Hours needed to produce one unit of manufactured goods agricultural goods Winneshiek 3 2 Allamakee 2 2

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1 Econ 101, sections 2 and 6, S06 Schroeter Final Exam, Red Choose the single best answer for each question. 1. Adam Smith used the "invisible hand" reference to describe how a. democratically elected public officials direct economic activity. b. the government controls the allocation of the nation's resources. c. the economic influence of large corporations is often overlooked. *. people acting selfishly bring about socially-desirable outcomes. 2. An economy can use its resources to produce two goods: capital goods and consumption goods. Suppose that the production possibility graph for this economy has the familiar "bowed-outward" appearance. Consider two points on the production possibility frontier: Points A and B. Point A has more consumption goods and fewer capital goods than does Point B. At which of these points is the opportunity cost of consumption goods lower? a. Point A. *. Point B. c. Neither point A nor point B. (The opportunity costs of consumption goods are equal at these two points because they are both on the production possibility frontier.) d. Impossible to determine without more information. (We would need to know which of the two goods is plotted on the horizontal axis.) 3. Which of the following is an example of a normative statement? a. "An increase in interest rates will slow the economy's rate of growth." b. "Persistent federal government deficits will lead to an increase in interest rates." c. "The average interest rate on home mortgages has increased over the past year." *. None of the above. (All of these statements are positive statements.) Questions 4, 5, and 6 are based on the following information. Two small countries, Winneshiek and Allamakee, use their labor resources to produce goods of two types: manufactured goods and agricultural goods. The table below gives the number of hours of labor needed to produce one unit of each type of good in each country. Hours needed to produce one unit of manufactured goods agricultural goods Winneshiek 3 2 Allamakee The opportunity cost of 1 unit of manufactured goods in Allamakee is *. 1 unit of agricultural goods. b. 2 units of agricultural goods. c. 3 units of agricultural goods. d. none of the above.

2 2 5. Which of the following is true? *. Allamakee has the comparative advantage in the production of manufactured goods. b. Winneshiek has the absolute advantage in the production of manufactured goods. c. Both a and b are true. d. None of the above is true. 6. Suppose that there were international markets in manufactured goods and agricultural goods and that the prices in these markets implied the following terms of trade: One unit of agricultural goods could be exchanged for two units of manufactured goods. At these terms of trade: a. Both countries would sell manufactured goods and buy agricultural goods. *. Both countries would sell agricultural goods and buy manufactured goods. c. Winneshiek would buy manufactured goods. Allamakee would buy agricultural goods. d. Winneshiek would buy agricultural goods. Allamakee would buy manufactured goods. 7. Which of the following would cause a rightward shift in the supply of a good? a. an increase in the good's own price. b. an increase in the price of a factor of production. *. a technological advance leading to a lower cost production method. d. an increase in the demand for the good. 8. In a competitive market, demand increases and supply decreases. The effect on equilibrium price and quantity will be *. an increase in equilibrium price and an ambiguous change in equilibrium quantity. b. a decrease in equilibrium price and an ambiguous change in equilibrium quantity. c. an increase in equilibrium quantity and an ambiguous change in equilibrium price. d. a decrease in equilibrium quantity and an ambiguous change in equilibrium price. 9. Which of the following are the best examples of substitute goods? a. personal computers and computer software programs. b. hotdogs and mustard. *. Dell and Gateway personal computers. d. tennis balls and tennis rackets. 10. Temporary surpluses in a market are eliminated by *. decreases in price, which cause quantity supplied to fall and quantity demanded to rise. b. decreases in price, which cause quantity supplied to rise and quantity demanded to fall. c. increases in price, which cause quantity supplied to fall and quantity demanded to rise. d. increases in price, which cause quantity supplied to rise and quantity demanded to fall. 11. If the own-price elasticity of demand for a good is -0.5, this implies that a. the quantity demanded would decrease by 10% if the price were to rise by 5%. b. it would take a 1% reduction in price to increase quantity demanded by 5%. c. consumers would demand twice as much of the good if the price were reduced by half. *. None of the above.

3 3 12. For a particular good, quantity demanded increases from 600 units/day to 750 units/day when the price decreases from $10/unit to $8/unit. Over this range of prices, the own-price elasticity of demand (calculated by the "midpoint method") is a b * d Increases in the price of a first-class stamp will increase the revenue of the U.S. Post Office if the demand for first-class postal service is *. inelastic. b. unit elastic. c. elastic. d. Any one of the above. (An increase in the price of a first-class stamp will increase revenue of the U.S. Post Office regardless of the elasticity of demand for first-class postal service.) 14. Suppose that the federal government were to impose a binding maximum price in the market for beer. The headline in the New York Times would read: a. "Price Floor Helps to Boost Brewers' Profits." b. "Market Awash in Beer Surplus." c. "Beer Prices Increase due to Government Action." *. "Prices Low but Many Beer Drinkers go Thirsty." 15. Assuming that the federal minimum wage is a binding price floor in the market for low-skill labor, a "guest worker" program, which would increase the supply of low-skill workers, would have what effect on this market? It would a. reduce the wage and reduce unemployment. b. reduce the wage and increase unemployment. *. have no effect on the wage and increase unemployment. d. reduce the wage and have no effect on unemployment. 16. When an excise tax is levied on the competitive market for a good, tax incidence depends on the elasticities of supply and demand. In which of the following cases will the buyers' share of the tax burden be the greatest? The elasticity of demand equals a and the elasticity of supply equals 0.5. * and the elasticity of supply equals 2.0. c and the elasticity of supply equals 0.5. d and the elasticity of supply equals 2.0.

4 4 17. Suppose that there are two groups of potential consumers of widgets. (Potential consumers because, for each of them, the decision to buy and consume a widget will depend on price.) One group has 500 people, each with willingness to pay of $2. The second group has 300 people, each with willingness to pay of $1.50. (These figures represent willingness to pay for the first widget. Everyone has $0 willingness to pay for any widget beyond the first.) If the price of a widget were $1.00, total consumer surplus would be a. $500. *. $650. c. $800. d. $ When an excise tax in levied on the competitive market for a good, the size of the deadweight loss depends on the elasticities of supply and demand. For a given initial (pre-tax) equilibrium, and a given dollar-per-unit size of the tax, in which of the following cases will the deadweight loss of the tax be the smallest? The elasticity of demand equals * and the elasticity of supply equals 0.5. b and the elasticity of supply equals 2.0. c and the elasticity of supply equals 0.5. d and the elasticity of supply equals Rent controls typically have which of the following effects? Then tend to a. encourage landlords to invest in maintenance and renovations. b. increase the vacancy rate in the rental housing market. c. increase the market value of rental apartment buildings. *. discourage construction of new rental housing. 20. In the late 70s, Arthur Laffer argued that reducing federal individual income tax rates would income tax revenue. When President Reagan actually reduced income tax rates in the early 80s, the result was a (an) in income tax revenue. a. decrease; decrease. b. decrease; increase. *. increase; decrease. d. increase; increase. 21. Sylvania, a small country, lifts its trade ban on wheat and immediately becomes an exporter of wheat. As a result of the lifting of the trade ban, domestic wheat consumers' surplus a. increases and domestic wheat producers' surplus increases. b. increases and domestic wheat producers' surplus decreases. *. decreases and domestic wheat producers' surplus increases. d. decreases and domestic wheat producers' surplus decreases.

5 5 22. If the U.S. government were to impose a tariff on a good that we are currently importing under free trade conditions, what effects would this have on surplus measures in the domestic (U.S.) market for the good? a. Consumer surplus, producer surplus, and total surplus would all decrease. b. Producer surplus would decrease; consumer surplus and total surplus would increase. *. Consumer surplus and total surplus would decrease; producer surplus would increase. d. None of the above. 23. A limit on the quantity of a foreign-produced good that can be imported into the U.S. is called a. a subsidy. b. a deadweight loss. c. an abatement. *. a quota. 24. The market for a good is subject to a negative externality. At the efficient (socially optimal) output level, marginal social cost a. is less than marginal social value. *. is equal to marginal social value. c. is greater than marginal social value. d. Impossible to determine without more information. 25. The Environmental Protection Agency (EPA) issues tradable sulfur allowances to electric power utilities. Utilities must have an allowance for each ton of sulfur dioxide emitted into the atmosphere by their power plants each year. Econovolt is a utility that initially receives 5000 allowances from the EPA for the current year but elects to purchase additional allowances at the market price of $250 per allowance. From this we can infer that, when Econovolt restricts its sulfur dioxide emissions to 5000 tons/year, its marginal abatement cost is *. greater than $250/ton. b. equal to $250/ton. c. less than $250/ton. d. either a, b, or c depending on the number of additional allowances purchased. 26. From society's perspective, commercial fisheries would tend to be overexploited if it were not for government regulation. a. This is a result of the fact that social and private incentives differ. b. This is an example of the tragedy of the commons. *. Both a and b. d. None of the above.

6 6 27. The web-based (virtual) version of Mankiw's text is an electronic file posted to an internet server. It can be accessed by any number of students at a time, but only if each has paid the website's registration fee. This means that Mankiw's virtual text is a. rival and excludable. *. non-rival and excludable. c. rival and non-excludable. d. non-rival and non-excludable. Questions 28 and 29 refer to Schedule Y-1 from the 2005 Instruction booklet for federal individual income tax form Bob and Lisa are a married couple (using the "married, filing jointly" tax filing status) with 2005 taxable income of $78,520. Schedule Y-1. Use if your filing status is married, filing jointly. If your taxable income is over but not over your tax is of the amount over $0 $14, % $0 14,600 59,400 $1, % 14,600 59, ,950 8, % 59, , ,800 23, % 119, , ,450 40, % 182, , , % 326, According to Schedule Y-1, Bob and Lisa's marginal tax rate is a. 15%. *. 25%. c. 28%. d. 33%. 29. According to Schedule Y-1, Bob and Lisa's federal income tax for 2005 is a. $11,048. *. $12,960. c. $15,232. d. $19, A person's average tax rate equals her a. tax obligation divided by her marginal tax rate. b. increase in taxes if her income were to increase by $1. *. tax obligation divided by her total income. d. increase in taxes owed if her marginal tax rate were to increase by 1%. 31. Which of these arrangements for financing public works is least consistent with the benefits principle? a. Gasoline taxes are used to finance road construction and maintenance. b. Property taxes are used to finance local fire and police protection. c. Taxes on airline tickets are used to finance the federal air traffic control system. *. Taxes on hotel rooms are used to finance local public schools.

7 7 32. Which of the following is a valid equation? a. accounting profit = revenue - implicit cost. b. economic profit = implicit cost - explicit cost + revenue. *. economic profit = accounting profit - implicit cost. d. accounting profit = economic profit + explicit cost. 33. A firm's average total cost is $100/unit when it produces 5000 units/week, and $98/unit when it produces 5200 units/week. Which of the following is the best estimate of the firm's marginal cost over the output range from 5000 to 5200 units/week? a. $99/unit. b. $72/unit. c. $65/unit. *. $48/unit. 34. A competitive firm faces a price of $5.00 for its product. It is currently producing where average total cost = marginal cost = $4.00. To maximize profit (or minimize loss) in the short-run, the firm should a. maintain its current output. *. increase output. c. decrease output but not shut down. d. not enough information given for an answer. 35. At its current output level, a monopoly faces a price of $5.00 for its product. Its average total cost = marginal cost = $4.00. To maximize profit (or minimize loss) in the short-run, the firm should a. maintain its current output. b. increase output. c. decrease output but not shut down. *. not enough information given for an answer. 36. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then there is a permanent decrease in demand. When the industry gets to the new zero-profit equilibrium that will eventually be reached in the long-run, a. industry output will be the same as in the original zero-profit equilibrium. b. price will be lower than in the original zero-profit equilibrium. *. there will be fewer firms than in the original zero-profit equilibrium. d. all of the above. 37. Rate-of-return regulation of a natural monopoly is intended to a. replace competition with government ownership. b. protect monopoly profits. *. set prices to allow a "fair" profit. d. stimulate entry of new competing firms.

8 8 Questions 38 and 39 refer to the following information. A monopolist faces three groups of potential customers. The groups differ in terms of their willingness-to-pay (WTP) for the first unit of the monopolist's product. (All potential customers have zero WTP for units beyond the first.) The table below shows the number of potential customers and WTP for each group. Group Number of potential customers WTP for first unit $ $ $2 The monopolist produces the product at zero fixed cost and a constant marginal cost of $1/unit. 38. If the monopolist were required to charge a uniform price, the price it would charge and the profit it would earn are a. $2; $900. b. $2; $1800. *. $3; $1000. d. $5; $ If the monopolist were allowed to price discriminate, the maximum profit it could earn would be a. $2000. *. $1800. c. $1600. d. $ When the profit earned by a typical firm in an industry depends on the business strategies of both the firm itself and its rivals, we say that firms in the industry are a. colluding. b. Nash competitors. *. interdependent. d. price takers. 41. The degree of cooperation among OPEC cartel members tends to vary over time. As a relatively cooperative period comes to an end, and member countries begin pursuing individual self-interest, we can expect to see OPEC production of crude oil a. increase and the world price of crude oil increase. *. increase and the world price of crude oil decrease. c. decrease and the world price of crude oil increase. d. decrease and the world price of crude oil decrease.

9 9 Questions 42 and 43 refer to the following payoff matrix describing a game played by two players. Player 1 has three strategies: "Up," "Middle," and "Down." Player 2 has two strategies: "Left" and "Right." The entries in the cells of the table denote payoffs for player 1 (π 1 ) and player 2 (π 2 ). Player 1's strategies Player 2's strategies "Left" "Right" "Up" π 1 = 12, π 2 = 9 π 1 = -2, π 2 = 7 "Middle" π 1 = 6, π 2 = 1 π 1 = 4, π 2 = 3 "Down" π 1 = 10, π 2 = 2 π 1 = 0, π 2 = Which of the following is true? a. "Up" is a dominant strategy for player 1. b. "Right" is a dominant strategy for player 2. c. "Middle" is a dominant strategy for player 1. *. None of the above is true. 43. Which of the following is true? a. ("Up," "Left") is a Nash equilibrium. b. ("Middle," "Right") is a Nash equilibrium. c. This game has no Nash equilibria. *. Both a and b are true. 44. If eight workers can manufacture 70 widgets per day, and nine workers can manufacture 90 widgets per day, and the if the price of widgets is $10 each, then the value of the marginal product of the ninth worker is a. $100. *. $200. c. $700. d. $ Value of the marginal product of labor is defined as the additional a. output a firm would experience if it hired one more worker. b. cost of hiring one more worker. *. revenue earned by hiring one more worker. d. profit realized by hiring one more worker. 46. Assuming an annual interest rate of 3.5%, what is the present value of $100 to be received in 3 years? *. $ b. $ c. $ d. $91.53.

10 Parents planning for their child's college education purchase a $10,000, 5-year, 5% annual interest rate certificate of deposit (CD) on the child's thirteenth birthday. What will be the value of the CD in 5 years when the child, at age 18, is ready to enroll at Iowa State University? (In other words, if you were to invest $10,000 today at an annual interest rate of 5%, what would your investment be worth in 5 years?) a. $12,345. b. $12,500. c. $12,622. *. $12, I take out an installment loan of $5,000 at an annual interest rate of 12%. The terms of the loan require repayment of principle and interest in three equal installments, due one year from today, two years from today, and three years from today. To the nearest dollar, what is the amount of each of the three installment payments? a. $1867. *. $2082. c. $2205. d. $ A bond with a face value of $100 can be purchased today for $88. When the bond matures in two years, I will be able to redeem it at face value. (In other words, I pay $88 today for a promise of $100 in two years.) What is the annual rate of interest implicit in this investment? *. 6.60% b. 6.82% c. 6.98% d. 7.04% 50. The Child Labor Deterrence Act sponsored by Senator Harkin would a. outlaw child labor in the United States. b. withhold U.S. foreign aid from countries that allow child labor. *. prohibit the importation of goods made using child labor. d. require special labeling for all products produced using child labor.