Introductory Microeconomics FINAL

Economics 101 – Wissink – F03

Introductory Microeconomics FINAL

READ THIS FIRST.

NAME: fill in your name LAST NAME, FIRST NAME.

IDENTIFICATION NUMBER: In spaces A - F: fill in your 6-digit CU ID number

SPECIAL CODES: In spaces O and P: fill in your section number 35-49

• USE THE ANSWER SHEET PROVIDED.
• NO BOOKS, NOTES, COMPUTERS OR CELL PHONES ARE ALLOWED.
• ONLY SIMPLE NON-GRAPHING CALCULATORS ARE PERMITTED.
• USE A NUMBER 2 PENCIL.
• THERE ARE 40QUESTIONS – DO THEM ALL.
• ALL QUESTIONS HAVE THE SAME WEIGHT (2.5 POINTS).
• NEITHER THE INSTRUCTOR NOR THE PROCTORS WILL ANSWER ANY QUESTIONS DURING THE EXAM.
• CHOOSE THE BEST POSSIBLE ANSWER FOR EACH QUESTION.
• THERE IS A 2 HOUR TIME LIMIT.

Glossary of some abbreviations:

P: price
Q: quantity
q: firm’s quantity
TR: total revenue
MR: marginal revenue
SR: short run
LR: long run
TC: total cost

ATC: average total cost
VC: variable cost

AVC: average variable cost
FC: fixed cost

AFC: average fixed cost
MC: marginal cost
SRATC: short run average total cost
area of a triangle is = .5(base)(height)

[1]. In a Cournot-Nash duopoly game, which of the following is false?

A. The two firms earn lower profits than a single monopolist.
B. The two firms earn higher profits than in the competitive equilibrium.
C. The Nash equilibrium is always more profitable for the two firms, taken together, than the cooperative outcome (collusion).
D. The market price is less than the price charged by a single monopolist but more than the competitive price.
E. Deadweight loss is less than for a monopoly in the same market, but still positive.

[2]. The difference between production possibilities curves with and without trade represents the

A. terms of trade.
B. gains from trade.
C. country's comparative advantage.
D. deadweight loss to a country.
E. country's absolute advantage.

[3]. The figure above shows two income distributions for the United States in 1992. Which of the following statements is true?

A. Income distribution A is more equal than income distribution B.
B. Income distribution B reflects the net effect of US tax and transfer programs on income distribution A, the pretax and transfer distribution of income.
C. Income distribution A reflects the net effect of US tax and transfer programs on income distribution B, the pretax and transfer distribution of income.
D. The fact that income distribution A never crosses income distribution B means that we cannot say which distribution is more equal.

[4]. Suppose that the price of a bag of tortilla chips is $3, and the price of a jar of salsa is $2. Holding the consumer’s spending on chips and salsa constant, how many bags of chips must the consumer forego to buy an additional 6 jars of salsa?

A. 0 bags
B. 2 bags
C. 3 bags
D. 4 bags
E. 6 bags

[5]. Consider the regulated market shown in the table above. The government has imposed a mandatory price floor of $4/q. The result is

A. a surplus of 3 units.
B. a shortage of 5.5 units.
C. a surplus of 5.5 units.
D. a shortage of 3 units.
E. equilibrium, no shortage or surplus exists.

[6]. The reason both prisoners confess in the prisoner's dilemma game is that

A. confession is the best option given the possible choices of the other prisoner.
B. criminals are never inclined to cooperate with each other.
C. the option of both confessing yields the most desirable result for the prisoners.
D. they each serve the least time if they confess.
E. decisions in real life are based on society's best interests.

[7]. The demand curve for pasta marinara at the Ivy Room in Willard Straight Hall is given by the formula: Q= 42 – 10P. Pasta is measured in 400g servings, and its price is in $/serving. It is well known that at the market equilibrium, the price elasticity of demand for pasta marinara is 0.4. Find the quantity demanded of pasta marinara if the price is $4.00.

A. 2 servings
B. 8 servings
C. 10 servings
D. 3 servings
E. Answer cannot be determined from given information.

[8]. Economists describe markets using the price elasticities of supply and demand rather than the slopes of the supply and demand curves because:

A. elasticity is easier to compute.
B. the slope tells us about relative changes whereas the elasticity tells us about absolute changes.
C. the elasticity, which does not depend upon the units of measurement, can be compared across markets whereas the slopes, which depend upon the units of measurement, cannot be directly compared.
D. the slope is more useful for straight line demand and supply curves while the elasticity is more useful for demand and supply curves that are linear in the logarithms.
E. it’s always more fun to study elasticity formulas.

[9]. Marginal cost is equal to average total cost when

A. average total cost is at a minimum.
B. average total cost is at a maximum.
C. average total cost is negative.
D. marginal cost is at a minimum.
E. marginal cost is at a maximum.

[10]. Market demand

A. does not depend on individual demand.
B. goes down when individual demand goes up.
C. is the sum of the quantities demanded by each individual in the economy at each price.
D. slopes upward.
E. is the sum of the quantities supplied by each producer in the economy at each price.

[11]. Which one of the following statements is true?

A. Markets that are Pareto efficient maximize net social surplus.
B. Markets that are Pareto efficient will always allocate the gains from trade equally to buyers and sellers.
C. Markets that are Pareto efficient are also necessarily equitable.
D. Markets that are Pareto efficient maximize the firm’s profit.
E. All of the above statements are true.

[12]. A payroll tax, like the Social Security payroll tax, on an employee’s wage and salary earnings will

A. decrease employment and increase the after-tax wage rate received by workers.
B. decrease both employment and the after-tax wage rate received by workers.
C. increase both employment and the after-tax wage rate received by workers.
D. decrease employment, however, the after-tax wage rate may increase, decrease or remain unchanged.
E. decrease the after-tax wage rate, however, employment may increase, decrease or remain unchanged

[13]. Hampton is a monopolist in the market for Finery. Finery is, of course, a cool type of shirt. The market demand curve for Finery is P=$1000-(Q/4). Hampton’s only cost of producing Finery is the $200 material cost for each shirt. Hampton’s profit maximizing price, quantity and profit level are

A. P=$350, Q=2800, profit=$420,000.
B. P=$300, Q=2800, profit=$280,000.
C. P=$400, Q=2400, profit=$480,000.
D. P=$200, Q=1600, profit=$700,000.
E. P=$600, Q=1600, proft=$640,000.

[14]. In the previous question, if Hampton could perfectly price discriminate, his profit level would be

A. $2,560,000.
B. $1,800,000.
C. $2,260,000.
D. $1,280,000.
E. $3,000,000.

[15]. John is a well-behaved utility maximizer. He spends all his income and consumes 35 apples a week and 14 loaves of bread. Apples cost $1 each and bread costs $2 per loaf. John's marginal utility from his 35th apple

A. equals his marginal utility from his 14th loaf of bread.
B. is twice his marginal utility from his 14th loaf of bread.
C. is half his marginal utility from his 14th loaf of bread.
D. is such that his total utility from apples equals his total utility from bread.
E. None of the above.

[16]. China and Korea both produce wheat and fabric with labor. The labor input is measured in person-hours, wheat is measured in pounds and fabric is measured in yards. The table below shows labor requirements to produce a unit of wheat and fabric in each country. (It is assumed that the labor requirements per unit of output in production remain the same irrespective of the quantity of the two goods produced.) Each country has 150 hours of labor available, which can be allocated between the two activities. What is the opportunity cost of producing one additional unit of wheat in terms of fabric in China?

1 lb. of Wheat / 1 yd. of Fabric
China / 15 hours / 25 hours
Korea / 30 hours / 10 hours

A. 25/15 yds.
B. 15/25 yds.
C. 15/30 yds.
D. 25/10 yds.
E. None of the above.

[17]. In the previous question, which country has the comparative advantage in the production of fabric?

A. Both Korea and China.
B. Neither Korea nor China.
C. China.
D. Korea.
E. Not enough information to determine.

[18]. Megan, Stanley and Elicia are stranded on an isolated mountain waiting for help to arrive. They spend their waking hours recycling food and water. Their production capabilities are given in the table below in terms of the maximum rates of food or water each can produce. Assuming that the three of them cooperate in production, what is the cost of producing the 57th liter of water?

Max Food (kg) / Max Water (liter)
Megan / 1 / 30
Stanley / 3 / 30
Elicia / 3 / 60

A. 10 kg/liter.
B. 1/30 kg/liter.
C. 1/10 kg/liter.
D. 20 kg/liter.
E. 1/20 kg/liter.

[19]. Which of following characterize what economists refer to as a pure public good?

I. Public or government provision.
II. Non-rivalry.
III. Non-excludability.

A. I and II.
B. I and III.
C. II and III.
D. I, II and III.
E. I only.

[20]. Assume Octavia is a nicely behaved utility maximizing consumer who spends all her income on beef and cheese only. Assume both goods are normal goods. When the price of cheese decreases, Octavia will

A. consume less beef and more cheese.
B. consume less beef, however, her cheese consumption may increase, decrease or remain unchanged.
C. consume more beef, however, her cheese consumption may increase, decrease or remain unchanged.
D. consume more cheese, however, her beef consumption may increase, decrease or remain unchanged.
E. consume more beef and more cheese.

[21]. The difference between the maximum amount of money consumers would have been willing to pay for Q units of a good in the market and the amount they actually paid for the Q units is referred to as

A. marginal benefit.
B. marginal cost.
C. consumers’ surplus.
D. producers’ surplus.
E. deadweight loss.

[22]. Which one of the following conditions is true for a longrun equilibrium in a monopolistically competitive market?

A. Consumers’ surplus equals producers’ surplus.
B. Equilibrium price equals social marginal benefit.
C. Equilibrium price equals social marginal cost.
D. Net social surplus is maximized.
E. The firm is productively efficient.

[23]. In the Cournot-Nash equilibrium for a duopoly, which of the following statements is false?

A. Each duopolist produces less than a simple monopolist would produce in the same market.
B. The sum of the economic profit of each duopolist is less than the economic profit of a simple monopolist in the same market
C. The deadweight loss is greater than the deadweight loss from a simple monopolist operating in the same market.
D. The market price is greater than the competitive price.
E. If the two duopolist have the same cost structure, they will be better off (higher profits for each) if they collude and divide the profit equally.

[24]. When income increases while the prices of all goods remain unchanged,

A consumption of inferior goods increases.
B. the slope of the budget line increases.
C. the slope of the budget line decreases.
D. the budget line shifts outward with a steeper budget line.
E. the budget line shifts outward with the same slope.

[25]. If a rise in the price of good X reduces the quantity of the good Y demanded, then

A. the cross price elasticity of demand between good X and good Y is negative.
B. the cross price elasticity of demand between good X and good y is positive.
C. good X is an inferior good.
D. good X is a normal good.
E. good Y is an inferior good.

[26]. A new growth hormone is discovered to increases the milk output of dairy cows and consumers know the hormone will decrease the purity of milk. Economists (good ones, that is) predict that

A. the price of milk would rise and the quantity would fall.
B. the price of milk would fall but the quantity could rise or fall or remain the same.
C. the price of milk could rise or fall but the quantity would fall.
D. the price of milk would fall and the quantity would rise.
E. the facts are insufficient to permit an answer.

[27]. You just won a free roundtrip ticket to LA and the ticket expires one year from now. You want to use it today and the airfare is $500 today. You also can sell it to anyone for a price of $450. If you don’t plan any other trips in this year besides today’s trip, what is the opportunity cost of using this free ticket today?

A. zero, the ticket is free.
B. $500.
C. $450.
D. $50.
E. incalculable because the ticket was a free ticket.

[28]. The five residents of a small community in Ithaca are considering constructing a public pool that costs $2,000 to build and is big enough to accommodate all of them without congestion. Their marginal benefits from this pool are shown in the table immediately above. If they decide to let a single price monopolist build it, then which of the following statements are true?

I. The monopolist will charge $700 per resident to maximize his profit.
II. The pool will be built.
III. The outcome is Pareto Efficient.

A. I and II.
B. I and III.
C. II and III.
D. II only.
E. I, II and III.

[29]. If a simple profit maximizing monopolist produces where his marginal cost equals his marginal revenue, then

A. his price should also equal his marginal cost.
B. his economic profit must be zero.
C. economic profit must be positive.
D. his price should also equal his marginal revenue.
E. his economic profit is maximized.

Voter / Marginal Benefit
Meredith / 1000
Luca / 350
Kats / 650
Ahmed / 1200
Kim / 500

[30]. The citizens of Ithaca are considering constructing a train station that costs $3,000 to build and is big enough to accommodate all of them without congestion. Their marginal benefits from this station are shown in the table above. Which one of the following statements is true?

A. A plan to build the station, granting all citizens access and taxing all citizens $600 each, would not pass a majority vote.
B. The voters of Ithaca would also approve a plan to build the station, tax each citizen $400, and charge an access fee of $300.
C. A private monopolist, restricted to charging a single price would conclude that the best access fee is $1200 but the project is not worth doing.
D. A price discriminating monopolist would build the station, charge a $500 access fee, and just break-even.
E. A private monopolist, restricted to charging a single price would conclude that the best access fee is $500 but the project is not worth doing.

[31]. United Airlines and TWA are players in a game in which each faces a choice between raising its ad spending or leaving its ad spending the same. The profit payoffs for the four combinations of strategies are as shown in the payoff matrix below. If both United and TWA are rational profit maximizers, what strategy will each follow?

A. Both will raise ad spending.
B. Both will leave ad spending the same.
C. TWA will raise spending and United will leave spending the same.
D. United will raise spending and TWA will leave spending the same.
E. This game has no Nash equilibrium.

[32]. A single-price profit-maximizing monopolist with a continuous linear demand curve has positive marginal costs at all levels of production above Q = 0. Which one of the following statements is false in the short run?

A. At the chosen level of output, an increase in the price of the good will necessarily reduce total revenue.
B. At the chosen level of output, demand for the good is price elastic.
C. At the chosen level of output some potential gains from trade are not realized.
D. At the chosen level of output, economic profit is necessarily positive.
E. At the chosen level of output, the monopolist is not maximizing total revenue.

[33]. Workers in a Midwest state can work in a factory for $15,000 per year or rent a 100-acre farm and grow corn, self farming. Farming is perfectly competitive. Normal farmland will produce 200 bushels of corn per acre per year. Equipment costs for a 100-acre parcel are $5000 per year. Workers like farming and factory work equally well. If corn sells for $2 per bushel in the corn market, what will be the equilibrium rent for 100 acres of normal farmland?

A. $5,000 per year.
B. $10,000 per year.
C. $15,000 per year.
D. $20,000 per year.
E. None of the above.

[34]. Rebecca is a single-price, profit-maximizing monopolist in the sale of singing lessons. If her demand and marginal cost curves are as shown, how much will she charge for each lesson and how many lessons will she sell each week?

A. $6 per lesson, 6 lessons per week.
B. $8 per lesson, 8 lessons per week.
C. $12 per lesson, 12 lessons per week.
D. $16 per lesson, 8 lessons per week.
E. $18 per lesson, 6 lessons per week.

[35]. Using the information from the previous question, in all, how much consumer surplus do buyers receive from their purchase of lessons at the monopoly price?

A. $8 per week.
B. $16 per week.
C. $32 per week.
D. $72 per week.
E. None of the above.

[36]. Using the information from the previous question, by how much does total economic surplus fall short of the maximum achievable surplus in this market?

A. $8 per week.
B. $16 per week.
C. $32 per week.
D. $56 per week.
E. None of the above.

[37]. The table above shows part of the total cost and marginal cost for Robinson to produce pumpkins in a small patch of land. Some of the data are missing, but you can fill it in and figure out what you need. If the price of pumpkins are $6 each in the perfectly competitive pumpkin market and Robinson’s choice of pumpkin production is discrete, how many pumpkins should Robinson produce and what is his profit and producer surplus?