Download Econ 101, section 6, S05

Econ 101, section 6, S05
Schroeter
Final Exam, Red
Choose the single best answer for each question.
1. When an economy cannot produce all the goods and services people wish to have it is
said to be experiencing
a. externalities.
b. market failure.
*. scarcity.
d. excludability.
2. Which of the following is an example of a normative statement?
a. If the price of a product decreases, all else equal, quantity demanded increases.
*. Reducing tax rates on the wealthy would be bad for the country.
c. Raising the level of the minimum wage will increase unemployment.
d. After adjusting for inflation, the price of oil is lower now than it was in the mid-70s.
Questions 3, 4, and 5 are based on the following information. Two small countries,
Ringgold and Decatur, use their labor resources to produce goods of two types:
manufactured goods and agricultural goods. The table below gives the number of hours
of labor needed to produce one unit of each type of good in each country.
Ringgold
Decatur
Hours needed to produce one unit of
manufactured goods
agricultural goods
6
10
4
5
3. Which of the following is true?
a. The resource cost of 1 unit of manufactured goods in Ringgold is 10 hours.
*. The opportunity cost of 1 unit of agricultural goods in Decatur is 1.25 units of
manufactured goods.
c. The resource cost of 1 unit of agricultural goods in Decatur is 0.8 units of
manufactured goods.
d. The opportunity cost of 1 unit of manufactured goods in Ringgold is 6 units of
agricultural goods.
4. Which of the following is true?
a. Ringgold has the absolute advantage in the production of manufactured goods.
*. Decatur has the absolute advantage in the production of agricultural goods.
c. Ringgold has the comparative advantage in the production of agricultural goods.
d. Decatur has the comparative advantage in the production of manufactured goods.
2
5. Suppose that there were international markets in manufactured goods and agricultural
goods and that the trade price of manufactured goods is 0.5 units of agricultural goods per
unit of manufactured goods. Which of the following is true? At these terms of trade
*. both countries would want to buy manufactured goods and sell agricultural goods.
b. both countries would want to buy agricultural goods and sell manufactured goods.
c. Ringgold would want to buy manufactured goods and Decatur would want to buy
agricultural goods.
d. Decatur would want to buy manufactured goods and Ringgold would want to buy
agricultural goods.
Questions 6, 7, and 8 refer to the following graph of supply and demand curves in a
competitive market.
Supply
($/unit)
p1
p2
p3
Demand
Q1 Q2
Q3
Q4
Q5
(units/day)
6. If the price in this market were temporarily at a level of p3, there would be
a. excess supply in the amount of Q5 - Q3.
b. excess demand in the amount of Q3 - Q2.
c. excess supply in the amount of Q4 - Q1.
*. none of the above.
7. Which of the following could account for a change in equilibrium to price p1 and
quantity Q4?
a. an increase in supply combined with a decrease in demand.
*. an increase in the price of a substitute.
c. an increase in the price of an important factor of production.
d. none of the above.
3
8. Which of the following could account for a change in equilibrium to price p3 and
quantity Q3?
a. a decrease in demand.
*. an increase in supply combined with a decrease in the price of a substitute.
c. an increase in income (assuming the good is a normal good) combined with a decrease
in supply.
d. a cost-saving technological innovation in the production of the good combined with an
increase in demand.
9. If a shortage exists in a competitive market we know that the actual price is
*. below the equilibrium price and quantity demanded is greater than quantity supplied.
b. above the equilibrium price and quantity demanded is greater than quantity supplied.
c. below the equilibrium price and quantity demanded is less than quantity supplied.
d. above the equilibrium price and quantity demanded is less than quantity supplied.
10. In a competitive market, supply and demand decrease simultaneously. The effect on
equilibrium quantity is
*. a decrease.
b. an increase.
c. ambiguous, but equilibrium price will increase.
d. ambiguous, but equilibrium price will decrease.
11. If a good is a luxury, demand for the good would tend to be
a. inelastic.
b. unit elastic.
*. elastic.
d. perfectly elastic.
12. For a particular good, the quantity demanded increases from 5000 units/day to 6200
units/day when the price decreases from $4.00/unit to $3.20/unit. Over this range of
prices, the own-price elasticity of demand (calculated by the "midpoint method") is
a. -1.238.
*. -0.964.
c. -0.743.
d. -0.512.
13. Law enforcement measures to curtail the supply of illegal addictive drugs include
interdiction of drug shipments from other countries, more aggressive police efforts to
catch drug pushers, and more severe punishments for those found guilty of drug
violations. What effect do these measures have on the market for illegal addictive drugs?
*. Price and total revenue both increase.
b. Price and total revenue both decrease.
c. Price increases and total revenue decreases.
d. Price decreases and total revenue increases.
4
14. Most labor economists believe that the supply of labor is less elastic than the demand
for labor. This means that the burden of a tax on wages will
a. be shared equally by workers and employers.
*. fall more heavily on workers.
c. fall more heavily on employers.
d. Impossible to determine without more information. (It depends on whether employers
are required to send the tax payment to the government, or whether the tax is withheld
from workers paychecks.)
15. In a market with a binding price floor
a. buyers have an incentive to offer sellers bribes in order to increase their chances of
getting some of the scarce supply.
b. the quantity demanded of the good will exceed the quantity supplied.
*. unless the government steps in to purchase the surplus, not all sellers who want to sell
at the floor price will be able to.
d. none of the above.
16. The market for widgets is in equilibrium at a quantity of 500 widgets/day. If the
government were to impose an excise tax of $1.00/widget on this market, it could expect
to collect tax revenue
a. equal to $500/day.
*. less than $500/day.
c. greater than $500/day.
d. either a, b, or c, depending on whether the demand elasticity is equal to, greater than,
or less than the supply elasticity.
17. Alex, Barry, Cathy, and Denise are four sports fans with willingness to pay for a
season ticket to the Cyclone men's basketball games of $550, $420, $350, and $250,
respectively. If season tickets sell for $300 each, total consumer surplus realized by these
four sports fans is
*. $420.
b. $370.
c. $310.
d. $250.
18. A competitive market is in equilibrium to begin. Then the government imposes a
binding price ceiling and arranges for the scarce supply to be rationed to those consumers
who value it most highly. What will be the effect on consumer surplus?
a. It will remain unchanged.
b. It will increase.
c. It will decrease.
*. Impossible to determine. (It could increase, decrease, or remain unchanged.)
5
The following graph depicts supply and demand in a hypothetical market. Use it to
answer questions 19 and 20.
($/unit)
15
10
Supply
7.5
6
Demand
3
200
300
(units/day)
19. If the government were to levy an excise tax of $4.00/unit on this market, it would
collect tax revenue of
a. $300/day.
b. $500/day.
*. $800/day.
d. $1200/day.
20. The deadweight loss of a $4.00/unit excise tax on this market would be
*. $200/day.
b. $300/day.
c. $400/day.
d. $500/day.
21. When a country moves from a free trade position and imposes a tariff on imports of a
particular good
a. domestic producers and consumers of the good both gain.
b. domestic producers and consumers of the good both lose.
*. domestic producers of the good gain and domestic consumers of the good lose.
d. domestic producers of the good lose and domestic consumers of the good gain.
6
22. A small country prohibits international trade in wheat, a homogeneous good. The
price of wheat in the domestic market is currently above the world market price. If the
trade ban were lifted, and free trade allowed, the country would
*. become an importer of wheat and the domestic price would decrease.
b. become an exporter of wheat and the domestic price would decrease.
c. become an importer of wheat and the domestic price would increase.
d. become an exporter of wheat and the domestic price would increase.
23. A tariff is a tax placed on
a. exported goods that lowers the domestic price below the world price.
b. exported goods that raises the domestic price above the world price.
c. imported goods that lowers the domestic price below the world price.
*. imported goods that raises the domestic price above the world price.
24. The impact of one person's actions on the well-being of a bystander is called
a. a deadweight loss.
b. the free-rider problem.
*. an externality.
d. a marginal abatement.
25. The Acme paper company owns two factories, factory A and factory B, along the
Wolf River. Currently, each factory dumps 500 tons of toxins per year into the river,
polluting it. The EPA has ordered Acme to reduce its emissions to a total of 400 tons per
year for the two factories combined. The marginal costs of pollution abatement differ
between the two factories:
Factory A: Marginal abatement cost is constant at $500/ton/year.
Factory B: Marginal abatement cost increases from a level of $200/ton/year for the first
ton of abatement, to a level of $500/ton/year for the 400th ton of abatement, and
continues to increase beyond 400 tons/year.
When the target pollution level of 400 tons/year is achieved in the least cost manner, the
pollution levels for each of the factories will be
a. 0 tons/year for Factory A and 400 tons/year for Factory B.
b. 200 tons/year for Factory A and 200 tons/year for Factory B.
*. 300 tons/year for Factory A and 100 tons/year for Factory B.
d. 400 tons/year for Factory A and 0 tons/year for Factory B.
26. In the context of the federal individual income tax, the cost to taxpayers of hiring tax
consultants to help file returns, and the cost to the Internal Revenue Service of
conducting random audits are examples of the
a. deadweight loss.
b. personal exemption.
*. administrative burden.
d. progressive structure.
7
27. Which of the following is the best example of a public good?
a. a candy bar.
b. the Ogallala aquifer.
*. the navigational aid provided by a lighthouse beacon.
d. the "town common" in medieval villages.
Questions 28 and 29 refer to Schedule Y-1 from the 2004 Instruction booklet for federal
individual income tax form 1040. Eric and Robin are a married couple (using the
"married, filing jointly" income tax filing status) with 2004 taxable income of $73,500 on
total income of $105,000.
Schedule Y-1. Use if your filing status is married, filing jointly.
If your taxable but not over
your tax is
of the amount
income is over
over
$0
$14,300
--------- 10%
$0
14,300
58,100
$1,430 + 15%
14,300
58,100
117,250
8,000 + 25%
58,100
117,250
178,650
22,787.50 + 28%
117,250
178,650
319,100
39,979.50 + 33%
178,650
319,100
---------86,328.00 + 35%
319,100
28. According to Schedule Y-1, Eric and Robin's federal income tax for 2004 is
a. $5,675.
b. $8,450.
*. $11,850.
d. $18,375.
29. According to Schedule Y-1, Eric and Robin's average tax rate for 2004 is
*. 11.29%.
b. 16.12%.
c. 17.50%.
d. 25.00%.
30. An income tax in which the average tax rate is the same for all taxpayers would be
considered a
a. progressive tax.
*. proportional tax.
c. regressive tax.
d. distortion-free tax.
31. A firm's explicit costs
*. require an outlay of money by the firm.
b. include all of the firm's opportunity costs.
c. include potential wage and salary income that is forgone by the firm's owners.
d. are not used in the calculation of economic profit.
8
32. A firm's average total cost is $50/unit, when it produces 100 units/day, and $52/unit,
when it produces 110 units/day. Which of the following is the best estimate of the firm's
marginal cost over the output range from 100 to 110 units/day?
a. $51/unit.
b. $64/unit.
*. $72/unit.
d. $83/unit.
33. A competitive firm faces a price of $5.00 for its product. It is currently producing
where average total cost is $7.50, average variable cost is $6.00, and marginal cost is
$5.00. To maximize profit (or minimize loss) in the short-run, the firm should
a. maintain its current output.
b. increase output.
c. decrease output, but not shut down.
*. shut down.
34. Average total cost is increasing at every output level for which
a. total cost is increasing.
b. marginal cost is increasing.
*. marginal cost is greater than average total cost.
d. both b and c.
35. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then there is
a permanent increase in demand. The short-run response to the demand shift will include
a. no change in price.
b. an increase in the number of firms in the industry.
*. an increase in profits earned by the representative firm.
d. all of the above.
36. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then there is
a permanent increase in demand. When the industry gets to the new zero-profit
equilibrium that will eventually be reached in the long-run,
a. industry output will be the same as in the original zero-profit equilibrium.
b. the representative firm's output will be greater than in the original zero-profit
equilibrium.
c. price will be higher than in the original zero-profit equilibrium.
*. none of the above.
37. At its current output level, a monopolist's marginal revenue, marginal cost, average
total cost, and price are $3/unit, $4/unit, $5/unit, and $6/unit, respectively. To maximize
profit (or minimize loss) in the short-run, the monopolist should
a. maintain its current output.
*. reduce its output, but not shut down.
c. shut down.
d. impossible to determine without more information.
9
38. Encouraging firms to invest in research and development is one justification for
a. resource monopolies.
b. natural monopolies.
c. antitrust prosecutions that break-up monopolies into smaller firms.
*. government-created monopolies.
39. A monopolist can sell 60 widgets/day when it charges a price of $2.50/widget. In
order to sell 61 widgets/day, the monopolist would have to reduce its price to
$2.45/widget. What is the monopolist's marginal revenue for the 61st widget/day?
a. $2.45/widget.
b. $0.45/widget.
c. -$0.05/widget.
*. -$0.55/widget.
40. The process of buying a good in one market at a low price and selling it in another
market at a higher price in order to profit from the price difference is know as
a. collusion.
b. price segregation.
c. predatory pricing.
*. arbitrage.
41. An oligopoly is a market structure in which
a. there are numerous firms, each one of which is too small to have an impact on others.
b. a single firm sells a product with no close substitutes.
*. a few firms offer similar or identical products.
d. firms are independent, leaving no role for strategic behavior.
Questions 42 and 43 refer to the following information. An identical product widget
duopoly faces a demand curve given by the equation: P = 20 - 0.1Q where P is the price
of widgets ($/widget) and Q is the combined output of both firms (widgets/day). Widgets
are produced at zero fixed cost and a constant marginal cost equal to $2/widget. Let's call
the two duopolists "Firm 1" and "Firm 2" and denote their output levels by q1 and q2,
respectively.
42. Which of the following outcomes for this duopoly would be efficient, with P = MC?
a. q1 = q2 = 60 widgets/day.
b. q1 = q2 = 100 widgets/day.
*. q1 = 80 widgets/day. q2 = 100 widgets/day.
d. q1 = 70 widgets/day. q2 = 90 widgets/day.
43. Suppose that Firm 2 produces 50 widgets/day. Which of the following output levels
for Firm 1 would yield the greatest profit for Firm 1?
a. q1 = 30 widgets/day.
b. q1 = 40 widgets/day.
c. q1 = 50 widgets/day.
*. q1 = 60 widgets/day.
10
Questions 44 and 45 refer to the following payoff matrix that describes an advertising
strategy game played by two firms selling competing products. Firm 1 has two
strategies: "Don't advertise" and "Advertise." Firm 2, if it were to advertise, would have
to choose between two alternative advertising campaigns. So Firm 2 has three possible
strategies: "Don't Advertise," "Campaign A," and "Campaign B." The entries in the cells
of the table give payoffs (profit levels) for Firm 1 (π1) and Firm 2 (π2). (A higher payoff
is better than a lower payoff.)
Firm 1's
Strategies
Don't advertise
Advertise
Don't advertise
π1 = 10, π2 = 6
π1 = 12, π2 = 5
Firm 2's strategies
Campaign A
Campaign B
π1 = 7, π2 = 12
π1 = 8, π2 = 14
π1 = 10, π2 = 11 π1 = 9, π2 = 10
44. Which of the following is true?
a. "Campaign B" is a dominant strategy for Firm 2.
b. "Campaign A" is a dominant strategy for Firm 2.
*. "Advertise" is a dominant strategy for Firm 1.
d. Neither firm has a dominant strategy.
45. Which of the following is true? (Note: I'm using the notation "(X, Y)" to mean that
Firm 1 plays strategy X and Firm 2 plays strategy Y.)
a. ("Don't advertise", "Campaign B") is a Nash equilibrium.
b. ("Don't advertise", "Don't advertise") is a Nash equilibrium.
*. ("Advertise", "Campaign A") is a Nash equilibrium.
d. This game has no Nash equilibria.
46. Members of OPEC have a collective interest in restricting crude oil production to the
__________ output level, but self interest often leads them to produce _______ output
than is consistent with their collective interest.
a. competitive; less.
b. Nash equilibrium; more.
*. monopoly; more.
d. none of the above.
47. To maximize profit, a price-taking firm hires workers up to the point at which the
value of the marginal product of labor equals
a. marginal cost.
b. marginal revenue.
*. the wage.
d. the output price.
11
48. Assuming an annual interest rate of 5%, what is the present value of $1 to be received
in 5 years?
a. $0.87.
b. $0.85.
c. $0.80.
*. $0.78.
49. I take out an installment loan of $10,000 at an annual interest rate of 15%. The terms
of the loan require repayment of principle and interest in four equal installments. The
first payment will be due one year from today. The second will be due two years from
today, etc. The fourth and last payment will be due four years from today. To the nearest
dollar, what is the amount of each of the four installment payments?
a. $2875.
b. $3306.
c. $3386.
*. $3503.
50. Suppose that, today, I deposit $100 in a savings account paying interest at an annual
rate of 3%. One year from today, I will deposit another $100 in the same account. I will
make no other deposits or withdrawals. What will be the balance in the account 5 years
from today?
*. $228.48
b. $231.85.
c. $234.17.
d. $237.45.