ECON 202-504 Fall 2012 Final Exam Instructor: Jinkook Lee
Name: UIN: Major:
Figure 1
1) Refer to Figure 1. Sergio Vignetto raises cattle and llamas on his land. A portion of his land is more suitable for raising cattle, and the other portion is better suited for raising llamas. Which of the graphs in Figure 1 represent his production possibilities frontier?
A) Graph A
B) Graph B
C) Graph C
D) either Graph A or Graph C
E) either Graph B or Graph C
Table 1
China
One Digital
Camera
100 hours
Wheat (per pound)
4 hours
South Korea 60 hours 3 hours
Table 1 shows the number of labor hours required to produce a digital camera and a pound of wheat in China and South Korea.
2) Refer to Table 1. If the two countries specialize and trade, who should export wheat?
A) There is no basis for trade between the two countries.
B) China
C) South Korea
D) They should both be exporting wheat.

Figure 2
3) Refer to Figure 2.
The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D
1 and
S
1 (point
A ). If the price of oranges, a substitute for apples, decreases and the wages of apple workers increase, how will the equilibrium point change?
A) The equilibrium point will move from A to E .
B) The equilibrium point will move from A to B.
C) The equilibrium point will move from A to C .
D) The equilibrium will first move from A to B , then return to A .
4) Refer to Figure 2.
The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D 2 and S 2 (point E ). Which of the following changes would cause the equilibrium to change to point A?
A) A positive change in the technology used to produce apples and decrease in the price of oranges, a substitute for apples.
B) An increase in the wages of apple workers and a decrease in the price of oranges, a substitute for apples.
C) An increase in the number of apple producers and a decrease in the number of apple trees as a result of disease.
D) A decrease in the wages of apple workers and an increase in the price of oranges, a substitute for apples.
5) Which of the following statements is true?
A) An increase in demand causes a change in equilibrium price; the change in price does not cause a further change in demand or supply.
B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in demand.
C) If both demand and supply increase there must be an increase in equilibrium price; equilibrium quantity may either increase or decrease.
D) If demand decreases and supply increases one cannot determine if equilibrium price will increase or decrease without knowing which change is greater.

Table 2
The Waco
Kid's
Cowboy Hats
1st hat
Marginal
Cost
(dollars)
$24
2nd hat
3rd hat
4th hat
30
38
46
6) Refer to Table 2. The table above lists the marginal cost of cowboy hats by The Waco Kid, a firm that specializes in producing western wear. If the market price of The Waco Kid's cowboy hats is $40
A) The Waco Kid will produce four hats.
B) producer surplus from the first hat is $40.
C) producer surplus will equal $28.
D) there will be a surplus; as a result, the price will fall to $24.
Figure 3
Figure 3 shows the market for apartments in Springfield. Recently, the government imposed a rent ceiling of $1,000 per month.
7) Refer to Figure 3. What is the value of consumer surplus after the imposition of the ceiling?
A) $120,000
B) $230,000
C) $270,000
D) $430,000
8) Refer to Figure 3.
What is the value of the portion of producer surplus transferred to consumers as a result of the rent ceiling?
A) $40,000
B) $100,000
C) $125,000
D) $140,000

Figure 4
9) Refer to Figure 4. Suppose the market is initially in equilibrium at price P 0 and then the government imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax?
A) The consumer will bear a smaller share of the tax burden if the demand curve is D 0.
B) The consumer's share of the tax burden is the same whether the demand curve is D 0 or D 1 .
C) The consumer will bear a smaller share of the tax burden if the demand curve is D 1.
D) The consumer will bear the entire burden of the tax if the demand curve is D 1 and the producer will bear the entire burden of the tax if the demand curve is D 0.
10) If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set
A) equal to the marginal external cost at the economically efficient level of pollution.
B) equal to the marginal private cost of production at the economically efficient level of pollution.
C) equal to the amount of the deadweight loss created in the absence of a pollution tax.
D) at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product.

Figure 5
Figure 5 shows a market with a negative externality.
11) Refer to Figure 5.
The deadweight loss due to the externality is represented by the area
A) abc.
B) abf.
C) abd.
D) ade.
Figure 6
12) Refer to Figure 6. In the absence of any government intervention, the private market
A) under produces by Q o - Q m units.
B) over produces by Q o
- Q m units.
C) over produces by Q n - Q m units.
D) under produces by Q n - Q m units.
13) The Coase theorem states that
A) government intervention is always needed if externalities are present.
B) assigning property rights is the only thing the government should do in a market economy.
C) if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.
D) a free market equilibrium is the best solution to address externalities.

14) At a price of $100, Beachside Canoe Rentals rented 11 canoes. When it increased its rental price to $125, 9 canoes were rented. Calculate the absolute value of the price elasticity of demand for canoe rentals, using the midpoint formula.
A) 2
B) 1.25
C) 0.9
D) 0.75
15) Studies show that the income elasticity of demand for wine is approximately five. What does this mean?
A) A one percent decrease in the price of wine leads to a five percent increase in wine consumption.
B) A one percent increase in income leads to a five percent increase in wine consumption.
C) A five percent increase in income leads to a one percent increase in wine consumption.
D) Wine is a relatively elastic good.
16) The demand for most farm products is relatively inelastic. All else constant, what is the effect on farm revenues as a result of the introduction of new and better farm equipment which increases in productivity?
A) Farm revenues increase.
B) Farm revenues decrease.
C) Farm revenues remain constant because consumers will not increase their consumption of farm products by much.
D) Farm revenues could increase or decrease depending on the cost of this new equipment.
17) Linesha, a college student working part-time receives a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information,
A) DVDs and Blu-ray discs are substitutes.
B) Blu-ray discs are normal goods and DVDs are inferior goods.
C) DVDs and Blu-ray discs are normal goods.
D) the cross-price elasticity between DVDs and Blu-ray discs is negative.
18) The law of diminishing marginal utility states that
A) eventually total utility falls as more of a good is consumed, other things constant.
B) the extra satisfaction from consuming a good decreases as more of a good is consumed, other things constant.
C) the extra satisfaction from consuming a good increases slowly as more of a good is consumed, other things constant.
D) when the extra satisfaction from consuming a good becomes negative, total utility starts falling, other things constant.

19) Total utility
A) cannot decrease as a person consumes more and more of a good.
B) has a constant rate of increase as a person consumes more and more of a good.
C) is equal to the sum of the marginal utilities of all units consumed.
D) is negative when marginal utility is declining.
Table 3
Quantity of
Pita Wraps
1
Total Utility
60
102
Quantity of
Bubble Tea
1
Total Utility
40
70 2
3
4
5
6
7
132
144
144
138
128
2
3
4
5
6
7
91
106
112
115
115
Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is $6 and the price of a glass of Bubble Tea is $3. Table 3 shows his total utility from different quantities of the two items.
20) Refer to Table 3.
What is Keegan's optimal consumption bundle?
A) 3 pita wraps and 3 bubble teas
B) 3 pita wraps and 4 bubble teas
C) 4 pita wraps and 2 bubble teas
D) 5 pita wraps and 0 bubble teas
21) The demand curve for canned peas is downward sloping. If the price of canned peas, an inferior good, rises,
A) the income effect which causes you to reduce your canned peas purchases is smaller than the substitution effect which causes you to increase your purchases, resulting in a net increase in quantity demanded.
B) the income effect which causes you to increase your canned peas purchases is smaller than the substitution effect which causes you to reduce your purchases, resulting in a net decrease in quantity demanded.
C) both the income and substitution effects reinforce each other to decrease the quantity demanded.
D) the income and substitution effects offset each other but the price effect of an inferior good leads you to buy more canned peas.

Figure 8
22) Refer to Figure 8.
When the price of hoagies increases from $5.00 to $5.75, quantity demanded decreases from Q 1 to Q 0. This change in quantity demanded is due to
A) the price and output effects.
B) the income and substitution effects.
C) the fact that marginal willingness to pay falls.
D) the law of diminishing marginal utility.
23) Which of the following is an implicit cost of production?
A) the loss in the value of capital equipment due to wear and tear
B) the salary you pay yourself for running your business
C) the utility bill paid to water, electricity, and natural gas companies
D) the interest you pay your mother for the money she loaned you to start your business

Figure 9
24) Refer to Figure 9.
The average product of the 4th worker
A) is 68.
B) is 17.
C) is 11.
D) cannot be determined.
25) If another worker adds 9 units of output to a group of workers who had an average product of
7 units, then the average product of labor
A) will remain the same.
B) will increase.
C) will decrease.
D) and what will happen to it cannot be determined.
Figure 10

26) Refer to Figure 10. Curve G approaches curve F because
A) marginal cost is above average variable costs.
B) average fixed cost falls as output rises.
C) fixed cost falls as capacity rises.
D) total cost falls as more and more is produced.
27) Assume the market for organic produce sold at farmers' markets is perfectly competitive. All else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run?
A) The equilibrium price is likely to increase and profits are likely to remain unchanged.
B) The equilibrium price is likely to remain unchanged and profits are likely to increase.
C) The equilibrium price is likely to decrease and profits are likely to decrease.
D) The equilibrium price is likely to increase and profits are likely to increase.
28) In perfect competition
A) the market demand curve and the individual's demand are identical.
B) the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic.
C) the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic.
D) the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
29) For a perfectly competitive firm, which of the following is not true at profit maximization?
A) Market price is greater than marginal cost.
B) Marginal revenue equals marginal cost.
C) Total revenue minus total cost is maximized.
D) Price equals marginal cost.
Figure 10

Figure 10 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
30) Refer to Figure 10.
The firm's manager suggests that the firm's goal should be to maximize average profit. In that case, what is the output level and what is the average profit that will achieve the manager's goal?
A) Q = 1,350 units, average profit =$5
B) Q = 1,100 units, average profit =$6
C) Q = 1,350 units, average profit =$9
D) Q = 1,800 units, average profit =$20
31) Unlike a perfectly competitive firm, for a monopolistically competitive firm
A) price ≠ marginal cost for all output levels.
B) price ≠ marginal revenue for all output levels.
C) price ≠ average revenue for all output levels.
D) marginal revenue = marginal cost at the profit-maximizing output.
Table 4
Quantity
(cases)
1
2
3
4
Price
(dollars)
$75
70
65
60
Total Revenue
(dollars)
$75
140
195
240
Total Cost
(dollars)
$60
85
105
115
5
6
7
55
50
45
275
300
315
130
155
190
8
9
40
35
320
315
230
280
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On.
Table 13-2 shows the firm's demand and cost schedules.
32) Refer to Table 4. What is the output ( Q ) that maximizes profit and what is the price ( P ) charged?
A) P =$55; Q =5 cases
B) P =$50; Q =6 cases
C) P =$45; Q =7 cases
D) P =$40; Q =8 cases

33) Refer to Table 4. What is likely to happen to the product's price in the long run?
A) It will fall.
B) It will increase.
C) It will remain constant.
D) This cannot be determined without information on its long-run demand curve.
Figure 11
34) Refer to Figure 11.
What is the area that represents the total fixed cost of production?
A) 0 P 1 aQ a
B) P 0 adP 3
C) P 1 bdP 3
D) That information cannot be determined from the graph.
35) For a natural monopoly to exist,
A) a firm must continually buy up its rivals.
B) a firm's long-run average cost curve must exhibit diseconomies of scale beyond the economically efficient output level.
C) a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of market demand.
D) a firm must have a government-imposed barrier.
Table 5
Price per Unit
Quantity
Demanded
(units)
Total Cost of
Production
(dollars)
$85
80
75
70
65
60
55
10
11
12
13
14
15
16
$530
540
550
560
575
595
625

A monopoly producer of foreign language translation software faces a demand and cost structure as given in Table 5.
36) Refer to Table 5.
What is the firm's profit-maximizing output and what is the price charged to sell this output?
A) P = $85; Q = 10
B) P = $80; Q = 11
C) P = $70; Q = 13
D) P = $65; Q = 14
Figure 12
Figure 12 shows the demand and cost curves for a monopolist.
37) Refer to Figure 12. What is the difference between the monopoly output and the perfectly competitive output?
A) 140 units
B) 240 units
C) 340 units
D) 560 units
38) Refer to Figure 12.
What is likely to happen to this monopoly in the long run?
A) New firms will enter the market to eliminate its profits.
B) It will expand its output to take advantage of economies of scale so as to further increase its profit.
C) As long as there are entry barriers, this firm will continue to enjoy economic profits.
D) It will be regulated by the government because of its excess profits.

Figure 13
39) Refer to Figure 13. Compared to a perfectly competitive market, consumer surplus is lower in a monopoly by an amount equal to the
A) area FHE .
B) area FGE .
C) area P 1 P 2 EF .
D) area P 1 P 2 GF .

Figure 14
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the virtual monopoly that Time Warner Cable had in most local communities in the region. Figure 14 shows the cable television market in Upstate New York.
40) Refer to Figure 14.
Suppose the local government imposes a $2.50 per month tax on cable companies. What happens to the price charged by the cable company following the imposition of this tax?
A) The price rises from P M to (P M + $2.50) .
B) The price rises from P M but it increases by an amount less than $2.50.
C) The price rises from P M but it increases by an amount greater than $2.50 to reflect the monopoly's markup.
D) The price remains at P M.

Name: UIN: Major:

Tom receives an allowance of $20 (per week). He spends all his allowance on pizza and Coke.
Initially, the price of pizza is $2 (per slice), and the price of Coke is $2 (per can). For Tom, pizza is inferior good and demand curve for pizza is downward sloping. Coke is normal good.
Now, suppose that the price of pizza rises to $4 (per slice).

Draw his initial, hypothetical, and new budget constraints. (1pt.)

Derive his initial and new optimal consumption bundles of pizza and Coke by using indifference curves. (1pt.)

Specify income effect and substitution effect. (1pt.)


Figure 13
Refer to Figure 13 to answer the following questions. a. Suppose the monopoly is regulated. If the regulatory agency wants to achieve economic efficiency, what price (P) and quantity (Q) should it require the monopoly to charge and produce? b. Will the regulated monopoly make a profit if it charges the price that will achieve economic efficiency? Briefly explain.