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Economics 103
Final Exam
True/False. Indicate whether the following definitions are true or false. If false,
briefly explain why. (Two points each).
1. Natural monopolies can be expected when there are large economies of
scale and high fixed costs.
2. When income rises, the demand for an inferior good also rises.
3. When demand is elastic, a ten percent increase in price will lead to a greater
than ten percent increase in quantity demanded.
4. A price ceiling is only effective if the price is above the equilibrium price.
5. Monopolistic competition is characterized by homogeneous (identical)
products.
6. The welfare loss due to monopoly refers to the fact that monopolists are able
to make profits by taking consumer surplus from the consumers.
7. An externality is said to occur when marginal private cost is not equal to
marginal social cost.
8. If there is a positive externality in the production of a good, too little of that
good will be produced.
9. Decreasing marginal product of labor and decreasing returns to scale are
exactly the same the thing.
10. If entry into a competitive market does not effect costs the long run supply
curve of the industry will be perfectly elastic.
Answer the following short answer questions. (Five points each)
11. Suppose demand is given by P=100 - Q and supply is fixed at Q=50. Graph
this situation and determine the equilibrium price and quantity.
12. Draw a graph of a monopoly. Indicate the welfare loss due to monopoly in
your graph.
13. What is the difference between a progressive and a regressive tax? Give an
example of each.
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14. What are the two characteristics that make a good a public good? Briefly
define these characteristics.
16. Explain (and use graphs) how trade can allow countries to consume outside
their production possibility frontier.
17. Sometimes when people go out to dinner in a group, they end up splitting
the bill evenly among all of them. When one member of a group (comprised of 5
individuals) is deciding whether to order a steak that costs $20 what is the
marginal private cost of the steak? What is the marginal group (social) cost of
the steak? Will group dinners result in more or less consumption? What would
an economist recommend?
18. In what sense is education a public good and in what sense is education a
private good?
19. Explain the difference between comparative and absolute advantage.
20. What is meant by the excess burden of a tax? The total burden?
Discussion: Answer the following Discussion Questions. (Ten Points)
A. A libertarian believes that almost no government intervention in the economy
is justified. She would think that most of the services provided by the
government could be better provided by private companies. Without discussing
your position on these issues outline all the assumptions that lie behind this
position. (Complete coverage of the assumptions is more important than a long
discussion of only some of them.)
B. Answer one of the following:
B1. In order to get people to drive less a new regulation has been
enacted that requires companies in the ten U.S. cities with the most pollution to
establish programs to make sure their employees car pool. Discuss. What is
the point of this regulation? As an economist do you think it is the best
regulation for the job?
B2. Recently the U.S. threatened to place very high tariffs on French
White Wine. Using all the appropriate graphs, completely discuss this issue.
Use the chicken version of the two by two game theory model to explain what the
U.S. policy makers were doing.