Examination 3 Economics II Payne

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1 Examination 3 Economics II Payne ON YOUR ACCUSCAN FORM, write: 1. Your name 2. Today s date 3. Exam 3 4. ECO232 and your section number Part 1. Multiple Choice. 42 points, 63 points total. Mark the letter corresponding to the best answer on your Accu-Scan form 100AS. USE PENCIL ONLY. 4) The marginal revenue product of labor (MRPL) is A) the additional profit a firm earns by employing one additional unit of labor. B) the same as the marginal product of labor. C) the total product of labor times the price of labor. D) the additional revenue a firm earns by employing one additional unit of labor. 5) Marginal revenue product of labor equals value marginal product of labor only in A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. 1) The major distinguishing characteristic of oligopoly is that A) firms are interdependent. B) firms can influence the price of their product. C) firms produce differentiated products. D) entry into the industry is blocked. 6) Refer to Figure This firm is currently hiring 16 workers. This firm should A) do nothing because it is maximizing profits. B) increase employment to 17 workers to increase profits. C) reduce employment to 14 workers to increase profits. D) reduce employment to 15 workers to increase profits. 2) Refer to Figure Six firms that produce chewing gum have formed a cartel. The cartel faces the market demand curve given by D. To maximize profits, the cartel should produce packs of chewing gum and the price should be. A) 14,000; $.30 B) $16,000; $.35 C) 12,000; $.40 D) 12,000; $.25 3) The demand for inputs is a derived demand because A) it is derived from nature. B) it does not come from competitive markets. C) it is derived from production. D) it depends on the demand for outputs. 7) Workers who install and maintain electrical power lines are known to have high wages. We can (in part) explain this because A) many individuals are qualified to do this job. B) the job is likely to be very dangerous. C) the job requires a low level of skill. D) the job is likely to be very dull. 8) According to the signalling effect, college education A) signals that the individual is a risk-taker. B) signals natural ability. C) is an investment. D) enhances productivity.

2 9. There s no fairness in this world, laments Zelda. You see these Mexicans, working like dogs, laying bricks, cutting weeds, and picking fruit in the hot sun, and they can barely feed their kids. And then there are these hotshot lawyers who stay in the air conditioning all day and make buckets of money. Andrea, her friend, says Yeah, but the lawyers spent a lot of loot going to college and law school, and so they have to get paid more. Brittany disagrees. She says that what matters is that the lawyers have a degree and the Mexicans don t. Chrissie, however, says None of that matters. People are willing to pay more for legal work than bricklaying, and so kids are willing to cough up the money for law school because they know they can get a good payback. According to marginal productivity theory, which of the three is right? A) Andrea B) Brittany C) Chrissie 15) A cartel is A) a group of firms that coordinate their pricing decisions. B) another word for a duopoly. C) a type of oligopoly in which the demand curve is "kinked." D) a group of firms that all produce the same level of output. For the next three questions, refer to Figure ) Becky's dominant strategy is and David's dominant strategy is. A) high; high B) low; low C) high; low D) low; high 10. If labor productivity grows faster in Country X than Country Y, then the MRPL and wage rate in Country X will likely grow? than in Country Y. A. faster than B. at the same rate as C. slower than 11. Say that there are two firms in Lambertville that sell stuffed animals. Both firms have a low price guarantee, promising to match any lower advertised price on any given stuffed animal they sell. In nearby Montfort, there are also two stuffed animal retailers, but they do not make any such guarantees. According to game theory, ceteris paribus, we should expect that the price of stuffed animals will be A. lower in Lambertville. B. lower in Montfort. C. the same in both cities. 12. An outcome of a game in which each player is doing the best he can, given the actions of the other players, is called a A. duopolist s dilemma. B. price-fixing arrangement. C. payoff matrix. D. Nash equilibrium. 13. Consider two business administration students at Auburn. Bob completes his studies this spring and receives his BS degree. Jack is one course short of his degree an elective course having no relationship to his intended field but does not finish his degree. Five years later, Bob s annual salary is $65,000; Jack s is $45,000. Bob s $20,000 extra income is a A) rent. B) transfer payment. C) distributional effect. D) sheepskin effect. 14. According to Friedman, a major problem with a military draft is that A) the government does not bear the full opportunity cost of taking a draftee out of the labor market. B) only wealthy and well-connected young men tend to be drafted. C) a draft is very costly for the government, since draftees have to be paid high wages. 17) David chooses to charge a low price A) only if Becky chooses a high price. B) only if Becky chooses a low price. C) regardless of whether Becky chooses a high or low price. D) in order to induce Becky to choose a high price. 18) The outcome of the game will be that A) both choose a high price. B) both choose a low price. C) Becky chooses a high price and David chooses a low price. D) David chooses a high price and Becky chooses a low price.

3 19. Workers who, for whatever reason, are less willing to change jobs, that is, workers with lower labor mobility, will, ceteris paribus, earn wages than those with greater mobility. A. lower B. higher C. about the same 26. A craft union is an organized group of workers that A) work in a particular industry with a variety of skills. B) work in various industries with similar skills. C) work in various industries with a variety of skills. D) work in a particular industry with similar skills. 20. Say that the price of opera tickets in Luxembourg has doubled in real terms over the past 15 years. Performance fees paid to highly talented opera singers have also approximately doubled over that time. According to Ricardo s theory of rent, which is the most likely explanation? A) Rising performance fees have led to rising ticket prices. B) Rising ticket prices have led to rising performance fees. C) The two increases have jointly caused each other. D) There is no relationship between the two phenomena. 21. Say that the risk-adjusted real rate of return on investment (ROI) is 12% in Ruritania and 4% in Urbania. Assuming no barriers to investment, we should expect to see investment flow from to until the ROI in Ruritania is that in Urbania. A) Ruritania; Urbania; less than B) Ruritania; Urbania; equal to C) Urbania; Ruritania; less than D) Urbania; Ruritania; equal to 22. DELETE The key difference between oligopoly industries and other market structures is the existence of A) barriers to entry. B) economies of scale. C) application of the efficiency wage. D) interdependence among firms. 23. DELETE Marginal revenue product of labor (MRPL) will necessarily equal value marginal product of labor (VMPL) only in a market. A) perfectly competitive B) monopolistically competitive C) oligopolistic D) monopolistic 24. Piano teachers frequently earn more per hour than school teachers, although the educational requirements and skills needed are similar. What best explains this? A) Parents are more concerned that their kids can play an instrument than know who won the War of B) Parents buy only a small number of hours of a piano teacher s time, but many hours of school teachers time. C) Piano teaching is more dangerous and unpleasant than teaching English. 25. DELETE Heart surgeons earn more per hour than truck drivers. This is because A) The demand for heart surgeons labor is greater than that of truck drivers labor. B) You have to go to school for many years to be a heart surgeon; not so much to be a truck driver. 27. The monopsony firm in Figure 18.7 wants to hire workers. A) L1 B) L2 C) L3 D) L4 28. The firm in Figure 18.7 will pay the workers it wants to hire a wage equal to A) W1. B) W2. C) W3. D) W A perfectly competitive firm facing the same supply of labor as shown in Figure 18.7 would hire A) L1 workers. B) L2 workers. C) L3 workers. D) L4 workers. 30. In general, a monopsonist will pay a wage, and hire workers than a competitive firm. A) lower; fewer B) lower; more C) higher; more D) higher; fewer

4 31. Which of the following is an example of a monopsony? A) In the west African nation of Mauritania, about 20% of the population are held as slaves. B) Bob is the only seller of eggplant in Mount Ivey. C) Ed and Celia have a mutual low-price guarantee between their landscape firms in Boston. D) In Hertford, Hereford, and Hampshire, hurricanes hardly ever happen. 32. A minimum wage can actually raise employment if the labor market is A. perfectly competitive. B. a monopsony. C. a monopoly. D. an oligopoly. 33) Labor unions generally favor A) import restrictions. B) strict immigration laws. C) increasing the minimum wage. D) a and c E) a, b, and c 34) A closed shop is an organization A) that is closed on holidays. B) in which an employee must belong to the union before he or she can work. C) that does not require workers to be union members in order to be hired, but does require them to join the union within a certain period of time after becoming employed. D) set up by the federal government to train ex-convicts to become productive workers. E) none of the above 35) A union shop is an organization that A) requires individuals to join a union within a certain period of time after becoming employed. B) requires individuals to be members of the union before they can be hired. C) is legal in all fifty states. D) is set up by labor unions to train new entrants and inform members of jobs in different states. E) a and c 38) Which of the following is not an assumption of the theory of monopolistic competition? A) There are high barriers to entry. B) There are many sellers and few buyers. C) Each firm in the industry produces and sells a homogeneous product. D) a and b E) all of the above 39) One of the ways in which monopolistic competitors differ from perfect competitors is that A) perfect competitors produce the quantity of output at which marginal revenue equals marginal cost and monopolistic competitors do not. B) perfect competitors produce a homogeneous product and monopolistic competitors do not. C) there is easy entry and exit for a perfect competitor, but not for a monopolistic competitor. D) a and c E) b and c 40) Does the monopolistic competitive firm exhibit resource-allocative efficiency? A) No, because at its chosen quantity of output, price does not equal the lowest possible average total cost. B) Yes, because at its chosen quantity of output, price equals marginal cost. C) No, because at its chosen quantity of output, price is greater than marginal cost. D) Yes, because at its chosen quantity of output, price is less than marginal cost. 41) "In equilibrium, a monopolistic competitor will produce an output level that is less than the level that would minimize its average total costs." This is a statement of the A) law of diminishing returns. B) law of second best. C) law of variable proportions. D) excess capacity theorem. Exhibit ) Right-to-work laws A) say that everyone has the right to work and that it is the responsibility of the government to make available employment opportunities. B) ensure that employers cannot prevent persons from gaining employment simply because they are members of a union. C) allow everyone to gain employment at a firm without being a union member but also require that once hired the employee must join the union. D) make it illegal to require union membership for purposes of employment. 37) If a monopsonist is hiring factors, it will choose to hire that quantity at which and pay a wage rate that is. A) MR = MC; equal to labor's MRP B) the supply curve of labor intersects the demand curve for labor; equal to labor's MRP C) MRP = MFC; equal to labor's MRP D) MRP = MFC; less than labor's MRP E) the supply curve of labor intersects the demand curve for labor; less than MFC

5 42) THIS QUESTION IS GOOFED FIX IT Refer to Exhibit Which of the following points represents the profit-maximizing quantity and price of a monopolistic competitor? A) A B) B C) C D) D E) E Part 3. Reserve reading article summaries. 12 points, 36 points possible total. End of Exam 3 End of Part 1 Part 2. Essay. 2 points, 20 points total. answers on BLANK PAPER, not your Accuscan form. Please write your USE COMPLETE PARAGRAPHS! 1. Let there be three fish ponds in an area, one populated with carp, one with catfish, and one with sturgeon. Carp have very little market value think cat food or fish oil pills catfish sell for a modest price as restaurant meals, and sturgeon produce caviar and are hence very valuable. Each pond is the property of a different owner. Let each pond be large enough to permit the use of the most advanced fishing technology, and let the owners of the ponds contract with separate fishing firms to catch and market the fish. i. Briefly state Ricardo s theory of rent. ii. Briefly state the rate-of-return equalization principle. iii. Which fishing firm--the carp fishers, the catfish fishers, or the sturgeon fishers-- will earn the highest rate of return on its capital? Explain fully. iv. Which pond owner will earn the highest rent? Explain fully. 2. In Chapter 7, p. 109, of Capitalism and Freedom, Capitalism and Discrimination," Friedman makes this statement:... the purchaser of bread does not know whether it was made from wheat grown by a white man or a Negro, by a Christian or a Jew. In consequence, the producer of wheat is in a position to use resources as effectively as he can, regardless of what the attitudes of the community may be toward the color, the religion, or other characteristics of the people he hires. Furthermore, and perhaps more important, there is an economic incentive in a free market to separate economic efficiency from other characteristics of the individual. A businessman or an entrepreneur who expresses preferences in his business activities that are not related to productive efficiency is at a disadvantage compared to other individuals who do not. i. Explain Friedman's argument fully. Include points that he makes in the chapter. ii. According to Friedman, capitalism reduces discrimination. Briefly summarize his argument. ii. The more common view in contemporary America is that capitalism and free markets foster discrimination and that a government policy of reverse discrimination--known as "affirmative action" is necessary to eliminate discrimination. Which position do you support? Explain fully. End of Part 2

Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space at the bottom of the last page.

Econ 0, Section 2, S0, Schroeter Exam #4, Special code = Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space at the bottom of the last page..