Economics 1 Final Exam December 9, 2008

Transcription

1 Name Test Form A Economics 1 Final Exam December 9, 2008 True-False Questions: Fill in Bubble A for True, Bubble B for False. 1. A profit-maximizing monopolist will sell more units of a good than the amount of the good that would be sold in a competitive equilibrium. 2. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue of the good is negative at that quantity. 3. A monopolist faces a downward-sloping demand curve for its product. In order to maximize its profits, it will choose the output that maximizes its marginal revenue. 4. If Person A has absolute advantage over Person B in the production of Good X, then Person A must also have comparative advantage over Person B in the production of Good X. 5. If the world price for a good exceeds the autarky price for the good, opening the international market to domestic producers will decrease the consumer surplus of domestic consumers of the good. 6. A competitive equilibrium for a good will maximize the number of trades of the good for which both the buyer and seller have a positive profit. 7. Suppose the demand curve for a good slopes down, and the supply curve for that good slopes up. If the supply curve shifts and the demand curve does not shift, the equilibrium price and quantity will move in opposite directions. 8. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduction in sellers profit and consumers surplus caused by a sales tax of $20 per unit will exceed the amount of revenue collected by the tax. 9. We can expect there to be excess demand in a market where a legal price ceiling is set lower than the competitive equilibrium price.

2 Economics If a firm s average variable cost does not change as it increases its output, the firm s marginal cost equals its average variable cost. Multiple Choice Questions 11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it would have to lower its price to $87 per unit. What is the marginal revenue of the 11th unit? $90 $87 $77 $57 $ The demand curve for Econ 1 textbooks is given by the equation P = 100 Q, where P is the price of the book and Q is the number of books sold. The variable cost of producing and selling a textbook is constant at $20 per book. The fixed cost is zero. What price would a profit-maximizing monopolist charge for the book? $20 $90 $40 $ Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem. Also assume that the textbook is sold by a profit-maximizing monopolist. How much higher or lower are the total profits of buyers and sellers than those profits would be in a competitive equilibrium for the textbook? Totals profits are $200 higher than they would be in a competitive equilibrium. Total profits are $600 higher than they would be in a competitive equilibrium. Total profits are $300 lower than they would be in a competitive equilibrium. Total profits are $800 lower than they would be in a competitive equilibrium. 14. If a monopolist that charges the same price to all customers faces a demand curve that slopes downward to the right, we can reasonably expect that the firm must lower prices if it hopes to increase its profits. will have no effect on the price of the product it sells. will find that its marginal revenue is less than the price of the product it sells. will find that its marginal revenue is greater than the price of the product it sells.

3 Final Exam The small island nation of Ruritania is populated by two farmers, Alf and Barney. Each farmer has 100 acres. The land can be used either for growing wheat or as pasture for beef cattle. Alf s land is better than Barney s land. Each acre that Alf plants to wheat will yield 50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds of beef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year, and each acre that Barney devotes to pasture will yield 30 pounds of beef per year. Alf s farm has absolute advantage in the production of beef and comparative advantage in the production of wheat. Barney s farm has comparative advantage in the production of beef. Barney s farm has comparative advantage in the production of wheat. Alf s farm has comparative advantage in both beef and wheat. More than one of the above statements is true. 16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acre of land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas is more productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons of grapefruit. Farmers in each state sell their crops in a national market. If the price of cotton in this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmers in each state grow? Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in both states will grow cotton but no grapefruit. Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in both states will grow grapefruit but no cotton. Farmers in both states will grow some of each crop. 17. Prices have changed in the market described above. Now the price of cotton is $150 per ton, and the price of grapefruit is $200 per ton. After the change, what will farmers in each state grow? Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in both states will grow cotton but no grapefruit. Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in both states will grow grapefruit but no cotton. Farmers in both states will grow some of each crop.

4 Economics For each hour of labor, Country A can produce 20 pounds of rutabagas or 16 pounds of grapes. For each hour of labor, Country B can produce 10 pounds of rutabagas or 4 pounds of grapes. The theory of comparative advantage implies that, under these conditions, Country A would find it advantageous to: export rutabagas and import grapes. export grapes and import rutabagas. export both rutabagas and grapes and import nothing. import both rutabagas and grapes and export nothing. grow all the rutabagas and grapes it consumes and neither import nor export. 19. In Clothes Will Cost Less, but Some Nations Pay, Marshall, Iritani and Dickerson outline some of the consequences of phasing out the Multifiber Arrangement (MFA). Which of the following options best describes the MFA? The MFA was a system of tariffs on imports of clothing from Asian to the US, Canada, and Europe. The MFA was a system of subsidies for textile manufacturers in the US that allowed them to compete with cheaper imports from Asia. The MFA was a system of quotas determining the amounts of certain types of clothing that various countries could export into the US, Canada and Europe. The MFA prescribed workplace and labor conditions that foreign textile manufacturers had to satisfy to export their products to the US, Canada, and Europe. 20. The article Depressing Times, published in The Economist on November 13, 2008, describes a harmful effect of a fall in the inflation rate that is too far, too fast. What is that harmful effect? A general fall in prices increases the value of the dollar, the quantity of goods and services that a dollar can buy. This increases the cost of the loans that consumers and firms have taken out. They rush to pay off those loans, which reduces their demand for goods and services, causing further price reductions and unemployment. A general fall in prices increases the value of the dollar, the quantity of goods and services that a dollar can buy. This increases the demand for goods and services, which drives up wage rates and decreases employment. A general fall in prices makes US exports less competitive in international markets, which leads to a cutback in domestic production and employment. A general fall in prices reduces the value of assets held by banks and other financial institutions. They are less willing to lend as a result, which decreases employment in manufacturing and other businesses.

5 Final Exam The supply function for fresh strawberries is given by the equation P s (Q) = 4 + 4Q. The demand function is given by the equation P d (Q) = 85 5Q where Q is the number of crates of strawberries sold. In competitive equilibrium, how many crates of strawberries will be sold? None of the above. 22. Mike owns and operates a restaurant. He pays his staff $10,000 per month and spends $8,000 per month on food, utilities, and other supplies. Because he owns the restaurant building, Mike doesn t pay rent. However, he could rent the building to someone else for $2,000 per month. If he did close his restaurant and rent his building to someone else, he would have to find a job. Mike believes that he could work for someone else at a salary of $3,000 per month. What is the opportunity cost to Mike of continuing to operate his restaurant? $10,000 per month $18,000 per month $20,000 per month $21,000 per month $23,000 per month 23. A spider mite infestation reduced the fall harvest of apples in Washington. As a result of the infestation, the harvest decreased by 15%, but the revenue of apple ranchers only decreased by 10%. The demand curve did not change. What was the price elasticity of demand for apples in Washington?

6 Economics The demand curve for motel rooms is downward sloping, and the supply curve for motel rooms is upward sloping. Also, the demand curve for gasoline is downward sloping, and the supply curve for gasoline is upward sloping. Because families on summer vacation trips buy lots of gasoline and also rent motel rooms, gasoline and motel rooms are complements. An increase in the price of gasoline decreases summer travel, which decreases the demand for motel rooms. Suppose there is a shift up in the supply of gasoline, with less gasoline supplied at every price. What would happen to the price of motel rooms and the number of motel rooms rented? The price of motel rooms would rise, and the number of motel rooms rented would fall. The price of motel rooms would rise, and the number of motel rooms rented would rise. The price of motel rooms would fall, and the number of motel rooms rented would fall. The price of motel rooms would fall, and the number of motel rooms rented would rise. 25. Ten residents of Greenfield are willing to pay someone as much as $8 a week to mow their lawn, and ten residents are willing to pay someone as much as $6 a week to mow their lawn. Thirty teenage boys are willing to mow a lawn each week if they receive at least $5 for the job. Suppose the city of Greenfield imposes a tax of $2 a week on each resident who hires a teenage boy to mow his or her lawn. How will that tax affect the competitive equilibrium price of lawn mowing? The price would fall by $2. The price would rise by $2 The price would not change. The price would fall by $1. The price would rise by $ The Bergstrom Box Company (BBC) makes cute Swedish boxes to sell to gullible American tourists. If it employs one worker, it can make and sell 6 boxes per day. If it employs two workers, it can make and sell 10 boxes per day; and if it employs 3 workers, it can make and sell 12 boxes per day. Each box sells for $10. If the wage of a worker is $30 per day, how many workers should BBC hire? 0 workers per day 1 worker per day 2 workers per day 3 workers per day 5 goats and no workers

7 Final Exam There are six box companies in Sweden (including Bergstrom Box Company). Each company has the same relationship between labor employed and output as Bergstrom Box Company described in the previous question. Each company can also sell its boxes for a price of $10 per box. There are 5 workers in Sweden willing to work in a box company for $25 per day or more, and there are 6 workers willing to work in a box company for $35 per day. What is the competitive equilibrium wage for box company workers in Sweden? $25 per day $30 per day $35 per day $40 per day $60 per day 28. The town of Sweet Harmony has 100 families. Seventy of those families have a child, and 30 do not. Thirty of the families with a child are willing to pay as much as $6,000 to educate their child, and the other forty are willing to pay as much as $3,000. Each educated child creates a positive externality of $10 for each family in Sweet Harmony. The cost of educating a child is $5,000. If each family must pay the cost of educating its child, how many children will be educated, and what is the total profit (including external benefits) of all families derived from the education of Sweet Harmony s children? 30 children will be educated, and the total profit is $30, children will be educated, and the total profit is $60, children will be educated, and the total profit is $90, children will be educated, and the total profit is $50, children will be educated, and the total profit is $120, Suppose the town of Sweet Harmony described in the previous question enacts a subsidy for families that educate their children. Each family who sends their child to school receives a subsidy of $1,000. This subsidy is financed by a tax on the residents of Sweet Harmony, which is shared equally among families in the town. Compared to the equilibrium described in the previous question, how will this subsidy affect the number of children educated and the total profit (including external benefits) of all families in Sweet Harmony? 40 more children will be educated, and total profits will decrease by $40, more children will be educated, and total profits will increase by $75, more children will be educated, and total profits will decrease by $25,000. no more children will be educated, and total profits will not change. no more children will be educated, and total profits will decrease by $50,000.

8 Economics The demand for tax accountants in Richtown, Connecticut, is given by the demand function Q = 4, P, where Q is the number of clients seeking to hire a tax accountant and P is the price accountants charge their clients. Each accountant can complete tax forms for 200 clients each year. The time an accountant takes to complete a tax form for any one client has an opportunity cost of $50. Each accountant must also pay the city $10,000 per year for a license to practice accounting in Richtown. The license fee and the opportunity cost are the only costs an accountant has. In long-run equilibrium (when accountants can enter and exit the accounting practice in Richtown), how many accountants will practice in Richtown?

9 Name Test Form B Economics 1 Final Exam December 9, 2008 True-False Questions: Fill in Bubble A for True, Bubble B for False. 1. If the world price for a good exceeds the autarky price for the good, opening the international market to domestic producers will decrease the consumer surplus of domestic consumers of the good. 2. A monopolist faces a downward-sloping demand curve for its product. In order to maximize its profits, it will choose the output that maximizes its marginal revenue. 3. Suppose the demand curve for a good slopes down, and the supply curve for that good slopes up. If the supply curve shifts and the demand curve does not shift, the equilibrium price and quantity will move in opposite directions. 4. A profit-maximizing monopolist will sell more units of a good than the amount of the good that would be sold in a competitive equilibrium. 5. If a firm s average variable cost does not change as it increases its output, the firm s marginal cost equals its average variable cost. 6. We can expect there to be excess demand in a market where a legal price ceiling is set lower than the competitive equilibrium price. 7. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduction in sellers profit and consumers surplus caused by a sales tax of $20 per unit will exceed the amount of revenue collected by the tax. 8. A competitive equilibrium for a good will maximize the number of trades of the good for which both the buyer and seller have a positive profit. 9. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue of the good is negative at that quantity.

10 Economics If Person A has absolute advantage over Person B in the production of Good X, then Person A must also have comparative advantage over Person B in the production of Good X. Multiple Choice Questions 11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it would have to lower its price to $87 per unit. What is the marginal revenue of the 11th unit? $77 $87 $57 $90 $ The demand curve for Econ 1 textbooks is given by the equation P = 100 Q, where P is the price of the book and Q is the number of books sold. The variable cost of producing and selling a textbook is constant at $20 per book. The fixed cost is zero. What price would a profit-maximizing monopolist charge for the book? $90 $60 $40 $ Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem. Also assume that the textbook is sold by a profit-maximizing monopolist. How much higher or lower are the total profits of buyers and sellers than those profits would be in a competitive equilibrium for the textbook? Total profits are $600 higher than they would be in a competitive equilibrium. Total profits are $300 lower than they would be in a competitive equilibrium. Total profits are $800 lower than they would be in a competitive equilibrium. Totals profits are $200 higher than they would be in a competitive equilibrium. 14. If a monopolist that charges the same price to all customers faces a demand curve that slopes downward to the right, we can reasonably expect that the firm will have no effect on the price of the product it sells. must lower prices if it hopes to increase its profits. will find that its marginal revenue is greater than the price of the product it sells. will find that its marginal revenue is less than the price of the product it sells.

11 Final Exam The small island nation of Ruritania is populated by two farmers, Alf and Barney. Each farmer has 100 acres. The land can be used either for growing wheat or as pasture for beef cattle. Alf s land is better than Barney s land. Each acre that Alf plants to wheat will yield 50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds of beef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year, and each acre that Barney devotes to pasture will yield 30 pounds of beef per year. Barney s farm has comparative advantage in the production of beef. Barney s farm has comparative advantage in the production of wheat. Alf s farm has comparative advantage in both beef and wheat. Alf s farm has absolute advantage in the production of beef and comparative advantage in the production of wheat. More than one of the above statements is true. 16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acre of land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas is more productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons of grapefruit. Farmers in each state sell their crops in a national market. If the price of cotton in this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmers in each state grow? Farmers in both states will grow grapefruit but no cotton. Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in both states will grow cotton but no grapefruit. Farmers in both states will grow some of each crop. 17. Prices have changed in the market described above. Now the price of cotton is $150 per ton, and the price of grapefruit is $200 per ton. After the change, what will farmers in each state grow? Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in both states will grow grapefruit but no cotton. Farmers in both states will grow cotton but no grapefruit. Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in both states will grow some of each crop.

12 Economics Mike owns and operates a restaurant. He pays his staff $10,000 per month and spends $8,000 per month on food, utilities, and other supplies. Because he owns the restaurant building, Mike doesn t pay rent. However, he could rent the building to someone else for $2,000 per month. If he did close his restaurant and rent his building to someone else, he would have to find a job. Mike believes that he could work for someone else at a salary of $3,000 per month. What is the opportunity cost to Mike of continuing to operate his restaurant? $10,000 per month $20,000 per month $18,000 per month $21,000 per month $23,000 per month 19. Ten residents of Greenfield are willing to pay someone as much as $8 a week to mow their lawn, and ten residents are willing to pay someone as much as $6 a week to mow their lawn. Thirty teenage boys are willing to mow a lawn each week if they receive at least $5 for the job. Suppose the city of Greenfield imposes a tax of $2 a week on each resident who hires a teenage boy to mow his or her lawn. How will that tax affect the competitive equilibrium price of lawn mowing? The price would rise by $2 The price would fall by $2. The price would not change. The price would fall by $1. The price would rise by $ The supply function for fresh strawberries is given by the equation P s (Q) = 4 + 4Q. The demand function is given by the equation P d (Q) = 85 5Q where Q is the number of crates of strawberries sold. In competitive equilibrium, how many crates of strawberries will be sold? None of the above.

13 Final Exam For each hour of labor, Country A can produce 20 pounds of rutabagas or 16 pounds of grapes. For each hour of labor, Country B can produce 10 pounds of rutabagas or 4 pounds of grapes. The theory of comparative advantage implies that, under these conditions, Country A would find it advantageous to: import both rutabagas and grapes and export nothing. export rutabagas and import grapes. export grapes and import rutabagas. export both rutabagas and grapes and import nothing. grow all the rutabagas and grapes it consumes and neither import nor export. 22. In Clothes Will Cost Less, but Some Nations Pay, Marshall, Iritani and Dickerson outline some of the consequences of phasing out the Multifiber Arrangement (MFA). Which of the following options best describes the MFA? The MFA prescribed workplace and labor conditions that foreign textile manufacturers had to satisfy to export their products to the US, Canada, and Europe. The MFA was a system of subsidies for textile manufacturers in the US that allowed them to compete with cheaper imports from Asia. The MFA was a system of tariffs on imports of clothing from Asian to the US, Canada, and Europe. The MFA was a system of quotas determining the amounts of certain types of clothing that various countries could export into the US, Canada and Europe. 23. The demand curve for motel rooms is downward sloping, and the supply curve for motel rooms is upward sloping. Also, the demand curve for gasoline is downward sloping, and the supply curve for gasoline is upward sloping. Because families on summer vacation trips buy lots of gasoline and also rent motel rooms, gasoline and motel rooms are complements. An increase in the price of gasoline decreases summer travel, which decreases the demand for motel rooms. Suppose there is a shift up in the supply of gasoline, with less gasoline supplied at every price. What would happen to the price of motel rooms and the number of motel rooms rented? The price of motel rooms would fall, and the number of motel rooms rented would fall. The price of motel rooms would rise, and the number of motel rooms rented would rise. The price of motel rooms would rise, and the number of motel rooms rented would fall. The price of motel rooms would fall, and the number of motel rooms rented would rise.

14 Economics The article Depressing Times, published in The Economist on November 13, 2008, describes a harmful effect of a fall in the inflation rate that is too far, too fast. What is that harmful effect? A general fall in prices increases the value of the dollar, the quantity of goods and services that a dollar can buy. This increases the demand for goods and services, which drives up wage rates and decreases employment. A general fall in prices makes US exports less competitive in international markets, which leads to a cutback in domestic production and employment. A general fall in prices increases the value of the dollar, the quantity of goods and services that a dollar can buy. This increases the cost of the loans that consumers and firms have taken out. They rush to pay off those loans, which reduces their demand for goods and services, causing further price reductions and unemployment. A general fall in prices reduces the value of assets held by banks and other financial institutions. They are less willing to lend as a result, which decreases employment in manufacturing and other businesses. 25. A spider mite infestation reduced the fall harvest of apples in Washington. As a result of the infestation, the harvest decreased by 15%, but the revenue of apple ranchers only decreased by 10%. The demand curve did not change. What was the price elasticity of demand for apples in Washington? The Bergstrom Box Company (BBC) makes cute Swedish boxes to sell to gullible American tourists. If it employs one worker, it can make and sell 6 boxes per day. If it employs two workers, it can make and sell 10 boxes per day; and if it employs 3 workers, it can make and sell 12 boxes per day. Each box sells for $10. If the wage of a worker is $30 per day, how many workers should BBC hire? 0 workers per day 1 worker per day 2 workers per day 3 workers per day 5 goats and no workers

15 Final Exam There are six box companies in Sweden (including Bergstrom Box Company). Each company has the same relationship between labor employed and output as Bergstrom Box Company described in the previous question. Each company can also sell its boxes for a price of $10 per box. There are 5 workers in Sweden willing to work in a box company for $25 per day or more, and there are 6 workers willing to work in a box company for $35 per day. What is the competitive equilibrium wage for box company workers in Sweden? $40 per day $35 per day $25 per day $30 per day $60 per day 28. The town of Sweet Harmony has 100 families. Seventy of those families have a child, and 30 do not. Thirty of the families with a child are willing to pay as much as $6,000 to educate their child, and the other forty are willing to pay as much as $3,000. Each educated child creates a positive externality of $10 for each family in Sweet Harmony. The cost of educating a child is $5,000. If each family must pay the cost of educating its child, how many children will be educated, and what is the total profit (including external benefits) of all families derived from the education of Sweet Harmony s children? 30 children will be educated, and the total profit is $30, children will be educated, and the total profit is $90, children will be educated, and the total profit is $60, children will be educated, and the total profit is $50, children will be educated, and the total profit is $120, Suppose the town of Sweet Harmony described in the previous question enacts a subsidy for families that educate their children. Each family who sends their child to school receives a subsidy of $1,000. This subsidy is financed by a tax on the residents of Sweet Harmony, which is shared equally among families in the town. Compared to the equilibrium described in the previous question, how will this subsidy affect the number of children educated and the total profit (including external benefits) of all families in Sweet Harmony? 40 more children will be educated, and total profits will decrease by $25, more children will be educated, and total profits will decrease by $40, more children will be educated, and total profits will increase by $75,000. no more children will be educated, and total profits will not change. no more children will be educated, and total profits will decrease by $50,000.

16 Economics The demand for tax accountants in Richtown, Connecticut, is given by the demand function Q = 4, P, where Q is the number of clients seeking to hire a tax accountant and P is the price accountants charge their clients. Each accountant can complete tax forms for 200 clients each year. The time an accountant takes to complete a tax form for any one client has an opportunity cost of $50. Each accountant must also pay the city $10,000 per year for a license to practice accounting in Richtown. The license fee and the opportunity cost are the only costs an accountant has. In long-run equilibrium (when accountants can enter and exit the accounting practice in Richtown), how many accountants will practice in Richtown?

17 Name Test Form C Economics 1 Final Exam December 9, 2008 True-False Questions: Fill in Bubble A for True, Bubble B for False. 1. A profit-maximizing monopolist will sell more units of a good than the amount of the good that would be sold in a competitive equilibrium. 2. We can expect there to be excess demand in a market where a legal price ceiling is set lower than the competitive equilibrium price. 3. Suppose the demand curve for a good slopes down, and the supply curve for that good slopes up. If the supply curve shifts and the demand curve does not shift, the equilibrium price and quantity will move in opposite directions. 4. If Person A has absolute advantage over Person B in the production of Good X, then Person A must also have comparative advantage over Person B in the production of Good X. 5. If the world price for a good exceeds the autarky price for the good, opening the international market to domestic producers will decrease the consumer surplus of domestic consumers of the good. 6. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduction in sellers profit and consumers surplus caused by a sales tax of $20 per unit will exceed the amount of revenue collected by the tax. 7. If a firm s average variable cost does not change as it increases its output, the firm s marginal cost equals its average variable cost. 8. A competitive equilibrium for a good will maximize the number of trades of the good for which both the buyer and seller have a positive profit. 9. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue of the good is negative at that quantity.

18 Economics A monopolist faces a downward-sloping demand curve for its product. In order to maximize its profits, it will choose the output that maximizes its marginal revenue. Multiple Choice Questions 11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it would have to lower its price to $87 per unit. What is the marginal revenue of the 11th unit? $77 $90 $87 $57 $ The demand curve for Econ 1 textbooks is given by the equation P = 100 Q, where P is the price of the book and Q is the number of books sold. The variable cost of producing and selling a textbook is constant at $20 per book. The fixed cost is zero. What price would a profit-maximizing monopolist charge for the book? $90 $20 $40 $ Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem. Also assume that the textbook is sold by a profit-maximizing monopolist. How much higher or lower are the total profits of buyers and sellers than those profits would be in a competitive equilibrium for the textbook? Totals profits are $200 higher than they would be in a competitive equilibrium. Total profits are $300 lower than they would be in a competitive equilibrium. Total profits are $800 lower than they would be in a competitive equilibrium. Total profits are $600 higher than they would be in a competitive equilibrium. 14. If a monopolist that charges the same price to all customers faces a demand curve that slopes downward to the right, we can reasonably expect that the firm will find that its marginal revenue is less than the price of the product it sells. must lower prices if it hopes to increase its profits. will have no effect on the price of the product it sells. will find that its marginal revenue is greater than the price of the product it sells.

19 Final Exam The small island nation of Ruritania is populated by two farmers, Alf and Barney. Each farmer has 100 acres. The land can be used either for growing wheat or as pasture for beef cattle. Alf s land is better than Barney s land. Each acre that Alf plants to wheat will yield 50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds of beef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year, and each acre that Barney devotes to pasture will yield 30 pounds of beef per year. Alf s farm has comparative advantage in both beef and wheat. Alf s farm has absolute advantage in the production of beef and comparative advantage in the production of wheat. Barney s farm has comparative advantage in the production of wheat. Barney s farm has comparative advantage in the production of beef. More than one of the above statements is true. 16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acre of land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas is more productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons of grapefruit. Farmers in each state sell their crops in a national market. If the price of cotton in this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmers in each state grow? Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in both states will grow grapefruit but no cotton. Farmers in both states will grow cotton but no grapefruit. Farmers in both states will grow some of each crop. 17. Prices have changed in the market described above. Now the price of cotton is $150 per ton, and the price of grapefruit is $200 per ton. After the change, what will farmers in each state grow? Farmers in both states will grow cotton but no grapefruit. Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in both states will grow grapefruit but no cotton. Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in both states will grow some of each crop.

20 Economics For each hour of labor, Country A can produce 20 pounds of rutabagas or 16 pounds of grapes. For each hour of labor, Country B can produce 10 pounds of rutabagas or 4 pounds of grapes. The theory of comparative advantage implies that, under these conditions, Country A would find it advantageous to: import both rutabagas and grapes and export nothing. export rutabagas and import grapes. export both rutabagas and grapes and import nothing. export grapes and import rutabagas. grow all the rutabagas and grapes it consumes and neither import nor export. 19. The demand curve for motel rooms is downward sloping, and the supply curve for motel rooms is upward sloping. Also, the demand curve for gasoline is downward sloping, and the supply curve for gasoline is upward sloping. Because families on summer vacation trips buy lots of gasoline and also rent motel rooms, gasoline and motel rooms are complements. An increase in the price of gasoline decreases summer travel, which decreases the demand for motel rooms. Suppose there is a shift up in the supply of gasoline, with less gasoline supplied at every price. What would happen to the price of motel rooms and the number of motel rooms rented? The price of motel rooms would fall, and the number of motel rooms rented would rise. The price of motel rooms would rise, and the number of motel rooms rented would rise. The price of motel rooms would fall, and the number of motel rooms rented would fall. The price of motel rooms would rise, and the number of motel rooms rented would fall. 20. The article Depressing Times, published in The Economist on November 13, 2008, describes a harmful effect of a fall in the inflation rate that is too far, too fast. What is that harmful effect? A general fall in prices increases the value of the dollar, the quantity of goods and services that a dollar can buy. This increases the demand for goods and services, which drives up wage rates and decreases employment. A general fall in prices makes US exports less competitive in international markets, which leads to a cutback in domestic production and employment. A general fall in prices increases the value of the dollar, the quantity of goods and services that a dollar can buy. This increases the cost of the loans that consumers and firms have taken out. They rush to pay off those loans, which reduces their demand for goods and services, causing further price reductions and unemployment. A general fall in prices reduces the value of assets held by banks and other financial institutions. They are less willing to lend as a result, which decreases employment in manufacturing and other businesses.

21 Final Exam A spider mite infestation reduced the fall harvest of apples in Washington. As a result of the infestation, the harvest decreased by 15%, but the revenue of apple ranchers only decreased by 10%. The demand curve did not change. What was the price elasticity of demand for apples in Washington? The supply function for fresh strawberries is given by the equation P s (Q) = 4 + 4Q. The demand function is given by the equation P d (Q) = 85 5Q where Q is the number of crates of strawberries sold. In competitive equilibrium, how many crates of strawberries will be sold? None of the above. 23. Mike owns and operates a restaurant. He pays his staff $10,000 per month and spends $8,000 per month on food, utilities, and other supplies. Because he owns the restaurant building, Mike doesn t pay rent. However, he could rent the building to someone else for $2,000 per month. If he did close his restaurant and rent his building to someone else, he would have to find a job. Mike believes that he could work for someone else at a salary of $3,000 per month. What is the opportunity cost to Mike of continuing to operate his restaurant? $21,000 per month $10,000 per month $20,000 per month $18,000 per month $23,000 per month

22 Economics In Clothes Will Cost Less, but Some Nations Pay, Marshall, Iritani and Dickerson outline some of the consequences of phasing out the Multifiber Arrangement (MFA). Which of the following options best describes the MFA? The MFA was a system of quotas determining the amounts of certain types of clothing that various countries could export into the US, Canada and Europe. The MFA was a system of subsidies for textile manufacturers in the US that allowed them to compete with cheaper imports from Asia. The MFA was a system of tariffs on imports of clothing from Asian to the US, Canada, and Europe. The MFA prescribed workplace and labor conditions that foreign textile manufacturers had to satisfy to export their products to the US, Canada, and Europe. 25. Ten residents of Greenfield are willing to pay someone as much as $8 a week to mow their lawn, and ten residents are willing to pay someone as much as $6 a week to mow their lawn. Thirty teenage boys are willing to mow a lawn each week if they receive at least $5 for the job. Suppose the city of Greenfield imposes a tax of $2 a week on each resident who hires a teenage boy to mow his or her lawn. How will that tax affect the competitive equilibrium price of lawn mowing? The price would not change. The price would fall by $1. The price would fall by $2. The price would rise by $2 The price would rise by $ The Bergstrom Box Company (BBC) makes cute Swedish boxes to sell to gullible American tourists. If it employs one worker, it can make and sell 6 boxes per day. If it employs two workers, it can make and sell 10 boxes per day; and if it employs 3 workers, it can make and sell 12 boxes per day. Each box sells for $10. If the wage of a worker is $30 per day, how many workers should BBC hire? 0 workers per day 2 workers per day 3 workers per day 1 worker per day 5 goats and no workers

23 Final Exam There are six box companies in Sweden (including Bergstrom Box Company). Each company has the same relationship between labor employed and output as Bergstrom Box Company described in the previous question. Each company can also sell its boxes for a price of $10 per box. There are 5 workers in Sweden willing to work in a box company for $25 per day or more, and there are 6 workers willing to work in a box company for $35 per day. What is the competitive equilibrium wage for box company workers in Sweden? $40 per day $30 per day $25 per day $35 per day $60 per day 28. The town of Sweet Harmony has 100 families. Seventy of those families have a child, and 30 do not. Thirty of the families with a child are willing to pay as much as $6,000 to educate their child, and the other forty are willing to pay as much as $3,000. Each educated child creates a positive externality of $10 for each family in Sweet Harmony. The cost of educating a child is $5,000. If each family must pay the cost of educating its child, how many children will be educated, and what is the total profit (including external benefits) of all families derived from the education of Sweet Harmony s children? 30 children will be educated, and the total profit is $90, children will be educated, and the total profit is $50, children will be educated, and the total profit is $30, children will be educated, and the total profit is $60, children will be educated, and the total profit is $120, Suppose the town of Sweet Harmony described in the previous question enacts a subsidy for families that educate their children. Each family who sends their child to school receives a subsidy of $1,000. This subsidy is financed by a tax on the residents of Sweet Harmony, which is shared equally among families in the town. Compared to the equilibrium described in the previous question, how will this subsidy affect the number of children educated and the total profit (including external benefits) of all families in Sweet Harmony? 40 more children will be educated, and total profits will increase by $75, more children will be educated, and total profits will decrease by $25, more children will be educated, and total profits will decrease by $40,000. no more children will be educated, and total profits will not change. no more children will be educated, and total profits will decrease by $50,000.

24 Economics The demand for tax accountants in Richtown, Connecticut, is given by the demand function Q = 4, P, where Q is the number of clients seeking to hire a tax accountant and P is the price accountants charge their clients. Each accountant can complete tax forms for 200 clients each year. The time an accountant takes to complete a tax form for any one client has an opportunity cost of $50. Each accountant must also pay the city $10,000 per year for a license to practice accounting in Richtown. The license fee and the opportunity cost are the only costs an accountant has. In long-run equilibrium (when accountants can enter and exit the accounting practice in Richtown), how many accountants will practice in Richtown?

25 Name Test Form D Economics 1 Final Exam December 9, 2008 True-False Questions: Fill in Bubble A for True, Bubble B for False. 1. A monopolist faces a downward-sloping demand curve for its product. In order to maximize its profits, it will choose the output that maximizes its marginal revenue. 2. If the world price for a good exceeds the autarky price for the good, opening the international market to domestic producers will decrease the consumer surplus of domestic consumers of the good. 3. Suppose the demand curve for a good slopes down, and the supply curve for that good slopes up. If the supply curve shifts and the demand curve does not shift, the equilibrium price and quantity will move in opposite directions. 4. If a firm s average variable cost does not change as it increases its output, the firm s marginal cost equals its average variable cost. 5. A competitive equilibrium for a good will maximize the number of trades of the good for which both the buyer and seller have a positive profit. 6. A profit-maximizing monopolist will sell more units of a good than the amount of the good that would be sold in a competitive equilibrium. 7. We can expect there to be excess demand in a market where a legal price ceiling is set lower than the competitive equilibrium price. 8. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue of the good is negative at that quantity. 9. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduction in sellers profit and consumers surplus caused by a sales tax of $20 per unit will exceed the amount of revenue collected by the tax.

26 Economics If Person A has absolute advantage over Person B in the production of Good X, then Person A must also have comparative advantage over Person B in the production of Good X. Multiple Choice Questions 11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it would have to lower its price to $87 per unit. What is the marginal revenue of the 11th unit? $57 $77 $87 $90 $ The demand curve for Econ 1 textbooks is given by the equation P = 100 Q, where P is the price of the book and Q is the number of books sold. The variable cost of producing and selling a textbook is constant at $20 per book. The fixed cost is zero. What price would a profit-maximizing monopolist charge for the book? $60 $90 $20 $ Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem. Also assume that the textbook is sold by a profit-maximizing monopolist. How much higher or lower are the total profits of buyers and sellers than those profits would be in a competitive equilibrium for the textbook? Totals profits are $200 higher than they would be in a competitive equilibrium. Total profits are $800 lower than they would be in a competitive equilibrium. Total profits are $300 lower than they would be in a competitive equilibrium. Total profits are $600 higher than they would be in a competitive equilibrium. 14. If a monopolist that charges the same price to all customers faces a demand curve that slopes downward to the right, we can reasonably expect that the firm will find that its marginal revenue is less than the price of the product it sells. must lower prices if it hopes to increase its profits. will find that its marginal revenue is greater than the price of the product it sells. will have no effect on the price of the product it sells.

27 Final Exam The small island nation of Ruritania is populated by two farmers, Alf and Barney. Each farmer has 100 acres. The land can be used either for growing wheat or as pasture for beef cattle. Alf s land is better than Barney s land. Each acre that Alf plants to wheat will yield 50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds of beef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year, and each acre that Barney devotes to pasture will yield 30 pounds of beef per year. Alf s farm has comparative advantage in both beef and wheat. Barney s farm has comparative advantage in the production of beef. Alf s farm has absolute advantage in the production of beef and comparative advantage in the production of wheat. Barney s farm has comparative advantage in the production of wheat. More than one of the above statements is true. 16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acre of land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas is more productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons of grapefruit. Farmers in each state sell their crops in a national market. If the price of cotton in this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmers in each state grow? Farmers in both states will grow cotton but no grapefruit. Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in both states will grow grapefruit but no cotton. Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in both states will grow some of each crop. 17. Prices have changed in the market described above. Now the price of cotton is $150 per ton, and the price of grapefruit is $200 per ton. After the change, what will farmers in each state grow? Farmers in both states will grow cotton but no grapefruit. Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cotton but no grapefruit. Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grapefruit but no cotton. Farmers in both states will grow grapefruit but no cotton. Farmers in both states will grow some of each crop.