Principles of Microeconomics – BAC160L9

Final Exam

Due Aug 6th, 2013

NAME: ______

  1. (Lorenz Curve)What is a Lorenz curve?

2.If income were distributed solely according to marginal productivity,

a. / every family would be above the poverty level
b. / it would be distributed evenly
c. / it would be distributed normally
d. / workers in capital-intensive industries would earn less than workers in labor-intensive industries
e. / some individuals would not receive any income

3.In a market economy, income is primarily determined by

a. / the productivity of household resources
b. / the level of transfer payments
c. / government monetary and fiscal policy
d. / the geographic distribution of resources
e. / the amount of financial assets owned by households

4.Taxes and in-kind transfers make the distribution of income more unequal.

a. / True
b. / False

NAME: ______

5.In the United States, the dramatic increase in government social spending since the mid-1960s has

a. / made incomes less equally distributed
b. / made incomes equally distributed
c. / not greatly increased the money income share of the poorest fraction of the population
d. / greatly increased the money income share of the richest fraction of the population
e. / decreased the percentage of families in the lowest fifth

6.Using the Lorenz curve, the degree of income inequality is measured by

a. / The line connecting all points for which a given percentage of families receives exactly the cumulative percentage of income
b. / the distance of the Lorenz curve from the line of perfect equality
c. / the flat diagonal line that applies to a perfectly elastic demand curve
d. / the number of times the Lorenz curve crosses the line of perfect equality
e. / is derived by dividing the number of people below the poverty line by the total population

7.On average, college graduates earn significantly more income than those with less education and the disparity tends to widen into middle age.

a. / True
b. / False

8.Data show that the poorest U.S. demographic group is

a. / the elderly because Social Security payments have not kept pace with inflation
b. / the elderly because they have no steady income
c. / the elderly because poverty increases with age
d. / households headed by someone under 18 years of age
e. / households headed by someone between 40 and 50 years old

9.The distribution of income in a market economy is primarily determined by differences in

a. / effort and sacrifice and intelligence with the most important factor being intelligence since human capital is a resource
b. / the level of needs of the average or median income individual when selling her labor
c. / resource ownership and the value that resources buyers place on the resources that are sold in the marketplace
d. / the level of government intervention in the economy as it relates to job openings
e. / the amount of time that an individual spends working and the intensity of this effort

10.Welfare data show that in the United States

a. / most welfare recipients receive benefits only for a short time
b. / welfare encourages young women to have children
c. / children brought up on welfare tend to remain on welfare as adults
d. / having poor parents does not increase the chances of a child's being on welfare as an adult
e. / children of poor parents have a 50 percent chance of being middle-income adults

NAME: ______

11.Private property rights are easily assigned to open-access resources.

a. / True
b. / False

12.When consumption of a good or service produces benefits or costs that are not reflected in the market price for the good, this is known as a(n)

a. / externality
b. / common pool problem
c. / nonexcludable resource
d. / public good
e. / renewable resource

13.When an activity results in the imposition of external costs, markets will produce more than the socially optimal level of that activity.

a. / True
b. / False

14.All of the following are examples of negative externalities except one. Which is the exception?

a. / water pollution
b. / your roommate going on a diet
c. / second-hand smoke
d. / loud conversation in the workplace
e. / your neighbor building a bomb shelter on her front lawn

15.Property rights can be defined and enforced

a. / only by the government
b. / only by ethical norms
c. / by the government and by ethical norms
d. / only through constant renegotiation
e. / by government, by informal social actions, and by ethical norms

16.All of the following are sources of negative externalities exceptone. Which is the exception?

a. / a paper mill that pollutes a river
b. / a person who throws a beer can out the window of a moving car
c. / cars, which emit carbon monoxide
d. / a solar water heater which is outside and obscure from view
e. / products that contribute to the greenhouse effect

NAME: ______

17.Suppose that the city builds a new park that is advertised as being "open to the public," and within two months the grass in the park is ruined by overuse. This would be an example of

a. / a nonrenewable resource
b. / a private good
c. / the common pool problem
d. / a positive externality
e. / a renewable and excludable resource

18.The equilibrium price and quantity in a free market usually reflect private marginal costs and benefits, not social ones.

a. / True
b. / False

19.At the market output and price for a good whose production causes pollution,

a. / pollution is eliminated
b. / the marginal social cost of production exceeds the marginal social benefit of production
c. / the private cost of production equals the private benefit of production
d. / the marginal social benefit of production equals the marginal social cost of production
e. / too little of the good is produced

20.A removal or depletion tax on an open-access resource increases the marginal private cost of using the resource by

a. / zero
b. / the amount of the tax
c. / the marginal product of the resource
d. / the average private cost of using the resource
e. / the average social cost of using the resource

21.Perfectly competitive firms are sometimes called price makers because they have significant control over product price.

a. / True
b. / False

22. In perfect competition, each firm's output is a large fraction of total market supply.

a. / True
b. / False

NAME: ______

23.Which of the following is not necessarily a characteristic of perfect competition?

a. / low prices
b. / a large number of buyers and sellers
c. / a homogeneous product
d. / perfect information
e. / easy entry and exit in the long run

24.Perfectly competitive firms respond to changing market conditions by varying their

a. / price
b. / output
c. / market share
d. / information
e. / advertising campaigns

25Which of the following markets best approximates the perfectly competitive market structure?

a. / automobile manufacturing
b. / insurance
c. / world commodity markets
d. / airlines
e. / manufacture of stereo equipment

26.Firms in perfect competition have no control over

a. / all of the following
b. / where to operate on their average total cost curves
c. / what price to charge
d. / how many inputs to use
e. / how much to produce

27.In a perfectly competitive industry we are likely to find

a. / firms producing a wide variety of products
b. / barriers to entry
c. / no profit possible in the short run
d. / firms that do not advertise
e. / firms that can choose the price of their products

28.Because it is small relative to the market, a perfectly competitive firm faces an inelastic demand curve for its output.

a. / True
b. / False

NAME: ______

29.Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $9. Which of the following will happen?

a. / The firm will not sell any output.
b. / The firm will sell less output than its competitors.
c. / The firm will make more profit than it could at the $10 price.
d. / The firm will make less profit than it could at the $10 price.
e. / The firm's revenue will increase and its costs may decrease.

30.In Connecticut, the apple market is perfectly competitive. Suppose that consumer tastes change so that the market demand for apples increases. In that case, the demand curves faced by individual firms will

a. / not change
b. / become less elastic
c. / shift upward
d. / shift leftward
e. / shift downward

31.Adam Matsumi is an attorney who can charge legal fees above the competitive level because entry of new competitors is made more difficult by the need to hold a(n)

a. / state license
b. / patent
c. / essential resource
d. / economy of scale
e. / copyright

32.Which of the following is not an example of De Beers Diamonds trying to increase consumer demand?

a. / sending the marketing message that a diamond lasts forever
b. / ads that illustrate that a diamond should remain in the family and not be sold
c. / informing potential customers about how diamonds lose monetary value over time
d. / introducing the idea of the diamond engagement ring
e. / the “spirit ring” as a sign of independence

33.Consumer concern about “blood diamonds,” a diamond mined in a war zone and sold to finance an insurgency, invading army's war efforts, or a warlord's activity, may have caused a drop in De Beers sales.

a. / True
b. / False

NAME: ______

34.After a corporate merger, Rebecca Jalamid became the CEO of a monopoly firm. She was surprised to learn that one benefit of being a monopoly was that her company

a. / could charge as high a price as desired
b. / was in a good position to capture the fruits of any innovation
c. / received increased scrutiny from government regulators
d. / started to attract potential competitors motivated to get a share of the economic profits of Rebecca’s company
e. / contributed to the deadweight loss in the economy

35Business-class airline tickets cost much more than coach-class tickets because, compared to householders, businesspeople’s demand for travel is

a. / equally elastic
b. / unitary elastic
c. / more elastic
d. / less elastic
e. / not a factor in the cost of airline tickets

NAME: ______

NARREND

36.In Exhibit 9-18, a non-discriminating monopolist will charge what price?

a. / P1
b. / P2
c. / P3
d. / either P1 or P2
e. / unable to tell from the information given

37.In Exhibit 9-18, how does market segment A differ from market segment B?

a. / demand is relatively more elastic in segment A than in segment B
b. / demand is relatively more income elastic in segment A than in segment B
c. / demand is relatively more income elastic in segment B than in segment A
d. / there are more consumers in segment A than in segment B
e. / demand is relatively more inelastic in segment A than in segment B

38.In Exhibit 9-18, a price discriminating monopolist will charge what price?

a. / P1 in segments A and B
b. / P2 in segments A and B
c. / P3 in segments A and B
d. / P1 in segment A and P2 in segment B
e. / unable to be determined

39.Anything that prevents new firms from competing on an equal basis with existing firms in an industry is called a barrier to entry.

a. / True
b. / False

40.Average revenue, demand, and price are all depicted by the same curve for a monopoly.

a. / True
b. / False

NAME: ______

41. Profit maximization depends upon demand conditions, as well as upon productivity and costs.

a. / True
b. / False

42.An industry consists of all firms that supply output to a particular market.

a. / True
b. / False

43.A firm in a perfectly competitive market

a. / can raise the price of its product and sell more output
b. / can lower the price of its product and sell more output
c. / can increase its supply to lower the price
d. / can decrease its supply to raise the price
e. / accepts the market price for its product

44.Suppose Thelma and Louise both sell fried green tomatoes in a perfectly competitive market. If Louise increases her output,

a. / Thelma must reduce output
b. / the price Thelma can charge falls
c. / the price Thelma can charge rises
d. / the price Thelma can charge is unaffected
e. / Thelma's profits must fall

45.If a perfectly competitive firm raises its price, its sales decrease to zero.

a. / True
b. / False

46.The price charged by a perfectly competitive firm is determined by

a. / each individual firm
b. / a group of firms acting together as a cartel
c. / market demand and market supply
d. / the firm's total costs alone
e. / the firm's average variable cost

NAME: ______

NARRBEGIN: Exhibit 8-1-1

Exhibit 8-1

Demand / Cost
Price / Q / Q / Marginal
cost
$60 / 5 / 1 / $50
80 / 4 / 2 / 60
100 / 3 / 3 / 100
120 / 2 / 4 / 140

NARREND

47.The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. Exhibit 8-1 shows cost data for one firm and demand data for one consumer. What is the equilibrium price?

a. / $60
b. / $80
c. / $100
d. / $120
e. / It is impossible to determine the equilibrium price because there is no information on market demand or supply.

48.Economic theory assumes that the goal of firms is to maximize

a. / sales
b. / total revenue
c. / profit
d. / price
e. / utility

49.Which of the following is not true with regard to economic profit?

a. / economic profit equals total revenue minus total cost
b. / economic profit excludes implicit cost
c. / economic profit is any profit greater than a normal profit
d. / firms attempt to maximize economic profit
e. / long-run economic profit is always zero in perfect competition

NAME: ______

50.The total revenue curve of a perfectly competitive firm

a. / is horizontal
b. / is vertical
c. / has a diminishing slope as output increases
d. / has an increasing slope as output increases
e. / has a constant slope as output increases

51.A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building he owns and currently rents for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What is the minimum revenue he must earn per year in order for it to be worth his while to open his sushi bar?

a. / $26,000
b. / $66,000
c. / $78,000
d. / $52,000
e. / $72,000

52.The graph of average fixed cost is a horizontal line.

a. / True
b. / False

53.In the long run, all of a firm's inputs are variable.

a. / True
b. / False

54.Which of the following probably has the shortest long run?

a. / a law firm
b. / a steel mill
c. / an automobile plant
d. / a tire factory
e. / an aircraft engine factory

55.Which of the following is a long-run adjustment?

a. / A new economics professor is hired on campus.
b. / General Motors increases its orders for steel.
c. / Microsoft cuts back its hiring of new graduates.
d. / Glow Electric disassembles one of its nuclear power plants.
e. / Texaco buys more crude oil to refine into gasoline.

NAME: ______

56.Which of the following is a short-run adjustment?

a. / Toyota builds an automobile plant in Kentucky.
b. / Faced with increasing enrollment, a private college builds a new School of Business building.
c. / Because of staggering losses, three insurance companies exit the industry.
d. / People's Bank hires two new tellers to meet increased demand for customer services.
e. / Shaveco enters the razor blade market with a new product, produced in the United States.

57.Which of the following would most likely reach the long run most rapidly?

a. / a nuclear power plant
b. / a college
c. / a lumber mill
d. / a shopping mall
e. / a hot dog stand

Exhibit 7-2

Labor / Total product
(pairs of shoes)
0 / 0
1 / 20
2 / 50
3 / 75
4 / 80
5 / 75

NARREND

58.Given the information in Exhibit 7-2, what is the marginal product of the third unit of labor?

a. / 45 pairs of shoes
b. / 25 pairs of shoes
c. / 15 pairs of shoes
d. / $45
e. / $25

NAME: ______

59.Given the information in Exhibit 7-2, what is the average product of the third unit of labor?

a. / 45 pairs of shoes
b. / 25 pairs of shoes
c. / 15 pairs of shoes
d. / $45
e. / $25

60.Given the information in Exhibit 7-2, what is the marginal product of the fourth unit of labor?

a. / 5 pairs of shoes
b. / 10 pairs of shoes
c. / 20 pairs of shoes
d. / 50 pairs of shoes
e. / 80 pairs of shoes

61.In terms of utility theory, "equilibrium" in the real world means that

a. / households are consuming as much of every commodity as they would like
b. / households have spent their incomes in such a way that their overall satisfaction is maximized
c. / households have spent their incomes in such a way that their marginal utility is maximized
d. / households have spent their incomes in such a way that their marginal utility is zero for every product consumed
e. / households have spent their incomes in such a way that their total utility is zero

62.A utility-maximizing consumer equalizes marginal utilities across all goods.

a. / True
b. / False

63.Consumers must understand the law of diminishing marginal utility in order to maximize their satisfaction.

a. / True
b. / False

64.When a consumer spends income so that the ratio of marginal utilities (MUs) of all goods purchased equals the ratio of their prices, the consumer is

a. / maximizing marginal utility
b. / spending too much on all goods
c. / maximizing total utility
d. / beyond the point of diminishing marginal utility
e. / behaving in opposition to the principal of rational behavior

NAME: ______

65.As a consumer allocates income between good A and good B, total utility is maximized when

a. / the marginal utility of A = the marginal utility of B
b. / the marginal utility of A = the marginal utility of B = 0
c. / the price of A = price of B
d. / marginal utility of A/price of A = marginal utility of B/price of B = 0
e. / marginal utility of A/price of A = marginal utility of B/price of B

66.Suppose that for Jason the marginal utility of $50-per-serving caviar is 100 and the marginal utility of $1-per-serving popcorn is 10. For his snack, Jason should buy

a. / the caviar if he has the $50; otherwise the popcorn
b. / the caviar if he has the $50; otherwise nothing
c. / the popcorn, whether he has the $50 or not
d. / one serving each of the caviar and popcorn, if he has $51
e. / five servings of popcorn for each serving of caviar

67.If Ellie Mae spends her income on possum and biscuits and the price of possum is three times the price of biscuits, then when Ellie Mae maximizes total utility, she will buy

a. / equal quantities of possum and biscuits
b. / three times as much possum as biscuits
c. / three times as many biscuits as portions of possum
d. / biscuits and possum until the marginal utility of possum is three times the marginal utility of biscuits
e. / biscuits and possum until the marginal utility of biscuits is three times the marginal utility of possum

68.Assume that you allocate your income to calzones and juice and that you have not yet spent your entire budget. If the marginal utility of a fourth calzone is 100 and the marginal utility of a third glass of juice is 50, you would

a. / eat a fourth calzone because it has a higher marginal utility
b. / drink a third glass of juice because you've had less juice
c. / consider the total utility received so far from calzones and juice before deciding what to consume next
d. / consider the relative prices of calzones and juice before deciding what to consume next
e. / consider whether or not marginal utility is diminishing before deciding what to consume next

NAME: ______