1
Econ 101, Section 7, S04
Schroeter
Final Exam, Red
Choose the single best answer for each question.
1. The opportunity cost of an item is
a. the number of hours needed to earn the money to buy it.
*. what you give up to get it.
c. usually less than the dollar price of the item.
d. zero if there is no dollar price charged for the item.
2. The characteristic "bowed-outward" shape of the production possibility frontier is a reflection of the fact that resources are
a. scarce.
*. specialized.
c. interchangeable.
d. durable.
Questions 3, 4, and 5 are based on the following information. Two small countries, Dumbarton and Elmira, 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 ofManufactured goods / Agricultural goods
Dumbarton / 3 / 8
Elmira / 4 / 5
3. The opportunity cost of 1 unit of manufactured goods in Dumbarton is
*. 0.375 units of agricultural goods.
b. 2.667 units of agricultural goods.
c. 0.750 units of agricultural goods.
d. 1.333 units of agricultural goods.
4. Which of the following is true?
*. Dumbarton has the absolute advantage in the production of manufactured goods.
b. Dumbarton has the comparative advantage in the production of agricultural goods.
c. Elmira has the comparative advantage in the production of manufactured goods.
d. None of the above are true.
5. Suppose that there are international markets in manufactured goods and agricultural goods. At which of the following terms of trade would Dumbarton and Elmira be able to engage in mutually beneficial trade with each other? The trade price of 1 unit of manufactured goods is
a. 0.2 units of agricultural goods.
*. 0.5 units of agricultural goods.
c. 1.0 units of agricultural goods.
d. 1.4 units of agricultural goods.
6. A rightward shift in the demand for a good could be the result of
a. a decrease in the good's price.
*. an increase in the price of a substitute good.
c. an increase in the price of an input used to produce the good.
d. Any one of the above could account for the rightward shift.
7. Gizmos are traded in a competitive market that is in equilibrium to begin. Then consumers' tastes shift toward gizmos because a popular celebrity is seen using one on television. At the same time, a technological innovation reduces the costs of producing gizmos. As a result, the equilibrium price of gizmos will
a. increase and equilibrium quantity will either increase, decrease, or stay the same.
b. decrease and equilibrium quantity will either increase, decrease, or stay the same.
*. either increase, decrease, or stay the same, and equilibrium quantity will increase.
d. either increase, decrease, or stay the same, and equilibrium quantity will decrease.
8. When there is a temporary surplus in a competitive market
a. some people who would like to buy are unable to buy.
b. price must be below the equilibrium level.
c. there is upward pressure on price.
*. the quantity supplied exceeds the quantity demanded.
9. The demand for widgets increases from 10,000 widgets/month to 15,000 widgets/month when price falls from $5.50 to $4.00/widget. Over this range of prices, the elasticity of demand for widgets (calculated by the midpoint method) is:
a. -0.546.
b. -0.889.
*. -1.267.
d. -1.833.
10. The University Bookstore finds that when it reduces its price on ISU apparel by 5%, its revenue from sales of ISU apparel increases by 5%. Evidently, the Bookstore faces a demand for ISU apparel that is
a. inelastic.
b. unit elastic.
*. elastic.
d. perfectly elastic.
11. Under rent control, tenants can expect
a. lower rent and higher quality housing.
*. lower rent and lower quality housing.
c. higher rent and higher quality housing.
d. higher rent and lower quality housing.
12. Suppose that an excise tax of $2.00/unit is imposed on a market in which demand is inelastic and supply is elastic. As a result of the tax, the price buyers pay for the good, (inclusive of the tax) will increase by
a. $2.00/unit.
*. more than $1.00/unit but less than $2.00/unit.
c. $1.00/unit.
d. less than $1.00/unit.
13. A legal maximum price at which a good can be sold is a price
a. floor.
b. support.
c. refund.
*. ceiling.
14. A consumer's willingness to pay for a good
a. measures the amount by which value exceeds purchase price.
b. is another term for consumer surplus.
c. equals the price of the good minus the cost of production.
*. is the maximum amount that the consumer will pay for the good.
15. Andrew, Bonita, and Carmen are potential suppliers of a gizmos. Their opportunity costs of supply of the first gizmo per day are $50, $65, and $75 for Andrew, Bonita, and Carmen respectively. (It's impossible to supply more than one gizmo per day.) If the market price of gizmos is $80,
a. none of the three will supply.
b. only Carmen will supply.
c. only Andrew and Bonita will supply and Bonita will get the greater producer surplus.
*. all three will supply and Andrew will get the greatest producer surplus.
Questions 16 and 17 refer to the following information. Equilibrium price in the competitive market for widgets is $1.00/unit. Then an excise tax of $1.00/unit is imposed on the market. With the tax in effect, sellers' price is $0.60/unit and quantity is 100 units/day below the (before-tax) equilibrium quantity. Assume that the supply and demand curves for widgets are straight lines.
16. The deadweight loss from the tax is
a. $20/day.
b. $40/day.
*. $50/day.
d. impossible to determine without further information.
17. As a result of the imposition of the tax, consumer surplus decreases by
a. $60/day.
b. $90/day.
c. $100/day.
*. impossible to determine without further information.
Questions 18 and 19 refer to the following diagram of domestic supply (Sd) and demand (Dd) for steel (a homogeneous good) in a small country. Initially the country allows free trade and faces a world market steel price of p1. At the request of domestic steel producers, the government imposes a tariff on steel that raises the domestic market price of steel to p2.
18. After the tariff goes into effect, annual imports of steel are
a. Q4 - Q1 tons/year.
b. Q4 - Q2 tons/year.
*. Q3 - Q2 tons/year.
d. none of the above.
19. The imposition of the tariff reduces domestic consumer surplus by the combined areas of regions
a. D and F.
b. B and E.
*. C, D, E, and F.
d. B, D, E, and F.
20. Two factories, A and B, dump "gunk" into a river, polluting it. Currently, each factory dumps 5,000 tons of gunk per year. It has been decided that pollution should be reduced to a total of 4,000 tons of gunk per year for the two factories combined. Abating (reducing) pollution levels is costly, although abatement costs differ between the two factories. The marginal costs of pollution abatement are as follows.
Factory A: Marginal abatement cost is constant at $100/ton/year.
Factory B: Marginal abatement cost for the first ton of abatement is $50/ton/year. Marginal abatement costs increase with the level of abatement, reaching $100/ton/year at 4000 tons/year of abatement, and continuing to increase beyond 4000 tons/year.
When the target pollution level of 4,000 tons of gunk per year is achieved in the least cost manner, the pollution levels for each of the factories would be
a. 0 tons/year for Factory A and 4,000 tons/year for Factory B.
b. 2,000 tons/year for Factory A and 2,000 tons/year for Factory B.
*. 3,000 tons/year for Factory A and 1,000 tons/year for Factory B.
d. none of the above.
21. If a competitive market is subject to a positive externality (and transaction costs prevent resolution of the problem through private bargaining), the market equilibrium quantity will be
a. equal to the socially optimal quantity.
*. less than the socially optimal quantity.
c. more than the socially optimal quantity.
d. either more or less than the socially optimal quantity, depending on whether the externality is on the production side or the consumption side.
22. Which of the following is the best example of a common resource?
*. a fresh water aquifer.
b. basic scientific research.
c. the navigational aid provided by the global-positioning satellite system.
d. an un-congested, non-toll highway.
Questions 23 and 24 refer to Schedule Y-1 from the 2003 Instruction booklet for federal individual income tax form 1040. Barney and Mabel are a married couple (using the "married, filing jointly" income tax filing status) with taxable income of $240,000 on total income of $320,000.
If your taxable income is over -- / but notover -- / your tax is / of the amount over --
$0 / $14,000 / ------10% / $0
14,000 / 56,800 / $1,400 +15% / 14,000
56,800 / 114,650 / 7,820 +25% / 56,800
114,650 / 174,700 / 22,282.50 +28% / 114,650
174,700 / 311,950 / 39,096.50 +33% / 174,700
311,950 / ------/ 84,389.00 +35% / 311,950
23. According to schedule Y-1, Barney and Mabel's marginal tax rate is
a. 25%.
b. 28%.
*. 33%.
d. 35%.
24. According to schedule Y-1, Barney and Mabel's federal income tax for 2003 is
*. $60,645.50.
b. $79,200.00.
c. $87,206.50.
d. $118,296.50.
25. Which of the following is true?
*. accounting profit = economic profit + implicit cost.
b. implicit cost = total revenue - explicit cost.
c. economic profit = total revenue - implicit cost.
d. none of the above are true.
26. A competitive firm faces a price of $5/unit for its product. It is currently operating at an output level for which average total cost is $5/unit and marginal cost is $6/unit. To maximize profit (or minimize loss) in the short-run, the firm should.
a. maintain its current output.
*. decrease output, but not shut down.
c. increase output.
d. impossible to determine without more information.
27. At an output rate of 30 units/hour, a firm's average total cost is $5.50/unit and it's marginal cost is $8.00/unit. Approximately how much would the firm's average total cost be at an output rate of 31 units/hour?
a. $5.44.
b. $5.51.
*. $5.58.
d. $5.63.
28. A widget monopolist can sell 60 widgets/day when it sets its price at $5.00/widget. To sell 61 widgets/day, the monopolist must cut its price to $4.96/widget. In the 60-to-61 widget/day output range, the monopolist's marginal revenue is approximately
a. $4.98/widget.
b. $4.05/widget.
c. $3.42/widget.
*. $2.56/widget.
29. A competitive industry is monopolized; in other words, all of the firms in the industry are purchased by one person who proceeds to operate them as a single, profit-maximizing firm. As a result of monopolization the industry's
a. price and quantity will increase.
b. price and quantity will decrease.
*. price will increase and quantity will decrease.
d. price will decrease and quantity will increase.
30. At its current output level, a monopolist finds that price is equal to marginal cost and marginal cost is greater than average total cost. To maximize profit (or minimize loss) in the short-run, the monopoly should
a. maintain its current output level.
b. increase its output level.
*. decrease its output level but not shut down.
d. impossible to determine without more information.
31. In order to qualify for the cheapest available round-trip fares on commercial airlines, you usually have to stay at your destination for a Saturday night and book your ticket at least two weeks in advance. These restrictions on bargain-price fares are designed to
a. reward frequent flyers.
*. reserve most of the cheapest fares for customers with relatively low willingness to pay.
c. insure that only business travelers qualify for the lowest fares.
d. identify the customers who are least costly for the airlines to serve.
Questions 32 and 33 refer to the following information. A gizmo monopolist faces two groups of potential customers:
1. 100 potential customers with willingness to pay (WTP) for the first gizmo of $4.00
2. 75 potential customers with WTP for the first gizmo of $6.00.
All potential customers have zero WTP for gizmos after the first. The gizmo monopolist has zero fixed cost and constant marginal cost of $3.00/gizmo.
32. If the monopolist is required to charge a uniform price, the maximum profit it could earn is
a. $175.
b. $200.
*. $225.
d. $250.
33. If the monopolist is allowed to price discriminate, the maximum profit it could earn is
a. $200.
b. $225.
c. $275.
*. $325.
Questions 34 and 35 refer to the following payoff matrix that describes a pricing game played by two firms producing competing products. Each firm has two strategies: Charge a "high" price or charge a "low" price. The entries in the cells of the table give payoffs (profit levels) for firm 1 (π1) and firm 2 (π2). (A higher payoff is better than a lower payoff.)
Firm 2's strategies"high price" / "low price"
Firm 1's
strategies / "high price" / π1 = 14, π2 = 17 / π1 = 6, π2 = 23
"low price" / π1 = 19, π2 = 9 / π1 = 10, π2 = 12
34. Which of the following is true?
a. This game has no Nash equilibrium.
b. Both firms charging a "high" price is a Nash equilibrium.
*. Both firms changing a "low" price is a Nash equilibrium.
d. Firm 1 charging a "high" price and firm 2 charging a "low" price is a Nash equilibrium.
35. Which of the following is true?
a. Charging a "high" price is a dominant strategy for firm 1.
b. Charging a "high" price is a dominant strategy for firm 2.
*. Charging a "low" price is a dominant strategy for both firms.
d. None of the above is true.
36. Recall the identical-product widget duopoly example discussed in lecture in conjunction with Chapter 16 on oligopoly. We considered three possible outcomes for this industry: "competitive," "monopoly" (or cartel), and Nash equilibrium. The ordering of these candidate market outcomes by price (highest to lowest) is
a. Nash equilibrium, competitive, monopoly.
b. monopoly, competitive, Nash equilibrium.
*. monopoly, Nash equilibrium, competitive.
d. None of the above.
37. When the profit earned by a typical firm in an industry depends on the business strategies of both the firm itself and its rivals, we say that firms in the industry are
a. colluding.
b. Nash competitors.
*. interdependent.
d. price takers.
38. The degree of cooperation among OPEC cartel members tends to vary over time. As a relatively cooperative period comes to an end, and member countries begin pursuing individual self-interest, we can expect to see OPEC production of crude oil
a. increase and the world price of crude oil increase.
*. increase and the world price of crude oil decrease.
c. decrease and the world price of crude oil increase.
d. decrease and the world price of crude oil decrease.
39. A firm is a price-taker in its output (widget) and labor markets. When it employs 10 workers, it can produce 1500 widgets/day. If it were to hire an 11th worker (holding other inputs fixed), output would increase to 1550 widgets per day. The price of widgets is $5/widget and workers can be hired at a wage of $200/worker/day. Which of the following is true?
a. VMPL for the 11th worker is $200/worker/day.
*. If the firm were to hire the 11th worker, profit would increase.
c. The firm is maximizing profit with 10 workers.
d. None of the above is true.
40. A gizmo manufacturing firm is a price taker in both its output (gizmo) and labor markets. Gizmos sell for $2/gizmo and workers can be hired for $120/worker/day. At its current employment level, the firm is earning positive economic profit and its marginal product of labor is 75 gizmos/worker/day. To maximize profit, the firm should
a. maintain its current employment level.
*. hire more workers.
c. lay off some workers.
d. impossible to determine without more information.
41. Nicotine is pharmacologically addictive. This fact was first publicly disclosed in a U.S. Surgeon General's report in ______. However, there is evidence that tobacco company scientists were aware of it in the early ______.
a. 1995, 1970s.
b. 1984, 1950s.
*. 1979, 1960s.
d. 1967, 1950s.
42. Assuming an interest rate of 3%, what is the present value of a $150 payment to be received in 4 years?
*. $133.27.
b. $133.93.
c. $134.05.
d. $134.36.
43. Assuming an interest rate of 6%, what is the future value, 3 years hence, of $100 today?
a. $117.50.
b. $118.00.
*. $119.10.
d. $119.63.
44. I take out an installment loan at an annual interest rate of 11%. The loan amount is $5000. The terms of the loan require repayment of principle and interest in four equal installments. The first payment will be due one year from today. The second will be due two years from today, etc. The fourth and last payment will be due four years from today. To the nearest dollar, what is the amount of each of the four installment payments?
a. $1542.
b. $1579.
c. $1598.
*. $1612.
45. You just won the lottery! You can select among three payment options:
Option 1: A single payment of $10,000 paid today.
Option 2: A single payment of $12,000 paid 4 years from today.
Option 3: Three payments of $3500 each. The first paid today, the second paid
1 year from today, and the third paid 2 years from today.
Assuming an interest rate of 4%, the ranking of present values of these options, from greatest to least, is
*. option 2, option 3, option 1.
b. option 3, option 1, option 2.
c. option 1, option 2, option 3.
d. None of the above.