Econ 101, Final, Fall 2008.

Transcription

1 Econ 101, Final, Fall Prof. Guse, W & L University Instructions. You have 3 hours to complete the exam. You will answer questions worth a total of 80 points. Please write your responses on the exam itself in the space provided. If you require additional space, write on the back of the page. You may refer only to your own handwritten, cheat sheet. Calculators and all other references materials are not allowed. If a question asks for a numeric quantity you may leave your answer in expression form for full credit. (e.g would be perfectly acceptable in place of 2.) Be sure to label any diagrams you draw, to show your work and to explain your reasoning. Reasoned explanations on the initial set of ten multiple choice questions are not required but are welcome, if you feel it necessary. You may keep your cheat sheets. Thank you and good luck! Name: Pledge: 1

2 1. [ 3 Points ] The bowed-out shape of the Production Possibility Frontier (PPF): (a) reflects the existence of opportunity cost. (b) reflects the existence of increasing marginal opportunity cost. (c) is due to technological inefficiency. (d) reflects economic inefficiency. 2. [ 3 Points ] Diminishing marginal product occurs whenever: (a) business is operating inefficiently, resulting in high per-unit costs. (b) business becomes so large that it is unwieldy to manage and productivity declines. (c) diseconomies of scale occur due to increasing marginal costs of production. (d) additional workers add less to output than did the workers who came before. 3. [ 3 Points ] A competitive firm with no fixed cost is producing where MR = $4.00 and MC = $2.00. This firm can increase profit by: (a) expanding output. (b) reducing output to reduce costs and increase profit. (c) keep doing what it is doing its already making a profit. (d) raise price to increase total revenue. 4. [ 3 Points ] Which of the following would not increase the demand (shift the curve to the right) for beer? (a) A new health study concludes that beer cures colds and skin disorders. (b) A price war results in beer selling for $.50 per bottle. (c) Bars begin to give away spicy snacks to their customers. (d) The price of a substitute, e.g. wine or malt liquor, rises. 5. [ 3 Points ] Suppose that the demand for calculators rose even more than the supply had increased. The net effect of the two increases would be the following change in equilibrium price and quantity: (a) an increase in quantity but a slight decrease in price. (b) increases in both quantity and price. 2

3 (c) decreases in both quantity and price. (d) an increase in price but a decrease in quantity. 6. [ 3 Points ] According to the principle of comparative advantage, (a) countries with a comparative advantage in the production of every good need not specialize. (b) countries should specialize in the production of goods which they enjoy consuming more than other countries. (c) countries should specialize in the production of goods for which they use fewer resources in production than their trading partners. (d) countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners. 7. [ 3 Points ] An increase in demand in a competitive industry leads to: (a) higher prices and profit in the short run only. (b) higher prices and profit in the long run only. (c) higher prices and profit as long as demand remains high. (d) no change in either price or profit. 8. [ 3 Points ] An excise tax (a tax per unit sold) on firms in a given industry: (a) will change the equilibrium price most when product demand is elastic. (b) will change the equilibrium quantity least when product demand is in elastic. (c) will impose the smallest share of the tax burden on consumers when product demand is inelastic. (d) will bring in the greatest revenue for the government when product demand is inelastic. 9. [ 3 Points ] A tax placed upon on polluting firms in a given industry would: (a) lower the price of the product. (b) increase the equilibrium output of the industry. (c) internalize the cost of the detrimental externality created by firms in the industry. (d) move the market away from its economically efficient equilibrium. 3

4 10. [ 3 Points ] If the price of a new car is $20,000, then consumers will continue to buy additional cars until the consumer surplus from the last car purchased is: (a) zero. (b) $20,000. (c) maximized. (d) minimized. 4

5 11. [ 15 Points ] WSX Toothpaste Corporation can hire labor for $10 per hour. They make toothpaste using labor and capital. In the short run, capital is fixed at 100. Figure 1 shows WSX s marginal and average product of labor curves for this fixed level of capital. Refer to this figure when answering the questions below. (a) [5] The price of their output, toothpaste, is $2 per tube. How much labor should WSX hire in the short run to maximize profit? (b) [5] What is the shutdown price? (c) [5] Suppose WSX wanted to maximize output instead of profit. How much labor should they hire in the short-run? MP Toothpaste / Hour labor 8 AP Average Product 5 Marginal Product Labor (Hours / day) Figure 1. 5

6 12. (5 Points) Suppose that an acre of land with mature orange trees on it will produce a steady harvest of 100 boxes of oranges per year forever. At current market prices of oranges of $5 per box and interest rate at 5%, what is V m, the value of an acre of mature trees to an orange grower? 13. (10 Points) Suppose the government sets a quota on the output of greenhouse gases. Assuming that the permits are transferable in each case, what is the difference between the government auctioning off the permits and giving them out to selected firms? 6

7 14. [20 points ] Mercury-runoff from gold-mining operations is thought to contribute significantly to merucry levels in the Amazon and it tributaries. This is bad for the local fishing industry as their catch becomes significantly less marketable. Suppose that demand for mercury among gold-miners in the Amazon is given by the following marginal willingness to pay schedule. MWTP = 2000 q while the cost to the fishing industry of mercury in the rivers is given by the following marginal cost function MC = 1 2 q where q is the quantity of mercury measured in flasks and MWTP and MC are both measured in $/per flask. Assume that every flask demanded by gold miners eventually ends up in the river and that gold-mining is the only source of mercury pollution. Assume also that, from the gold-miner s point of view, the supply of mercury is perfectly elastic at $500 / flask. Draw a diagram showing the demand, marginal private cost and marginal social cost of mercury in the Amazon. Indicate the following quantities on your diagram. (Calculations are not required.) (a) Quantity demanded for Mercury without any regulation, Q 0 D (b) The size of an efficient Mercury tax, τ eff (c) Demand for Mercury with the efficient tax, Q 1 D (d) Government revenue from an efficient tax. (e) Savings to the fishing industry from an efficient tax. 7

8 EXTRA SPACE. 8