# ECON 2100 (Summer 2009 Section 06) Final Exam. Multiple Choice Questions: (2 points each)

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1 ECON 2100 (Summer 2009 Section 06) Final Exam Multiple Choice Questions: (2 points each) 1. Price Elasticity of Demand is defined as A. the unique price at which Total Consumer Expenditures on a good are maximized. B. the unique price at which quantity demanded drops to zero units. C. a measure of the sensitivity of quantity demanded to a change in price, defined as the slope of the demand curve at its steepest point. D. a measure of the sensitivity of quantity demanded to a change in price, defined as the percentage change in quantity demanded divided by the percentage change in price. 2. Suppose that demand for carrots is elastic at all prices. If the price of carrots decreased by 5%, then quantity demanded of carrots would A. increase, but by less than 5%. B. increase by exactly 5%. C. increase, but by more than 5%. D. also decrease by exactly 5%. 3. In Industry Y : the largest firm produces 25% of total industry output, the second largest firm produces 20% of total industry output, the third largest firm produces 15% of total industry output, and the fourth largest firm produces 10% of total industry output. From this information alone we know that A. this market is a Pure Monopoly. B. the value of the Four Firm Concentration Ratio is exactly equal to 70. C. the value of the Four Firm Concentration Ratio is greater than 70. D. the value of the Herfindahl-Hirschman Index must be zero. 4. Kevin sells laundry detergent door-to-door in a small, rural town in Iowa. Since he is not operating in a perfectly competitive market, he has some market power. He is currently charging \$6.75 for each 64 ounce bottle of laundry detergent, a price at which he sells 400 units per month. If he increased the price of each unit to \$7.50, he should expect that A. he would still be able to sell 400 units per month. B. he would no longer be able to sell 400 units per month. C. his Total Revenue would definitely increase. 5. is a market structure in which firms sell very similar products (i.e., slight differentiation ), but in which there are significant barriers to entry which prevent most potential rivals for entering the market. A. Perfect Competition B. Monopolistic Competition C. Oligopoly D. Monopoly 6. In the Short Run, the only variable input which Company X hires is labor. Suppose that the Marginal Product of Labor is always positive. When increasing the amount of labor hired from 29 units to 30, output increases from 800 units to 815 units. If the production process of this firm exhibits a Diminishing Marginal Product of Labor, then units of output would be produced if 31 units of labor were hired. A. exactly 815 B. more than 815 but fewer than 830 C. exactly 830 D. more than 830 but fewer than 845

3 13. The short run supply curve of a firm operating in a perfectly competitive market is A. the portion of the Marginal Cost curve which lies above the Average Variable Cost Curve. B. the portion of the Marginal Cost curve which lies above the Average Total Cost Curve. C. the portion of the Average Total Cost Curve which lies above the Average Variable Cost curve. D. a horizontal line at the prevailing market price. 14. The is defined as a period of time sufficiently short so that amount hired/used of at least one input is equal to some predetermined level (based upon a previous decision). A. Efficient Scale B. Short Run C. Intermediate Run D. Long Run 15. If the Law of Demand is satisfied for a good, then A. demand for the good must increase if consumer income increases. B. quantity demanded of the good will increase if price of the good decreases. C. the corresponding demand curve will have a negative slope (i.e., will be downward sloping ). 16. With which of the following statements is there general agreement among most economists? A. Rent controls increase the quantity/quality of available housing. B. A wealthy society has an obligation to provide free medical services to all citizens (even those people with very low incomes). C. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. For Questions 17 to 18, consider a society with the Production Possibilities Frontier illustrated below: 1, Computers A C B D Which of the following combinations of output is feasible but inefficient? A. 200 bushels of wheat and 350 computers ( Point B ) B. 310 bushels of wheat and 500 computers ( Point D ) C. 280 bushels of wheat and 850 computers ( Point C ) Wheat 18. If this society is currently producing 160 bushels of wheat and 850 computers (i.e., Point A ), then A. they could increase their output of wheat without having to decrease their output of computers. B. if they wanted to produce 150 additional bushels of wheat, they would have to decrease their output of computers by at least 350 units. C. if they wanted to produce 250 additional computers, they would have to decrease their output of wheat by at least 120 units. D. None of the above answers are correct.

4 19. is a per unit tax imposed on a good that generates a negative externality, which reduces trade to the efficient level (and therefore eliminates Deadweight-Loss). A. A Nash Tax B. A Coasian Tax C. A Pigouvian Tax D. A Progressive Tax 20. Comparing Average Tax Rates in the United States resulting from the Federal Income tax in 2006 to those in 2000 A. Average Tax Rates decreased for taxpayers in all income levels between 2000 and B. Average Tax Rates increased for taxpayers in all income levels between 2000 and C. Average Tax Rates increased for the poor (the bottom 25% of wage earners ), remained constant for the middle class (the middle 25% to 75% of wage earners ), and decreased for the rich (the top 25% of wage earners ). D. Average Tax Rates increased slightly for the poor and middle class (the bottom 75% of wage earners ) and decreased substantially for the very rich (the top 5% of wage earners ). 21. The Principle of Comparative Advantage A. states that in a comparative sense, citizens of wealthy countries have an advantage over citizens of poor countries, since the former have easier access to higher quality and lower cost education, healthcare, and consumer goods. B. states that the most productive worker in a society will always have a Comparative Advantage in the production of every good. C. states that a society can produce a greater amount of total output when individuals focus their production on those activities for which they posses a Comparative Advantage. D. None of the above answers are correct. 22. 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. For Questions 23 through 25, consider the following simultaneous move game: Player 2 Left Right Player 1 Top 200, , 20 Bottom 150, , If Player 2 were to choose Right, then the best reply for Player 1 would be to A. also choose Right. B. choose Left. C. choose Top. D. choose Bottom. 24. In this game, A. Player 1 has a dominant strategy, but Player 2 does not. B. Player 2 has a dominant strategy, but Player 1 does not. C. both Player 1 and Player 2 have a dominant strategy. D. neither Player 1 nor Player 2 has a dominant strategy. 25. This game A. fits the definition of a Prisoner s Dilemma. B. does not have any Nash Equilibria (even in mixed strategies ). C. has an equilibrium in which Player 1 chooses Top and Player 2 chooses Left.

5 26. The 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. Free Rider Problem B. Coasian solution to Externalities C. Tragedy of the Commons D. Principle of Absolute Advantage 27. A Private Good is A. Non-Rival in consumption and Excludable B. Non-Rival in consumption and Non-Excludable C. Rival in consumption and Excludable D. Rival in consumption and Non-Excludable For Questions 28 through 30, consider a monopolist facing demand and with costs of production as illustrated below. Further, if this monopolist were restricted to charging a common price for every unit of output sold, Marginal Revenue would be as illustrated below by the curve labeled MR(q) \$ MC(q) ATC(q) AVC(q) Demand quantity 0 4,000 MR(q) 8,600 7,100 5, If this monopolist must charge a common price for every unit of output sold, then they will maximize profit by selling units of output and charging a price of for each unit sold. A. 4,000; \$2.00 B. 4,000; \$5.40 C. 5,600; \$9.40 D. 7,100; \$ Again suppose that this monopolist must charge a common price for every unit of output sold. When the monopolist charges the price and sells the quantity of output which maximize profit, A. Consumers Surplus will be equal to zero. B. Deadweight-Loss will be positive, due to the monopolist selling more than the efficient quantity of the good. C. the monopolist is unable to earn a positive profit. 30. If this monopolist is able to engage in First Degree Price Discrimination (or Perfect Price Discrimination ), then A. they would choose to sell 8,600 units of output (more than the efficient level of output). B. Total Producer s Surplus would be smaller than it was under No Price Discrimination. C. Total Consumers Surplus would be equal to zero.

6 31. In the presence of a negative externality, A. the free market would typically provide less than the efficient amount of the good. B. the free market would typically provide more than the efficient amount of the good. C. some people will try to free ride and enjoy the benefits of units of the good purchased by others. 32. Which of the following goods would likely fit the definition of a Public Good? A. A Whopper from Burger King. B. High school education provided at a public school. C. Books available to be borrowed from a public library. D. A FA-22 Raptor fighter jet. For questions 33 through 36, refer to the graph below, which illustrates the supply and demand for pens in price Supply (a) (b) (d) (c) (e) (f) Demand quantity 0 1,000 2,075 2, At the free market equilibrium (without any government intervention in the market): units will be traded, each at a price of. A. (1,000); (\$10.50) B. (1,000); (\$4.10) C. (2,075); (\$7.00) D. (2,775); (\$10.50) 34. At the free market equilibrium (without any government intervention in the market), Total Consumers Surplus is equal to A. area (a). B. areas (a)+(b)+(c). C. areas (c)+(e). D. area (f). 35. If the government imposed a price ceiling of \$4.10 in this market, then A. Total Consumers Surplus would be equal to area (a). B. all sellers would be made better off. C. 1,000 units of the good would be traded. 36. Suppose a per unit tax of \$6.40 was imposed on sellers in this market. With this tax in place A. no trade would take place. B. there would likely be a positive Deadweight-Loss due to too much trade. C. tax revenue of \$6,400 would be generated. D. Total Producers Surplus would be smaller than at the free market equilibrium outcome, while Total Consumers Surplus would be unchanged from the free market equilibrium outcome.

7 37. Which of the following statements is a Positive Statement? A. Joe Biden is the most handsome Vice President this country has ever had. B. A profit maximizing monopolist will sell less than the efficient amount of a good. C. No household in the U.S. with an annual income below \$40,000 should have to pay any out-ofpocket expenses for medical care. D. The United States would be a better country if the possession and consumption of all alcoholic beverages was made illegal. 38. Elliot manages a company which produces tires for cars. When producing 10,000 units of output he realizes Average Variable Costs of \$20 and Average Total Costs of \$25. His Marginal Cost of producing the 10,000 th unit of output were \$30. From this information, it follows that A. his Average Total Costs of Production are minimized by producing 10,000 units of output. B. if he were to produce 25,000 units of output, his Average Fixed Costs would be equal to \$2. C. he is unable to earn a positive profit in the Short Run. D. if he were to increase his level of production slightly, his Average Variable Costs would decrease in value. 39. Consider a monopolist who is charging a price of \$15 for each unit of output sold. At this price, they are able to sell 20,000 units of output. Their Marginal Costs of Production at this level of output are equal to \$12. Finally, price elasticity of demand is equal to ε = 2. From this information, it is clear that this monopolist is A. not generating any revenue. B. maximizing profit but is not able to earn a positive profit. C. maximizing profit and is able to earn a positive profit. D. not maximizing profit. 40. In 2007: George earned \$923,807 of income, of which he paid 24.0% in U.S. Federal Income Taxes; John earned \$386,527 of income, of which he paid 30.7% in U.S. Federal Income Taxes; and Joe earned \$319,853, of which he paid 20.7% in U.S. Federal Income Taxes. If income provides a measure of economic capacity and average tax rate provides a measure of tax burden, then these figures could suggest that the U.S. Federal Income Tax A. should be abolished and replace with a national sales tax. B. satisfies the notion of horizontal equity. C. violates the notion of vertical equity. D. results in the rich paying too little in taxes.

8 ECON 2100 (Summer 2009 Section 06) Final Exam Student Name: Score on MC Questions: (2)( ) = out of 80 points. Score on Short Answer Questions : out of 20 points. Score on Extra Credit Question : out of 4 points. Exam Grade: + + = out of 100 points.

9 Short Answer Questions : 1. Consider the market for beef. Suppose that for this good, the following estimated values of elasticity have been determined: (Price elasticity of Demand for Beef) = ( 1.234) (Cross-Price Elasticity of Demand for Beef with respect to the price of Chicken) = (0.214) (Cross-Price Elasticity of Demand for Beef with respect to the price of Vodka) = ( 0.002) (Income Elasticity of Demand for Beef) = (0.346) Based upon these estimated values, clearly answer the following questions (making specific reference to the numerical values above to support your answer when appropriate). 1A. If the Price of Beef were to decrease, would Total Consumers Surplus in the market for Beef increase or decrease? Clearly explain. (2 points) 1B. Is Beef a normal good or an inferior good? Clearly explain. (2 points) 1C. If the Price of Beef were to increase slightly, would Total Consumer Expenditures on Beef increase, decrease, or remain unchanged. Clearly explain. (3 points) 1D. Suppose the Price of Chicken were to decrease. How would the Equilibrium Price of Beef and Equilibrium Quantity of Beef change? Explain. (3 points)

10 2. Consider a firm operating in a perfectly competitive market with costs of production as illustrated below: \$ ATC(q) MC(q) AVC(q) quantity ,000 2,000 2,200 2,400 2,650 3,000 2A. Determine the numerical value of Fixed Costs for this firm. (2 points) 2B. Suppose that the price of output in this market is currently \$4.00. How many units of output should the firm produce in the Short Run? Is the firm able to earn a positive profit in the Short Run? Explain. (3 points) 2C. Suppose that the price of output in this market is currently \$7.00. How many units of output should the firm produce in the Short Run? Is the firm able to earn a positive profit in the Short Run? Explain. (3 points) 2D. Suppose that the price of output in this market is currently \$ How should the firm expect this output price to change in the Long Run? Explain. (2 points)

11 EXTRA CREDIT: EC. IEPR Incorporated is the only seller of a unique good for which there are no close substitutes. They face demand for their product of 72,000,000 D ( p) =. For this demand function, price elasticity of demand 2 p is equal to ε = 2 at all points along the demand curve. This firm has costs of production equal to C ( q) = 30q + 500,000. From this cost function, it follows that this firm has constant marginal costs of \$30 for all units produced. EC 1. In order to maximize profit, what price should this firm charge and how many units of output should they sell? Explain. (2 points) EC 2. Is this firm able to earn a positive profit? Clearly explain why or why not. (2 points)

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