FINAL. January 17, 2011 GROUP A

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1 EC101 Sections 04 Fall 2010 NAME: ID #: SECTION: Instructions: FINAL January 17, 2011 GROUP A You have 90 minutes to complete the exam. There will be no extensions. Students are not allowed to go out of the exam room during the exam. Those students who leave the exam room will not be readmitted. The exam consists of 40 multiple choice questions. Each multiple choice question is worth 1 point for a total of 40 points. Use a pencil to mark your answers on the answer sheet. Make sure you write your name and ID number on the answer sheet as well. Please mark the group of your test on the answer sheet under Test Form. No calculators, dictionaries or formula sheets are allowed. The use of cell phones is strictly prohibited. Make sure your cell phone is turned off and inside your bag. Do NOT use your cell phone even for timekeeping purposes. This is a closed books/notes exam. Choose only one answer for each question. TWO wrong answers will take away one correct answer. There is absolutely no talking during the exam. The proctors will NOT answer any questions. There are 10 pages in this exam booklet. Version A Page 1

2 1. Insurance markets have a problem with people who buy insurance and then proceed to behave in reckless ways, or at least take less care to avoid losses after being insured. This behavior is associated with A) Market signaling. B) Moral hazard. C) Asymmetric information. D) Adverse selection. 2. Jane has $500 a week to spend on food and clothing. The price of food is $10 and the price of clothing is $25. Which of the following pairs of food and clothing are in Jane's choice set? A) 0 units of clothing and 500 units of food. B) 50 units of clothing and 50 units of food. C) 10 units of clothing and 25 units of food. D) 20 units of clothing and 50 units of food. 3. The average total cost curve is increasing when A) marginal cost is less than average total cost. B) marginal cost is decreasing. C) marginal cost is greater than average total cost. D) marginal cost is increasing. 4. When a producer operates in a market characterized by negative production externalities, a tax that forces them to internalize the externality will A) increase the amount of the commodity exchanged in market equilibrium. B) restrict the producer's ability to take the costs of the externality into account when deciding how much to supply. C) have an offsetting effect that reduces the producer's private production costs. D) give sellers the incentive to take account of the external effects of their actions. 5. To be considered a public good, a good must be A) rival in consumption and excludable. B) rival in consumption and nonexcludable. C) nonrival in consumption and excludable. D) nonrival in consumption and nonexcludable. Version A Page 2

3 6. When a certain outcome is preferred to a risky outcome with the same expected value, an individual is said to be A) riskless. B) risk neutral. C) risk loving. D) risk averse. 7. If the income and substitution effects of a price increase work in the same direction, the good whose price has changed is a: A) normal good. B) superior good. C) inferior good. D) Giffen good. 8. How does total revenue change as one moves down a linear demand curve? A) It is unaffected by a movement along the demand curve. B) It first increases, then decreases. C) It increases. D) It decreases. 9. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should A) decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand. B) increase the price for both groups of customers. C) increase the price charged to customers with the price elastic demand and decrease the price charged to customers with the price inelastic demand. D) charge the same price to both groups of customers. Use the following to answer questions 10-11: Figure: Indifference Curves and Consumption Bundles Version A Page 3

4 10. (Figure: Indifference Curves and Consumption Bundles) In the accompanying figure, the lines AA and BC are parallel. The optimal consumption point could shift from b to c as a result of: A) an equal percentage increase in the prices of both hot dogs and pizza, while income is unchanged. B) a decrease in income with prices constant. C) a change in tastes. D) both a and b 11. (Figure: Indifference Curves and Consumption Bundles) In the accompanying figure, the initial optimum is at a. The price of hot dogs now increases, and the new equilibrium point is c. The change in hot dog consumption due to the income effect of the price change is: A) H2 to H1. B) H3 to H2. C) H1 to H2. D) H3 to H In monopolistic competition, the demand curve facing a firm will become more elastic the: A) greater the elasticity of its supply curve B) greater the number of sellers C) fewer the number of sellers D) greater the obstacles to entry 13. Suppose that in a mixed market for reliable used cars and lemons, consumers are willing to pay as much as $5,000 for a reliable used car but only $1,000 for a lemon. Sellers of reliable used cars ask $4,000 per car and sellers of lemons ask $800. Buyers cannot tell if a used car is reliable or is a lemon. It has been estimated that 20% of all used cars in the market are lemons. Based on that information, we predict that A) only good cars will sell, for $4,200 each. B) only lemons will sell, for $1,000 each. C) both reliable cars and lemons will sell for $1,000 each. D) both reliable cars and lemons will sell for $4,200 each. 14. When a profit-maximizing perfectly competitive firm actually ends up minimizing losses, this happens because the firm wants to produce the quantity at which price is equal to A) marginal cost. B) average cost. C) fixed cost. D) sunk cost. Version A Page 4

5 15. When a firm has market power, it can A) control the number of firms that will operate in an industry. B) influence the market price of the good it sells. C) sell as much as it wants at any market price. D) choose to disregard government regulation. 16. Consider the following three market baskets: Food Clothing A 6 3 B 8 5 C 5 8 Refer to the table above, which of the following cannot be true? A) A and C could be on different indifference curves. B) the consumer could be indifferent between A and B. C) A and C could be on the same indifference curves. D) the consumer could be indifferent between B and C. 17. The efficient quantity of a public good is determined by equating the marginal cost of producing the good with A) the marginal benefit of the median consumer. B) the marginal cost of producing a comparable private good. C) the marginal benefit of each individual. D) the sum of the individual marginal benefits. Use the following to answer question 18: Figure: Producer Surplus Version A Page 5

6 18. (Figure: Producer Surplus) In the accompanying figure, when the price rises from $25 to $35, producer surplus for a total producer surplus of. A) increases by $30; $60 B) decreases by $35; $100 C) decreases by $10; $30 D) increases by $10; $ Roy recently bought a cat. He liked it so much that he bought two more. Eventually, when Roy had seven cats, he complained that it was not worth it to buy another. What is a possible explanation? A) The supply curve for cats is downward sloping. B) A consumer will always buy positive amounts of all goods. C) His demand curve has a positive slope. D) The law of diminishing marginal utility is in effect. 20. A consumer is currently purchasing nine books and five CDs. If she buys one less CD and one more book, what will happen to the marginal utility that she receives from the last unit of each good? A) The marginal utility from the tenth book will be lower; the marginal utility from the fourth CD will be higher. B) The marginal utility from the tenth book will be higher; the marginal utility from the fourth CD will be lower. C) The marginal utility from the tenth book will be lower; the marginal utility from the fourth CD will be lower. D) The marginal utility from the tenth book will be higher; the marginal utility from the fourth CD will be higher. 21. It takes Farmer 10 hours to produce meat and 5 hours to produce potatoes. It takes Rancher 4 hours to produce meat and 1 hour to produce potatoes. Farmer and Rancher both could benefit by the Farmer specializing in and the Rancher specializing in A) They cannot benefit by specialization and trade. B) potatoes, meat C) neither good, meat D) meat, potatoes Version A Page 6

7 22. Suppose that for high-productivity workers, the cost of a college education is $20,000 per year and for low-productivity workers, the cost is $30,000 per year. The firm will pay a high productivity worker $100,000 more over his lifetime than it would pay a lowproductivity worker. A high-productivity worker is someone who has A) 5 years of college education. B) 3 years of college education. C) 4 years of college education. D) 6 years of college education. 23. When externalities exist, buyers and sellers A) do not neglect the external effects of their actions and the market equilibrium is not efficient. B) do not neglect the external effects of their actions and the market equilibrium is efficient. C) neglect the external effects of their actions but the market equilibrium is still efficient. D) neglect the external effects of their actions and the market equilibrium is not efficient. Use the following table to answer questions Table: Cleaning costs Waste Reduced Total Cleaning Cost, Firm 1 Total Cleaning Cost, Firm 2 1 $ 10 $ 5 2 $ 20 $10 3 $ 35 $15 4 $ 55 $25 5 $ 80 $40 6 $110 $ (Table: Cleaning costs) Currently, both Firm 1 and Firm 2 are producing 6 units of waste each. What will the total cost of abatement be if the government commands each firm to produce only 3 units of waste? A) $35 B) $50 C) $15 D) None of the above Version A Page 7

8 25. (Table: Cleaning costs) If, instead of the command-and-control policy, the government issued 3 marketable pollution permits to each firm, what would happen to the total cost of reducing pollution? A) $50 B) $15 C) $35 D) none of the above 26. If a cartel determines the profit-maximizing quantity for the whole group, it will choose the quantity at which A) cost is lowest B) marginal cost equals marginal revenue C) marginal cost equals demand D) price is highest 27. Demand is said to be inelastic A) if demand shifts only slightly when the price of the good changes. B) if buyers respond substantially to changes in the price of the good. C) if the quantity demanded changes only slightly when the price of the good changes. D) if the price of the good responds only slightly to changes in demand. 28. Mr. Cobb, a corn farmer, pays his workers $8 an hour. At his current level of labor use, the marginal product of an additional hour of labor is 3 bushels of corn. The market price of corn is $2.75. In order to maximize his profits, Mr. Cobb should: A) This question cannot be answered without knowing the average product of labor. B) hire more labor. C) hire less labor. D) leave the amount of labor hired unchanged. 29. Joanna can buy either pizza or soda. If the price of pizza and soda doubles, and so does Joanna s money income for that month, we can deduce that Joanna s budget constraint for that month will A) shift in but remain parallel to the old one. B) swivel in so that the slope of the budget constraint is doubled. C) remain unchanged. D) shift out but remain parallel to the old one. Version A Page 8

9 30. Economists would argue that whales have become an endangered species because A) nobody owns the whales. B) fishermen have killed too many whales. C) of natural selection. D) the discovery of electricity has resulted in a decrease in the demand for whale oil. 31. If the price of a substitute to good X increases, then A) the demand for good X will not change. B) the demand for good X will decrease. C) the demand for good X will increase. D) the market price of good X will decrease. 32. An efficient allocation of risk is an allocation of risk in which: A) all insurance premiums are equal to the expected value of the claims. B) all risk is diversified. C) all risk is eliminated. D) those who are most willing to bear risk end up bearing it. 33. Suppose that Kathy drinks coffee and tea and is in consumer equilibrium. The marginal utility of the last cup of coffee that she drank was 8, while the marginal utility of the last cup of tea she had was 7. If the price of the tea is $0.70 per cup, what is the price of a cup of coffee? A) $0.61 B) $0.88 C) $1.14 D) $ Under rent control, bribery is a mechanism to A) allocate housing to the poorest individuals in the market. B) allocate housing to the most deserving tenants. C) bring the total price of an apartment (including the bribe) closer to the equilibrium price. D) force the total price of an apartment (including the bribe) to be less than the market price. Version A Page 9

10 35. The equilibrium of supply and demand in a market A) minimizes the costs incurred by consumers. B) maximizes the total benefits received by buyers and sellers. C) minimizes the expenditures of buyers. D) maximizes the profits of producers. 36. A person is likely to free ride when a good is: A) nonrival. B) artificially scarce. C) nonexcludable. D) private. 37. What is one reason why law requires all car owners to have auto insurance? A) because otherwise, insurance prices would be too high for good drivers B) because they are trying to protect the insurance companies from asymmetric information problems C) because they are trying to protect buyers of insurance from asymmetric information problems D) because otherwise bad drivers would not buy insurance 38. Taxes adversely affect the allocation of resources in society because A) not everyone pays taxes. B) they distort prices and thus the decisions of households and firms. C) they do not always fall more heavily on the rich. D) the taxes collected are not enough to finance government. 39. If a consumer is maximizing utility by consuming sprockets and woggles, which of the following is false? A) The consumer is on the highest possible indifference curve B) The total value that the consumer places on woggles must be equal to the total value that the consumer places on sprockets. C) The consumer is spending all his income. D) The relative value of the last sprocket in terms of last woggles' is equal to the relative price of sprockets. 40. As the size of a tax increases A) the deadweight loss from the tax increases. B) the deadweight loss from the tax remains constant. C) no one knows how the deadweight loss changes because no tax has ever been reduced. D) the deadweight loss from the tax declines. Version A Page 10

11 Answer Key 1. B 2. C 3. C 4. D 5. D 6. D 7. A 8. B 9. A 10. D 11. A 12. B 13. D 14. A 15. B 16. B 17. D 18. A 19. D 20. A 21. D 22. C 23. D 24. B 25. D 26. B 27. C 28. B 29. C 30. A 31. C 32. D 33. D 34. C 35. B 36. C 37. A 38. B 39. B 40. A Version A Page 11