Economics 102
Study Questions for Final Examination
Part I: Questions 1, 2, and 3
1. A. You will be given a situation with a company in a perfectly competitive industry. First, define perfect
competition. Then, assume that this perfectly competitive industry begins in long-run equilibrium, drawing the
situation on the relevant graphs (for both one typical seller and for the whole industry). You will be given a
situation that can be translated into a change in the demand for the product. You are to analyze the results of the
change in the short-run and then in the long-run, showing all of the changes on the relevant graphs. Practice graphs
are provided below. (15 Points)
B. You are to assume that all companies in this industry hire their labor in a perfectly competitive labor
market. Draw this situation (before the change) on the graphs: one for a typical employer and one for all employers.
Then, you are to analyze the results of the change (given in Part A) on the labor market, showing all changes on the
relevant graphs. Consider both the short-run and long-run of Part A. Practice graphs are provided below. (10 points)
2. You will be given a different case involving a change in demand with a company in a monopolistically
competitive industry. First, define monopolistic competition. Then, you are to show the graph, beginning in longrun equilibrium (define this). You are to analyze the results of this second case in both the short-run and the longrun, showing all of the relevant changes on the graph and explaining your reasoning. A practice graph is provided
below. (10 points)
3. You will be given yet another case involving a different change in demand with a company that is a pure
monopoly. First, define pure monopoly. Then, you are to show the graph. You are to analyze the results of this
case in both the short-run and the long-run, showing all of the relevant changes on the graph. A practice graph is
provided below. (10 points)
Part II: Questions 4, 5, and 6
4. The last 20 years have seen the growth of the idea of the market economy. Market economies have replaced
socialist economies. In the United States, the idea of the market economy has been extended to areas such as health
care and environmental protection. You are to debate the desirability of this dominance of the ideas of the market
economy. In question 4, you are to argue that market economies bring great benefits to society as a whole. In
your essay, consider and explain the following points: (a) the way by which a market economy allocates resources
to their best uses (allocative efficiency -- define); (b) the way by which market economies generate productive
efficiency in the short-run and again in the long-run (be sure to define these terms); (c) the ways by which a market
economy provides incentives for people to undertake behaviors that are in society’s interest (explain these
behaviors); (d) the ways by which market economies provide incentives for behaviors that lead to lower costs,
improved products, and greater production; (e) the ways by which people’s incomes (both wages and profits) are
determined in a market economy; (f) the way by which a market economy reduces the information one needs in
order to make socially desirable decisions. (Do not simply answer these 6 points. Include these as part of your
overall argument.) (20 points)
5. Those who argue in favor of the market economy also argue that government will not be able to make the kinds
of decisions that will be socially desirable and often make decisions that are socially undesirable. In question 5,
you are to describe the argument against government involvement in the economy. In your essay, consider and
explain the following points: (a) the special interest effect; (b) the shortsightedness effect; and (c) the problems of
government bureaucracies. (Do not simply answer these 3 points. Include these as part of your overall
argument.) Use these points as well as others to write a conclusion as to why command economies tended to
perform poorly. Give as many examples as you can. (15 points)
6. Many people oppose the complete reliance on markets. They believe that market economies have advantages
but also have many problems. Government activities are needed to overcome these problems. In question 6, you
are to argue that market economies have many problems that require government involvement to rectify. In your
answer, be sure to specify what the government remedy would be. In particular, consider and explain each of the
following points: (a) the problem of insufficient competition in general and what can be done about it; (b) the
problem of some companies becoming natural monopolies (define this term and then use it to explain why high
technology industries are not likely to be competitive); (c) the problems that result from negative and positive
externalities (define these terms and give some examples); (d) the problems that result from public goods (define
this term plus explain what problems result); and (e) the inequality that results (and why it results). (Do not simply
answer these 5 points. Include these as part of your overall argument.) (20 points)
$
Perfect Competition
Marginal Cost
Average Total Cost
a
0
One Representative Company
Price1 = Marginal Revenue1
Quantity
All Sellers Together (The Industry)
$
Supply1
(Price)
A
Demand1
0
Q
Quantity
The Labor Market --- One Typical Employer in Perfect Competition
$
A
Wage
MRP1
0
l1
Quantity of Labor
The Labor Market --- All Employers Together in Perfect Competition
$
A
Supply of Labor
Demand1 = Sum MRP1
0
L1
Quantity of Labor
Monopolistic Competition
$
Marginal Cost
Average Total Cost
b
P
a
Demand
Marginal Revenue
0
Q1
Quantity
Monopoly
$
Marginal Cost
Average Total Cost
e
P1
b
d
c
Demand
a
Marginal Revenue1
Q1
Quantity