AEC : The Economics of Food And Agriculture Practice Cumulative Exam

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1 AEC : The Economics of Food And Agriculture Practice Cumulative Exam True/False: 1 points each 1. As consumers eat more processed foods and eat out more often, the percentage of the consumer food dollar that goes back to the farmer has fallen to about 20%. 2. The Law of Diminishing Marginal Utility tells us that total utility increases at a decreasing rate (thus, marginal utility declines as more of a good is consumed). 3. If demand is inelastic with respect to price, increasing price will increase total revenue because the increase in revenue per unit sold will offset the loss in units sold. 4. The supply curve to the firm is the marginal cost curve above the average variable cost curve in the short-run, and above the average total cost curve in the long-run. 5. Non-price competition attempts to increase the demand for the product using product differentiation, and making the demand for the product more price inelastic. Multiple Choice: 3 points 1. General trends in US farm structure include: a. a reduction in the number of farms, yet an increase in average farm size b. more farmers that rely on off-farm income c. more than 50% of farms that gross less than $10,000 annually d. more women, but fewer African-American farmers 2. An increase in US interest rates will a. increase the global demand for US investments b. decrease the demand, thus the value, of the dollar c. increase exports d. decrease imports 3. With regard to the US food processing sector: a. US food manufacturers face very little competition from foreign food companies. b. The market structure of the food processing sector is becoming increasingly monopolistically competitive. c. Recent merger and acquisition activity continues to increase market concentration. d. Food manufacturers continue to substitute labor for capital. 4. As production or output increases: a. total variable costs of production decline b. total fixed costs of production remain constant c. total costs decline at an increasing rate d. total fixed costs of production increase

2 5. The Law of Diminishing Marginal Productivity tells us that a. as additional units of a variable input are added are added to a fixed input base, total production will eventually increase at a decreasing rate b. as additional units of variable input are used, total production will always increase c. marginal productivity will eventually exceed total productivity 6. The supply of most agricultural products is inelastic due to: a. most agricultural products are relatively perishable b. the length of the production cycle of most crops and livestock is relatively long c. the large proportion of fixed inputs used relative to variable inputs d. on-farm storage is typically very limited 7. The South African government knows that the price elasticity of supply for white corn is 0.8. They would like for corn production to increase by 20%. All other things equal, how much will price have to increase in order to obtain that level of supply increase? a. 16 percent b. 25 percent c. 40 percent d. none of the above 8. Since the passage of the 1996 FAIR Act (also known as the Farm Bill): a. the number of agribusiness mergers has fallen b. federal government subsidies to farmers have fallen c. the food market has become less concentrated d. more federal subsidies have gone to small family farms 9. Consider the following two-good case: The MU for pizza is 60 and the price is $6. The MU for a submarine sandwich is 32 and the price is $4. A rational consumer would: a. Eat more subs until the MU per dollar is higher than that of pizza b. Eat more pizza until the MU per dollar is smaller than that of subs c. Eat more pizza until the MU of pizza is equal to it s price d. Eat more submarine sandwiches until MU is negative 10. If the cost of rock climbing falls relative to canoe rental (both are normal goods), a consumer is motivated primarily by the income effect if s/he: a. increases purchases of canoe rental, rock climbing, or both b. decreases purchases of canoe rental, rock climbing, or both c. increases purchases of rock climbing and decreases purchases of canoe rental d. increases purchases of canoe rental and decreases purchases of rock climbing 11. Since the Sept 11 terrorist attack on the US, the stock market has recovered. We might expect a. a strengthening of the dollar, causing a decrease in exports and an increase in imports b. a strengthening of the dollar, causing an increase in exports and a decrease in imports c. a weakening of the dollar, causing an increase in exports and a decrease in imports d. a weakening of the dollar, causing a decrease in exports and an increase in imports

3 12. California wine producers, who also export wine to Canada, have stiff competition from Australian wine makers. California wine producers would prefer a a. a strong Canadian dollar relative to the US dollar b. a strong Australian dollar relative to the US dollar c. a weak US dollar relative to the Canadian and Australian dollar d. a strong Australian and Canadian dollar relative to the US dollar 13. Which of the following will increase the supply of papaya? a. an increase in the price of papaya b. an increase in the demand for papaya c. a reduction in the costs of raising papayas 14. To maximize profits, a firm should produce where: a. Revenue is maximized b. Costs are minimized c. MR=MC d. All of the above 15. At one of its plants, Ragu is considering increasing production from a profitable 210 cases of spaghetti sauce per hour to 220 cases per hour. The marginal cost of doing so is $6.25 per case. Ragu can gain $5.94 per case in additional revenue by selling the sauce. What should they do? a. Keep production the same - the increase in costs would outweigh the gain in revenue b. Reduce production until MR is less than MC c. Increase production, since MR > MC d. Shut-down - they re not covering their variable costs 16. If the price of cherry furniture falls relative to mahogany furniture (substitutes) a. the demand for mahogany furniture would increase b. the cross price elasticity would be positive c. the supply of cherry furniture would decrease d. the consumer would be motivated primarily by the income effect if s/he simply increases purchases of cherry furniture 17. US agricultural exports a. typically are larger than US agricultural imports, resulting in an agricultural trade surplus b. of bulk commodities are relatively volatile compared to intermediate and consumer-oriented food exports c. rely on Japan, Canada and Mexico as our largest markets d. are inversely related to changes in the value of the dollar 18. US-owned foreign affiliate sales a. of processed foods are much smaller in value compared with US exports of processed foods b. are a manufacturing, marketing and distribution strategy used by small, domestic companies c. do not count as US exports 19. Which of the following is an example of backward integration? Ragu, a spaghetti sauce processor in

4 the US: a. begins contracting tomato production in Mexico b. merges with a company that processes salsa c. buys a trucking company to transport their canned goods to grocery store outlets d. sells off a subsidiary that processes tomato juice 20. Recent consumer food trends include a: a. decrease in soft drink and confectionery goods (candy) consumption b. decrease in processed dairy food consumption (cheese, sour cream, yogurt, etc) c. decrease in fresh fruit and vegetable consumption d. increase in total meat consumption 21. US farm income a. is positively (or directly) related to the value of the US dollar b. is positively (or directly) related to interest rates c. is negatively (or inversely) correlated with agricultural exports d. is negatively (or inversely) correlated with government payments 22. Assuming normal goods, a parallel shift of the budget constraint to the left would: a. move the consumer to a lower indifference curve b. decrease demand for those goods c. decrease the quantity supplied for those goods d. reduce consumer surplus 23. Increased market concentration in the food sector has: a. reduced innovation and non-price competition b. increased the numbers of firms in the food chain c. increased reliance on the natural forces of supply and demand to set price d. increased economies of scale, resulting in lower food prices ; market concentration in the food sector has decreased 24. You own a Japanese sushi bar in San Francisco, that imports many different types of fish for use in making sushi. A strengthening of the US dollar would a. shift your MC curve up and to the left b. shift your average variable cost curve down c. increase your total fixed cost curve 25. Assume the US cotton market is in equilibrium and the government decides to raise cotton prices by 10% to help local farmers (a price support). The price elasticity of demand is -1.4 and the price elasticity of supply is 0.7. From this we know that a. the demand for cotton is more elastic than the supply of cotton, with respect to price b. cotton consumers are more responsive to changes in price, as compared to producers c. the supply curve for cotton is steeper then the demand curve for cotton d. in absolute terms, the loss in consumer surplus will be smaller than the gain in producer surplus

5 26. In #25 above, this policy action would: a. cause a market surplus of cotton b. increase the supply of cotton c. decrease the demand for cotton 27. In #25 above, a larger market surplus would develop if a. demand was inelastic and supply was elastic b. demand was elastic and supply was inelastic c. both curves were more elastic d. both curves were more inelastic, because a market shortage was created by the government action Graphing: 5 points (Only use ONE graph and be sure to label everything!) A. Draw the supply and demand for beef. B. Recent mergers in the meat industry have improved economies of scale in beef production. Draw this impact on your graph. C. New genetically engineered corn has reduced feed costs in the livestock sector. Draw this impact on your graph. After (B) occurred, what happened to market price market quantity demand/quantity demanded supply/quantity supplied After (C) occurred, what happened to market price market quantity demand /quantity demanded supply/quantity supplied Optional Bonus: 5 points What one topic in this course invoked the strongest emotional reaction from you? Why?

6 Essay: 10 points (clearly thought out, neatly written, in paragraph form) What would be your ideal vision for Rural America 50 years from now? Discuss three government policies that would encourage and preserve that vision.

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