Econ 109
Introduction to Economics-1
Final Exam
12/9/2000
Name_______________________
Part I. (40 Points) Choose the best answer and mark it on your scantron sheet.
1. If the marginal principle were applied to health care costs,
#. only health care expenditures in which marginal benefits exceed or
equal marginal costs would be implemented.
b. only health care expenditures in which marginal costs exceed
marginal benefits would be implemented.
c. we would be provided with unlimited health care.
d. we would adopt all new health care technologies regardless of their
cost.
e. only the rich could afford medical care.
2. As a percentage of GDP, the United States has lower health
expenditures than
a. Canada.
b. Germany.
c. Sweden.
d. Japan.
#. None of the above are true.
3. Which of the following is not an antipoverty program?
a. Aid to Families with Dependent Children (AFDC)
b. Temporary Assistance to Needy Families (TANF)
c. Medicaid
#. the Social Security System
e. one of the above are true.
4. According to the Census Bureau, a group of related family members
and unrelated individuals who live in the same housing unit is known as
a. a poverty budget.
b. a family.
c. a commune.
#. a household.
e. an individual unit.
5. The government can encourage and promote the consumption of
goods that generate spillover effects through the use of
a. the free-rider problem.
b. the median voter rule.
c. external benefits.
#. subsidies.
e. private goods.
6. If the public were asked to voluntarily pay for national defense, some
people would not pay for it even though they would still be consumers
of national defense. This is an example of
#. the free-rider problem.
b. the median voter rule.
c. external benefits.
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d. subsidies.
e. private goods.
7. A tax on a good or a service will result in
a. a decrease in the equilibrium quantity and a decrease in the
equilibrium price.
b. an increase in the equilibrium quantity and a decrease in the
equilibrium price.
#. a decrease in the equilibrium quantity and an increase in the
equilibrium price.
d. an increase in the equilibrium quantity and an increase in the
equilibrium price.
e. an ambiguous effect on equilibrium quantity and price.
8. Local governments get most of their revenue from:
a. individual income taxes.
b. sales taxes.
#. property taxes.
d. corporate income taxes.
e. payroll taxes.
9. If the exchange rate was 100 yen per dollar last month and is currently
120 yen per dollar, then the yen has ______________ and the dollar
has _______________.
a. appreciated, depreciated
b. appreciated, appreciated
#. depreciated, appreciated
d. depreciated, depreciated
e. depreciated, not changed
10. If a nation with a fixed exchange rate has a balance of payment deficit,
in order to maintain the exchange rate, the government must
#. supply foreign exchange to the market.
b. demand foreign exchange from the market.
c. supply domestic currency from the market.
d. neither supply nor demand foreign exchange.
e. neither supply nor demand domestic currency.
11. Suppose that interest rates in Germany decrease. This will cause the
mark to ___________ and the equilibrium quantity of dollars on the
foreign exchange market to ____________.
#. depreciate, fall
b. appreciate, fall
c. depreciate, rise
d. appreciate, rise
e. appreciate, remain constant
12. If U.S. exports are $100, imports are $120, net income from foreign
investments is $10 and net transfers from abroad is -$20, then the U.S.
has a current account
#. deficit of $30.
b. surplus of $240.
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c. deficit of $20.
d. surplus of $100.
e. deficit of $120.
13. If U.S. exports are $200, imports are $300, net income from foreign
investments is $20 and net transfers from abroad is -$50, then the U.S.
has a capital account
a. deficit of $130.
b. surplus of $20.
c. deficit of $100.
#. surplus of $130.
e. surplus of $50.
14. Suppose that the demand for U.S. exports increases. This will cause
the dollar to __________ and the equilibrium quantity of dollars on the
foreign exchange market to ____________.
a. depreciate, fall
b. appreciate, fall
c. depreciate, rise
#. appreciate, rise
e. appreciate, remain constant
15. According to the theory of purchasing power parity, if a basket of
goods in the United Kingdom cost £500 while an identical basket in
the U.S. cost $1,000, then the exchange rate between pounds and
dollars will be
a. 2.0 pounds per dollar.
b. 1.5 pounds per dollar.
c. 1.0 pounds per dollar.
d. 0.75 pounds per dollar.
#. 0.5 pounds per dollar.
16. If the price of a computer is 1,000 dollars in the U.S. and 4,000 marks
in Germany and the exchange rate is 2 marks per dollar, then the real
exchange rate for computers is
a. 0.25.
#. 0.5.
c. 0.75.
d. 1.0.
e. 2.0.
17. A situation in which there is no trade between nations is known as
a. dumping.
b. absolute advantage.
c. an import quota.
#. autarky.
e. an infant industry.
18. Suppose the government is considering imposing either a tariff or a
quota on an imported good. If they use a quota, they will distribute the
import licenses randomly to importers. With a quota the
_______________ will make money, and under a tariff the
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____________ will make money.
a. government, government
b. government, importers
#. importers, government
d. importers, importers
e. Neither the government nor the importers will make money.
19. A tax on an imported good is called
a. an import ban.
b. an import quota.
c. a voluntary export restraint.
d. the terms of trade.
#. a tariff.
20. Free trade will
a. harm workers who make goods that are imported, benefit workers
who make goods that are exported, and harm the nation as a whole.
b. benefit workers who make goods that are imported, harm workers
who make goods that are exported, and harm the nation as a whole.
#. harm workers who make goods that are imported, benefit workers
who make goods that are exported, and benefit the nation as a whole.
d. benefit workers who make goods that are imported, harm workers
who make goods that are exported, and benefit the nation as a whole.
e. harm workers who make goods that are imported, harm workers
who make goods that are exported, and harm the nation as a whole.
21. If two nations specialize in the production of the good in which they
have a comparative advantage and then participate in free trade, then
for each nation
a. the consumption possibilities curve will be equal to the production
possibilities curve.
#. the consumption possibilities curve will be outside of the production
possibilities curve.
c. the consumption possibilities curve will be inside the production
possibilities curve.
d. the consumption possibilities curve may be inside or outside the
production possibilities curve.
e. None of the above are true.
22. The Advertiser's Dilemma refers to which of the following?
a. Firms cannot tell what will happen to their sales if they advertise.
#. If all firms advertise, the effects cancel out and profits fall due to the
higher costs.
c. If a firm advertises, it should choose the optimal level of advertising.
d. It is very expensive to advertise during television events that have
many viewers.
e. Advertising is very costly and does not benefit society.
23. Which of the following conditions must be met to ensure that a firm has
the ability to price discriminate?
a. perfect competition
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b. the ability to differentiate between consumers
c. market power
d. consumers unable to resell the product
#. all but (a)
24. A benefit to society from advertising is which of the following?
#. Consumers may be able to make more informed decisions.
b. Consumers like products better because they have a certain image
or aura.
c. Firms are able to set higher prices because consumers have a
more inelastic demand for their products.
d. Firms hire many employees to write advertising campaigns.
e. None of the above is a benefit from advertising.
25. Which of the following is not an example of price discrimination?
a. a ballpark that charges lower ticket prices for children under 5 years
old
b. a discount offered to students on the purchase of a new computer
#. a store-wide sale at your local department store
d. a dentist who offers a range of prices based upon his patients'
income
e. an "early bird" special at a restaurant
26. How much should a firm advertise?
a. Until an additional advertisement gets no more customers.
b. Until the marginal benefit of an additional advertisement
decreases.
#. Until the marginal benefit of the last advertisement equals the
marginal cost.
d. Until the marginal cost of an additional advertisement increases.
e. Until total revenues from advertising equal total costs of
advertising.
27. Which of the following is NOT a true statement about price
discrimination?
a. Price discrimination increases firm profits.
b. Price discrimination benefits some consumers.
c. The price discriminating firm will charge a higher price to the group
with more inelastic demand.
d. Price discrimination harms some consumers.
#. All of the above statements are true.
28. What two words best complete the following sentence?
The firm’s short-run supply curve shows the relationship
between________ and ________.
#. price, quantity supplied
b. average cost, variable cost
c. quantity demanded, fixed costs
d. consumer surplus, producer surplus
e. price, variable cost
29. A cost a firm has already paid or has already agreed to pay is a/an
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a. implicit cost.
#. sunk cost.
c. explicit cost.
d. variable cost.
e. shut-down cost.
30. In the short-run, an increase in demand results in a(n)
#. greater increase in the equilibrium price than in the long-run.
b. smaller increase in the equilibrium price than in the long-run.
c. increase in the equilibrium price equal to that in the long-run.
d. greater increase in the equilibrium quantity than in the long-run.
e. increase in the equilibrium quantity equal to that in the long-run.
31. Which of the following is a characteristic of a decreasing-cost industry?
a. constant prices
b. increasing prices
#. negatively sloped supply curve
d. increasing average cost of production
e. constant average cost of production
32. What was the direct effect on the ice market after electricity went out
during Hurricane Andrew?
a. Prices decreased per bag.
#. The demand for ice increased.
c. There was no direct effect.
d. The supply curve became steeper in long run.
e. The equilibrium quantity decreased.
33. During World War II, the Allied powers contracted with Spain to
purchase Spain's entire output of wolfram, a crucial ore in the
production of weapons. This prevented the Axis powers from acquiring
the ore. What do you think happened to the price of wolfram during
World War II?
a. stayed the same
b. decreased slightly
c. decreased largely
#. increased
e. fluctuated up and down
34. If the government regulates a natural monopoly through a policy of
average-cost pricing, we would expect that, compared to an
unregulated natural monopoly,
a. the market would be efficient.
b. prices would be lower and output would be lower.
c. prices would be higher and output would be higher.
d. prices would be higher and output would be lower.
#. prices would be lower and output would be higher.
35. As compared to perfect competition, monopolies
#. reduce consumer surplus, create positive economic profits, and
generate deadweight loss.
b. increase consumer surplus, create positive economic profits, and
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generate deadweight loss.
c. reduce consumer surplus, create negative economic profits, and
generate deadweight loss.
d. reduce consumer surplus, create positive economic profits, and
generate deadweight gains.
e. increase consumer surplus, create negative economic profits, and
generate deadweight loss.
36. A monopolist will choose a level of output that sets
a. the price equal to the marginal cost.
b. marginal cost greater than marginal revenue.
c. marginal cost equal to the market demand curve.
#. marginal revenue equal to marginal cost.
e. marginal revenue greater than marginal cost.
37. Large economies of scale, such as those involved in the production of
electricity, result in a(n)
a. upward sloping long-run average cost curve.
b. flat long-run average cost curve.
#. downward sloping long-run average cost curve.
d. upward sloping demand curve.
e. a flat marginal revenue curve.
38. Under a policy of average-cost pricing,
#. the government picks the point on the demand curve where the price is equal to
the average cost.
b. the government picks a point on the demand curve where the price
equals marginal cost.
c. the government picks a point on the demand curve where the price
is less than the average cost.
d. the government picks a price such that marginal revenue is equal to
marginal cost.
e. the government sets the price equal to consumers' marginal
willingness to pay.
39. A natural monopoly occurs when
#. the entry of a second firm would make both firms unprofitable.
b. the entry of a second firm would make both firms more profitable.
c. the exit of a second firm would make the first firm unprofitable.
d. the exit of the first firm would make the second firm unprofitable.
e. any of the above are true.
40. Often a firm will spend money to lobby government officials to allow the
firm to act as a monopolist. This process is known as
a. deadweight loss.
b. corruption.
c. the creation of a natural monopoly.
d. the marginal principle.
#. rent seeking.
Part II. ( 24 points) Fill in the blanks using the vocabulary below.
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1. Complete the statement with average or marginal. The short-run marginal cost curve
intersects the short-run average cost curve at the minimum point of the
_average______ cost curve.
2. Complete the statement: A perfectly competitive firm will produce the quantity of
output at which __price________ equals _marginal_____________ _cost_______.
3. Complete the statement with operate or shut down. Consider a firm with total revenue
of $500, total cost of $700, and variable cost of $ 400. The firm should
__operate___________________ its production facility.
4. Complete the statement. A firm that is losing money should continue to operate if the
market price exceeds __average________ __variable________ _cost_____.
5. Complete the statement. The firm’s short-run supply curve shows the relationship
between ___price_________________ and _quantity_________________.
6. Complete the statement with a number. At a price of $15 per CD, a firm sells 80 CD’s
per day. If the slope of the demand curve is $0.10 per CD, marginal revenue is
_____$7____________.
7. Complete the statement with increase or decrease. Suppose a firm starts with a single
price and then switches to a price-discrimination scheme. The firm will
__increase___________ the price for the group of consumers with relatively inelastic
demand and __decrease______ the price for the group with relatively elastic demand.
8. Complete the statement with excess supply or excess demand. A tax on chairs will
initially cause _excess____ ___demand_______ in the market for chairs and
__excess____ _supply_______ in the markets for the inputs used to make chairs.
9. Complete the statement with right or left. A tax on a particular good shifts the market
supply curve to the ___left______________.
10. A natural monopolist picks the quantity of output at which _marginal_____________
__revenue_____________ equals _marginal______________ _cost___________.
11. Complete the statement with above or below. A natural monopoly occurs when the
long-run average cost curve lies entirely __above____________ the demand curve of
the typical firm in a two-firm market.
12. Complete the statement with above or below. The equilibrium price under an import
quota is ___below_____________ the price that occurs with an import ban and
__above___________ the price that occurs with free trade.
Vocabulary
Above
Along
Average
Average variable cost
Below
Constant
Cost
Decrease
Downward
Excess demand
excess supply
fallen
increase
left
marginal
marginal cost
marginal revenue
operate
price
right
risen
quantity
shift
shut down
total
$-7
$-5
$0
$5
$7
$15
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Part III. (45 points) Answer all three questions.
1. Suppose, in the future, countries in the European Monetary Union (EMU) lose
confidence in the attractiveness of the United States as a haven for their investments,
perhaps in part because US interest rates decline dramatically. Suppose this causes a
repatriation of money to EMU countries, and fewer Euros are supplied to the US and to
the foreign exchange
Demand for Euros
$ price of the
Euro
Demand for Euros
$ price of the
Euro
$/Euro
$/Euro
Supply of Euros
Quantity of Euros
Figure 1A: Before Capital Flight
Quantity of Euros
Figure1B: After Capital Flight
a. After capital flight, show the shift in the supply curve of Euros in Figure 1B.
b. Does the equilibrium quantity of Euros increase or
decrease?__decrease____________
c. Does the Euro appreciate or depreciate? __appreciate_______________
d. Illustrate the new exchange rate in Figure 1B.
e. If the U S Federal Reserve intervenes in the foreign exchange market using its
reserves of foreign exchange, which curve will shift, the demand curve for Euros
or the supply curve for Euros? __supply____________
2. Currently, for the third quarter of 2000, the economy is at full employment at $10.05
trillion(T) for GDP. Net exports, X-M, are in deficit at $-0.39 T and government
expenditures, G, are $1.75 T. So together, government expenditures and net exports are $
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1.36 T. Note that the government is in surplus, i.e. expenditures exceed receipts from
taxes etc., so the government is absorbing purchasing power rather than generating it.
For the sake of simplicity, assume government expenditures and net exports do
not vary with national income, as illustrated in Figure 2.
In thinking about the prospects about a recession in 2001, the expenditure
emphasis is on the private domestic economy: consumers and business firms.
GDP,
Expenditure
Components
In $ Trillions
$10.05 T
Total GDP
Line
Total GDP Line if C + I fall
G + (X-M) = $ 1.36 T
G + (X-M) < $ 1.36 T
450
National Income
Full Employment
National Income, $10.05T
Figure 2: The Keynesian Cross and GDP Expenditure = National Income
Equilibrium
a. Together, how many trillions must consumption and investment total at the full
employment level of national income? _____$8.69 T______________
b. Draw in the total expenditure (or GDP) line in Fig. 2, which increases with
national income, since consumption increases with national income, showing
its intersection with the GDP= National Income line at $10.05 T.
c. Suppose consumer confidence continues to weaken, and consumption and
investment expenditure fall. Illustrate the consequent shift in the total
expenditure (or GDP) line in Figure 2.
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d. If the balance of trade deficit grows worse, and fiscal policy and government
expenditure do not change, illustrate the effect on the G + (X-M) line in
Figure 2.
e. If all of these unfortunate things come to pass, what will happen to the
unemployment rate? __it ___
___will_______
___rise_____________.
3. The technology for electricity generation has increasing returns to scale and therefore a
downward sloping long-run average total cost (LATC) curve, as illustrated in Figure 3.
These are the conditions for a natural monopoly.
Price per
Kilowatt Hour
Market Demand
pM
LATC
pR
Long Run Marginal Cost
qM
qR
Marginal Revenue
Billions of Kilowatt Hours,q
Figure 3: Market Demand and Long Run costs per Kilowatt Hour for Electricity
a. If the government deregulates electricity, as has happened in California, and
the monopolist is free to determine output and price, show in Fig. 3 the price,
pM, and the output, qM, the monopolist will choose.
b. Under government control of electricity, an efficient use of resources would
result from setting price equal to long run marginal cost (LMC) where LMC
crosses the demand curve. Why isn’t this a feasible price for the government
to set? The low price would benefit the consumer. _monopolist_________
_makes_____
_a_
__loss___________.
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c. With government regulation of the electricity market, using average cost
pricing, the government could set long-run average total cost to price where
LATC crosses the demand curve. Illustrate this regulated price, pR, and
corresponding quantity, qR, in Fig. 3. Comparing, deregulation, with the
monopolist free to maximize profits, to regulation, is the consumer better off
or worse off? _better________
___off_________( with regulation).
IV. (60 points) Answer all three questions.
1. Suppose the US economy goes into recession next year and the balance of trade
deficit continues to worsen.
a. Explain the options for Federal Reserve monetary policy.
b. What would the Federal Reserve’s domestic policy objective(s) be?
c. What would the Federal Reserve’s objective be with regard to the capital
account, international money flows, and the foreign exchange value of the
dollar?
d. What might limit the Fed in achieving both its domestic and international
policy objectives/
2. On November 28, 2000 there was a story in the business section of the Los Angeles
Times concerning Microsoft’s appeal of Judge Penfield Jackson’s order to break up
the company.
a. What are the economic issues in this anti-trust case? What is the public
interest that justifies involvement of the U S Department of Justice and goes
beyond the possible damages suffered by competitors? Why not just let
Microsoft and its competitors fight it out with lawsuits?
b. Why can a monopolistic market structure be against the public interest?
c. Could Microsoft have mounted any defense based on economic arguments
about its positive contributions to consumers and the public interest?
3. Median household income, measured in constant purchasing power 1999 dollars, rose
from $32, 800 in 1967 to $40,800 in 1999. Yet not all households gained equally. The
poorest sixty percent of American households saw their share of the American pie
shrink during this period, from 32.1% in 1967 to 27.5% in 1999.
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a. Who gains and who loses in America in relative terms?
b. What demographic and economic attributes characterize the “winners”?
c. What demographic and economic attributes characterize the “losers”?
d. How important is “human capital’ in distinguishing between the “winners”
and the “losers”?
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1. Outline
a. The Fed would consider lowering interest rates.
b. The domestic policy objectives would be (1) full employment, (2) price
stability, and (3) moderate interest rates
c. The Federal reserve would like to keep short run interest rates high enough to
maintain attractive interest rate differentials and attract foreign capital.
d. Two main sets of objectives, one domestic and one foreign, and only one
instrument, the Federal Funds rate. The Fed can not simultaneously lower and
raise short term interest rates.
To prevent recession or stimulate a recovery, the Federal reserve would lower
short term interest rates to encourage consumer spending and investment by firms. The
domestic policy objectives of the Fed would be full employment, price stability, and
moderate interest rates.
The Fed is faced with a difficulty on the international side of policy issues since
the US is running a large trade deficit and consequently needs an offsetting surplus on
capital account. To attract foreign capital, US interest rates have to be relatively attractive
and if the Fed lowers short term interest rates too far, it could risk capital flight.
2. Outline
a. The US department of Justice had to show that Microsoft engaged in
monopolistic behavior, restraining trade and competition, and furthermore
injured consumers. It is the latter which justifies the government pursuing an
anti-trust case.
b. Monopolists use their power to restrict output and raise price, injuring
consumers, diminishing consumer surplus, and causing inefficiency.
c. Microsoft could have argued that it used much of its profit to invest in
technology and new products, benefiting consumers in the long run. Instead,
Microsoft concentrated on arguing that it had not behaved like a monopolist.
The government needed to show that Microsoft’s behavior in restraint of
competition not only damaged competitors but also injured consumers, and thereby was a
threat to the public interest.
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A monopolist, in seeking profit, reduces output and charges consumers a higher
price, thereby shifting consumer surplus to the monopoly profit. Furthermore, in the
process, this inefficient production causes an additional loss of consumer welfare not
captured by monopoly profit, but lost to everyone.
Microsoft could have used a defense based on Schumpeterian economics, arguing
that the firm plowed profits back into research and development, creating new products
and new technology, along run benefit to consumers and the economy. I tcould have also
argued that its high market share was a due to economies of scale in production,
marketing, and consumer use of a single operating system, somewhat analogous to the
advantages of having a single utility.
3. Outline
a. The poorly educated, unskilled, and low ability individuals lose and the well
educated, highly skilled, and high ability individuals gain.
b. The winners have personal and economic attributes of ability, education, and
skill.
c. The losers tend to be children, especially in households headed by part-time
female workers who may have low ability, low skill, and low levels of
education.
d. Human capital, which increases with ability, education, and experience,
distinguishes the poor from the affluent.
Since the 1960’s, the demand for able, well educated and experinced workers has
outstripped supply. In contrast, the demand for less able, poorly educated, and
inexperienced workers has fallen. The only exception to this decline in demand may be
the latter nineties, because of the exceptional prosperity in this period.
The poor are often concentrated in rural pockets, among part-time workers, and in
families headed by female heads of household who can not simultaneously work full time
and care for the children.