Economics 1 Unit #3 Test Name:
Class Day and Time:
Part A. Answer each of the following questions. Each question is worth 4 points.
1. A. Fill in the blanks for MPP and MRP if Q represents boxes of cookies made by a factory
And the boxes sell for $2 each. This part of the question is worth 2 points.
N Q MPP MRP
3 80 - - - - - -
4 120 _______ _______
5 140 _______ _______
6 150 ________ _______
1. B. Continuing the above problem, if the marginal factor cost of a worker is $100, how
many workers will this business hire? Answer with an integer from 3 to 6. This part
of the question is worth 2 points.
2. A. Arnold, Bettie, and Charles work in the theater snack bar. They are all
interchangeable workers. Fill in the blank with Arnold’s predicted wage. This
question is worth 2 points.
Arnold: Cash Register - MRP = $14
Bettie: Candy and Soda - MRP = $13
Charles: Cleaning floor and counters - MRP = $10
Arnold’s wage = _______
2. B. If the above workers are not interchangeable workers, so that each one is the only one
that can do the job they are normally assigned to, then fill in the blank below with
Arnold’s predicted wage.
_______________
3. Suppose you have the following marginal utility schedule for money.
Dollar $3 $4 $5 $6
Marginal Utility 8 7 6 5
Total Utility 27 34 40 45
You have an income of $6 and a car worth $3. You drive in such a way that you crash
your car once every 2 years. In years that you crash, you immediately spend $3 to replace
it, leaving $3 to spend on other things.
A. What is your total utility over 2 years if you do not crash your car in year 1, then crash
it in year 2?
B. Now an insurance company offers you the deal that every year you pay them $2, and in
years when you crash, they will give you $3 to replace your car. What is your total
utility over 2 years if you do not crash your car in year 1 and do crash it in year 2?
C. Would this person buy the insurance? Write yes or no below.
4. A. A welfare program exists with a guaranteed income of $20,000 and a benefit
reduction rate of 0.2 or 20%. If someone earns $30,000 dollars in his job, what is the
amount of the welfare payment?
________________________________
B. At what private income will the payment drop to $0?
________________________________
5. List 3 of the reasons given in class for income equality to exist.
A. _____________________
B. _____________________
C. _____________________
6. List 2 examples of goods with negative externalities.
Good: _________________ Externality: _____________________________________
Good: _______________ Externality: ______________________________________
7. List 3 examples of Public Goods.
A. ______________________________
B. ______________________________
C. ______________________________
8. Answer whether the following statement is true, false, or uncertain, and explain why.
Because it is important to have a good President, voters will spend a lot of time
researching the information necessary to cast an informed vote.
Part B. Answer the following multiple choice questions by marking the letter of the best answer on your scantron. Each question is worth 1 point.
1. When technological progress increases the productivity of workers, the result is:
a. the demand curve for workers shifts right.
b. the demand curve for workers shifts left.
c. the supply curve for workers shifts right.
d. the supply curve for workers shifts left.
2. Which of the following is true about the theory of declining marginal utility of money
with no other factors considered?
a. It explains buying insurance but not gambling.
b. It explains gambling but not buying insurance.
c. It explains neither gambling nor buying insurance.
d. It explains both gambling and buying insurance.
3. A person buys insurance even if he expects to lose money on it because:
a. he is an idiot.
b. with the diminishing marginal utility of money, there comes a point where more money makes him less happy.
c. no one actually does this.
d. he will pay low utility dollars to the insurance company when things are good in order to
get back high utility dollars when things are bad.
4. The marginal productivity theory of factor input prices says that if there is competition, factor
inputs will be paid:
a. what is a fair price.
b. the smallest amount a company can get away with paying them.
c. The amount the government sets for them.
d. their marginal revenue product.
5. A company will keep hiring workers until:
a. MRP = Marginal Factor Cost.
b. MRP is higher than Marginal Factor Cost.
c. MRP is lower than Marginal Factor Cost.
d. The MRP of the last worker hired is zero.
6. The tragedy of the commons is that a fishing area that is open to use to everybody with no
restrictions will often:
a. not be used at all.
b. be fished to extinction.
c. be kept secret to all but a few.
d. be the source of fierce fights between the users.
7. A public good is:
a. easily excludable.
b. not easily excludable.
c. one produced by the government.
d. both a and c.
8. A person who attempts to get a public good without paying is called:
a. a thief.
b. a customer.
c. marginal guy.
d. a free rider.
9. A positive externality arises in a situation where a third party, outside the transaction,
a. fails to allocate resources efficiently.
b. suffers from a market transaction by others.
c. benefits from a market transaction by others.
d. pays a pollution tax to balance social costs.
10. A pollution charge is a form of tax imposed on:
a. the quantity of pollution that a firm emits.
b. pollution control technologies.
c. every economy in the world.
d. low-income market-orientated industries.
11. The idea that people insured against a certain event will act in such a way as to make the
event more likely to happen is called:
a. risk.
b. hazard risk.
c. moral hazard.
d. moral risk.
12. A used car seller offering a long generous warranty to convince his customers these are
high quality cars is an example of a seller using:
a. information.
b. a signal.
c. moral hazard.
d. an externality.
13. The signaling theory of education says that college graduates earn more money because:
a. they have learned valuable skills in college.
b. they need to get a return on the investment of their tuition payments.
c. they deserve it for all the hard work they have put in.
d. they have demonstrated they are teachable employees.
14. A person in a position where earning more money does not increase there is a
large drop in their welfare payment is said to be in a:
a. bad situation.
b. moral hazard.
c. poverty trap.
d. welfare pit.
15. The median voter theory predicts that the winner of an election will be the candidate:
a. who excites very liberal or very conservative voters to turn out and vote.
b. has the best TV commercials.
c. has the most money to spend.
d. has views closest to the average voter.
16. Voters are often ignorant of what their Congressman is doing because:
a. people are stupid.
b. the cost of acquiring information is higher than the benefit.
c. politicians purposely keep voters ignorant.
d. Most voters have not gone to college.
pays a pollution tax to balance social costs.