Economics 1Unit #3 TestName:
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 marginal product of labor (MPL) and marginal revenue product of
labor (MRP) ifQ represents boxes of cookies made by this factor of production andthe boxes
sell for $4 each. This part of the questionis worth 2 points.
NQ MPL MRP
5 250 ------
6 300______
7 325 ______
8 335 ______
1. B. Continuing the above problem, if the marginal factor cost of a worker is $125, how
many workers will this business hire? Answer with an integer from 5 to 8. This part
of the question is worth 2points.
2. A. Arnold, Bettie, and Charleswork in the theater snack bar. They are allinterchangeable
workers. Fill in the blank with Arnold’s predictedwage. This part of the question is
worth 2 points. Part B below is also worth 2 points.
Arnold: Cash Register - MRP = $18
Bettie: Candy and Soda - MRP = $16
Charles: Cleaning floor and counters - MRP = $14
Arnold’s wage = ______
2. B. If the above workers are not interchangeable workers, so that each one is the only one
that cando 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 12 8 4 2
Total Utility 50 58 62 64
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 of0.3 or 30%. If someone earns $50,000 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 2 examples of goods with negative externalities.
Good: ______Externality: ______
Good: ______Externality: ______
6. Answer whether the following statement is true, false, or uncertain, and explain why.
The cost to eliminate poverty in the United States can be found by simply calculating
how much people are currently below the poverty line and paying them the amount
necessary to raise their income up to the poverty line.
7. a. Suppose the price of a donut is $2 and the price of an orange is $3. Also suppose that a
shopper has a current marginal utility of donuts equal to 20 utils and a marginal utility of
oranges equal to 24 utils. Would the shopper chose to buy a donut or an orange? Show
your work. This part of the question is worth 3 points.
b. Suppose that for whichever you answered above (orange or donut), the shopper has an
allergy to that food. Would it be possible then that they would buy the other item even
with the marginal utilities above? Circle your answer. This question is worth 1 point.
Yes, the shopper might buy the other item. No, they definitely would not buy the other item.
8. A shopper has the following marginal utilities for bags of candy, cartons of milk, and cartons
of eggs. Assume the person can buy partial units of each, and that the marginal utility only
declines as you go from one bag or carton to the next, not within a bag or carton. The person
has two dollars to spend. What quantity of each will the shopper buy?
Candy - $0.50 a bagMilk - $1.00 a cartonEggs - $2.00 a carton
120 utils 30 utils20 utils
210 utils25 utils 4 utils
3 8 utils15 utils 1 util
Buys: Candy ______Milk ______Eggs ______
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:
- the demand curve for workers shifts right.
- the demand curve for workers shifts left.
- the supply curve for workers shifts right.
d. the supply curve for workers shifts left.
2. Nonexcludable means:
a. it is costly or difficult to keep someone from consuming the good even though they
have not paid for the good.
b. There are certain types of customers that the business will choose to not exclude
from buying the good.
c. Someone who has bought a good chooses to share it with he friends.
d. The government has a law that no one can be kept from consuming this good.
3. 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.
4. An externality is:
a. an action taken by a person that imposes costs or benefits outside of the market
exchange.
b. a government order to someone to do an action that happens outside of the market
exchange.
c. the benefit someone receives from using a particular good more than once.
d. a good that is produced outside or “external” to the main factory.
5. Which of the following is true about the theory of declining marginal utility of money
with no other factors considered?
- It explains buying insurance but not gambling.
- It explains gambling but not buying insurance.
- It explains neither gambling nor buying insurance.
- It explains both gambling and buying insurance.
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 buys insurance even if he expects to lose money on it because:
- he is an idiot.
- 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.
9. The marginal productivity theory of factor input prices says that if there is competition, factor
inputs will be paid:
- what is a fair price.
- the smallest amount a company can get away with paying them.
- The amount the government sets for them.
- their marginal revenue product.
10. When person does something that gives information about that person to somebody
else without directly telling the other person, this is called:
a. information-giving.
b. signaling.
c. sharing.
d. marking.
11. What was not on the list of things that can cause income inequality discussed in class?
a. Region.
b. Education.
c. Luck.
d. Family structure.
12. Which of the following could be signals a used car seller could use to convince a
possible buyer that the car is a good one?
a. A money back guarantee.
b. A long warranty.
c. allowing the buyer to have his mechanic check out the car.
d. all of the above.
13. A business should hire a number of workers so that:
a. marginal revenue product equals marginal factor cost.
b. marginal revenue product is as high above marginal factor cost as it can go.
c. marginal revenue product is as far below marginal factor cost at it can go.
d. its profit is zero.
14. The specific amount of income the government believes is necessary for a basic
standard of living is called the:
a. poor standard.
b. poverty trap.
c. basic necessity standard.
d. poverty line.
15. The amount of welfare payment that someone with no other income receives from the
government is called the:
a. private income.
b. basic income.
c. low-level income.
d. guaranteed income.
16. A bag of fertilizer with an MRP (marginal revenue product) of $90 should have a price
in the farm supply store of:
a. significantly higher than $90.
b. significantly lower than $90.
c. around $90.
17. Why do firms pay the workers a wage equal to what they produce (their MRP)
according to the marginal productivity theory of factor input prices?
a. The government forces them to.
b. If they do not, some other firm will hire that worker away by paying more.
c. It is the fair wage.
d. It is tradition.
18. The benefit reduction rate is:
a. the total welfare payment the recipient gets from the government.
b. the total income that welfare recipient has, including both government payment and
private income.
c. the reduction in the number of people in poverty caused by this welfare program.
d. the drop in government payment for each dollar of private income earned.
19. The theory that winning candidates in elections are the ones that are closest to the
position of the average voter is called:
a. the average voter theory.
b. the median voter theory.
c. the crucial voter theory.
d. the critical voter theory.
20. What is a problem with self-insurance?
a. If the event never happens, the person is out more than if he bought insurance.
b. the event may not happen for a long time, in which case the self-insurer is out all
the money he set aside.
c. If the even happens early, there will not be enough money to cover the damages.
d. Both a and b.
21. Rational ignorance refers to the theory that people may be ignorant of some information
because:
a. people are, in general, ignorant.
b. people may judge the benefit of acquiring that information is not worth the cost.
c. the media purposely keeps them ignorant.
d. all of the above.
22. Rational ignorance predicts congressmen will:
a. often aid special interest groups because the average voter won’t even know they
did it.
b. almost always do what is best for the general good of the country, after all, that is
their job.
c. behave almost randomly, because the average congressman is ignorant of what he
is supposed to do.
d. follow is political ideology.
23. What is internalizing the externality?
a. Making it illegal to do the activity that has the externality.
b. Passing a tax so the polluter has the pay the dollar amount of the harm he is causing
others.
c. Both a and b.
d. Neither a nor b.
24. Why are voters more likely to be rationally ignorant than car buyers?
a. Politics is more complicated than cars.
b. Car buyers get the car they choose, but voters get the candidate everyone else
chooses.
c. Everyone has to buy a car, but not everyone has to vote.
d. Trick question – voters are not more likely to be rationally ignorant.
25. If the median voter theory is true, then why within the context of the theory might we
end up with candidates that are much more liberal or conservative than the median
voter?
a. Voters actually voted based on personality of the candidates.
b. To win the primary, you have to appeal to the median voter in each party, not the
country as a whole.
c. The incumbent candidate usually has an advantage.
d. Trick question – that never happens.
26. Public choice economics refers to studying:
a. Public goods.
b. Market failure.
c. Poverty.
d. Political choice making.
27. Which of the of the following is a cause of market failure?
a. Public goods.
b. Externalities.
c. Tragedy of the common.
d. All of the above.
28. If the benefit reduction rate is made lower, then:
a. Welfare recipients have more of an incentive to work, and positive payments will
continue to a higher income.
b. Welfare recipients have more of an incentive to work, and positive payments will
stop at a lower level.
c. Welfare recipients have less of an incentive to work, and positive payments will
stop at a lower level.
d. Welfare recipients have less of an incentive to work, and positive payments will
continue to a higher income.
29. Which of the of the following is a cause of market failure?
a. Public goods.
b. Externalities.
c. Tragedy of the common.
d. All of the above.
30. Why would someone need to use a signal to transmit some information to another
person rather than just telling them?
a. Because the other person might think the first person is lying.
b. Because they two people might be far apart.
c. Because the first person can then charge a fee for transmitting the information.
d. All of the above.
31. When a person buys insurance, they should usually expect to:
a. make money.
b. lose money.
c. break even.
32. The consumer will continue to buy an item until:
a. its marginal utility reaches zero.
b. its MU/P goes below the MU/P of other items the consumer could buy.
c. he runs out of money he can spend on it.
d. he has all of the item he can use.
33. What is diminishing marginal utility?
a. The additional utility provided by one additional unit of consumption.
b. The common pattern that each marginal unit of a good consumed provides more of an
addition to utility than the previous unit.
c. The common pattern that with each marginal unit of a good consumed, total utility
declines.
d. The common pattern that each marginal unit of a good consumed provides less of an
addition to utility than the previous unit.
34. Which of the following is a public good?
a. A car.
b. A road.
c. A gas station.
d. All of the above.