1 Econ 101, sections 2 and 6, S06 Schroeter Makeup Exam Choose the single best answer for each question. 1. A "zero sum game" is one in which a. every player breaks even in the long run. b. there is only one winner; all others lose. *. the winners' gains are exactly equal to the losers' losses. d. it is possible for all players to come out ahead. 2. To an economist, the term "market failure" means a. a business venture that goes bankrupt. *. a failure of the market to allocate resources efficiently. c. the adverse impact of one person's actions on a by-stander. d. a law that prohibits free exchange among buyers and sellers. Questions 3 and 4 are based on the following information. Two small countries, Pottawattamie and Muscatine, use their labor resources to produce goods of two types: manufactured goods and agricultural goods. The table below gives the number of hours of labor needed to produce one unit of each type of good in each country. Hours needed to produce one unit of manufactured goods agricultural goods Pottawattamie 6 3 Muscatine Which of the following is true? a. Pottawattamie has the absolute advantage in the production of manufactured goods. b. Pottawattamie has the comparative advantage in the production of manufactured goods. c. Muscatine has the comparative advantage in the production of agricultural goods. *. None of the above is true. 4. Suppose that there are international markets in manufactured goods and agricultural goods. Pottawattamie and Muscatine would be able to engage in a mutually beneficial trade with each other if the trade price of one unit of manufactured goods were a. 4 units of agricultural goods. b. 3 units of agricultural goods. c. 1 unit of agricultural goods. *. none of the above.
2 2 5. Which of the following would cause a leftward shift in the demand for a good? a. an increase in income (assume the good is a normal good). b. an increase in the good's own price. *. a decrease in the price of a substitute. d. a decrease in the price of a complement. 6. When a popular movie star is spotted drinking tomato juice, the demand for tomatoes increases. At the same time, an increase in the price of fertilizer makes it more costly to grow tomatoes. In the competitive market for tomatoes, the equilibrium price will *. increase and the equilibrium quantity will either increase, decrease, or stay the same. b. decrease and the equilibrium quantity will either increase, decrease, or stay the same. c. either increase, decrease, or stay the same, and the equilibrium quantity will increase. d. either increase, decrease, or stay the same, and the equilibrium quantity will decrease. 7. In a competitive market, which of the following would cause a decrease in equilibrium price and an increase in equilibrium quantity? a. an increase in demand. b. a decrease in demand. *. an increase in supply. d. a decrease in supply. 8. If the own-price elasticity of supply for a good is 0.5, this implies that suppliers would a. respond to a doubling of price with a 5% increase in quantity supplied. *. require a 10% increase in price to increase the quantity supplied by 5%. c. supply five times as much of the good if price were to double. d. supply 5% more of the good in response to a 1% increase in price. 9. Bagel Bob finds that when he increases the price of his bagels by 10%, his revenue from bagel sales increases. Bagel Bob faces a demand curve for his bagels that is a. unit elastic. *. inelastic. c. elastic. d. The answer could be any one of the above, depending on whether the size of the revenue increase is equal to, greater than, or less than 10%. 10. A government imposed maximum price at which a good can be sold is called a a. price floor. b. target price. c. compensated price. *. none of the above.
3 3 11. The effects of an excise tax depend on the elasticities of supply and demand. For a given demand elasticity, and a given dollar-per-unit amount of the tax, as supply becomes more elastic, the tax's impact on unit sales will *. increase and the buyers' share of the tax will increase. b. increase and the buyers' share of the tax will decrease. c. decrease and the buyers' share of the tax will increase. d. decrease and the buyers' share of the tax will decrease. The following graph depicts supply and demand in a hypothetical market. Use it to answer questions 12, 13, and 14. ($/unit) Supply Demand (units/day) 12. This market is in equilibrium to begin. Then the government imposes an excise tax of $1.20/unit. When the tax goes into effect, the price consumers pay will increase by a. $1.20/unit. *. $0.80/unit. c. $0.60/unit. d. $0.40/unit. 13. When the excise tax of $1.20/unit is in effect, consumer surplus is a. $36/day. b. $24/day. *. $18/day. d. $12/day. 14. The deadweight loss of the $1.20/unit excise tax is a. $36/day. b. $24/day. c. $18/day. *. $12/day.
4 4 15. In the early 1980s, supply-side economists suggested that the U.S. was at a. the minimum point on the Laffer curve. b. the point where the Laffer curve intersects the horizontal axis. c. some point along the upward-sloping portion of the Laffer curve. *. some point along the downward-sloping portion of the Laffer curve. 16. Suppose that the Bush administration decides to impose a $1,000 tax on every Japanese-made sport utility vehicle sold in the United States. This is an example of *. a tariff. b. an export subsidy. c. a quota. d. a compensating differential. 17. A small country initially prohibits international trade in wheat, a homogeneous good. When the trade ban is repealed, the country becomes an importer of wheat. As a result of the repeal of the trade ban, domestic consumers of wheat a. gain and domestic producers of wheat gain. *. gain and domestic producers of wheat lose. c. lose and domestic producers of wheat gain. d. lose and domestic producers of wheat lose. 18. Suppose a particular market is subject to a positive externality. Suppose further that transaction costs prevent an efficient solution via Coasian bargaining. Then, at the market equilibrium quantity, marginal social cost will be a. greater than marginal social value. b. equal to marginal social value. *. less than marginal social value. d. Either a, b, or c depending on whether the externality is on the consumption "side" or the production "side." 19. Internalizing an externality means a. the government imposes regulations that eliminate the externality at its source. b. the people affected by the externality seek compensation through legal action. *. incentives are altered so that people take account of the external effects of their actions. d. the activity responsible for the externality is subsidized. 20. Public goods are a. rival and excludable. b. rival and non-excludable. c. non-rival and excludable. *. non-rival and non-excludable.
5 5 21. A "flat-tax" proposal would impose no taxes on the first $20,000 of a household's annual income. Every dollar of annual income above $20,000 would be taxed at the marginal rate of 20%. A household with annual income of $50,000 would face an average tax rate of *. 12% b. 16% c. 18% d. 20% 22. If a tax takes a smaller fraction of income as income rises, it is a. proportional. *. regressive. c. progressive. d. marginal. 23. For the year 2005, H&K Construction Company had accounting profit that exceeded its economic profit by $1.5 million. From this, we can infer that H&K Construction had a. explicit costs equal to $1.5 million. b. revenue equal to $1.5 million. *. implicit costs equal to $1.5 million. d. none of the above. 24. Wages paid to workers, at the rate of $75/worker/day, represent a firm's only variable cost. When the firm employs 8 workers, output is 1200 units/day. When the firm employs 10 workers, output is 1500 units/day. Over this output range (1200 to 1500 units/day), the firm's marginal cost is approximately a. $0.25/unit. *. $0.50/unit. c. $4.00/unit. d. $150.00/unit. 25. A competitive firm faces a price of $6.00/unit for its product. It is currently operating where marginal cost is $5.00/unit and average variable cost is $3.00/unit. To maximize profit (or minimize loss) in the short-run, the firm should a. maintain its current output. *. increase output. c. decrease output but not shut down. d. The answer could be either a, b, or c, depending on the level of average total cost.
6 6 26. When market conditions in a competitive industry are such that firms cannot cover their total costs, then a. the industry will eventually disappear, since consumers are unwilling to pay a sufficiently high price. b. additional firms will enter, supply will increase, and price will rise to a break-even level. *. some firms will go out of business, causing price to rise until the remaining firms can cover their costs. d. the losses sustained by firms in the short-run will be offset by long-run economic profit. 27. If a monopolist can sell 7 units/day when the price is $3.00/unit, and 8 units/day when the price is $2.50/unit, then the marginal revenue of the 8th unit is a. $3.00/unit. b. $2.50/unit. *. -$1.00/unit d. none of the above. 28. Which of the following is an example of price discrimination? a. Nabisco provides cents-off coupons for its grocery products. b. Amtrak offers a lower price for weekend travel compared to weekday rates on the same routes. c. Hotel rates for AARP members are lower than for nonmembers. *. All of the above are examples of price discrimination. 29. Bill and Pete are players in a game in which each must choose among a set of strategies. A dominant strategy for Bill is one that a. is a best response to Pete's current strategy choice. b. maximizes Bill's payoff assuming that Pete will play his best strategy. *. is Bill's best choice no matter which strategy Pete chooses. d. makes Bill better off without harming Pete. 30. An oligopoly equilibrium in which each firm maximizes its own profit, given the actions of its rivals, is called a a. cartel equilibrium. *. Nash equilibrium. c. dominant equilibrium. d. competitive equilibrium.