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Economics 51GH - Fall Semester 2000 Final Exam – December 19, 2000 Name _______________________ Student # ____________________ Circle the correct answer. (Questions 1-71 are worth one point each) 1. Suppose the elasticity of demand for movies is -2. If the ticket price rises from $5 to $7, the quantity demanded will fall by: a. 66 percent. b. 33 percent. c. 40 percent. d. 200 percent. e. none of the above 2. Assume bacon and eggs are complements. An increase in the price of bacon would cause: a. no change in the demand for eggs, just a movement along the demand curve. b. a decrease in the demand for eggs. c. an increase in the demand for eggs. d. an increase in the supply of eggs. 3. When demand for a product is very inelastic, the burden of a tax falls mainly on: a. producers. b. consumers. c. tax collectors. d. people who drop out of the market. 4. Both price floors and price ceilings, when effective, lead to a. shortages. b. surpluses. c. reductions in quality. d. a reduction in the quantity traded. 5. Consumer surplus in a market will increase when: a. supply increases. b. demand becomes less elastic. c. supply increases and demand increases such that the market price remains the same. d. All of the above will increase consumer surplus. 6. According to the yearly income statement of Joe's Clothing Store, total revenue was $67,000 and total cost $48,000. However, Joe worked full time with no salary and invested $30,000 to buy and stock merchandise. Can we conclude that the economic profit of Joe's Clothing Store is $19,000? a. Yes, given the information supplied. b. No. The interest income foregone on this investment should be subtracted from $19,000 to calculate Joe's profit. c. No. The opportunity cost of Joe's labor should be subtracted from $19,000 to calculate Joe's profit. d. No. Both the interest income foregone and the opportunity cost of Joe's labor should be subtracted from $19,000 to calculate Joe's profit. 1 7. The demand curve for the perfectly competitive firm is: a. vertical. b. negatively sloped. c. positively sloped. d. horizontal. 8. Economic profits: a. are being earned is a firm enjoys a return in excess of the opportunity cost of the resources employed. b. are being earned is total revenue exceeds all explicit costs. c. are being earned when the accounting statement of the firm shows a positive profit. d. exist if marginal revenue equals marginal cost. 9. Marginal revenue is less than price for the monopolist because: a. the monopolist must lower the price to all buyers to sell an additional unit of output. b. the monopolist must set price according to government regulations. c. the monopolist equates average revenue to average cost to maximize profits. d. marginal revenue is zero for the monopolist. 10. Price discrimination occurs when: a. a seller charges the same price to different customers for the same product or service. b. a seller charges a higher price to a customer that requires more services compared to another (such as delivery). c. a seller charges different prices to different customers for the same product or service. d. a seller refuses to trade with certain individuals. 11. A monopolist that practices perfect price discrimination: a. creates no deadweight social loss. b. charges one group of buyers a higher price than another group, such as offering a student discount. c. produces the same monopoly level of output as when a single price is charged. d. charges some customers a price below marginal cost, because his costs are covered by the high-priced buyers. 12. In the Korea over the past three decades, average income as measured by real GDP per capita has grown by about 8 percent per year. This implies that per capita real GDP doubled every ______ years. a. 9 b. 12 c. 4 d. 15 e. 20 13. When a factory causes air pollution that harms people who live nearby: a. the private cost of producing the good exceeds the social cost. b. the social cost of producing the good exceeds the private cost. c. the private benefit of the good exceeds the social benefit. d. the social benefit of the good exceeds the private benefit. 2 14. A positive externality occurs when: a. the social benefit of the good exceeds the social cost. b. the social cost of the good exceeds the social benefit. c. the social benefit of the good exceeds the private benefit. d. the social cost of the good exceeds the private cost. 15. Internalizing an externality means: a. swallowing the externality. b. government regulations or taxes are sufficient to eliminate the externality. c. the legal system enforces property rights to eliminate the externality. d. changing private costs or benefits so that they equal social costs or benefits. 16. A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in discounted future profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a drill that causes less interference for $6000. Either would restore the radio station's lost profits. What is the economically efficient outcome? a. The radio station puts up a shield that they pay for. b. The radio station puts up a shield that the dentist pays for. c. The radio station doesn't put up the shield and the dentist doesn't buy a new drill. d. The dentist gets a new drill, no matter who pays for it. 17. If the government wants to tax a polluter, the economically efficient outcome occurs when: a. the marginal tax equals the marginal cost to other people from the pollution. b. the average tax equals the average cost to other people from the pollution. c. the total tax equals the total cost to other people from the pollution. d. the tax is high enough to stop pollution completely. 18. The tragedy of the commons is: a. the fact that government regulation is required to combat externalities. b. the overuse of a common resource relative to its economically efficient use. c. the idea that monopoly elements in society lead to inefficient production. d. a new movie with Brad Pitt and Sandra Bullock 19. If the price elasticity for eggs is 0.8 and the cross-price elasticity of eggs with respect to the price of cheese is -0.3, we can conclude that a. the demand for eggs is inelastic, and eggs and cheese are complementary goods. b. the demand for eggs and the demand for cheese are both inelastic. c. the demand for eggs is elastic, and eggs and cheese are substitute goods. d. the demand for eggs is inelastic, and eggs and cheese are substitute goods. e. elastic eggs are hard to crack. 20. Suppose a war in the Middle East disrupts oil supplies and doubles the price of oil in the world oil market. We would expect a _____ shift in the _____ curve for gasoline. a. leftward; supply b. rightward; supply c. rightward; demand d. leftward; demand e. onward; upward 3 21. The price of coffee rose 50 percent and coffee sales fell 25 percent. Doughnut sales also fell 25 percent. From this information we can say a. demand for coffee is inelastic. b. coffee and doughnuts are complements. c. the cross-price elasticity of demand for doughnuts with respect to the price of coffee is – 0.5. d. all of the above are correct. e. none of the above are correct. 22. How does the market equilibrium price and quantity sold of health care services change as income rises? a. Price rises and the quantity traded rises, assuming health care is a normal good. b. Price falls and the quantity traded falls, assuming health care is a normal good. c. Price rises but the effect on quantity traded is uncertain; as price rises demand falls to an indeterminate level. d. Quantity traded rises but the effect on price is uncertain; as price rises, supply increases and the final effect on price is uncertain. e. Is Jar Jar Binks a guy or a gal? 23. A zero-sum game is a situation in which a. everyone is made worse off. b. the probability of winning is less than 50 percent c. it’s sort of like strip poker d. one must make an all-or-nothing bet to play the game. e. one person can gain only if another loses. 24. If John goes to the movies and the ticket price is $6, we can infer that a. his expected benefit of going to the movies is $6. b. his opportunity cost of going to the movies is $6. c. his expected benefit of going to the movies is higher than his opportunity cost, but we know only that the opportunity cost is at least equal to $6. d. John shouldn't go to the movies; he could be engaging in a higher-valued alternative activity. e. John is a slug 25. For which pairs of goods is the cross-price elasticity of demand likely to be negative? a. razors and blades b. contact lens and eyeglasses c. UPS and parcel post d. Ford trucks and GM trucks e. Jar Jar Binks and that ugly thing that flies around smoking a cigar. 26. Suppose butter and margarine are substitutes. If the government publicizes health warnings about margarine, we would expect that a. both the price of butter and the price of margarine would rise. b. the price of butter would rise and the price of margarine would fall. c. Hilary will protect us from margarine d. both the price of butter and the price of margarine would fall. e. the price of butter would fall and the price of margarine would rise. 4 Annual Output per Worker Wheat Pigs Kansas 10,000 bu 200 Missouri 10,000 bu 250 27. Consider the data in the above table. a. Kansas a has a comparative and an absolute advantage in wheat b. Missouri has a comparative and an absolute advantage in wheat c. Kansas has a comparative advantage in pigs d. Missouri has a comparative advantage in pigs e. I’m a photojournalism major, what do I know about pigs? 28. Which of the following patterns of trade might we observe? a. Missouri exports pigs to Kansas, price per pig = 35 bu. of wheat b. Missouri exports pigs to Kansas, price per pig = 55 bu. of wheat c. Missouri exports wheat to Kansas, price per bu. = 1/40 bu. of wheat d. Missouri exports wheat to Kansas, price per bu. = 1/45 pig e. None of above. 29. Consider the production possibilities curve for the combined Missouri and Kansas economies. Suppose that both states produce nothing but pigs. Starting from an initial situation in which wheat production is zero, what is the opportunity cost of the first bushel of wheat? a. 1/40 pig b. 1/45 pig c. 1/35 pig d. 1/30 pig e. none of above 30. If a drought destroyed half of the U.S. garlic crop at a time when the health benefits of garlic were being well-publicized, economists would expect that in the market for garlic a. quantity traded would rise but the change in price is uncertain without further information. b. price would rise but the change in quantity traded is uncertain without further information. c. both price and quantity traded would rise. d. price would rise and quantity traded would fall. e. lots of people would have bad breath. 31. Holding fixed the equilibrium quantity and price, the total gain from trade is greatest when: a. the supply curve is perfectly inelastic. b. the supply curve is somewhat elastic, so that producers get some surplus. c. the demand curve shifts toward the origin. d. the situation is a potential Pareto improvement. 32. The supply of beachfront property in Florida is an example of a. inelastic supply. b. elastic supply. c. a rationed good. d. a free good. e. organized crime 5 33. When the supply of good X decreases, total expenditure on good X increases. When the demand for good X increases, the quantity sold increases by a larger percentage than the price. Demand is _____; supply is _____. a. elastic; elastic. b. elastic; inelastic. c. inelastic; elastic. d. inelastic; inelastic. e. pink; green 34. If the long run elasticity of demand for residential electricity is unitary, then the short run demand is likely to be a. elastic. b. inelastic. c. about the same as the long run elasticity. d. approximately equal to 2. e. shockingly low 35. Demand tends to be more elastic for goods a. on which people spend larger fractions of their incomes. b. on which people spend smaller fractions of their incomes. c. when people have little time available to adjust to a change in price. d. that don't have close substitutes. 36. If the demand for rice rises when household income rises, then rice is a(n) a. normal good. b. inferior good. c. substitute good. d. complementary good. e. none of above 37. Jones works full-time running a grocery in which he has invested $25,000. Last year his total revenues were $100,000 and he paid $85,000 for goods he sold, electricity, and other expenses. An economist would calculate his profit for the year as a. $15,000 b. $15,000 minus the opportunity cost he incurred by working full-time in the store. c. $15, 000 minus the opportunity costs he incurred by tying up $25,000 of capital in the store. d. $15,000 minus the opportunity cost he incurred both for his labor and for the capital he had invested in the store. e. $60,000 38. If the price of white wine is high in New York, and low in Missouri, we would expect a. arbitrage to narrow the price differential, and result in increased consumption in New York. b. arbitrage to maintain the price differential, but increase consumption in New York. c. arbitrage to reduce the price differential only if consumers in the two states had identical tastes. d. arbitrage might increase the price differential if transportation costs between the two states fell. e. more winos in Missouri. 6 39. A tax will reduce the quantity traded in a market because: a. some sellers will not want to be bothered with collecting a sales tax. b. some buyers who were willing to trade at the pre-tax price will not be willing to purchase the good at a higher price that includes the tax. c. some buyers will resent have sellers pass the tax on to them. d. all the gains from voluntary trades will be transferred to the government through taxation. 40. When the supply for a product is very inelastic, the burden of a tax is borne mainly by: a. consumers. b. sellers. c. workers who produce the product. d. consumers of complementary products. 41. Which of the following is a fixed cost for the Soho Textile Company? a. yarn b. the labor cost of second-shift employees c. electricity d. rent 42. Suppose that the marginal benefit to a buyer from obtaining soup is declining, is $2 for the 10th can of soup, and is $1 for the 11th can. Suppose also that the marginal cost of producing soup is constant at $1. The economically efficient level of production: a. is 10 cans. b. is 11 cans. c. is greater than 11 cans, because marginal cost is constant. d. cannot be determined with the information given. 43. A 5 percent tax is levied on products A and B, both of which have the same demand elasticity. The quantity traded of A is nearly the same after the tax, while the quantity traded of B falls dramatically. Which of the following can we conclude? a. Producers of A bear a greater share (relative to consumers) of the tax burden than the producers of B. b. Product B has a smaller elasticity of supply than product A. c. Tax revenue is greater from product A. d. Tax revenue is greater from product B. e. Tax revenues for A and B are equal. 7 S A B F C G T H D E I J K D 44. The figure above shows the effect of a tax T on a good. The loss in consumer surplus from the tax is: a. B + F b. A + B + F c. C + G + H + J d. B + A + R + F e. A 45. The deadweight social loss associated with this tax is: a. H + J b. G + H c. C + G + D d. F + G e. none of above 46. If Lee's marginal benefit from one cookie is $2 and from the second is $1, then a. Lee's demand curve would show he'd buy one cookie if the price was $2 and two cookies if the price was $3. b. Lee would buy two cookies if the price was $1.50. c. Lee's demand curve would show he'd buy one cookie if the price was $2 and two cookies if the price was $1. d. Lee would buy 3 cookies if the price was $1. e. Lee would buy 1 cookie if the price was $1. 47. If Farmer Jones's land is more productive than the other farmers in his industry, we would expect a. that Farmer Jones would earn economic rents that equal what appears to be his higher profits than the other farmers in the industry. b. Farmer Jones will earn zero economic profits and should put his land to better use in an industry where he could earn positive profits. c. Farmer Jones will charge higher prices than his competitors due to his superior resources. d. Farmer Jones will drive out all other competitors since he operates with greater efficiency than other sellers. e. Farmer Jones would have a real nice CD stereo-player in his tractor. 8 P P US ROW S S $5 $4 $3 D $2 D Q Q 100 X 400 800 48. The graph above shows a situation in which the world supply and demand for this good are equal at a price of $4. Total US export revenues are: a. $400 b. $200 c. $2000 d. $1600 e. none of above 49. As compared to a situation with no international trade, the additional gains from trade due to international trade are: a. $200 b. $400 c. $800 d. $1600 e. none of above 50. The discounted present value of $1000 paid two years from now is: a. greater than $1000 b. rises when interest rates increase c. falls when interest rates increase d. is constant when interest increases e. none of above 51. If the support price for wheat is $100 per bushel, and the government purchases 50,000 bushels, then a. private quantity demanded exceeds quantity supplied at a price of $100. b. private quantity demanded is less than quantity supplied at a price of $100. c. private demand is inelastic at a price of $100. d. there is a shortage equal to 50,000 bushels at a price of $100. e. that’s a lot of bread, man. 9 P P US ROW S S $3 T $2 $1 D 100 200 300 400 D Q Q The above graph shows the effect of a tariff (T) of $2 on an imported good. The world price of the good before the tariff was imposed was $2. 52. Government Tariff revenues are: a. $200 b. $100 c. $300 d. $600 e. none of above 53. If government spending on a good rises in a market where the supply curve for the good is perfectly elastic, we can predict that a. price will rise and private purchases will decline by less than the increase in government purchases. b. total production will rise by the amount of the increase in government demand and the price will remain constant. c. total production will rise by less than the increase in government demand. d. price will rise but total production will remain constant. Government demand and the price will remain constant. e. total production will rise by more than the increase in government demand. 54. If the long-run supply curve is perfectly inelastic, in the long run a 10% increase in the money supply will: a. increase real GDP by 10% b. increase real GDP, but by less than 10% c. will decrease GDP 10% d. will decrease GDP, but by less than 10%. e. none of above. 10 $7 $5 MC = AC $3 D 0 1000 MR 2200 55. The above graph shows a profit-maximizing monopolist. This monopolist’s economic profits are: a. $5000 b. $2000 c. $6900 d. $1000 e. none of above 56. The deadweight loss associated with this monopoly is: a. $1300 b. $1200 c. $6800 d. $1000 e. none of above 57. The inflation rate is 4 percent in the United States and 10 percent in Mexico. As a consequence we would expect: a. higher real interest rates in Mexico b. higher real interest rates in the U.S. c. depreciation of the dollar d. depreciation of the peso e. the tequila to flow freely in El Paso. 58. Sally deposits $1000 in her checking account bank account at Cowdung bank. The effect of this is to: a. increase Cowboy bank reserves by $1000 b. increase M1 by $1000 c. increase M1 by more than $1000 d. lower the money multiplier e. multiply the lower money 11 59. Which of the following is associated with price ceilings? a. a surplus of goods b. rising prices c. an increased supply d. rationing by waiting e. all of above are associated with price ceilings. 60. If the government imposes a tax on a good whose demand is perfectly elastic, then a. buyers pay the full amount of the tax. b. sellers pay the full amount of the tax. c. buyers and sellers each pay half of the tax. d. the tax yields no revenue for the government. e. I hear that Dr. Geiss is easier than this jerk, and he also tells better jokes. 61. The market demand curve in the perfectly competitive industry is a. horizontal. b. perfectly inelastic. c. less elastic than the demand curve faced by the firm. d. the sum of the demand curves of the firms in the industry. e. perfectly elastic. 62. If people begin to transfer funds from demand deposits to money market mutual funds: a. M1 will fall and M2 will rise b. M2 will fall and M1 will rise c. M1 will fall and M2 will not change d. the discount rate will increase e. if Professor Podgursky had better communication skills, I'd know the answer to this. 63. Fiat money means: a. paper money that is not backed by a commodity like gold or silver b. paper money issued on the island of Fiat c. the difference between M1 and M2 d. U.S. paper currency issued before WWI e. money issued by a central bank 64. The current chairman of the Federal Reserve Bank of the U.S. is a. Paul Volker g. Alan Ladd b. Hilary Clinton h. Alan Greenspan c. Benjamin Strong i. Alan Sheperd d. Andrew Jackson j. Alan Alda e. Michael Jackson k. Sam Adams f. Jesse Jackson l. none of above 12 65. The federal funds rate is: a. the interest rate on short-term government bonds b. the interest rate on long-term government bonds c. the interest rate the Fed. charges member banks for short term loans d. the interest rate that banks charge each other when the borrow and lend bank reserves for short periods 66. Which of the following would cause an increase in aggregate demand? a. Fed purchases of government securities on the open market b. a decrease in government spending c. a tax increase d. Fed. sales of government securities on the open market. e. none of above. 67. Employment is 100 million and there are 20 million unemployed therefore: a. the unemployment rate is 20% b. the unemployment rate is 25% c. the labor force is 100 million d. the unemployment rate is 10 percent e. none of above 68. The difference between Gross Domestic Product minus _______ equals National Income a. changes in business inventories b. net exports c. exports of nets d. depreciation e. the monetary base 69. The aggregate price level can increase due to a. an increase in the money supply or a decrease in the velocity of money b. an increase in the money supply or an increase in the velocity of money c. a fall in real interest rates d. an increase in the currency-deposit ratio e. frankly my dear, I don't give a damn. 70. If the world quantity demanded exceeds the world quantity supplied of mangos at $2 per pound, then a. the United States will export mangos. b. the United States will import mangos. c. the world price will tend to rise. d. the world price will tend to fall. e. when’s the last time you saw a broadcast news story about mangos? 71. The U.S. monetary base refers to: a. a naval base on the island of monetary b. currency plus demand deposits c. the gold in Fort Knox d. Bill Gates' checking account e. currency plus bank reserves 13 72. Milton Friedman in his Monetary History of the U.S. notes that M2 fell by roughly one-third between 1929 and 1933. He considers this a major cause of the Great Depression. In fact, bank reserves and the monetary base increased between 1929 and 1933. How can we reconcile these two facts? (question worth 5 points) 73. Consider the following data: Year 1992 1999 (question #73 is worth 4 points) CPI (1985=100.0) 140.0 150.0 The percent increase in consumer prices between 1992 and 1999 was: 14 74. Sally Jones earned $20,000 in 1992 and $30,000 in 1999. Compute the percent increase in Sally's real earnings between 1992 and 1999. (question worth 4 points) 75. Express Sally's salary in 1999 in dollars of 1992 purchasing power. (question worth 4 points) 76. How do macroeconomists view the relationship between inflation and unemployment in the short-run and the long run? (question worth 6 points) 15 The Federal Reserve announces that it is going to begin purchasing government securities on the open market. 77. What is the effect on U.S. bank reserves and M1? (question worth 2 points) 78. Analyze the short-run and long run effect of such a policy on real GDP and real interest rates. (question worth 4 points) Answer Key: Question # Answer 1 E 2 B 3 B 4 D 5 A 6 D 7 D 8 A 9 A 10 C 11 A 12 A 13 B 14 C 15 D 16 D 17 A 18 B 19 A 20 A 16 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 D A E C A B D E B B A A C B A A D A B B D B A A D C A D B C B A B E B B D A D B C C A H D A E 17 68 69 70 71 D B C E 18