Download Final Exam - Rose

SL 151
Bremmer I
Fall 2006
Name __________________________________________
CM ______
Final Exam - - Test Booklet #_______
Part I. True-False Questions (1 point each). Indicate on the answer sheet provided whether each of the following statements is
true (T) or false (F).
1.
If supply is perfect elastic, an increase in demand causes an increase in output, but there is no change in price.
2.
A negative cross-price elasticity of demand implies that the two products are substitutes.
3.
When a country allows trade and becomes an exporter of a good, domestic consumers are better off and domestic
producers are worse off.
4.
When an excise tax is imposed, the combined loss of consumer surplus and producer surplus exceeds the tax revenues that
the government receives.
5.
When marginal product is falling, average product must also fall.
6.
The vertical distance between the average total cost curve and the average variable cost equals average fixed cost, which
decreases as output increases.
7.
If the production possibilities curve is a linear, negatively-sloped line, the opportunity cost of a given product remains
constant as production of the good increases.
8.
If a country produces two goods, consumer goods and capital goods, the present position on its production possibilities
curve will not influence the future location of the curve.
9.
If the current price is above the equilibrium price, a shortage results.
10. A simultaneous decrease in both demand and supply results in a definite decrease in the equilibrium price, but the change
in the equilibrium quantity is indeterminate.
11. If borrowers expect future inflation to increase, then they will borrow more now as they expect to pay back the loan with
money that is worth less.
12. Official unemployment statistics overstate unemployment because discouraged workers who are not actively seeking work
are counted as unemployed.
13. Inflation means that the price of every good is rising.
14. In the long run macro model, if workers acquire more education, the demand for labor increases and real wages rise.
15. Referring to Figure 1, if the economy was experiencing stagflation at point B, accommodating policy would return the
economy to point A.
16. Referring to Figure 1, if the economy was initially at point A, an increase in the money supply will ultimately move the
economy to point D in the long run.
17. One source of economies of scale is increased specialization of labor and capital.
18. Given a perfectly competitive, decreasing-cost industry, an increase in demand means a lower price and a larger output in
the long run.
19. A pure monopolist will shut down in the short run if P < ATC.
20. Transfer payments such as social security or unemployment compensation are included in G when calculating GDP.
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Part II. Multiple Choice Questions (3 points each). Indicate the best answer for each question on the answer sheet provided.
1. Referring to Figure 2, which of the following statements is true?
A. Resources in the economy are not specialized and resources are equally suited to producing either SUVs or compact cars.
B. The bundle of goods at point E can be produced with current resources and current technology, but to do so would involve
inefficient use of resources.
C. The bundle of goods at point D is unobtainable given current resources and current technology.
D. Comparing points B and C, the opportunity cost of producing one more compact car is greater at point B than it is at point C.
E. None of the above statements are true.
2.
A.
B.
C.
D.
E.
Everything else held constant, which of the following would shift the production possibilities curve to the left?
An increase in the labor supply.
An increase in the unemployment rate to a level that is greater than the natural rate of unemployment.
An improvement in technology.
A decrease in the supply of natural resources
Both B and D.
3. Referring to Figure 3, which of the following statements is false?
A. Both production possibilities curve (a) and production possibilities curve (b) exhibit the law of increasing costs.
B. The shift in the production possibilities curve from curve (a) to curve (b) implies an improvement in the technology of producing
consumer goods but no change in the technology of producing capital goods.
C. Referring to curve (a), everything else held constant, the choice of point P will lead to more rapid economic growth than would
the choice of point N.
D. A movement from point N to point P would imply that society has chosen a different set of outputs.
E. Given production possibilities curve (b), while the country can’t produce the bundle of goods at point L; free trade may allow the
country to consume the bundle of goods at point L.
Answer the next three questions on the base of Figure 4 which shows the production possibilities curves for Italy and Greece.
4.
A.
B.
C.
D.
E.
Referring to Figure 4, the diagrams suggest that:
Italy should import both X and Y from Greece.
production in both countries is subject to increasing costs.
Greece should export product X and Italy should export product Y.
Italy should export product X and Greece should export product Y.
Greece should import both X and Y from Italy.
5. Referring to Figure 4, which of the following is feasible terms of trade at which goods X and Y might be exchanged?
A. 1X for 0.5Y
B. 1X for 2.5Y
C. 1X for 1.5Y
D. 1X for 3Y E. 1Y = 0.25X
6.
Referring to Figure 4. Assume that prior to specialization and trade, Italy was at point I and Greece was at point G on
their respective production possibilities curves. After both countries specialize according to comparative advantage, the
resulting gains from trade will be:
A. 25 X. B. 15X and 5Y.
C. 10Y.
D. 25Y.
E. 5X and 15Y.
7.
A.
B.
C.
D.
E.
8.
A.
B.
C.
D.
E.
Figure 5 shows the demand and supply curves for good X. Referring to Figure 5, which of the following would cause the
demand curve to shift from D1 to D2?
A decrease in the price of X
A decrease in income, assuming X is a normal good
An increase in the price of good K, assuming K and X are complements
A decrease in the price of good S, assuming S and X are substitutes
Consumers expect the future price of good X to increase
Figure 5 shows the demand and supply curves for good X. Referring to Figure 5, which of the following would cause the
supply curve to shift from S1 to S2?
An increase in the price of X
A decrease in the price of an input used in the production of good X
The government imposes a $1 per unit excise tax on producers of good X
A decrease in the number of firms producing good X
Firms expect the future price of good X to increase
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9.
A.
B.
C.
D.
E.
An analysis of the market for good X shows that the price of a complement, good Y, is declining. At the same time, there
is a technological advance that increases the supply of good X. As a result the:
equilibrium price and equilibrium quantity of good X will both increase.
equilibrium quantity of good X will rise, but the change in the equilibrium price of good X is indeterminate.
equilibrium price of good X will rise, but the change in the equilibrium quantity of good X is indeterminate.
equilibrium price of good X will increase while the equilibrium quantity of good X will decrease.
equilibrium quantity of good X will decrease, but the change in the equilibrium price of good X is indeterminate.
10. Suppose a market is in equilibrium and then a price ceiling is established above the equilibrium price. Which of the
following would happen?
A. Quantity demanded will decrease while quantity supplied will increase.
B. A surplus will develop.
C. A shortage will develop.
D. Demand decreases while supply increases.
E. The market will remain in equilibrium with no change in equilibrium price and quantity.
11.
A.
B.
C.
D.
Referring to Figure 6, which of the following statements is true?
Between prices P1 and P2, the price elasticity of demand is greater than 1.
Between prices P1 and P2, demand is inelastic.
Between prices P1 and P2, demand is unitary elastic.
Between prices P1 and P2, the absolute value of the percentage change in price is greater than the absolute value of the percentage
change in quantity demanded.
E. Statements A, B, and D are all true.
12.
A.
B.
C.
If the market supply curve is a linear, positively-sloped straight line that cuts the origin, supply is:
elastic for all prices and quantities.
D. perfectly elastic.
inelastic for all prices and quantities.
E. unitary elastic at all prices and quantities.
perfectly inelastic.
13. In Figure 7, D1 and S1 are the supply and demand curves before the imposition of the excise tax. S 2 is the after-tax supply
curve. Referring to Figure 7, which of the following statements is true?
A. The excise tax is equal to line segment FE.
B. The deadweight loss associated with the excise tax is area FEI.
C. Government tax receipts are equal to area BCEF.
D. The tax burden on consumers equals area BCEF while the tax burden on firms equals area ABFG.
E. The tax causes producer surplus to fall by area BCEI.
14.
A.
B.
C.
Figure 8 shows the effect of imposing a tariff on imported goods. The $1 tariff causes:
a deadweight loss of $5.
D. producer surplus to decrease.
a deadweight loss of $11.
E. consumer surplus to increase.
a deadweight loss of $55.
15.
A.
B.
C.
If a firm’s total output is increasing in the short run:
marginal product must be decreasing. D. marginal product could be increasing or decreasing.
marginal product must be increasing. E. marginal product is negative.
average product must be increasing.
16.
A.
B.
C.
D.
E.
The short-run cost curves for Lenny’s Lobsters are shown in Figure 9. According to Figure 9:
the variable cost of producing 70,000 lobsters is $280,000.
average product is maximized when the firm produces 50,000 units.
diminishing returns initially sets in with the company produces 50,000 units.
the firm will shut down in the short run if the price was less than $4.
fixed cost is equal to $3 at all levels of output.
17.
A.
B.
C.
D.
E.
Which of the following statements about a firm’s long-run average cost curve is correct?
The firm’s long-run average cost curve is drawn by joining the minimum points on all its short-run average total cost curves.
Diseconomies of scale may arise because as output increases, new tiers of management have to be created.
Diseconomies of scale arise because workers become more adept and more productive when they are put on specialized tasks.
When a firm experiences economies of scale, it uses its current plant size overcapacity.
The long-run average cost curve is U-shaped because of the law of diminishing marginal returns.
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18.
A.
B.
C.
If average variable cost is falling, then:
marginal cost must be falling.
marginal cost must be increasing.
marginal cost must be less than average variable cost.
19.
A.
B.
C.
In the short run, an increase in fixed cost will cause:
the average variable cost curve to shift up.
D. A, B and C.
the average total cost curve to shift up.
E. Both B and C.
the marginal cost curve to shift up.
D. marginal cost must be greater than average variable cost.
E. marginal product must be increasing.
20.
A.
B.
C.
D.
The law of diminishing marginal returns indicates that:
as extra units of a variable resource are added to a fixed resource the extra or marginal product will decline beyond some point.
because of economies and diseconomies of scale a competitive firm’s long-run average cost curve will be U-shaped.
the market demand curve or goods produced by purely competitive industries is downward sloping.
beyond some point the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra
amounts of satisfaction.
E. total output will be decreasing when marginal product is positive but falling.
21.
A.
B.
C.
D.
E.
The short-run supply curve for a perfectly competitive firm is:
the average fixed cost curve.
the upward-sloping portion of its marginal cost curve.
the upward-sloping portion of its average total cost curve.
the portion of its marginal cost curve above the average total cost curve.
the portion of its marginal cost curve above the average variable cost curve.
22.
A.
B.
C.
Which of the following statements about the firm depicted in Figure 10 is true?
The firm represented in this diagram is selling under the conditions of pure monopoly.
If market price was P2, the demand curve facing this firm is the horizontal line labeled MR 2.
If the market price was P1, the profit-maximizing (or loss-minimizing) firm will produce output Q1 in the short run; but, firms will
leave the industry in the long run.
D. If the market price was P2, the profit-maximizing (or loss-minimizing) firm will produce output Q3 in the short run and firms will
enter the industry in the long run.
E. If the market price was P3, in the short run, the profit-maximizing firm will produce output Q4 and earn normal profits.
23. Figure 11 shows a typical firm in a perfectly competitive, decreasing-cost industry. Based on the information in Figure 11,
what will happen in the long run?
A. Curve S will shift to the right while the ATC, AVC, and MC curves shift down.
B. Curve S will shift to the left while the ATC, AVC, and MC curves shift up.
C. Curve D will shift to the right will the ATC, AVC, and MC curves shift up.
D. Curve S will shift to the left but the ATC, AVC, and MC curves don’t shift.
E. Curve S will shift to the left and the ATC, AVC, and MC curves will shift down.
24. In equilibrium, which of the following conditions are common to both the unregulated monopoly and to pure competition?
A. P = MC.
B. P = ATC.
C. MR = MC.
D. P = MR.
E. P = MC = ATC.
25.
A.
B.
C.
If the long-run supply curve for a perfectly competitive industry is upward sloping, then:
it is a constant-cost industry.
D. Both B and C.
input prices decrease as firms exit the industry.
E. None of these answers.
it is an increasing-cost industry.
26.
A.
B.
C.
D.
E.
Refer to Figure 12 which shows the total revenue function of a pure monopoly. According to Figure 12:
in the short run, if the monopoly only had fixed costs, then its profit-maximizing output would be q2.
marginal revenue is negative at q1.
demand is inelastic at q1.
diminishing marginal returns sets in at q2.
at q3 the price elasticity of demand is greater than 1.
27. If you have a mortgage on your house at 6 percent and the inflation rate when the mortgage was acquired was 3 percent
but since then inflation has increased and it is now 8 percent per year, the current real interest rate is:
A. 14 percent per year. B. 6 percent per year.
C. 0 percent per year.
D. -2 percent per year. E. 8 percent per year.
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28. Figure 13 shows a perfectly competitive industry that became monopolized. Initially the horizontal line label MC was the
long-run supply curve of the perfectly competitive industry. Based on the information in Figure 13, when the industry
becomes monopolized:
A. consumer surplus falls by area b + e.
B. producer surplus increases by area b.
C. the deadweight social loss equals area e.
D. the market price will be greater and the market output will be less than under perfect competition.
E. All of the above.
29. Referring to the pure monopoly depicted in Figure 14, which of the following statements is (are) true?
A. If the monopoly was unregulated, the profit-maximizing monopoly would charge $7.50 per unit and produce 1,100 units.
B. If the monopoly was regulated, and the regulators forced the monopoly to charge the socially optimal price, the firm would set a
price of $11.00 and sell 1,800 units.
C. If the monopoly was regulated, and the regulators forced the monopoly to charge the “fair price,” the firm would set a price of
$12.00 and sell 1,500 units.
D. All of the above.
E. None of the above.
30.
A.
B.
C.
Holding everything else constant, which of the following would cause an increase in consumption?
An increase in the price level.
D. A decrease in the interest rate.
A decrease in stock prices.
E. An increase in taxes.
A decrease in future expected income.
31.
A.
B.
C.
Holding everything else constant, which of the following would cause an increase in the equilibrium nominal interest rate?
A decrease in expected inflation.
D. A decrease in the risk of holding bonds.
An increase in the money supply.
E. An increase in the federal government budget surplus.
An increase in the price level.
32.
A.
B.
C.
In calculating GDP, investment is defined as:
the purchase of a stock or bond.
what consumers do with their savings.
spending on new capital goods by government.
D. the purchase of new capital goods by firms.
E. Both C and D.
33. Production by Honda, a Japanese firm, in the United States is included in _____ GDP and production by the Nike
Corporation, a U.S. firm, in Vietnam is included in _____ GDP.
A. U.S. and Japanese; U.S. and Vietnamese
D. Japanese; U.S.
B. Japanese; Vietnamese
E. U.S.; Vietnamese
C. U.S.; U.S.
34.
A.
B.
C.
Frictional unemployment is the result of:
foreign competition.
technological change and increased automation.
normal labor market turnover with people between jobs.
35.
A.
B.
C.
In the long run macro model, if the money supply increases:
the LRAS shifts to the right, P decreases, and Y increases.
D. the AD shifts to the left, P decreases, but Y is unaffected.
the LRAS shifts to the left, P increases, and Y decreases.
E. the AD shifts to the right and both P and Y increase.
the AD shifts to the right, P increases, but Y is unaffected.
36.
A.
B.
C.
D.
E.
Holding everything else constant, if nominal interest rates in America increase, then:
the dollar becomes stronger and U.S. net exports decrease.
U.S. bond prices increase.
American bonds become less attractive to foreign investors and the demand for dollars falls.
the dollar becomes weaker and U.S. net exports increase.
Both C and D.
37.
A.
B.
C.
Stagflation is a combination of _____ real GDP and a _____ price level.
increasing; rising
D. decreasing; rising
increasing; falling
E. no change in; rising
decreasing; falling
D. a slowdown in the rate of economic expansion.
E. discouraged workers who stop looking for jobs.
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38.
A.
B.
C.
D.
E.
The short-run aggregate supply curve will shift to the right if:
workers expect future inflation to increase.
there is a positive supply shock such as a decrease in the price of crude oil.
there was a tight labor market.
there was an increase in the price level.
if powerful unions forced firms to pay higher wages.
39.
A.
B.
C.
D.
E.
An open market sale would:
make the dollar depreciate.
cause bond prices to increase.
causes an increase in consumption, investment, and net exports.
All of the above.
None of the above.
40. According to the long-run self correcting mechanism, if real GDP is greater than the full-employment level of real GDP,
then nominal wages ___, the short-run aggregate supply curve shifts to the ___, and the price level ___.
A. increase; left; increases
D. increase;left;decreases
B. decrease;right;decreases
E. increase;right;decreases
C. decrease;left;increases
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SL 151
Name
CM _____
Bremmer
Fall 2006
Answer Sheet and Short Answer Questions -- Final Exam - - Exam Booklet #______
PART I. TRUE (T) or FALSE (F)
--------------------------------------------
PART II. MULTIPLE CHOICE
-------------------------------------------------------------
1. ______
11. ______
1. ______
11. ______
21. ______
31. ______
2. ______
12. ______
2. ______
12. ______
22. ______
32. ______
3. ______
13. ______
3. ______
13. ______
23. ______
33. ______
4. ______
14. ______
4. ______
14. ______
24. ______
34. ______
5. ______
15. ______
5. ______
15. ______
25. ______
35. ______
6. ______
16. ______
6. ______
16. ______
26. ______
36. ______
7. ______
17. ______
7. ______
17. ______
27. ______
37. ______
8. ______
18. ______
8. ______
18. ______
28. ______
38. ______
9. ______
19. ______
9. ______
19. ______
29. ______
39. ______
10. _____
20. ______
10. _____
20. ______
30. ______
40. ______
Part III. Short Answer Questions (60 points). Give a complete, but concise answer for each of the following
questions. Answer each question with complete sentences. Use math, graphs, or equations to help explain
each answer. If you require more space, write on the back, indicating that you have done so and clearly
labeling each answer.
1. Assuming that addicts use street crime to finance their habits, explain how more aggressive border
surveillance and successful drug interdiction affects the amount of U.S. street crime. Use a supply
and demand model to illustrate your graph and explain any key assumptions. (10 points)
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2. Assume a constant-cost, perfectly competitive industry produces good X. Using two graphs, one
showing the market demand and supply curves of good X and the other showing the average cost
curves of the typical firm, illustrate and describe how a giving a $1 per unit subsidy to every producer
affects the industry and the typical firm, both in the short and long run. (10 points)
3. Assume a profit-maximizing monopolist is earning only normal profits in the short run. Illustrate
and explain what happens to the monopolist’s price and output if the government imposes a flat,
lump-sum tax of $100 on the monopolist. What will the firm do in the short run and in the long run?
(10 points)
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4. Using the four-quadrant, long-run macroeconomic model discussed in class, illustrate and describe
the effect of an increase in the labor supply. What happens to real GDP, the price level, the real wage,
and employment? (10 points)
5. Assume the economy is at full employment. Using the aggregate demand-aggregate-supply model,
illustrate and explain the short-run effects of a decrease in stock prices. Using your graph, illustrate
and explain how the self-correcting mechanism will return the economy to full-employment output in
the long-run. Given the short-run decrease in stock prices, illustrate and explain how fiscal and
monetary policy can be used to return the economy to full employment. (10 points)
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6. Opponents of activist demand-side policy argue that government intervention results in a more
volatility in the price level and in output. Using the AD-LRAS-SRAS model, illustrate and explain
their argument. (10 points)
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