1 Name Student ID # Section # Econ Lecture l Final for Fall 1997 Section 1: Multiple Choice (2 points each) Please circle the best answer for the following 25 questions. 1. The benefit to a firm of hiring one more unit of labor is the a. marginal product multiplied by the wage. b. marginal product minus the wage. c. the marginal product of capital. d. value of the marginal product of labor. 2. The impact of one person s actions on the well-being of another is called a. deadweight loss. b. an externality. c. an efficient outcome. d. competitive advantage. 3. If one person s use of a good diminishes another person s enjoyment of it, the good is a. excludable. b. normal. c. exhaustible. d. rival. 4. An example of an implicit cost of production would be a. the cost of a delivery truck. b. the income the owner of the firm could have earned working for someone else. c. the cost of flour for producing bread in a bakery. d. all of the above are implicit costs. 5. For a perfectly competitive firm, a. average revenue is always equal to average variable cost. b. price is equal to average revenue. c. average revenue is equal to marginal revenue. d. both b and c are true. e. all of the above are true. 6. A natural monopoly occurs when a. firms are characterized by falling marginal cost curves. b. a monopoly firm requires the use of free natural resources to produce its product. c. average total cost of production decreases as more output is produced. d. the monopolist s product is sold in its natural state (such as water or diamonds).
2 7. Compared with no trade, imports under free trade result in in consumer surplus that in producer surplus. a. an increase; is greater than the decrease b. an increase; is less than the decrease c. a reduction; is greater than the increase d. a reduction; is less than the increase 8. If we add up all profits for firms in an oligopolistic market, the amount the profits a monopolist would earn in that market. a. can be either greater than, less than or equal to b. is less than or equal to c. is greater than or equal to d. is greater than 9. The profit maximizing rule for a monopolistically competitive firm is to select the quantity at which a. price is equal to marginal cost. b. marginal revenue is equal to marginal cost. c. price is equal to marginal revenue. d. average revenue exceeds average total cost. 10. Chris and Jamie are roommates. Chris enjoys smoking. Jamie enjoys smoke-free air. If Chris values smoking more than Jamie values smoke-free air, the efficient outcome a. will only happen if Jamie is given the property rights to clean air. b. will only happen if Chris is given the property rights to smoking. c. is to ban smoking from the apartment. d. is to let Chris smoke. 11. Suppose there are two types of labor that are exactly the same, except type one has more human capital than type two. Which of the following statements is true? a. The wage for type one labor will be higher. b. More type one labor will be supplied than type two labor. c. The wage for type two labor will be higher. d. No one will want to hire type one labor. 12. Consider a negative income tax that uses the following formula: TAX = (1/2)(INCOME) - 15,000 What will happen to a family that earns no income? a. They will pay $15,000 in taxes. b. They will receive an income subsidy of $15,000. c. They will receive an income subsidy of $7,500. d. Nothing because a negative income tax requires a family to earn income.
3 13. Suppose Iran and Iraq are the only two countries that produce oil. Each can choose a high amount of production or a low amount of production. The profits they could earn are summarized below. high production low production high Iraq gets $40 billion Iraq gets $30 billion production Iran gets $40 billion Iran gets $60 billion Iran low Iraq gets $60 billion Iraq gets $50 billion production Iran gets $30 billion Iran gets $50 billion Iraq Which of the following is a Nash equilibrium? a. Both choose low production. b. Iran chooses high production and Iraq chooses low production. c. Iraq chooses high production and Iran chooses low production. d. Both choose high production. 14. A small town has decided to pay for its police force by asking everyone in town to contribute the amount of money equal to the value they will get from having a police force. What economic problem are we likely to observe? a. The outcome will be efficient. b. The free rider problem. c. The tragedy of the commons. d. The outcome will be inequitable. 15. If the XYZ company chooses not to produce anything this month, its will be zero for the month. a. opportunity cost b. average cost c. variable cost d. total cost 16. Julie says that she would buy one banana split sundae every day regardless of the price. If she is telling the truth, a. Julie s price elasticity of demand for banana split sundaes is one. b. Julie s income elasticity of demand for banana split sundaes is negative. c. Julie s price elasticity of demand for banana split sundaes is zero. d. None of the above answers is correct.
4 17. Surf City sells swimming suits at an ocean resort. During the peak season the price of swimming suits is greater than average total costs. During the off-season the price of swimming suits is less than average variable costs. What should Surf City do? a. Stay open only in the peak season. b. Exit the market. c. Stay open only in the off-season. d. Stay open in both the peak and the off-season. 18. Arnie can mow the lawn in 1 hour. He can clip the dog s nails in 10 hours. Amy can mow the lawn in 3 hours. She can clip the dog s nails in 12 hours. Which of the following statements about Arnie and Amy is true? a. Arnie has an absolute advantage in mowing the lawn. b. Amy has an absolute advantage in clipping the dog s nails. c. Arnie has a comparative advantage in both jobs. d. Both a and c are true. 19. Consumers generally prefer to have more of all goods. Which property of indifference curves fits this statement? a. higher indifference curves are preferred to lower indifference curves b. indifference curves do not cross c. indifference curves are downward-sloping d. indifference curves bow inward 20. Heidi likes to consume two goods, magazines and videos. When we draw her indifference curves, videos are on the x-axis. The price of a magazine is $1.00. The price of a video is $3.00. At the point that Heidi chooses to consume, her marginal rate of substitution is a. 6. b. 3. c. 1/2. d. unknown. We need more information to determine this. 21. Recall the guest lecture by John Landon-Lane. After the reforms ( ) in New Zealand the manufacturing sector became much smaller. Why? a. There are more sheep than humans in New Zealand. b. New Zealand has an absolute advantage in manufacturing. c. New Zealand has a comparative disadvantage in manufacturing. d. New Zealand has an absolute advantage in agriculture. 22. Recall the guest lecture by Daria Zakharova discussing public utilities in Russia. The Russian government must subsidize the public utilities. Why? a. The public utilities are not regulated. b. The regulated price is less than marginal cost. c. The public utilities earn zero economic profits. d. Workers at the public utilities work harder than most other Russian workers.
5 23. Recall the guest lecture by Navin Aswal. The fair price shops (shops that sell goods bought by the government) in India often have problems with a shortage of goods. Why might this be the case? a. The free market price for these goods is lower than the retention price. b. People love to shop at the fair price shops. c. The retention price for these goods is lower than the free market price. d. People do not like to shop at fair price shops. 24. Recall the guest lecture by Ashvin Ahuja discussing air pollution in Thailand. Which of the following statements is true? a. Consumers in Thailand refuse to buy goods from companies that pollute. b. Firms that pollute in Thailand do not consider the social costs of pollution when they decide how much output to produce. c. Firms that pollute in Thailand produce the efficient amount of output. d. Both b and c are true. 25. Recall the guest lecture by Antoine Martin discussing banks in Switzerland. Why did the Cartel Commission recommend that the Swiss Bank Association stop announcing recommended prices to its members? a. They believed the banks were colluding and reducing competition. b. The recommended prices were too low. c. It was unfair to banks that were not members. d. None of the above statements is correct.
6 Section 2: Definitions (2 points each) Choose seven of the following eight terms and state the definition in the space provided. public good efficient scale opportunity cost monopolistic competition
7 human capital inferior good marginal rate of substitution diminishing marginal product
8 Section 3: Short Answer Answer all of the following three questions in the space provided. All work must be shown to receive full credit. All diagrams must be fully labeled. Results shown on diagrams must be accompanied by writing them out in words. (4 points) 1) a) Suppose the United States imports textiles. Draw a demand-supply diagram showing the market for textiles in the United States. (Label the closed economy equilibrium price and quantity demanded as P 1 and Q 1 respectively.) How much will be imported? (3 points) b) Suppose the United States puts a tariff on textiles. Show this on your diagram from part a. How much is imported after with tariff? (8 points) c) Complete the following chart. Consumer surplus Producer surplus Government surplus Deadweight loss Before the tariff After the tariff
9 (5 points) 2) a) A major earthquake hits the island nation of Unluckyland destroying much of their capital. What will happen to the quantity supplied and the rental rate of capital? Draw a diagram to justify your answer. (5 points) b) What will happen to the wage and quantity supplied of labor in Unluckyland? Draw a diagram to justify your answer.
10 (5 points) 3) a) A drug company has just patented a new drug. Draw a diagram that shows how much of the drug the company will produce (label this Q 1 ) and the price of the drug (label this P 1 ). (3 points) b) How much profit does the drug company earn? (3 points) b) Will there be deadweight loss? Why or why not?