ECONOMICS 1A: THE END IS NIGH! - PREPARING FOR THE FINAL EXAM

Transcription

1 Professor Gregory Clark Winter 2000 ECONOMICS 1A: THE END IS NIGH! - PREPARING FOR THE FINAL EXAM Date Coverage: Wed, Mar 22, 4-6 pm. Syllabus sections 1-12 (and a little of 13) and all the material on problem sets 1-7. For the purposes of review, Baumal and Blinder, pp , , , , , are the most relevant sections of the text for what I have emphasized. Equal weighting will be given to all the material covered so far. That is there is an equal probability of any topic covered coming up on the final. Format: There will be 25 multiple choice questions for 100 points and some longer questions for 50 points, making 150 points in total. Bring a pencil. We will supply the scantrons. Calculators will not be necessary and will not be allowed. Exam Week Office Hours Mon 20-Wed 22 Gregory Clark Helen Han Seungjoon Lee Nichole Renda Jared Rodecker Brian Rosario Jennifer Wood 9-11 Tuesday, 9-10 Wednesday 9-11 Tuesday 1-3 Tuesday 1-3 Monday 1-4 Wednesday Wednesday 3-5 Tuesday

2 Multiple Choice (100 points) (This sample exam only has 15 short questions) 1. If consumption of gasoline is associated with an external cost of $1 per gallon then the gasoline market will only operate efficiently if: A. There is a tax of $1 per gallon on producers of gasoline B. There is a tax of $1 per gallon on consumers of gasoline. C. Either A. or B. D. There is a subsidy of $1 per gallon to producers of gasoline. E. There is a subsidy of $1 per gallon to consumers of gasoline. 2. Suppose a firm has a downward sloping demand curve. Which of the following will NOT be true. A. The firm maximizes profits by setting marginal revenue equal to marginal cost. B. The firm may have many competitors. C. The price charged by the firm will be greater than marginal costs. D. The price charged by the firm will equal marginal costs. E. The price charged by the firm will be inefficient. 3. In the short-run A. All factors of production are fixed. B. All factors of production are variable. C. Some factors of production are variable, while at least one factor of production is fixed. D. All of the above are correct E. None of the above are correct 4. The short run marginal cost of producing output for a firm will be: A. The increase in short run average total costs from producing another unit of output. B. The increase in short run average variable costs from producing another unit of output. C. The increase in short run total costs from producing another unit of output. D. The increase in short run variable costs from producing another unit of output. E. C. and D. 5. A firm switching from a single price to a price discrimination scheme will the price for the group of consumers with relatively elastic demand and the price for the group of consumers with relatively inelastic demand A. Decrease, increase B. Decrease, decrease C. Increase, increase D. Increase, decrease E. Not enough information to answer

3 6. The practice of price discrimination: A. Occurs when a monopolist sells a product below the marginal cost of production. B. Increases a monopolist's marginal costs. C. Will always increase a monopolist's profit. D. Does not require that a firm have control over the price at which it sells its output. E. is to charge a higher price to the high elasticity demand group of customers and a lower price to the low elasticity demand group of customers. 7. Suppose that the demand for shoes is Qd = P and the supply of shoes is Qs = P. What is the initial quantity of shoes produced in the market? A. 20 B. 40 C. 60 D. 80 E. none of the above 8. Suppose that the demand for shoes is Qd = P and the supply of shoes is Qs = P. Suppose the government imposes a $20 tax on the suppliers of shoes. What is the new market price of shoes? A. $30 B. $40 C. $50 D. $60 E. $70 9. A regulatory regime under which the government picks the point on the demand curve at which price equals average cost: A. Is a pricing policy known as average cost pricing. B. Is a regulatory technique used to induce marginal cost pricing. C. Is a regulatory technique used to induce average revenue pricing. D. Assures economic profits greater than zero. E. Assures economic profits less than zero. 10. Because a natural monopolist has no incentive to control costs, a policy of average cost pricing will: A. Cause the monopolist to charge a price greater than average cost. B. Cause the profits a monopolist earns to initially increase then decrease. C. Cause price to fall initially, but to rise as costs rise. D. Create an incentive for the monopolist to achieve the efficient level of output. E. Create an incentive for the monopolist to find the method of production with the lowest cost.

4 11. Suppose that a monopolist faces demand for its product of Q = 30 - P and has constant marginal costs of $6 per unit. What profit would the monopolist receive if it produced optimally? A. $9 B. $25 C. $36 D. $81 E. $ Why do movie theaters charge different prices for admission but the same price to everyone for popcorn? A. There is no marginal cost associated with selling an additional seat to a theater, but there are incremental costs involved with producing and selling popcorn B. Once inside the movie theater, the firm has market power in selling popcorn, since it prohibits customers from bringing in outside food C. While people can purchase popcorn for other people, it is difficult to transfer a movie ticket from one consumer to another D. None of the above are correct E. All of the above are correct 13. Which of the following is a requirement for efficiency in an economy? A. The government never intervenes in any competitive markets. B. There are no taxes on goods. C. The value people attach to any good, measured in $, is greater than or equal to the cost to society of producing the good, measured in $. D. There are no taxes on all normal goods. E. Only inferior goods are taxed. 14. Suppose that the demand for ficus can be written as Q d = 32 - P and the supply of ficus can be written as Q s = P - 8. If the price of ficus is $20, which of the following is true? A. There will be a surplus of 12 ficus B. There will be a shortage of 12 ficus C. There will be a surplus of 0 ficus D. There will be a shortage of 10 ficus. E. None of the above are correct. 15. Suppose the own price elasticity of demand for cabbage at the current price is 1. What (approximately) happens to the revenue of cabbage sellers if the price rises by 2%? A. It stays the same. B. It falls 2%. C. It rises 2%. D. It falls ½%. E. It rises ½%.

5 Part B: Short Answer Questions (50 points) 1. Taxes in competitive markets. Suppose that in London there are 1,000 apartments zoned for rental use only, which are thus supplied for rentals whatever the rental price in the market is (they cannot be used for any other purpose). Suppose that the demand for these apartments is given by the equation Q d = 1,600 Rent. where Rent is the monthly amount charged in rent for an apartment. a. (4) Draw the demand curve and supply curve on the graph below, labeling each curve and the axes, and indicating the units. b. (4) Calculate the equilibrium rent and quantity of rental apartments? c. (4) To raise revenue Margaret Thatcher imposes a tax of $100 per month on renters. Show on your diagram above the changes that this produces in the demand curve. Calculate the new rent and quantity of apartments? How much of the tax burden is borne by apartment owners after the tax is imposed? d. (2) Calculate the deadweight loss from the tax. e. (2) Calculate the rent seeking loss from the tax. f. (4) Margaret Thatcher is defeated in a special election by Ken Livingston who promises to tax apartment owners instead of renters. On the diagram below show the demand and supply curves where the $100 tax is imposed on apartment owners. Calculate the new market rental and the quantity of apartments rented. 2. Price Discrimination. Suppose the average costs for American Airlines is $0.21 per coach passenger per mile. a. (6) The price charged to different customers in coach class on a particular route will often differ by large amounts. Explain briefly as many ways as you can in which American Airlines price discriminates on a particular route. b. (2) If the plane on a particular route is not full what is the efficient price? c. (6) The price charged by American Airlines for the flight from San Francisco to Dallas exceeds that charged for San Francisco to New Orleans, even though the flight to New Orleans goes via Dallas. Explain why. 3. The Long Run in Competitive Markets. Suppose the taxi industry in Manhatten is perfectly competitive. The long run total cost per ride delivered by each cab per day is given by LTC = (q 2 /4) where $100 is the rental fee for a cab per day, and q is the number of rides per day. The LMC is thus q/2. a. (2) What is the long run average cost (LAC) as a function of q? b. (4) At how many rides per day is average cost per ride minimized? c. (2) What will be the price in the long run if the taxi industry is a constant cost industry? d. (2) In the long run how many rides does each taxi deliver per day? e. (2) Suppose the daily demand curve is given by Q d = P. How many taxi cabs operate each day in the city? f. (4) Is the constant cost assumption for this industry reasonable?