Instructor: Hirofumi Shimizu

Economics 101 Section 8

Final Exam Fall 1999

Final Exam A

Mark the one best answer to each of the following 60 multiple choice questions on the answer sheet.

Be sure to mark the answer by the corresponding question number on the answer sheet. Do not make any stray marks on your answer sheet.

Which of the following best characterizes a movement along the production possibility boundary?

(a)an increase in available labor

(b)technological progress

(c)the employment of previously unemployed resources

(d)a reallocation of resources from good X (e.g. military good) to good Y (e.g. civilian good)

Along a linear production possibility boundary, 1 unit of resources can produce 4 units of clothing or 3 units of food. What is the opportunity cost of producing 1 unit of clothing?

(a)4/3 units of food

(b)3/4 unit of food

(d)3/4 unit of clothing

One country is said to have an absolute advantage over another country in the production of good X when

(a)the first country can produce good X at a lesser opportunity cost than the second.

(b)the first country can produce good X at a greater opportunity cost than the second.

(c)the first country has a larger supply of the raw materials required to produce good X.

(d)an equal quantity of resources can produce more of good X in the first country than in the second.

One country is said to have a comparative advantage over another country in the production of good X when

(a)the first country can produce good X at a lesser opportunity cost than the second.

(b)the first country can produce good X at a greater opportunity cost than the second.

(c)the first country has a larger supply of the raw materials required to produce good X.

(d)an equal quantity of resources can produce more of good X in the first country than in the second.

Suppose that an equal quantity of resources can produce one radio or four cameras in the United States and one radio or three cameras in Italy. In that case, gains from trade in these two goods

(a)are maximized if the United States exports cameras and imports radios.

(b)are maximized if the United States exports radios and imports cameras.

(c)are maximized if the United States exports both cameras and radios.

(d)are maximized if the United States imports both cameras and radios.

By trading in international markets, countries will be able to

(a)produce at any point beyond their domestic production possibility boundaries.

(b)produce at any point inside their domestic production possibility boundaries.

(c)consume at any point beyond their domestic production possibility boundaries.

(d)consume at any point along their domestic production possibility boundaries.

Which of the following would NOT cause the demand curve for Toyotas to shift?

(a)a change in the price of gasoline

(b)a change in the price of Toyotas

(c)a change in population

(d)a change in the price of Hondas

Consider bread and butter. When the price of bread falls, the demand curve for butter is likely to

(a)shift to the right.

(b)shift to the left.

(c)remain stationary, although its price will fall.

(d)remain stationary, although its price will rise.

When average household income decreases and the price of machinery used in producing good X falls, which of the following describes the expected change in equilibrium price and equilibrium quantity of good X (normal good)?

(a)The equilibrium quantity increases, but the change in equilibrium price cannot be determined.

(b)The equilibrium quantity decreases, but the change in equilibrium price cannot be determined.

(c)The equilibrium price increases, but the change in equilibrium quantity cannot be determined.

(d)The equilibrium price decreases, but the change in equilibrium quantity cannot be determined.

10.

Suppose that the quantity of a good demanded rises from 80 units to 120 units when the price falls from $1.00 to $.80 per unit. The own-price elasticity of demand () for this product is

(a)-0.555…

(b)-1.0

(c)-1.5

(d)-1.8

11.

When the elasticity of demand () is –1.5, as price falls

(a)total revenue remains constant.

(b)total revenue falls.

(c)total revenue rises.

(d)the change in total revenue cannot be determined.

12.

Products that are known to be close complements should have

(a)zero cross-price elasticities of demand.

(b)high negative cross-price elasticities of demand.

(c)identical own-price elasticities of demand.

(d)high positive cross-price elasticities of demand.

13.

Producers will bear a larger burden of an excise tax if

(a)supply is relatively elastic.

(b)supply is relatively inelastic.

(c)demand is relatively inelastic.

(d)if government collects the tax from producers.

14.

With inelastic short-run supply and highly elastic long-run supply of housing, the imposition of effective rent controls will

(a)lead to a reduction in the housing shortage over time.

(b)lead to a worsening of the housing shortage over time.

(c)lead to no significant change in the housing shortage over time.

(d)lead the price of rental housing to revert back to its equilibrium level in the long run.

15.

Extremely good weather which causes an increase in the production of agricultural commodities often lead to lower farm revenues. This can be explained by

(a)the elastic demand for most agricultural commodities.

(b)the inelastic demand for most agricultural commodities.

(c)the elastic supply of most agricultural commodities.

(d)the inelastic supply of most agricultural commodities.

16.

Suppose a consumer can purchase only two goods, X and Y. Let the quantity of X be measured on the horizontal axis and the quantity of Y be measured on the vertical axis. If the price of X increases from $2 to $4, and the price of Y increases from $3 to $4, then the budget line for the consumer will shift

(a)toward the origin and become steeper.

(b)toward the origin and become flatter.

(c)away from the origin and become steeper.

(d)away from the origin and become flatter.

17.

Normally, as more of a good is consumed,

(a)the total utility and marginal utility will rise.

(b)the total utility and marginal utility will fall.

(c)the total utility falls while the marginal utility rises.

(d)the total utility rises while the marginal utility falls.

18.

The condition required for a consumer to be maximizing utility, for any pair of products, X and Y, is

(a)MUx/MUy = Py/Px.

(b)MUx/MUy = Px/Py.

(c)MUx/Py = MUy/Px.

(d)MUx = MUy.

19.

Suppose that a consumer's budget line is $200 = $4X + $1Y. Further suppose that the consumer's ratio of marginal utilities (MUx/MUy) is 1/3 at the point of consumption. To maximize satisfaction, this consumer should

(a)buy more X and less Y.

(b)buy less X and more Y.

(c)not change her purchasing behavior.

(d)buy less X and less Y.

20.

Consumer surplus is

(a)the sum of the marginal values of consumption to the consumer.

(b)the total value that a consumer receives from a purchase of a particular good.

(c)the area above the price line and below the demand curve.

(d)the consumption of a commodity above and beyond the amount required by the consumer.

21.

Average product of labor (APL) is maximized when

(a)total product (TP) is maximized.

(b)marginal product of labor (MPL) is maximized.

(c)total product (TP) equals average product of labor (APL).

(d)marginal product of labor (MPL) equals average product of labor (APL).

22.

If total product (TP) is increasing, then

(a)marginal product of labor (MPL) must be increasing.

(b)marginal product of labor (MPL) must be greater than total product (TP).

(c)marginal product of labor (MPL) must be greater than zero.

(d)marginal product of labor (MPL) must be greater than one.

23.

When average variable cost (AVC) is increasing, marginal cost (MC) must be

(a)above average variable cost (AVC) and falling.

(b)below average variable cost (AVC) and falling.

(c)below average variable cost (AVC).

(d)above average variable cost (AVC).

24.

As the firm's output increases, in the short run,

(a)average fixed cost (AFC) decreases continuously.

(b)marginal cost (MC) approaches average fixed cost (AFC).

(c)marginal cost (MC) reaches a maximum, then decreases.

(d)average variable cost (AVC) reaches a maximum, then decreases.

25.

Constant returns to scale are shown graphically by

(a)a downward-sloping long-run average cost (LRAC) curve.

(b)an upward-sloping long-run average cost (LRAC) curve.

(c)an upward-sloping long-run marginal cost (LRMC) curve.

(d)a horizontal long-run average cost (LRAC) curve.

26.

Which of the following conditions indicates long-run cost minimization, assuming two inputs, labor (L) and capital (K)?

(a)PK(MPK) = PL(MPL)

(b)MPL / MPK = PK / PL

(c)MPL / PL = MPK / PK

(d)MPL / PK = MPK / PL

27.

For Firm A, the marginal product of capital (MPK) is 6 and that of labor (MPL) is 3. The price of capital is $2 and that of labor is $1. To minimize total costs, Firm A should

(a)substitute labor for capital.

(b)not alter the factor mix.

(c)substitute capital for labor.

(d)reduce the price of capital.

28.

Suppose an isoquant map is drawn with capital (K) on the vertical axis and labor (L) on the horizontal axis. As the firm moves down along the isoquant, the ratio

MPL / MPK

(a)increases.

(b)decreases.

(c)remain the same.

(d)cannot be determined from the information given.

29.

A profit-maximizing firm should NOT produce in the short run if

(a)price is less than average variable cost (AVC).

(b)price is less than average total cost (ATC).

(c)average variable cost (AVC) is less than price.

(d)average total cost (ATC) is less than price.

30.

If it produces at all, a profit-maximizing firm should produce the output at which

(a)average total cost (ATC) is minimized.

(b)total revenue (TR) exceeds total cost (TC).

(c)marginal revenue (MR) equals marginal cost (MC).

(d)total revenue (TR) is maximized.

31.

Short-run supply curve for a monopolist

(a)is the entire marginal cost (MC) curve.

(b)is the marginal cost (MC) curve above the average variable cost (AVC) curve.

(c)is the entire average revenue (AR) curve.

(d)does not exist.

32.

Economists predict that new firms will enter an industry whenever

(a)accounting profits are greater than zero.

(b)economic profits are greater than zero.

(c)economic profits are greater than accounting profits.

(d)accounting profits are greater than economic profits.

33.

If a firm can sell 3 units of output for $5 each or 4 units for $4 each, the marginal revenue (MR) of the fourth unit sold is

(a)$1.

(b)$2.

(c)$4.

(d)$5.

34.

A difference between monopoly and perfect competition is that

(a)perfectly competitive firms are apt to maximize profit while monopolists will maximize revenue.

(b)monopolists are apt to maximize profit while perfectly competitive firms will maximize revenue.

(c)monopolists cannot maintain positive economic profit in the long run.

(d)perfectly competitive firms cannot maintain positive economic profit in the long run.

35.

Price discrimination increases a seller's profits because it

(a)increases the willingness of consumers to pay for a good.

(b)allows the seller to more fully exploit economies of scale.

(c)allows the seller to provide differentiated products.

(d)allows the seller to capture some consumer surplus.

36.

In the above game, Firm B's dominant strategy

(a)is "Raise price."

(b)is "Maintain price."

(c)is both "Raise price" and "Maintain price."

(d)does not exist.

37.

The OPEC cartel was successful initially for all of the following reasons EXCEPT:

(a)Short-run demand for oil was highly inelastic.

(b)Short-run supply of oil was highly inelastic.

(c)Demand for oil was increasing over the initial period.

(d)Countries in the cartel was making huge profit initially.

38.

Producer surplus is

(a)total revenue (TR) minus total fixed cost (TFC).

(b)profit minus total revenue (TR).

(c)the area below the price line and above the marginal cost (MC) curve.

(d)total revenue (TR) minus total cost (TC).

39.

Assuming that costs would be the same in an industry under either monopoly or perfect competition, a monopoly will produce at a point where, compared with the perfectly competitive equilibrium,

(a)output is smaller and price is higher.

(b)output is smaller and price is lower.

(c)output is larger and price is higher.

(d)output is larger and price is lower.

40.

A natural monopoly exists when

(a)there is only one source of supply of a natural resources.

(b)long-run average cost (LRAC) remain constant throughout the range of market demand.

(c)long-run average cost (LRAC) declines throughout the range of market demand.

(d)long-run average cost (LRAC) increases throughout the range of market demand.

41.

The marginal revenue product of labor (MRPL) is

(a)the increase in total revenue resulting from selling one more unit of output.

(b)the increase in marginal revenue resulting from selling one more unit of output.

(c)the average product of labor multiplied by product price.

(d)the marginal product of labor multiplied by product price.

42.

A profit-maximizing perfectly competitive firm should choose the level of labor so that

(a)marginal product of labor (MPL) = marginal revenue product of labor (MRPL).

(b)marginal revenue product of labor (MRPL) = marginal cost of labor.

(c)marginal product of labor (MPL) = wage.

(d)marginal revenue product of labor (MRPL) = the product's price.

43.

Suppose that women are discouraged from being engineers, but face no barriers in becoming schoolteachers. Then, it follows that

(a)the salaries of women and men engineers must be equal.

(b)women will earn higher salaries than men as schoolteachers.

(c)male schoolteachers will earn lower salaries than they would with free access to engineering jobs by women.

(d)the gap between salaries earned by men and women will narrow.

44.

Households / Percentage of Total Income
Lowest fifth
(Lowest 20%) / 5.0%
Second fifth
(Second 20%) / 11.0%
Third fifth
(Third 20%) / 15.0%
Fourth fifth
(Fourth 20%) / 20.0%
Highest fifth
(Highest 20%) / 49.0%

The above table provides hypothetical data for the percentage of total income earned by each fifth of the population. Which of the following points would be on a Lorenz curve based on this data?

(a)5 percent on the horizontal axis, 20 percent on the vertical axis.

(b)20 percent on the horizontal axis, 49 percent on the vertical axis.

(d)60 percent on the horizontal axis, 15 percent on the vertical axis.

45.

When the interest rate is i, the present value of $X to be received at the end of each year, for two years is

(a).

(b).

(d).

46.

If the interest rate is 10 percent, the present value of $100 to be received a year from now is

(a)$82.64.

(b)$90.91.

(c)$110.

(d)$1,000

47.

If the interest rate is 5 percent, the present value of $100 received each year forever is

(a)$95.24.

(b)$2,000.

(c)$2,500.

(d)$20.

48.

As a general profit-maximizing principle, it is worthwhile for a firm to buy a piece of capital if

(a)the present value of the stream of future MRPs falls below the purchase price.

(b)the present value of the stream of future MRPs falls below the rental price.

(c)the present value of the stream of future MRPs exceeds the purchase price.

(d)the present value of the stream of future MRPs exceeds the rental price.

49.

The present value of a capital asset will increase if

(a)the purchase price of the capital asset decreases.

(b)the purchase price of the capital asset increases.

(c)the MRPs decreases.

(d)the MRPs increases.

50.

When production creates negative externalities,

(a)marginal social cost exceeds marginal external cost.

(b)marginal private cost exceeds marginal external cost.

(c)marginal social cost = marginal private cost + marginal external cost.

(d)marginal social cost = marginal private cost – marginal external cost.

51.

When production creates negative externalities, perfectly competitive output occurs when

(a)marginal benefit = marginal private cost.

(b)marginal benefit = marginal external cost.

(c)marginal benefit = marginal social cost + marginal private cost.

(d)marginal benefit = marginal social cost.

52.

If consumption generates positive externalities, perfectly competitive market will result in

(a)too little output at too low a price.

(b)too much output at too low a price.

(c)too little output at too high a price.

(d)too much output at too high a price.

53.

When consumption creates positive externalities,

(a)marginal social benefit exceeds marginal external benefit.

(b)marginal private benefit exceeds marginal external benefit.

(c)marginal social benefit = marginal private benefit + marginal external benefit.

(d)marginal social benefit = marginal private benefit – marginal external benefit.

54.

When consumption creates positive externalities, allocatively efficient output occurs when

(a)marginal private benefit = marginal cost.

(b)marginal social benefit = marginal cost.

(c)marginal external benefit = marginal cost.

(d)marginal private benefit + marginal social benefit = marginal cost.

55.

When steel production creates negative externalities,

(a)a corrective tax could be imposed on the steel producer to achieve the socially optimal level of output.

(b)marginal social cost is less than marginal private cost.

(c)the market will produce too little steel without government intervention.

(d)a subsidy to the steel producer could achieve the socially optimal level of output.

56.

Direct pollution controls are usually inefficient because, for any given amount of pollution reduction, they

(a)create new pollution as they eliminate existing pollution.

(b)take into account differing marginal abatement costs among firms.

(c)are not complied with by firms.

(d)do not allow marginal abatement costs of all emitters to be equalized.

57.

Consider two firms, X and Y, that must engage in pollution abatement. If currently Firm X and Firm Y have the same marginal abatement cost, then

(a)reallocating abatement activity between Firm X and Firm Y won't reduce the total abatement cost to the society.

(b)reallocating some of Firm X's abatement activity to Firm Y will reduce the total abatement cost to the society.

(c)increasing both firms' abatement activity won't increase the total abatement cost to the society.

(d)reallocating all abatement activity to either Firm X or Firm Y will reduce the total abatement cost to the society.

58.

All of the following are examples of public goods EXCEPT: