It can operate at any level of output, as long as it stays on ATCD.d. It can operate at any level of output, as long as it stays on ATCA.

e. The firm has no options. It cannot change output level in the short run.

34. A good is excludable ifa. one person's use of the good diminishes another person's enjoyment of it.b. the government regulates its availability.c. it is a normal good.d. it is not a normal good.e. people can be prevented from using it.

35. When one person uses a common resource, he/she diminishes other people’s enjoyment of it. This is an example ofa. a market force.b. a negative externality.c. the “invisible hand.”d. free-rider.e. excludability.

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Questions 36-38 refer to the following diagrams

36. In the figure shown, the free-trade price and quantity demanded would bea. P1, Q1.b. P1, Q4.c. P2, Q2.d. P1, Q2.e. P2, Q3.

37. In the figure shown, the domestic price and quantity demanded after the tariff would bea. P1, Q1.b. P1, Q4.c. P2, Q2.d. P1, Q2.e. P2, Q3.

38. In the figure shown, consumer surplus with free trade would bea. A.b. A + B.c. A + Cd. A + C + G.e. A + B + C + D + E + F.

39. In the long run all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm isa. Average Revenue > Marginal Cost.b. Average Revenue < Marginal Costc. Price > Average Total Cost.d. Average Revenue > Average Fixed Cost.e. Price < Average Total Cost.

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Using the following diagram to answer questions 40-42

40. A firm with the production function shows herea. would never produce in stage III, which involves the employment above L3.b. would never produce in stage III, which involves the employment above L4.c. would never produce in stage I, which involves the employment above L1.d. would never produce in stage I, which involves the employment above L2.e. would never produce in stage II, which involves the employment between L2 and L3.

41. The above figure shows a production function. Which of the following statements concerning the marginal and average product of labor is correct?a. Marginal product becomes negative after point R.b. At L3, average product equals the marginal product.c. At point N, average product is greater than the marginal product.d. At point R, the marginal product reaches its maximum.e. At point M, the marginal product reaches its maximum.

42. All of the following statements are correct except one. Which is INCORRECT?a. The average product falls between R and M.b. The marginal product rises everywhere between 0 and R.c. The average product reaches its maximum at R.d. The average product rises between N and R.e. The marginal product becomes negative after M.

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Using the following diagram to answer questions 43-45.

43. If this labor market is monopsonistic, the wage rate and level of employment respectively will be a. OA and OF.b. OB and OF.c. OC and OF.d. OD and OE.e. OB and OG.

44. Now assume that an union is formed to bargain with the monopsonistic employer of the previous question. To what level can this union increase the wage rate without causing the number of jobs to decline below that which the monopsonist would otherwise have provided?a. OA.b. OB.c. OC.d. OD.e. OD minus OA.

45. If the union of the previous question seeks to maximize the number of jobs available for its members, what wage rate will it seek to impose on the monopsonist?a. OA.b. OB.c. OC.d. OF.e. OD minus OA.

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Use the following information to answer questions 46 through 48.

Each year the United States considers renewal of Most Favored Nation (MFN) trading status with China. Historically, legislators have made threats of not renewing MFN status because of human rights abuses in China. The non-renewal of MFN trading status is likely to involve some retaliatory measures by China. The non-repeated game below reflects the potential economic gains associated with a two-outcome game in which China may impose trade sanctions against U.S. firms and the United States may not renew MFN status with China. The following table contains the dollar value of all trade flow benefits to the United States and China under two-trade relationship scenarios.

ChinaImpose trade sanctions against U.S. firms

Do not impose trade sanctions against U.S. firms

United States

Don't renew MFN status with China

U.S. trade value = $65 bChina trade value = $75 b

U.S. trade value = $140 bChina trade value = $5 b

Renew MFN status with China

U.S. trade value = $35 bChina trade value = $285 b

U.S. trade value = $130 bChina trade value = $275 b

46. If both countries follow a dominant strategy, the value of trade flow benefits for China will bea. $285 b.b. $275 b.c. $75 b.d. $5 b.e. either a or c

47. If both countries follow a dominant strategy, the value of trade flow benefits for the United States will bea. $35 b.b. $65 b.c. $130 b.d. $140 b.e. either b or c

48. When this game reaches a Nash equilibrium, the value of trade flow benefits will bea. United States $140 b and China $5 b.b. United States $65 b and China $75 b.c. United States $35 b and China $285 b.d. United States $130 b and China $275 b.e. None of above is correct.

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Questions 49-52 refer to the following demand and supply equations QD = 55 - 3PQS = 5 + 2P

49. The equilibrium price is: a. $12.00 b. $10.50 c. $10.00d. $9.50 e. $9.00

50. If a per-unit tax of $2.50 was imposed, what would be the price paid by consumers? a. $12.50 b. $11.00 c. $10.50d. $10.00 e. $9.50

51. What would be the tax revenue generated by the per-unit tax of $2.50?a. $62.50b. $55.00c. $27.50d. $25.00e. $0

52. What is the economic incidence of the tax?a. 50% of the tax is paid by consumers and 50% is paid by producers.b. 100% of the tax is paid by consumers and 100% is paid by producers.c. 25% of the tax is paid by consumers and 45% is paid by producers.d. 60% of the tax is paid by consumers and 40% is paid by producers.e. 40% of the tax is paid by consumers and 60% is paid by producers.

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Questions 53-55 are based on the following diagram.

53. In the figure above, an optimizing consumer is most likely to select the consumption bundle associated witha. point Ab. point Bc. point Cd. point De. point E

54. It may be possible for the consumer to reach I2 ifa. the price of Y decreases.b. the price of X decreases.c. income increases.d. All of the above would be correct.e. None of above would be correct.

55. A consumer is currently consuming some of good X and some of good Y. If good Y is a normal good for this consumer, a rise in consumer income will causea. an increase in the consumption of X.b. a decrease in the consumption of Y.c. an increase in the consumption of Y.d. a decrease in the consumption of X..e. a decrease in both X and Y.

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Questions 56-58 refer to the following table. Assume each seller have one unit to sell.The Costs of Five Possible SellersSeller Cost Kyle $1,500Nathan 1,200Cheslea 1,000Hillary 750Landon 500

56. If the market price is $1,000, the total cost in the market would bea. $3,700.b. $2,700.c. $2,500.d. $2,250.e. $1,500.

57. If the price is $1,000, Landon’s producer surplus would bea. $1,000.b. $800c. $750.d. $500.e. $250.

58. If the price is $1,100, who would be willing to supply the product?a. Kyle and Nathanb. Kyle, Nathan and Chesleac. Cheslea, Hillary and Landond. Cheslea and Hillarye. All of them

59. Private goods area. excludable and nonrival.b. nonexcludable and rival.c. excludable and rival.d. nonexcludable and nonrival.e. None of above.

60. The own price elasticity of demand for a good is 1.5 in absolute value.  If prices increase from $2.50 to $2.75, the quantity demanded will: a. rise by 10%. b. rise by 15%. c. rise by 25%. d. fall by 10%. e. fall by 15%.

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Questions 61-63 refer to the following table.Quantities Purchased

Income Good X Good Y $30,000 2 20 50,000 5 10

61. Refer to the table. Using the midpoint method, what is the income elasticity of good Y?a. -0.75b. 0.75c. -1d. -1.33e. 0

62. Refer to the table. Good X isa. a normal good.b. an inferior good.c. not related to income.d. underpriced.e. very price elastic.

63. Refer to the table. Good Y isa. not related to income.b. an inferior good.c. price inelastic.d. a normal good.e. None of above is correct.

64. Consider the following set of demand functions. Demand 1: QD = 100 − PDemand 2: QD = 100 − 0.5PDemand 3: QD = 100 − 0.25Pat any given price, we can conclude that,a. demand curve 2 is the most elastic; demand curve 1 is the next most elastic; demand

curve 3 is the least elastic.b. demand curve 3 is the most elastic; demand curve 2 is the next most elastic; demand

curve 1 is the least elastic.c. demand curve 1 is the most elastic; demand curve 2 is the next most elastic; demand

curve 3 is the least elastic.d. demand curve 2 is the most elastic; demand curve 3 is the next most elastic; demand

curve 1 is the least elastic.e. demand curve 1 is the most elastic; demand curve 3 is the next most elastic; demand

curve 2 is the least elastic.

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65. Mary Murphy has an income of $100, the prices of two goods X and Y are equal to $1, and she buys 50 units of X and 50 units of Y. Now suppose the price of Y increases to $2. Which of the following statements is true?a. In order to maximize utility she must buy less of both X and Yb. To maximize utility, she should buy less Y in order to reduce her marginal utility

from Y.c. To maximize utility, she should buy less Y in order to increase her marginal utility

from Y.d. To maximize utility, she should reduce her purchase of Y by 50 percent.e. None of these statements are true.

66. When we have a “bad” (negative) externality produced in a competitive industry:a. The marginal social cost of producing an extra unit of a good is greater than the

marginal private cost of producing an extra unit of a good.b. The marginal social cost of producing an extra unit of a good is equal to the marginal

private cost of producing an extra unit of a good. c. The marginal social cost of producing an extra unit of a good is less than the marginal

private cost of producing an extra unit of a good.d. All of above are possible.e. None of the above is correct.

67. Suppose that requiring motorcycle riders to wear helmets reduces the probability of a motorcycle fatality from 0.3% to 0.2% over the lifetime of a motorcycle rider and that the cost of a lifetime supply of helmets is $500. It is efficient for the government to require riders to wear helmets if human life is valued ata. $100 or more.b. $150 or more.c. $500 or more.d. $50,000 or more.e. $500,000 or more.

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Use the following information to answer questions 68-70.Adrian's Premium Boxing Service subcontracts with a chocolate manufacturer to box premium chocolates for their mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week.

Number of Workers

Output (Boxes of Premium Chocolates Produced per Week)

Marginal Product of

LaborCost of Factory

Cost of Workers

Total Cost of Inputs

0 0 ----- 1 330 150 275 4252 630 3 150 825 9754 890 5 950 60 1,375 6 10 1,800

68. What is the marginal product of the fourth worker?a. 40b. 110c. 160d. 260e. 275

69. What is the total cost associated with making 890 boxes of premium chocolates per week?a. 975b. 1,100c. 1,125d. 1,250e. 1,375

70. One week, Adrian exactly breaks even. If her revenue for the week is $1,525, how many boxes of chocolate did she produce?a. 5b. 60c. 350d. 950e. 1,375

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71. A person that regularly watches public television but fails to contribute to public television’s fund-raising drives is known as a. A common resource.b. A costly rider.c. A free rider.d. An unwelcome rider.e. Excess baggage.

Use the following information to answer questions 72-73.Rocchetta Industries manufactures and supplies bottled water in Mexico. As a result of a contamination of water supplies at many of Mexico's resort communities, the demand for bottled water has increased.

72. We would expect that the value of marginal product for Rocchetta Industries workers woulda. fall.b. rise.c. be offset by a decrease in wages.d. be unaffected by a rise in demand for bottled water.e. None of above is correct.

73. In the labor market that Rocchetta uses to staff its bottling plants, an increase in demand for bottled water would lead to a(n)a. increase in supply of labor.b. decrease in demand for labor.c. increase in demand for labor.d. decrease in supply of labor.e. No change in both demand and supply for labor.

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Use the following information to answer questions 74 through 77.Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month.

Output (Instructional Modules per

month)Fixed Cost

Variable Cost

Total Cost

Average Fixed Cost

Average Variable

Cost

Average Total Cost

Marginal Cost

0 1,080 ---- ---- ---- ----1 1,080 400 1,480 4002 965 4503 1,350 2,430 4 1,900 475 5 2,500 216 6 4,280 7007 4,100 8 5,400 135 9 7,300 10 10,880 980

74. What is the marginal cost of creating the tenth instructional module in a given month?a. $108b. $155c. $180d. $1,080e. $2,500

75. What is the average variable cost for the month if 6 instructional modules are produced?a. $180.00b. $533.33c. $700.00d. $713.33e. $1,080

76. What is the average fixed cost for the month if 10 instructional modules are produced?a. $108b. $250c. $700d. $980e. $1,080

77. How many instructional modules are produced when marginal cost is $1,900?a. 4b. 6c. 7d. 9e. 10

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Use the following information to answer questions 78 through 80.Gertrude Kelp owns three boats that participate in commercial fishing for fresh pacific salmon off the coast of Alaska. As part of her business she hires a captain and several crew members for each boat. In the market for fresh pacific salmon, Gertrude is one of thousands of fisher-persons. While Gertrude usually catches a significant number of fish each year, her contribution to the entire harvest of salmon is negligible relative to the size of the market.

78. When Gertrude participates in the labor market to hire crew members for her boats, she is most likely considered aa. buyer.b. seller.c. major player.d. minor player.e. discriminator.

79. If the price of fresh pacific salmon were to decrease significantly, it is most likely that Gertrude woulda. become a seller in the factor market.b. hire more crew workers.c. reduce her demand for crew workers.d. increase her demand for crew workers.e. try to increase her catch to make up for lost revenue.

80. If Gertrude is a competitor in both the fresh pacific salmon market and the market for crew workers she is called aa. price taker in the salmon market and a wage setter in the crew market.b. price taker in both markets.c. price taker in the crew market and a price setter in the salmon market.d. price setter in both markets.e. None of above.

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