Ag Econ 1041
Third Exam, 140 points
November 13, 2012
Name ______
8 a.m. Section
KEY __________________________
True/False – one point each
T F 1. Demand is downward sloping due to the income and substitution effects as well as diminishing marginal utility.
T F 2. When making decisions we face various constraints that can include income, time or others.
T F 3. Cross price elasticity is always positive.
T F 4. A normal profit is the opportunity cost of the owner(s).
T F 5.
An individual’s goal is to maximize marginal utility.
T F 6. If General Motors is attempting to cut its cost of production it is trying to increase the demand for automobiles and trucks.
T F 7. The income elasticity of avocados is a measure of how much the demand for avocados will change or shift if income changes.
T F 8. Economies of scale occur when a larger firm or enterprise realizes lower average costs primarily because of its larger size.
T F 9. Choosing an alternative with the lowest opportunity cost will lead to maximizing utility.
T F 10. A market is where buyers and sellers meet, though not necessarily in person, to exchange goods.
T F 11. If the price of soft drinks rise and the quantity purchased declines, we have seen a shift in demand for soft drinks.
T F 12. Externalities are impacts that fall outside the market of a good.
T F 13. When the marginal product of the variable input begins to decrease, total product also begins to decrease.
T F 14. When average costs are increasing, marginal costs are greater than average costs.
T F 15. I always want to choose the alternative that leaves me the highest opportunity cost.
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T F 16. Public goods can be provided efficiently by the private sector.
T F 17. People make decisions at the margin rather than average.
T F 18. The Coase Theorem is based on market results being efficient.
T F 19. Opportunity cost is the net value of the best alternative to the one you choose.
T F 20. Supply creates demand.
T F 21. The market supply curve reflects the lowest opportunity cost for each level of output and price facing an industry.
T F 22. Consuming the good with the highest MU/MC allows you to get the greatest value per dollar.
T F 23. Once we know the demand for a product we can predict specifically how much will be produced.
T F 24. The law of diminishing marginal utility is consistent with consumer behavior that produces a negatively sloped demand curve.
T F 25. Marginal cost will fall because of diminishing returns.
T F 26. Advertising raises costs in an effort to increase demand.
T F 27. A price cut will increase the revenue a firm receives if the demand for its product is elastic.
T F 28. The goal of a business is to produce a good at the lowest cost possible.
T F 29. Profit equals total cost minus marginal revenue.
T F 30. Corn farmers are making a profit this year, all farmers must be making a profit.
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Multiple choice are valued at two points each
__ a __ 31. If the price elasticity of demand for dance lessons is 2.66, demand for dance lessons
is a) Elastic b) Unit elastic c) Inelastic d) Perfectly unit elastic e) None of the above
__ c __ 32. The change in total cost that results from the production of one additional unit is
called a) Marginal revenue b) Average variable cost c) Marginal cost d) Average total cost e) None of the above
__ b __ 33. If two variables are negatively related, then as the value of one variable a) Increases, the other value increases b) Increases, the other value decreases c) Decreases, the other value decreases d) Increases, the other value may either increase or decrease e) All of the above
__ c __ 34. If the consumption of a good is rival but not excludable it a) Should not be consumed b) Is a normal good c) Is a common resource d) Is a public good e) Is none of the above
__ a __ 35. If the price of hand calculators falls from $10 to $9, and as a result, the quantity
demanded increases from 100 to 125, we can conclude a) Demand is elastic b) Demand is inelastic c) Demand is of unit elasticity d) Not enough information is given e) Demand is income elastic
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__ b __ 36. If the price elasticity of demand for gasoline is .20 a) A 10% fall in the price of gasoline will increase the amount purchased by 20% b) A 10% rise in the price of gasoline will decrease the amount purchased by 2% c) A rise in the price of gasoline will reduce the total revenue going to sellers d) The demand for gasoline is linear e) Gasoline is an inferior good
__ e __ 37. Shortages are a) When we have more produced than demanded b) Caused by too many resources being used c) Increased demand d) Reduced supply e) Caused by events or actions imposed on the market
__ a __ 38. If the demand for a product is elastic, total revenue will a) Rise as price falls b) Fall as price falls c) Remain constant in response to a price change d) Increase whether price increases or decreases e) Cause price to stretch too much
__ d __ 39. The net benefit that consumers get from buying a good in a market is a) Total revenue b) Own-price elasticity c) Total utility d) Consumer surplus e) None of the above
__ a __ 40. Producer surplus is a) Area below the market price and above supply b) Market price multiplied by the quantity sold c) Area below the supply curve d) The area below demand and above the market price e) All of the above
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Short answers are valued at 5 points each
41. In terms of own-price elasticity, place an “X” in the appropriate box.
Elastic
If price increases and TR increases
If the relative change in Qd is less than P
If MR is positive as more is consumed
X
Inelastic
X
X
Near the highest price on demand curve
Ep > 1
X
X
42. If someone’s use of a good reduces the value to me, than there is __ rivalry ______________
in consumption.
43. Why does marginal cost eventually rise?
Diminishing returns (↑ MP okay)
44. Diagram the situation where a tax is imposed to offset the misallocation of resources due to
a negative externality.
P
S
1
S
P
P
1
0
D = MB
0 Q
1
Q
0
Q
5

45. Diagram what happens in the market for electric or hybrid vehicles as gas prices rise.
P
S
P
1
P
0
0 Q
0
Q
1
D D
Q
1
46. Show on a diagram why grain prices rise when there is widespread drought in farming areas.
P
S
1
S
P
P
1
0
D
0 Q
1
Q
0
Q
47. The supply of automobiles was relatively constant during 2012, yet prices rose. Show the
market result on a graph.
P
P
1
P
0
S
D D
1
0 Q
0
Q
1
Q
6

48. Workers in grain farming became more productive. Diagram this result for the grain market.
P
S
S
1
P
0
P
1
D
0 Q
0
Q
1
Q
49. Cory eats peanut butter and jelly sandwiches more than hamburgers, which he consumes
more than turkey sandwiches. Use the decision rule to explain why.
MU Pbj > MU h > MU t
MC MC MC
50. Show with a diagram a minimum wage being implemented. Show the deadweight loss.
P
DWL S
M w
M w
P
0
0 Q d
Q
0
Q s
D
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Matching – one point each
L 51. Margin
N
M
P
K
T
J
S
I
R
H
52.
53.
54.
55.
Opportunity cost
Utility
Externality
Demand
A. Not all benefits or costs considered
B. Price x quantity sold
C. Not provided efficiently by markets
D. Used for production
E. Output per input
56. Production possibilities F. Lowest opportunity cost
57. Ceteris paribus G. Direct or positive relationship of P & Q
58. Market
59.
60.
61.
Inelastic demand
Coase Theorem
Price
H. Signal to buyers and sellers
I. P increase causes revenue increase
J. Other variables unchanged
K. Willingness and ability to buy
Q
G
E
F
O
D
B
A
C
62.
63.
Equilibrium
Supply
L. Edge, where change occurs
M Value to individual(s)
64. Productivity
65. Comparative advantage O. Rival but not excludable
66. Common resource P. Impact outside good’s market
67. Resources
68. Revenue
Q. Qs = Qd
R. Government should replicate market results
69. Inefficient
N. Foregone alternative(s)
70. Public good
S. Where exchange is arranged
T. What can be produced
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The following questions are valued at 10 points each
71. Draw the straight line curve below. Fill out the corresponding TR. Is demand elastic at
P = 4, Q = 1? ______ Yes _________________
Q =
P = $/Q
TR =
0
5
0
1
4
4
2
3
6
3
2
6
4
1
4
5
0
0
P
5
4
3
2
1
D
0 1 2 3 4 5 Q
72. Diagram an excise tax increase. Show the changes in price and quantity exchanged. Also
show the deadweight loss. a) If demand is inelastic who is likely to pay the largest portion of the tax (have the greatest tax incidence)? ___ Buyers ___________________________
P
P
1
S t
S
P
0 DWL
D
0 Q
1
Q
0
Q
9