Practice Final Paper - Intermediate Theory - Price and Distribution | ECON 410, Exams of Microeconomics

Download Practice Final Paper - Intermediate Theory - Price and Distribution | ECON 410 and more Exams Microeconomics in PDF only on Docsity! Econ 410, Fall 2007 Lauren Raymer Practice Final Name___________________________________ PID___________________________________ Choose the one alternative that best completes the statement or answers the question. 1) A vertical demand curve is 1) A) completely inelastic. B) infinitely elastic. C) highly (but not completely) inelastic. D) highly (but not infinitely) elastic. 2) Which of the following represents the price elasticity of demand? 2) A) Q P P Q B) QP × P Q C) Q P + P Q D) Q P - P Q 3) Gary Franklin is a movie critic. He invented the Franklin Scale with which he rates movies from 1 to 10 (10 being best). When asked about his scale, Mr. Franklin explained "that it is a subjective measure of movie quality. A movie with a ranking of 10 is not necessarily 10 times better than a movie with a ranking of 1, but it is better. A movie with a ranking of 5 is better than a movie with a ranking of 1, but is not as good a movie with a ranking of 10. That's all it really tells you." Based on Mr. Franklin's description, his scale is: 3) A) cardinal but not ordinal. B) ordinal but not cardinal. C) an objective standard to judge movies. D) neither cardinal nor ordinal. 4) Which of the following is true about the indifference curve where one commodity (such as pollution) is "bad"? 4) A) It is horizontal. B) It is vertical. C) It has a negative slope. D) It has a positive slope. 5) If indifference curves are concave to the origin, which assumption on preferences is violated? 5) A) Transitivity of preferences. B) Diminishing marginal rates of substitution. C) More is preferred to less. D) Completeness. 6) Consider the following three market baskets: Food Clothing A 15 18 B 13 19 C 14 17 If baskets B and C are on the same indifference curve, and if preferences satisfy all four of the usual assumptions, then: 6) A) A is preferred to C. B) A is preferred to B. C) both A and B answer choices are correct. D) none of the above. 1 7) A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis? 7) A) -7/100. B) -15/7. C) -7/15. D) 7/15. 8) An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket? 8) A) MRSxy = Px/Py. B) MRSxy is at a maximum. C) Px/Py = money income. D) MRSxy = money income. E) all of the above. 9) If a consumer must spend her entire income on some combination of two commodities and chooses to spend it all on just one of the commodities then: 9) A) the other commodity must have zero marginal utility. B) the two commodities must be perfect substitutes. C) the other commodity generates less utility per dollar spent on the good. D) the other commodity is an economic bad. 10) An individual demand curve can be derived from the curve. 10) A) income-consumption B) price-consumption C) price-income D) income-substitution E) Engel curve 11) The income-consumption curve 11) A) shows the utility-maximizing quantity of some good (on the horizontal axis) as a function of income (on the vertical axis). B) illustrates the combinations of incomes needed with various levels of consumption of a good. C) is another name for income-demand curve. D) illustrates the utility-maximizing combinations of goods associated with every income level. 12) If an Engel curve has a positive slope 12) A) as the price of the good on the horizontal axis increases, more of both goods in consumed. B) as the price of the good on the vertical axis increases, more of the good on the horizontal axis is consumed. C) the good on the horizontal axis is normal D) both goods are normal. 13) Which of the following describes the Giffen good case? When the price of the good 13) A) rises, the income effect is opposite to and greater than the substitution effect, and consumption falls. B) falls, the income effect is in the opposite direction to the substitution effect, and consumption falls. C) falls, the income effect is in the same direction as the substitution effect, and consumption rises. D) falls, the income effect is in opposite direction to the substitution effect and consumption rises. E) Both A and D are correct. 2 27) If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called: 27) A) the total product. B) the average product. C) the marginal product. D) an isoquant. E) none of the above. 28) Use the following statements to answer this question. I. The numerical labels attached to indifference curves are meaningful only in an ordinal way. II. The numerical labels attached to isoquants are meaningful only in an ordinal way. 28) A) I is false, and II is true. B) I is true, and II is false. C) both I and II are false. D) both I and II are true. 29) Two isoquants, which represent different output levels but are derived from the same production function, cannot cross because 29) A) isoquants represent different utility levels B) additional inputs will not be used by profit maximizing firms if those inputs decrease output C) isoquants are downward sloping D) this would violate a transitivity condition E) both B and D are true 30) Use the following two statements to answer this question: I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output. 30) A) I is true, and II is false. B) Both I and II are false. C) Both I and II are true. D) I is false, and II is true. 31) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C = L0.5M0.75. This production function exhibits 31) A) increasing returns to scale for all output levels B) constant returns to scale for all output levels C) no clear pattern of returns to scale D) decreasing returns to scale for all output levels 5 Figure 6.2 32) Refer to Figure 6.2. The situation pictured is one of 32) A) decreasing returns to scale, because doubling inputs results in less than double the amount of output. B) constant returns to scale, because the line through the origin is linear. C) decreasing returns to scale, because the isoquants are convex. D) increasing returns to scale, because the isoquants are convex. E) increasing returns to scale, because doubling inputs results in more than double the amount of output. 33) In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land? 33) A) No. B) Yes. C) It depends on what the rate of inflation was between 1985 and 1992. D) It depends on what the rate of interest was. 34) In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and are therefore an example of 34) A) a variable cost. B) a fixed cost. C) a sunk cost. D) an opportunity cost. E) an implicit cost. 6 35) Which of the following statements correctly uses the concept of opportunity cost in decision making? I. "Because my secretary's time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be." II. "Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be." 35) A) I is true, and II is false. B) I and II are both true. C) I is false, and II is true. D) I and II are both false. 36) Carolyn knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information? 36) A) average fixed cost B) total cost C) fixed cost D) variable cost E) Carolyn can determine all of the above costs given the information provided. 37) Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II. The marginal cost of a given level of output is the slope of the line that is tangent to the variable cost curve at that level of output. 37) A) Both I and II are true. B) Both I and II are false. C) I is true, and II is false. D) I is false, and II is true. 38) An isocost line reveals the 38) A) input combinations that can be purchased with a given outlay of funds. B) output combinations that can be produced with a given outlay of funds. C) costs of inputs needed to produce along an expansion path. D) costs of inputs needed to produce along an isoquant. 39) Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be 39) A) 25/20 or 1/4. B) 500. C) -4/5. D) 25/500. 40) Which of the following is NOT an expression for the cost minimizing combination of inputs? 40) A) MPL/MPK = w/r. B) MRTS = MPL /MPK. C) MPL/w = MPK/r. D) MRTS = w/r. E) None of these. 41) A firm's short-run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm's returns to scale? 41) A) The firm experiences increasing, constant, and decreasing returns in that order. B) The short-run average cost curve reveals nothing regarding returns to scale. C) The firm experiences increasing returns to scale. D) The firm experiences first decreasing, then increasing returns to scale. 7 55) When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus 55) A) are negative. B) are positive, and not offset by the cost to consumers and the government. C) are positive, but more than offset by the cost to consumers and the government. D) and consumer surplus are both positive. 56) When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, the impact on total welfare is the 56) A) change in consumer surplus + the change in producer surplus - the cost to government. B) change in consumer surplus + the change in producer surplus + the cost to government. C) change in consumer surplus + the change in producer surplus. D) change in consumer surplus. Figure 9.1 57) Refer to Figure 9.1. If the government establishes a price ceiling of $20, the resulting deadweight loss will be 57) A) $30. B) $600. C) $300. D) $20. E) $0. 58) Refer to Figure 9.1. Suppose the market is currently in equilibrium. If the government establishes a price ceiling of $20, producer surplus will 58) A) fall by $200. B) rise by $300. C) fall by $300. D) remain the same. E) rise by $200. 10 59) Refer to Figure 9.1. Suppose the market is currently in equilibrium. If the government establishes a price ceiling of $20, consumer surplus will 59) A) fall by $200. B) rise by $300. C) remain the same. D) rise by $200. E) fall by $300. 60) Refer to Figure 9.1. If the government establishes a price ceiling of $20, how many widgets will be sold? 60) A) 40 B) 20 C) 60 D) 50 E) 30 61) Refer to Figure 9.1. If the market is in equilibrium, total producer surplus is 61) A) $30. B) $70. C) $1200. D) $400. E) $800. 62) Which of the following is NOT true regarding monopoly? 62) A) Monopolist can charge as high a price as it likes. B) Monopoly is the sole producer in the market. C) Monopoly price is determined from the demand curve. D) Monopoly demand curve is downward sloping. 63) Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity. 63) A) lower; larger B) lower; smaller C) higher; smaller D) higher; larger E) none of these 64) As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should 64) A) do nothing without information about your fixed costs. B) expand output until marginal revenue equals zero. C) reduce output until marginal revenue equals marginal cost. D) expand output. E) reduce output beyond the level where marginal revenue equals zero. 65) If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be: 65) A) positive. B) indeterminate from the given information. C) zero. D) negative. 66) A monopsonist will buy ________ units of input than a competitor, and will pay ________ per unit. 66) A) fewer; less B) fewer; more C) more; more D) more; less 11 67) Unlike a competitive buyer, 67) A) the price that a monopsonist pays depends on the number of units purchased. B) a monopsonist sets marginal value equal to marginal expenditure. C) a monopsonist pays a different price for each unit purchased. D) a monopsonist faces an upward-sloping industry supply curve. Scenario 8: Adriana is a monopolist producing green calculators. The average and marginal cost curves and average and marginal revenue curves for her product are given as follows: AC = Q + (10,000/Q) MC = 2Q AR = 30 - (Q/2) MR = 30 - Q 68) Refer to Scenario 8. The deadweight loss from monopoly is 68) A) 25 B) 0 C) 10 D) 5 E) none of the above 69) Refer to Scenario 8. Suppose that the regulatory agency sets your price where average revenue equals average cost. How much profit will Adriana make? 69) A) She will lose money and will go out of business. B) She will make a profit. C) She will break even. D) none of the above. 70) Which of the following is true in long run equilibrium for a firm in a monopolistic competitive industry? 70) A) The demand curve is tangent to average cost curve. B) The marginal cost curve is tangent to average cost curve. C) The demand curve is tangent to marginal cost curve. D) The demand curve is tangent to marginal revenue curve. 71) The market structure in which strategic considerations are most important is 71) A) oligopoly. B) pure monopoly. C) pure competition. D) monopolistic competition. 72) In the Cournot duopoly model, each firm assumes that 72) A) the price of its rival is fixed. B) rivals will match price cuts but will not match price increases. C) the output level of its rival is fixed. D) rivals will match all reasonable price changes. 73) A situation in which each firm is doing the best it can, given what its rivals are doing is called a 73) A) Nash equilibrium. B) zero sum game. C) Stackelberg equilibrium. D) Cooperative equilibrium. 74) Which of the following can be thought of as a barrier to entry? 74) A) strategic actions by incumbent firms. B) patents. C) scale economies. D) all of these. 12 87) Which of the following would be LEAST likely to contribute to a moral hazard problem among drivers? 87) A) Provide medical coverage and car repair/replacement coverage to drivers, their passengers, and any and all individuals involved in the accident, no matter who was at fault. B) Make automobile insurance mandatory for all drivers. C) Pass a law limiting the amount of damages that juries may award in accident cases. D) Modify all cars to remove the driver's seat belt and the steering wheel air bag. E) Provide medical coverage to all drivers, their passengers, and any and all individuals involved in the accident, no matter who was at fault. Scenario 3 Consider the following information: The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run. 88) Refer to Scenario 3. If the fire protection program were not in place, the insurer would not be willing to ensure the warehouse for any amount less than 88) A) $80. B) $300,000. C) $3,000. D) $6,000. E) $300. 89) Refer to Scenario 3. If there is no insurance and no fire protection program in place, the expected loss from fire for this company is 89) A) $300. B) $6,000. C) $0. D) $300,000. E) $3,000. 90) Refer to Scenario 3. If there is no insurance and a fire protection program in place, the expected loss from fire for this company is 90) A) $6,000. B) $0. C) $300,000. D) $300. E) $3,000. 91) Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, equilibrium price 91) A) and output are too high to be optimal. B) is too low to be optimal, and equilibrium quantity is too high. C) is too high to be optimal, and equilibrium quantity is too low. D) and output are too low to be optimal. E) is optimal, but there is an excess supply. 92) Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, 92) A) there is a gap between quantity supplied and quantity demanded in equilibrium. B) the marginal social cost curve is above and to the left of the supply curve. C) the marginal social cost curve is below and to the left of the demand curve. D) the marginal social cost curve is below and to the right of the supply curve. E) the marginal social cost curve is above and to the right of the demand curve. 15 93) The marginal benefit and marginal private cost curves for aphrodisiacs are given as follows: MB = 200 - Q MPC = Q In addition to private costs, there is a marginal external cost of $10 per unit of output. What is the efficient level of output? 93) A) 55 B) 0 C) 95 D) 100 E) none of the above 94) Which is NOT an advantage of emissions fees over standards? 94) A) Fees can reduce the cost of attaining some goal level of emissions when firms have different abatement costs and different standards can be assigned to different firms. B) Fees may provide an incentive for a firm to investigate emissions-reduction technology that will reduce emissions below existing standards. C) Fees can reduce the cost of attaining some goal level of emissions when firms all have the same abatement costs. D) Fees can give a firm the incentive to reduce emissions below the standard when new technology allows. E) Fees can reduce the cost of attaining some goal level of emissions when firms have different abatement costs and different standards cannot be assigned to different firms. 95) In equilibrium, the price of a transferable emissions permit 95) A) equals the marginal cost of abatement for the firm with the lowest cost, and is less than the marginal cost of abatement of other firms. B) equals the marginal social cost of emissions. C) is constrained to the amount the government first charged for it. D) equals the marginal cost of abatement for the firm with the highest cost, and exceeds the marginal cost of abatement of other firms. E) equals the marginal cost of abatement for all firms. 96) When new technologies make cleaner production possible, 96) A) the price of transferable permits would rise. B) the quantity of transferable permits would rise. C) the quantity of transferable permits would fall. D) emissions would fall under a system of permits, but would not fall under a system of fees unless the government raised them. E) emissions would fall under a system of fees, but would not fall under a system of transferable emissions permits unless the government bought back some of the permits. 97) When there are externalities, economic efficiency can be achieved without government intervention 97) A) at no time. B) when the externality affects only a few parties and property rights are well defined. C) when the externality affects only a few parties and property rights are not well defined. D) when the externality affects many people and property rights are not well defined. E) when the externality affects many people and property rights are well defined. 16 Scenario 1: It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result. Factory Fishermen A: No filter or treatment plant $10,000 $2,000 B: Filter; no treatment plant $6,000 $10,000 C: No filter; treatment plant $10,000 $4,000 D: Filter; treatment plant $6,000 $6,000 98) Refer to Scenario 1. If the fishermen are given the right to clean water, 98) A) the outcome will be more efficient than if the factory is given the right to use the water as it sees fit. B) the efficient outcome will occur no matter who is given which property right, but how that maximum gain is split will be determined during bargaining. C) the factory will be forced to shut down. D) the outcome will be less efficient than if the factory is given the right to use the water as it sees fit. E) the efficient outcome will occur no matter who is given which property right, and the individual gains will be the same in each case. 99) Refer to Scenario 1. It would be acceptable to both parties to have the fishermen pay the factory 99) A) $500 to install a filter. B) $4,000 to install a filter. C) $6,000 to install a filter. D) any amount greater than $4,000 and less than $6,000 would make both parties better off. E) $0 to install a filter. 100) Refer to Scenario 1. What should the fishermen do if they know the factory will maximize profits and no negotiation is possible? 100) A) Install a treatment plant. B) Do not install a treatment plant. C) Install a filter. D) Exit the industry. E) It makes no difference if the fishermen do or do not install a treatment plant. ESSAY. Write your answer in the space provided or on a separate sheet of paper. 101) A firm's total cost function is given by the equation: TC = 4000 + 5Q + 10Q2. (1) Write an expression for each of the following cost concepts: a. Total Fixed Cost b. Average Fixed Cost c. Total Variable Cost d. Average Variable Cost e. Average Total Cost f. Marginal Cost (2) Determine the quantity that minimizes average total cost. Demonstrate that the predicted relationship between marginal cost and average cost holds. 17