Econ Final Fall 1998

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1 Name Recitation Section Number Student ID Number Econ Final Fall 1998 Form D 1

2 Section 1: Multiple Choice (2 points each) For the following thirty-eight questions, find the best answer and fill in the corresponding circle on your answer sheet. 1. A firm is if it is the only seller of its product and if the product has no close substitutes. a. monopolistically competitive b. an oligopoly c. a monopoly d. competitive 2. To maximize profits a monopoly will choose to produce the amount of output such that a. average total cost is less than average variable cost. b. price equals marginal revenue. c. marginal revenue equals marginal cost. d. price is less than average variable cost. 3. As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good a. decreases. b. increases. c. is unaffected. d. Not enough information given. 4. The efficient level of production for a monopoly occurs where the marginal cost curve intersects the a. variable cost curve. b. demand curve. c. marginal revenue curve. d. supply curve. 5. Equilibrium quantity in markets characterized by oligopoly are than in monopoly markets and than in perfectly competitive markets. a. higher, higher b. lower, higher c. higher, lower d. lower, lower 6. Members of a cartel have an incentive to to increase their profits further. a. limit membership b. report the cartel to the authorities c. lower production d. cheat 2

3 7. 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. Iraq 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 Which of the following is a Nash equilibrium? a. Both choose high production. b. Both choose low production. c. Iran chooses high production and Iraq chooses low production. d. Iraq chooses high production and Iran chooses low production. 8. Monopolistic competition differs from oligopoly because in monopolistically competitive markets a. strategic interactions between firms are not very important. b. each of the sellers offers a somewhat different product. c. there are barriers to entry. d. all firms can eventually earn economic profits. 9. The profit maximizing rule for a monopolistically competitive firm is to select the quantity at which a. average total cost is equal to marginal revenue. b. average revenue exceeds average total cost. c. marginal revenue is equal to marginal cost. d. average total cost is minimized. 10. Recall the guest lecture by Daria Zakharova discussing public utilities in Russia. It is common for Russians to leave lights, televisions and radios turned on when they leave their homes. Which of the following statements best describes the economic reason for this? a. The new Russians strongly believe in conspicuous consumption. b. The politicians benefit from this. c. The regulated price for utilities is lower than marginal cost in Russia. d. The public utilities in Russia are subsidized. 3

4 11. 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. 12. In the long run monopolistically competitive firms a. have excess capacity. b. produce at the efficient scale. c. earn positive profits. d. both a and b are true. 13. In the long run all costs are a. fixed. b. variable. c. sunk. d. None of the above. 14. Jackie likes to consume two goods, coffee and jumbo muffins. When we draw her indifference curves, cups of coffee are on the x-axis. The price of a cup of coffee is $3. The price of a jumbo muffin is $2. At the point that Jackie chooses to consume, her marginal rate of substitution is a. 3/2. b. 3. c. 2. d. unknown. We need more information to determine this. 15. Laura can mow the lawn in 30 minutes. She can clean the house in 4 hours. Joe can mow the lawn in 20 minutes. He can clean the house 2 hours. Which of the following statements about Laura and Joe is true? a. Joe has a comparative advantage in both jobs. b. Joe has an absolute advantage in mowing the lawn. c. Laura has an absolute advantage in cleaning the house. d. Both a and b are true. 16. If an indifference curve is bowed inward, the marginal rate of substitution is a. likely to be identical to the relative price for each bundle along the indifference curve. b. is equal to the slope of the indifference curve. c. different for each bundle along the indifference curve. d. likely to be constant for all bundles along the indifference curve. 4

5 17. In the long run we expect perfectly competitive firms to a. produce at the efficient scale. b. produce the quantity that minimizes average total costs. c. both a and b. d. none of the above. 18. When the price of a good or service changes, a. demand shifts in the opposite direction. b. supply shifts in the same direction. c. there is a change in quantity supplied in the opposite direction. d. there is a movement along a stable supply curve. 19. Get Smart University has decided to raise the price on parking permits to increase revenue for parking improvements. If the buyers of parking permits have a unit elastic demand, then a. the planned price increase would not change total revenue. b. the effect of the planned price increase is ambiguous. c. the planned price increase would increase total revenue. d. the planned price increase would decrease total revenue. 20. A tax of $.10 per bag on the buyers of popcorn will cause a. the demand curve to shift right with the horizontal distance between the demand curves equal to $.10. b. the demand curve to shift left with the horizontal distance between the demand curves equal to $.10. c. the demand curve to shift right with the vertical distance between the demand curves equal to $.10. d. the demand curve to shift left with the vertical distance between the demand curves equal to $ Recall the guest lecture by Bill McCausland. Which of the following trade patterns cannot be explained by comparative advantage? a. Canada tends to import fruits and vegetables. b. Canada tends to export live animals. c. Canada tends to export forestry products. d. Before the Auto Pact of 1965 Canadians bought mostly cars produced in Canada. 22. 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. People love to shop at the fair price shops. b. The retention price for these goods is lower than the free market price. c. People do not like to shop at fair price shops. d. The free market price for these goods is lower than the retention price. 5

6 23. Recall the guest lecture by Pascal Gauthier. Suppose that when Canada enters a free trade agreement with Chile there is trade creation with Chile and trade diversion with France in the market for wine. Which of the following statements must be true? a. There is not enough information to determine the relative prices of wine in Chile and France. b. The price of wine from Chile plus the tariff is lower than the price of wine from France plus the tariff. c. The free market price of wine in France is higher than the free market price of wine in Chile. d. The free market price of wine in Chile is lower than the price of wine in France plus the tariff. 24. The impact of one person s actions on the well-being of another is called a. rivalness. b. competitive advantage. c. deadweight loss. d. an externality. 25. A good is excludable if a. people can be prevented from using it. b. one person s use of the good diminishes another person s enjoyment of it. c. the government regulates its availability. d. it is not a normal good. 26. If a country allows trade in a good, and the domestic (closed economy) price of the good is higher than the world price, a. additional information about demand is needed to determine whether the country will export or import the good. b. the country will become an exporter of the good. c. the country will become an importer of the good. d. the country will neither export nor import the good. 27. If more is preferred to less then a. indifference curves might cross. b. indifference curves will bow inward. c. indifference curves will be downward-sloping. d. higher indifference curves are preferred to lower indifference curves. 28. If the demand for a good is inelastic, then a decrease in the price of that good will cause a. demand for that good to increase. b. an increase in total revenue. c. a decrease in total revenue. d. no change in total revenue. 6

7 29. Greg buys a new sound system for his dorm room for $300. He receives consumer surplus of $800 from the purchase. How much does Greg value his sound system? a. $1,100 b. $300 c. $500 d. $ Taxes may cause deadweight loss because a. it is difficult to determine how high the tax should be. b. they transfer purchasing power to the government which always wastes money. c. some buyers and sellers leave the market. d. producer surplus increases. 31. The opportunity cost of something is a. the cost of compliance with government regulations. b. the value of the next best alternative. c. identical to the accounting cost. d. not considered in determining economic profit. 32. A perfectly competitive market is characterized by a. many buyers and sellers b. goods offered for sale are nearly identical. c. free entry. d. all of the above. 33. Suppose the price of paper increases and the number of students enrolled in microeconomics increases. In the market for microeconomics textbooks a. quantity demanded will increase and the change in price is ambiguous. b. quantity demanded will decrease and the change in price is ambiguous. c. the price will increase and the change in quantity demanded is ambiguous. d. both price and quantity demanded will increase. 34. Butter has a close substitute (margarine). We expect demand for butter to be a. upward sloping. b. elastic. c. inelastic. d. unit elastic. 35. When there is a price floor in a market (assume the price floor has an effect) a. there will be a surplus. b. there will be a shortage. c. buyers can buy as much as they want at the legal price. d. Both a and c are true. 7

8 36. Darrel likes to go to the opera and to jazz concerts. The price of an opera ticket decreases. The substitution effect is stronger than the income effect for Darrel. (Trips to the opera and jazz concerts are NOT Giffen goods.) After the price change Darrel will a. buy fewer opera tickets, but the change in jazz concert tickets is ambiguous. b. buy more opera tickets, but the change in jazz concert tickets is ambiguous. c. buy more opera tickets and more jazz concert tickets. d. buy more opera tickets and fewer jazz concert tickets. 37. Susumu and Toshi are officemates. Susumu enjoys having a messy office. Toshi enjoys a clean office. If Susumu values a messy office more than Toshi values a clean office, the efficient outcome a. is to have a clean office. b. is to have a messy office. c. will only happen if Susumu is given the property rights to having a messy office. d. will only happen if Toshi is given the property rights to clean office. 38. Costs that change with the amount of output produced are called a. explicit costs. b. fixed costs. c. variable costs. d. implicit costs. 8

9 Section 2: Definitions (2 points each) State the definition of the following three terms in the space provided. Nash equilibrium Name Recitation section number Student id number producer surplus public good 9

10 Section 3: Short Answer Answer the following question in the space provided. costs, revenue Quantity Name Recitation section number Student id number (6 pts) a) Public utilities are considered to be natural monopolies. On the above diagram draw and label the curves needed to determine the quantity of output produced and the amount of profit for a public utility. (2 pts) b) Suppose public utilities were not regulated. Label the price the utility would charge on your diagram as P 1. Label the quantity they would produce as Q 1. (2 pts) c) Suppose the public utilities were regulated with marginal cost pricing. Label the price the utility would charge on your diagram as P 2. Label the quantity they would produce as Q 2. (2 pts) d) Clearly label on your diagram the profits the public utility would earn under the marginal cost pricing regulation. (3 pts) e) If marginal cost pricing is used, what else must the government do for the utility? Why? (3 pts) f) Name an alternative type of regulation for natural monopolies that does not require the action described in part e and explain why the action described in part e is not needed. 10

Econ Lecture l Final for Fall Section 1: Multiple Choice (2 points each) Please circle the best answer for the following 25 questions.

Econ Lecture l Final for Fall Section 1: Multiple Choice (2 points each) Please circle the best answer for the following 25 questions. Name Student ID # Section # Econ 1101 - 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