Econ 101, section 4, S07
Schroeter
Final Exam, Blue
Choose the single best answer for each question.
1. If the goal of a government policy is to promote efficiency, the objective is to
a. create a more fair distribution of income.
b. change the way in which the economic "pie" is divided.
*. enlarge the "size" of the economic "pie."
d. protect a domestic industry from foreign competition.
2. The adage, "There is no such thing as a free lunch," means
a. the cost of living is always increasing.
*. people face tradeoffs.
c. if something looks too good to be true, it probably isn't worth pursuing.
d. even people on welfare have to pay for food.
Questions 3, 4, and 5 are based on the following information. Two small countries,
Winneshiek and Winnebago, use their labor resources to produce goods of two types:
manufactured goods and agricultural goods. The table below gives the number of hours
of labor needed to produce one unit of each type of good in each country.
Winneshiek
Winnebago
Hours needed to produce one unit of
manufactured goods
agricultural goods
1/2
3
2
4
3. The opportunity cost of 1 unit of agricultural goods in Winneshiek is
a. 6 hours.
*. 6 units of manufactured goods.
c. 1/6 hour.
d. 1/6 unit of manufactured goods.
4. Which of the following is true?
*. Winneshiek has the absolute advantage in the production of agricultural goods.
b. Winneshiek has the comparative advantage in the production of agricultural goods.
c. Winnebago has the comparative advantage in the production of manufactured goods.
d. None of the above is true.
5. Suppose that there are international markets in which 1 unit of manufactured goods can
be traded for 1 unit of agricultural goods. At these terms of trade,
a. Winneshiek would want to buy agricultural goods and sell manufactured goods.
b. Winnebago would want to buy manufactured goods and sell agricultural goods.
c. Winnebago would want to buy agricultural goods and sell manufactured goods.
*. both a and c.
2
6. Which of the following relationships is reflected in the downward slope of a demand
curve?
*. An increase in the price of a good will lead to a decrease in quantity demanded.
b. The quantity demanded of a good will decrease when the price of a substitute good
increases.
c. For inferior goods, quantity demanded and income are negatively related.
d. When quantity supplied increases, quantity demanded will decrease.
7. In a competitive market, simultaneous increases in supply and demand would
necessarily result in
a. an increase in equilibrium price.
*. an increase in equilibrium quantity.
c. neither a nor b.
d. both a and b.
8. Which of the following could be responsible for an increase in the demand for a good?
a. an increase in the price of a substitute good.
b. an increase in average household income (assuming the good is a normal good).
c. an increase in the price of a complement good.
*. both a and b.
9. What will happen in the competitive market for music compact discs if the royalties
paid to the recording artists decrease and the price of compact disc players decreases?
The equilibrium price of music compact discs will
*. either increase, decrease, or stay the same, and the equilibrium quantity will increase.
b. either increase, decrease, or stay the same, and the equilibrium quantity will decrease.
c. increase and the equilibrium quantity will either increase, decrease, or stay the same.
d. decrease and the equilibrium quantity will either increase, decrease, or stay the same.
10. Which of the following is consistent with an own price elasticity of demand equal
to - 0.5?
a. The quantity demanded will fall by 5% if price doubles.
b. A 5% increase in price leads to a 5% reduction in quantity demanded.
*. A 10 % increase in price leads to a 5% reduction in quantity demanded.
d. The quantity demanded will decrease by 10% if price increases by 5%.
11. When the local recycling center raised the price it offers for aluminum cans from
$0.50 per lb. to $0.60 per lb., the quantity of aluminum cans it was able to purchase
increased from 250 lbs./month to 290 lbs./month. In this community, and over this range
of prices, the elasticity of supply (calculated by the "midpoint method") of recycled
aluminum cans is
a. 1.45.
b. 1.23.
*. 0.81.
d. 0.69.
3
12. Demand in the competitive market for wheat is inelastic. All else equal, a reduction
in the amount of acreage planted in wheat will lead to
*. an increase in the price of wheat and an increase in wheat farmers' revenues.
b. an increase in the price of wheat and a decrease in wheat farmers' revenues.
c. a decrease in the price of wheat and an increase in wheat farmers' revenues.
d. a decrease in the price of wheat and a decrease in wheat farmers' revenues.
13. In a competitive market, a binding price floor
a. causes excess demand.
b. causes a shortage.
*. must be above the equilibrium price.
d. creates incentives for illegal sales at prices above the floor.
14. A $1.00/unit excise tax is imposed on the competitive market for widgets. Under
which of the following circumstances will the impact on the price widget buyers pay
(inclusive of the tax) be the greatest? The elasticity of demand for widgets is
a. -2.0 and the elasticity of supply is 2.0.
b. -2.0 and the elasticity of supply is 0.5.
*. -0.5 and the elasticity of supply is 2.0.
d. -0.5 and the elasticity of supply is 0.5.
15. Which of the following is true?
a. The demand for gasoline is more elastic in the short-run than in the long-run.
b. A good that has numerous close substitutes is likely to have inelastic demand.
c. The demand for a particular brand of laundry detergent is likely to be less elastic than
the demand for laundry detergent in general.
*. None of the above is true.
16. Although lawmakers originally legislated a "fifty-fifty" division in the payment of the
FICA tax (half to be paid by employees; half to be paid by employers),
a. employers are able to pass their share of the tax entirely along to employees.
*. the actual outcome, in terms of tax incidence, does not depend on the legislated
division.
c. the employer is now required by law to pay more than 50% of the tax.
d. the employee is now required by law to pay more than 50% of the tax.
17. Consumer surplus is
*. the amount a buyer is willing to pay for a good minus the amount actually paid.
b. the amount a buyer is willing to pay for a good minus the cost of producing it.
c. the price of a good minus the consumer's willingness to pay for the good.
d. the amount of a good that a consumer is able to purchase at below-equilibrium prices.
4
18. Anita occasionally stops at Starbucks on her way to work to buy a latte. Her
willingness to pay is $6.00, $4.50, and $1.50, for the first, second, and third lattes of the
week; and $0 for lattes beyond the third of the week. If the price of lattes falls from
$5.00 to $4.00, Anita's weekly consumer surplus increases from
a. $2.00 to $3.00.
b. $1.50 to $3.00.
*. $1.00 to $2.50.
d. none of the above.
19. When the government imposes an excise tax of $3.00/unit on a competitive market,
the number of units sold (with the tax in place) is 750/day. The imposition of the tax
reduces consumer surplus by $2250/day and reduces producer surplus by $1125/day.
The deadweight loss of the tax is
*. $1125/day.
b. $2250/day.
c. $3375/day.
d. $4500/day.
20. There is currently an excise tax of $1.00/unit on the competitive market for widgets.
If the government were to boost the tax rate to $2.00/unit, the revenue collected from the
widget excise tax would
a. double.
b. definitely increase, but by less than double.
c. definitely decrease.
*. none of the above.
21. When President Bush imposed tariffs on imported steel in March 2002, which of the
following groups supported the move?
a. U.S. steel consumers.
*. U.S. steel companies.
c. Foreign steel companies.
d. the World Trade Organization.
22. The term market failure refers to
a. a firm that is forced out of business because of losses.
*. a market that fails to allocate resources efficiently.
c. an unsuccessful new product line, resulting in a loss for the firm.
d. competition among firms that drives prices down.
23. The "free-rider" problem arises in the case of
a. excludable goods.
*. non-excludable goods.
c. rival goods.
d. non-rival goods.
5
Questions 24, 25, and 26 refer to the following figure. It depicts the domestic demand
(Dd) and supply (Sd) of cotton, a homogeneous product, in Moldova, a small country.
(When we say that Moldova is a "small" country, we mean that the price of cotton in the
rest-of-the-world will not be affected by changes in Moldova's trade policy.)
($/lb.)
2.00
Sd
1.20
0.80
0.60
Dd
0.20
4,000
6,000 10,000
15,000 17,500
(lbs./day)
24. If the world market price of cotton is $0.60/lb., in a free trade situation, Moldova will
import
a. 17,500 lbs./day.
b. 15,000 lbs./day.
*. 13,500 lbs./day.
d. 9,000 lbs./day.
25. Starting from a free trade situation with a world market price of $0.60/lb., the
government of Moldova imposes a $0.20/lb. tariff on cotton imports. The tariff revenue
that will be collected as a result is
a. $3,250/day.
b. $2,700/day.
c. $2,400/day.
*. $1,800/day.
26. Starting from a free trade situation with a world market price of $0.60/lb., the
government of Moldova imposes a $0.20/lb. tariff on cotton imports. The change in
domestic consumer surplus that results from the imposition of the tariff is a decrease of
*. $3,250/day.
b. $2,700/day.
c. $2,400/day.
d. $1,800/day.
6
27. The competitive market for gizmos is subject to a negative externality and transaction
costs prevent the affected parties from reaching an efficient solution via Coasian
bargaining. At the market equilibrium quantity of gizmos, marginal social cost will
a. equal marginal social value.
*. be greater than marginal social value.
c. be less than marginal social value.
d. either b or c depending on whether the externality is the result of the production or the
consumption of gizmos.
28. Which of the following is the best example of a public good?
*. a tornado siren.
b. cable TV service.
c. the Ogallala aquifer.
d. a patented invention.
29. Under which of the following circumstances would a 5% sales tax on all purchases of
food be regressive? Wealthy households spend
*. a smaller proportion of their income on food than do poor households.
b. the same proportion of their income on food as poor households.
c. a greater proportion of their income on food than do poor households.
d. None of the above. (A sales tax limited to 5% of food expenditures is always
progressive.)
Questions 30 and 31 refer to Schedule Y-1 from the 2006 Instruction booklet for federal
individual income tax form 1040. Ted and Louise are a married couple using the
"married, filing jointly" filing status. They prepare their own federal income tax returns.
Schedule Y-1. Use if your filing status is married, filing jointly.
If your taxable but not over
your tax is
of the amount
income is over
over
$0
$15,100
--------- 10%
$0
15,100
61,300
$1,510 + 15%
15,100
61,300
123,700
8,440 + 25%
61,300
123,700
188,450
24,040 + 28%
123,700
188,450
336,550
42,170 + 33%
188,450
336,550
---------91,043 + 35%
336,550
30. Ted and Louise initially calculate their taxable income for 2006 to be $81,750. How
much federal income tax would they owe on this amount?
a. $11,507.50.
*. $13,552.50.
c. $16,872.50.
d. $18,172.50.
7
31. While double-checking their figures, Ted and Louise discover $200 in additional
allowable deductions. How would this discovery affect their calculated tax liability?
It would ________ their calculated tax liability by _______.
*. decrease; $50.00.
b. decrease; $200.00
c. increase; $50.00.
d. increase; $200.00.
32. The largest source of income for the federal government is
a. corporate income tax.
*. individual income tax.
c. property tax.
d. sales tax.
33. For the year 2006, the Reliable Ratchet Company had revenue of $7,500,000, explicit
costs of $7,100,000, and implicit costs of $1,200,000. For 2006, Reliable Ratchet had
accounting profit of
a. $6,300,000 and economic profit of $5,900,000.
b. $400,000 and economic profit of $6,300,000.
*. $400,000 and economic profit of -$800,000.
d. $6,300,000 and economic profit of -$400,000.
34. For a particular firm, labor is the only variable input. Fixed cost is $2000/week and
variable cost per unit of labor is $600/worker/week. When the firm employs 9 workers,
output is 1700 widgets/week and the marginal product of the 10th worker is 100
widgets/week. What is the firm's average total cost of production when it employs 10
workers?
a. $4.63/widget.
*. $4.44/widget.
c. $4.35/widget.
d. $4.11/widget.
35. Which of the following is true? At an output level at which average total cost is
increasing, marginal cost is
a. less than average total cost.
b. equal to average total cost.
*. greater than average total cost.
d. impossible to determine without more information.
36. A competitive firm faces a price of $2.00/unit for its product. It is currently operating
where marginal cost is $2.50/unit and average total cost is $1.50/unit. To maximize
profit (or minimize loss) in the short-run, the firm should
a. increase output.
*. decrease output, but not shut down.
c. shut down.
d. impossible to determine without more information.
8
37. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then
demand decreases and stays at the new lower level. After the industry has made its longrun adjustment to the demand shift, there will be
a. fewer firms than before.
b. less industry output than before.
*. Both a and b.
d. None of the above.
38. When a monopolist sells 20 widgets/day, her revenue is $1600/day. The marginal
revenue of the 21st widget/day is $50/widget. By approximately how much does the
monopolist have to reduce her price in order to increase her sales from 20 to 21
widget/day?
a. $30.00/widget.
b. $16.50/widget.
c. $2.38/widget.
*. $1.43/widget.
39. At its current output level, a monopolist's price is $6/unit, it's average total cost is
$5/unit, its marginal revenue is $4/unit, and its marginal cost is $3/unit. To maximize
profit (or minimize loss) in the short-run, the monopolist should
a. maintain its current output level.
*. increase its output level.
c. decrease its output level, but not shut down.
d. not enough information given for an answer.
40. Which of the following is not a characteristic of oligopoly markets?
a. Firms have some degree of market power.
b. The profit of any one firm is affected by actions taken by other firms.
c. There are relatively few firms in the market.
*. Goods typically sell at prices equal to marginal cost.
41. In order to profit from price discrimination, a monopoly must be able to
a. separate customers according to their willingness to pay.
b. prevent resale of its good or service.
c. engage in arbitrage.
*. both a and b.
42. In the short-run, a firm hires labor at a fixed wage of $120/worker/day, and sells
output at a fixed price of $8/widget. At its current labor employment level, the firm is
making positive economic profit and its marginal product of labor is 12
widgets/worker/day. To maximize profit (or minimize loss) in the short-run, the firm
should
*. lay off some workers.
b. maintain its current labor employment level.
c. hire more workers.
d. impossible to determine without more information.
9
Questions 43 and 44 refer to the following payoff matrix describing a game played by
two players: Player A and Player B. Player A has two strategies: "Up" and "Down."
Player B has three strategies: "Left," "Center," and "Right." The cells of the table contain
the payoffs to each player for each combination of strategies. In each cell, Player A's
payoff is listed first and Player B's payoff is listed second. (A higher payoff is better than
a lower payoff.)
Player A's
strategies
Up
Down
Left
(6, -2)
(4, 0)
Player B's strategies
Center
(-2, 3)
(8, 6)
Right
(0, 7)
(-1, 2)
43. Which of the following is true?
a. Only Player A has a dominant strategy.
b. Only Player B has a dominant strategy.
*. Neither player has a dominant strategy.
d. Both Player A and Player B have dominant strategies.
44. Which of the following is true?
a. ("Up," "Right") is a Nash equilibrium.
b. ("Down," "Left") is a Nash equilibrium.
c. ("Down," "Center") is a Nash equilibrium.
*. Both a and c are true.
45. If I invest $10 in a savings account that pays an annual interest rate of 3%, what will
be the balance in the account in 6 years?
*. $11.94.
b. $11.80.
c. $11.42.
d. $10.90.
46. Assuming an annual interest rate of 12%, what is the present value of $100 to be
received in 3 years?
a. $140.49.
b. $136.00.
c. $73.53.
*. $71.18.
47. I take out an installment loan of $5000 with an annual interest rate of 11%. The terms
of the loan require repayment of principal and interest in three equal installments, due
one year from today, two years from today, and three years from today. Rounded to the
nearest whole dollar, what is the amount of each of the three installment payments?
a. $2061.
*. $2046.
c. $2033.
d. $2021.
10
48. You are 6' - 6" tall, weigh 320 lbs. and have just been drafted by the Minnesota
Vikings to play offensive tackle. You sign a contract to play for two years and are given
a choice of three salary payment options:
Option 1: A single payment of $25 million paid today.
Option 2: Three payments of $9 million each; the first paid today, the second paid
in one year, and the third paid in 2 years.
Option 3: A single payment of $28 million paid in 2 years.
Assuming an annual interest rate of 5%, Option ___ has the greatest present value and
Option ___ has the smallest present value.
a. 1; 2.
*. 2; 1.
c. 1; 3.
d. 3; 1.
49. Recall lecture's model of child labor in developing countries. In that model's "bad"
labor market equilibrium
a. only adults work and wages are low.
b. adults and children both work and wages are high.
*. adults and children both work and wages are low.
d. only children work and wages are low.
50. The Child Labor Deterrence Act sponsored by Senator Harkin would
a. outlaw child labor in the United States.
b. withhold U.S. foreign aid from countries that allow child labor.
c. require special labeling for all products produced using child labor.
*. prohibit the importation of goods made using child labor.