ECON 2100 (Fall 2018 Section 11) Final Exam Version B

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1 ECON 21 (Fall 218 Section 11) Final Exam Version B Multiple Choice Questions: (3 points each) 1. I am taking of the exam. B. Version B 2. Which of the following could never lead to a change in demand for wine? A. a decrease in the price of Pepsi. B. an increase in the price of cheese. C. a decrease in the price of wine. D. an increase in consumer income. 3. Misty attended the Nirvana concert at the Omni Coliseum in Atlanta on November 29, She paid $2 for a ticket to this show. Her reservation price as a buyer of the ticket was $8. As a result, her Consumer s Surplus from going to the concert was A. $5 B. $6 C. $1 D. $1,6 4. Consider the following two statements: (I) Musician Krist Novoselic was the bass guitarist in the rock band Nirvana. and (II) Nirvana is the best rock band of the past thirty years. Statement (I) is a statement, and Statement (II) is a statement. A. positive; positive. B. normative; normative. C. positive; normative. D. normative; positive. For Questions 5 and 6, consider the following scenario (illustrated by the simultaneous move game below). The two bands Foo Fighters (denoted FF) and Giants in the Trees (denoted GITT) are simultaneously deciding to have a New Year s Eve concert in either Seattle, WA or Los Angeles, CA. Their payoffs (reflecting profits, based upon ticket sales) are stated in the payoff matrix below. FF GITT Los Angeles Seattle Los Angeles 81, 6 9, 1 Seattle 7, 15 63, 9 5. In this game, A. both Foo Fighters and Giants in the Trees have a dominant strategy. B. neither Foo Fighters nor Giants in the Trees has a dominant strategy. C. Foo Fighters has a dominant strategy, but Giants in the Trees does not. D. Foo Fighters does not have a dominant strategy, but Giants in the Trees does. 6. This game A. fits the definition of a Prisoner s Dilemma. B. does not have any Nash Equilibria (even in mixed strategies ). C. has exactly one Pure Strategy Nash Equilibria. D. has exactly two Pure Strategy Nash Equilibria.

2 7. Dave and Pat are in a band with their friends Taylor, Nate, Chris, and Rami. They sell t-shirts at their concerts (they played a total of 1 shows during the past month). Demand for t-shirts is such that price elasticity of demand is ε = 9/8 = at every point along the demand curve. T-shirts can be produced at a constant marginal cost of $4 per unit, with fixed costs of $2. In order to maximize profit from selling t-shirts, they should charge a per unit price of. A. $56.25 B. $45 C. $36 D. $ Producer s Surplus is equal to A. Profit minus Fixed Costs of Production. B. Revenue minus Total Costs of Production. C. Revenue minus Variable Costs of Production. D. More than one of the above answers is correct. For questions 9 and 1, consider the following scenario. Floyd is a barber. He provides hair cutting services for men in a perfectly competitive market. The graph below illustrates the maximum profit which he can earn in this perfectly competitive market as a function of the price of his output. Observe that maximum profit is equal to $2, if and only if price is less than or equal to $1. Profit of Firm 7,22 Profit 1 2 Price of Output 6, , 9. For this firm, Fixed Costs of production are: A. $2,. B. $7,22. C. $2,. D. $. 1. For this firm, the Minimum Value of Average Variable Costs of Production is: A. $1. B. $2. C. $22. D. $24.

3 11. is a parable which illustrates why a good that is non-excludable but rival in consumption will be used/consumed by members of society at a level which is more than socially desirable. A. The Tragedy of the Commons B. The Free Rider Problem C. The Coase Theorem D. Nash s Existence Theorem 12. Visually, the demand curve facing a firm operating in a perfectly competitive market is A. positively sloped, since the Law of Demand will be violated in such a market. B. downward sloping, since the only way for such a firm to increase quantity sold is by charging a lower price for their output. C. a vertical line, since whatever price such a firm sets, quantity demanded will always be exactly equal to the capacity of the firm. D. a horizontal line, since such a firm can sell as much as they want at the prevailing market price but would lose all customers if they tried to charge a higher price. 13. Chad has reservation prices for good 1 and good 2 of R 1 4 and 2 8. He has the option to buy good 1 at a price of p 1 7, buy good 2 at a price of 2 6, or a bundle consisting of both good 1 an good 2 at a price of p b 11. Given this options, Chad should A. not make any purchase. B. purchase only good 1. C. purchase only good 2. D. purchase the bundle consisting of both good 1 and good 2. For Questions 14 and 15, consider the following scenario. Kurt and Dave spend their time producing drums and guitars. The table below provides a summary of the number of units of each good that each worker produce in a week. Drums Guitars Kurt 2 8 Dave Dave s Opportunity Cost for producing a unit of drums is equal to. A = 1/3 B. 2 4 = 1/2 C. 4 2 = 2 D = Focusing on the production of guitars, has an Absolute Advantage in the production of guitars and has a Comparative Advantage in the production of guitars. A. Dave; Dave. B. Kurt; Kurt. C. Kurt; Dave. D. Dave; Kurt.

4 16. Suppose that the current exchange rate between U.S. Dollars and Canadian Dollars is 1 U.S. Dollar is equal to 1.32 Canadian Dollars, and suppose that the price elasticity of demand for beer in Canada is.248. Consider a situation in which Canada and the U.S. were to adopt a single currency (the Amero ), the value of which was initially set equal 66 U.S. Cents (i.e., half the value of a Canadian Dollar). After converting all demand curves in Canada from Canadian Dollars to Ameros, the value of the price elasticity of demand for beer in Canada will be. A..124 B..248 C D When considering potential government policies, it is important to recognize that A. all economists agree that Deadweight Loss can be eliminated by increasing taxes. B. when government provides a good/service it is often a free-lunch for consumers, since the good/service is being provided using resources that would otherwise be squandered. C. most households are not rational decision makers (but all firms are). D. if a policy alters the costs and/or benefits for a decision maker, then the decision-maker might change his behavior as a result of the policy. For questions 18 and 19, consider a situation in which four different candidates Courtney, Eric, Jill, and Caroline are running for Mayor of Portland, Oregon. Voter preferences are summarized by the table below. Suppose throughout that all voters choose to vote and cast their vote sincerely (that is, in-line with their true preferences, given the options available on the ballot). Voter Type 1 st Choice 2 nd Choice 3 rd Choice 4 th Choice % of Population [i] Courtney Eric Jill Caroline 22% [ii] Courtney Jill Eric Caroline 16% [iii] Jill Courtney Eric Caroline 4% [iv] Jill Eric Courtney Caroline 5% [v] Jill Caroline Courtney Eric 15% [vi] Eric Caroline Jill Courtney 8% [vii] Caroline Eric Jill Courtney 12% [viii] Caroline Jill Eric Courtney 18% 18. Suppose that the election rules are such that there is a single vote with all four candidates on the ballot, and the person with the plurality of votes (i.e., the most votes) wins. Under these rules, the person chosen to be Mayor would be A. Courtney B. Eric C. Jill D. Caroline 19. Suppose that the election rules are such that there is first a single vote with all four candidates on the ballot. If someone gets over 5% of the vote, they are elected; however, if nobody gets over 5% of the vote, then there is a runoff between only the two highest vote getters in the initial election. The winner is then the candidate who receives the majority of votes in this runoff. Under these rules, the person chosen to be Mayor would be A. Caroline B. Jill C. Eric D. Courtney

5 2. Consider a consumer with preferences for which consumption bundle (as a function of prices and income) is A. x1 and x2 p1 p2 p1 p2. B. * 4I x1 and x2 5 p1 5 p2. C. * 3I x1 and x2 4 p1 4 p2. D. x1 and x2 2 p 2 p x 2 MRS 1,2. This consumer s optimal x1 For questions 21 and 22, consider the market for pennyroyal tea, which has supply and demand as illustrated below. Suppose that the free market outcome is efficient. price Supply a b 4.25 Demand 15, 21, 25,5 21. Imposing a per unit tax of $1. on buyers would A. create a Deadweight Loss equal to areas a+b. B. generate tax revenue of exactly $21,. C. result in buyers paying $6.15 per unit. D. more than one of the above answers is correct. quantity 22. Consider two potential policies: Policy Alpha is a per unit tax of $2 imposed on buyers and Policy Beta is a per unit tax of $3 imposed on sellers. Which of the following statements is correct? A. The resulting decrease in Consumers Surplus would be smaller under Policy Alpha than under Policy Beta. B. The resulting decrease in Producers Surplus would be smaller under Policy Beta than under Policy Alpha. C. Quantity traded would be exactly the same under Policy Alpha and Policy Beta. D. None of the above answers is correct.

6 23. refers to a legal restriction on the price at which trade can take place. A. Price Elasticity of Demand B. A Negative Externality C. A Price Control D. Market Power 24. A good that is rival in consumption but non-excludable is a good. A. private B. public C. collective D. common For Questions 25 and 26, consider the following scenario. Johnny Park is the only seller of Good X in Springfield, VA. Demand and Marginal Costs for his output are illustrated in the graph below. Marginal Costs of production are minimized if he produces 2, units. Suppose throughout that he is able to engage in First Degree (i.e., Perfect) Price Discrimination. $ MC(q) (i) (iv) (ii) (iii) 2, (v) (vi) (vii) 5, (viii) Demand 11, quantity Fixed Costs of production equal to $2,. Finally, the eight regions identified above have areas equal to: Area (i) Area (ii) Area (iii) Area (iv) Area (v) Area (vi) Area (vii) Area (viii) $9, $16, $8, $6, $11, $7, $14, $2, 25. When Johnny maximizes profit (by way of engaging in Perfect Price Discrimination), he will sell units of output. A. more than 5, but less than 11, B. exactly 5, C. more than 2, but less than 5, D. exactly 2, 26. When Johnny maximizes profit (by way of engaging in Perfect Price Discrimination), he is able to earn a profit of. A. $4, B. $31, C. $51, D. $71,

7 27. Consider a market in which there is excess demand at price of $12 and excess supply at a price of a price of $2. These observations imply that the market equilibrium price must be A. below $12. B. somewhere between $12 and $2. C. exactly equal to $2. D. exactly equal to $32 (the sum of $12 and $2). 28. The provides a simplified representation of the interaction between households and firms in the Markets for Finished Goods/Services and the Markets for Factors of Production. A. Inverse Elasticity Pricing Rule B. Circular Flow Diagram C. Model of Supply and Demand D. Production Possibilities Frontier For Questions 29 and 3, consider the information conveyed in the graph below. Polly manages a Mexican seafood restaurant in Aberdeen, WA. Demand, Marginal Revenue, and Marginal Costs for meals at her restaurant are illustrated below. Assume throughout that she charges all customers the same price (the Marginal Revenue curve illustrated below reflects this assumption) $ MC(q) a b c d e f g h i Demand 1,65 2,4 3,875 MR(q) 2,825 quantity 29. To maximize profit, Polly should sell units of output. A. 1,65 B. 2,4 C. 2,825 D. 3, When Polly sells the quantity and charges the price which maximize profit, A. Consumers Surplus is equal to areas a+b+c+d+e. B. Producer s Surplus is equal to areas c+d+f+g+h. C. Deadweight Loss is equal to area i. D. the government receives tax revenue equal to areas c+d+f+g.

8 31. A Production Possibilities Frontier A. should always be a straight line, as a direct result of the Low-Hanging-Fruit Principle. B. should be positively sloped, illustrating the Law of Supply. C. essentially presents a society with a menu of available combinations of output from which it can choose. D. More than one of the above answers is correct. 32. The states that a person is more likely to take an action if its benefit rises and less likely to take an action if its cost rises. A. Cost-Benefit Principle B. Incentive Principle C. Universal Economic Principle D. Principle of Comparative Advantage For questions 33 and 34, consider the graph below which illustrates Frances Farmer s budget line and preferences over two goods ( good 1 and good 2 ). I x 2 p 2 A B C D 8 92 I p 1 55 x Her preferences appear to A. be monotonic and satisfy the property of convexity. B. be monotonic but violate the property of convexity. C. not be monotonic but satisfy the property of convexity. D. not be monotonic and violate the property of convexity. 34. Which consumption bundle (or bundles) is optimal for Frances? A. Bundle A. B. Bundle B. C. Bundle C. D. Bundle D.

9 35. If demand is very elastic and supply is very inelastic, then imposing a Per Unit Tax on buyers will result in A. a big decrease in both the price ultimately received by sellers and the price ultimately paid by consumers. B. a big increase in both the price ultimately received by sellers and the price ultimately paid by consumers. C. a big decrease in price ultimately received by sellers, but only a small increase in price ultimately paid by consumers. D. only a small decrease in price ultimately received by sellers, but a big increase in price ultimately paid by consumers. For questions 36 through 38, consider the market illustrated below: $ Marginal Social Costs Marginal Private Costs b c a d Marginal Private Benefits = Marginal Social Benefits quantity 3,42 4,68 6,2 6, It would appear as if A. this good is a collective good. B. this good is clearly being produced by a monopolist. C. production/consumption of this good generates a negative externality. D. production/consumption of this good generates a positive externality. 37. At the free market outcome, Deadweight-Loss would be A. area a. B. areas b+c. C. areas a+b+c. D. area d. 38. The efficient quantity of trade would be realized if the government imposed a per unit tax of. A. $12.75 B. $1. C. $6.3 D. $1.95

10 Answer questions 39 and 4 based upon the estimated values of elasticities stated below: (Price Elasticity of Demand for X ) = 1.43 (Price Elasticity of Demand for Y ) =.72 (Income Elasticity of Demand for X ) =.29 (Income Elasticity of Demand for Y ) =.35 (Cross Price Elasticity of Demand for X with respect to the price of Y ) =.46 (Cross Price Elasticity of Demand for Y with respect to the price of X ) = If the price of Good X were to slightly decrease, then total consumer expenditures on Good X would A. decrease, because Good X is a Geffen Good. B. decrease, because demand for Good X is inelastic. C. increase, because Good X is a Geffen Good. D. increase, because demand for Good X is elastic. 4. Suppose that consumer income were to increase. The direct result of this change on the equilibrium price and quantity in the market for Good Y would be that the equilibrium price of Good Y would and the equilibrium quantity of Good Y would. A. increase; increase. B. decrease; decrease. C. increase; decrease. D. decrease; increase.

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