Download Exam 03

Name: ______________________
Econ 163—Bethany College
EXAM 03
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There are 110 possible points on this exam. The test is out of 100.
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You have one hour to complete this exam but you should be able to complete it in
less than that
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Please turn off all cell phones and other electronic equipment.
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You are allowed a calculator for the exam. This calculator cannot be capable of
storing equations. This calculator cannot double as a cell phone.
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Be sure to read all instructions and questions carefully.
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Remember to show all your work.
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Recall basic logic. “Water is wet” is a true statement. “Water is wet and leopards
have stripes” is a false statement.
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Please print clearly and neatly.
Part I: Multiple Choice. Circle the letter that corresponds to the best answer.
5 points each.
1. Deadweight loss occurs when:
a. Consuming where marginal cost exceeds marginal benefit
b. Not consuming where marginal benefit exceeds marginal cost
c. Consuming where marginal benefit exceed marginal cost
d. A & B
e. None of the above
2. Which of the following is an example of a price floor?
a. Rent control
b. The minimum wage
c. The ban on selling organs
d. A & B
e. None of the above
3. The Edict on Maximum Prices in 301 C.E., established by the Roman Emperor
Diocletian, created price ceilings on various jobs and goods in a failed effort to
curb inflation. For example, a farm laborer could be legally paid no more than
10.8 cents a day (payment set in modern currency). If the market rate of farm
labor is 12 cents a day, which of the following would be a plausible consequence
of this law?
a. Farms produce more food than they otherwise would.
b. Nothing unusual.
c. A laborer works less hard than he otherwise would.
d. An increase in unemployment for farm hands.
e. None of the above
4. The iconic blue-and-white Chinese porcelain sold to people all over the world
(particularly between the 14th and the 16th centuries) was so successful,
entrepreneurs in Persia, Netherlands, Syria, Iberia, Mexico, and many other areas
attempted to copy it. The actual process for creating such high quality ceramics
was kept secret but in 1708 a German alchemist finally found a way to replicate it
the ancient art. What do you expect happen to the price of porcelain after 1708
and why?
a. It should fall, because of the increased competition.
b. It should fall, because of the lower cost to create Chinese porcelain.
c. It should rise, because of the greater difficulty in keeping the method a
secret.
d. It should not change at all because demand and supply will react
accordingly.
a. None of the above
5. Why do monopolies make greater than average profits?
a. By reducing the quantity sold.
b. By forcing people to buy their good.
c. By not having to spend any money on advertising.
d. B & C
e. None of the above
6. Suppose a friend insisted that the government should require everyone to have
Internet access. What would be a good economic challenge (if any) to this plan?
a. That there are more beneficial ways to spend our resources.
b. That getting that last holdout connected has few benefits but high costs.
c. None. This is a good idea because everyone could get stuff cheaper.
d. A & B
e. None of the above
7. Suppose there was no “great economic problem.” Which of the following options
would have to occur for this to happen?
a. Zero transportation costs.
b. All resources are no longer scarce.
c. The death of all humans except one.
d. B & C
e. None of the above
8. Why is the average fixed cost always decreasing as quantity increases?
a. Because fixed costs don’t change.
b. Because variable costs are constant.
c. Because average fixed costs are determined by dividing by quantity.
d. A & C
e. None of the above
9. In July 2011, oil companies had a 6.5% profit margin (for each dollar of sales, 6.5
cents was profit), ranking 131 (profit margin is the far right column). Other
industries making the same profit margin included packaging & containers, office
supplies, farm & construction, and newspapers. Assuming these profits are
typical, what does this constant profit margin across very different industries
suggest about oil companies’ economic profit?
a. They are making zero economic profit.
b. They are making above-average economic profit and should expect entry.
c. They are making above-average economic profits but should expect no
entry or exit.
d. Nothing because it is the total revenue that matters, not profits per dollar
of sales.
e. None of the above
10. Which of the following is an example of a fixed cost for a T-shirt business right
when it gets started?
a. Building a factory
b. Purchasing more fabric for T-shirts
c. Hiring additional workers
d. A & B
e. None of the above
Part II: True/False. Answer true or false, and justify your answer.
10 points each.
11. Monopolies can charge whatever price they want and still earn a profit.
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12. An example of a barrier to entry is a patent.
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13. Price controls always create deadweight loss.
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Part III: Short Answer. Answer the following.
15 points each.
14. During the American Revolutionary War, P
General George Washington stationed
many of his troops in Pennsylvania. In
1777, the state’s government set several
prices ceilings on goods needed to supply
the army, including food, in an effort to
save money. Washington’s army nearly
starved to death at Valley Forge the
following winter. Using this information,
create a supply and demand diagram for
food, illustrating the effects of the price
control. Make sure to indicate the true
price, market price, legal price (if they are
different), deadweight loss (if any), and
the quantity supplied and demanded.
S
D
Q
15. Consider a long standing monopoly. Using the graph below, indicate where the
firm produces, where it makes a profit/loss and how much it is, if it should
anticipate entry/exit, what price it sells its good at, and any deadweight loss, if
applicable.
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P ($)
7
6
MC
5
ATC
4
3
2
1
MR
0
0
1
2
3
D Q
4
5
6