ECON , SPRING 2011 Principles of Microeconomics Final Exam Wednesday, May 11th Instructor: Sung Ick Cho

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1 ECON , SPRING 2011 Principles of Microeconomics Final Exam Wednesday, May 11th Instructor: Sung Ick Cho 1) Tabitha shares a flea market booth with her sister. Her share of the rent is $150 per month. She is considering moving to her own, larger booth which she will not have to share with anyone. The larger booth rents for $450 per month. Recently, you ran into Tabitha in the grocery store and she tells you that she has rented the larger booth. Tabitha is as rational as any other person. As an economics major, you rightly conclude that A) Tabitha did not have a choice; her sister was overcharging her. B) Tabitha figures that the additional benefit of having her own booth (as opposed to sharing) is at least $300. C) Tabitha figures that the benefit of having her own booth (as opposed to sharing) is at least $450. D) the cost of having one's own booth outweighs the benefits. Answer: B Diff: 2 Page Ref: 7/7 Topic: Optimal Decisions Are Made at the Margin Objective: LO1: Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. 2) Competition forces firms to produce and sell products as long as the to consumers exceeds the of production. A) marginal benefit; marginal cost B) marginal benefit; marginal benefit 1

2 C) marginal cost; marginal cost D) marginal cost; marginal benefit Answer: A Diff: 2 Page Ref: 10/10 Topic: Efficiency Objective: LO2: Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services? AACSB: Reflective Thinking 3) The economic analysis of minimum wage involves both normative and positive analysis. Consider the following consequences of a minimum wage: a. The minimum wage law causes unemployment. b. Unemployment would be lower without a minimum wage law. c. Minimum wage laws benefit some workers and harm others. d. The minimum wage should be more than $7.25 per hour. Which of the consequences above are positive statements and which are normative statements? A) a, b, and c are positive statements and d is a normative statement. B) a and b are positive statements, c and d are normative statement. C) Only a is a positive statement, b, c and d are normative statements. D) a and c are positive statements, b and d are normative statements Answer: A Diff: 2 Page Ref: 13/13 Topic: Normative and Positive Analysis Objective: LO3: Understand the role of models in economic analysis. 2

3 Special Feature: Don't Let This Happen to YOU!: Don't Confuse Positive Analysis with Normative Analysis Figure F-1 4) Refer to Figure F-1. is (are) inefficient in that not all resources are being used. A) Point A B) Point B C) Point C D) Points A and C Answer: A Diff: 1 Page Ref: 38/38 Topic: Production Possibilities Frontiers Objective: LO1: Use a production possibilities frontier to analyze opportunity costs and trade-offs. AACSB: Reflective Thinking 3

4 Figure F-2 Figure F-2 shows the production possibilities frontiers for Costa Rica and Guatemala. Each country produces two goods, pineapples and coconuts. 5) Refer to Figure F-2. Which country has a comparative advantage in the production of coconuts? A) Guatemala B) They have equal productive abilities. C) Costa Rica D) neither country Answer: A Diff: 2 Page Ref: 46-47/46-47 Topic: Comparative Advantage Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. 6) Refer to Figure F-2. If the two countries have the same amount of resources and the same technological knowledge, which country has an absolute advantage in the production of both pineapples and coconuts? A) Guatemala 4

5 B) neither country C) Costa Rica D) cannot be determined Answer: B Diff: 2 Page Ref: 46-47/46-47 Topic: Absolute Advantage Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. Figure F-3 7) Refer to Figure F-3. An increase in the price of a complement would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. Answer: D 5

6 Diff: 2 Page Ref: 72/72 Topic: Price of Related Goods Objective: LO1: Discuss the variables that influence demand. 8) The supply curve for umbrellas A) shows the supply of umbrellas consumers are willing and able to buy at any given price. B) is downward sloping. C) shows the relationship between the quantity of umbrellas firms are willing and able to supply and the quantity of umbrellas consumers are willing and able to purchase. D) shows the relationship between the price of umbrellas and the quantity of umbrellas supplied. Answer: D Diff: 1 Page Ref: 74/74 Topic: Supply Curves Objective: LO1: Discuss the variables that influence demand. AACSB: Reflective Thinking Figure F-4 6

7 9) Refer to Figure F-4. The figure above represents the market for coffee grinders. Assume that the market price is $21. Which of the following statement is true? A) There is a shortage that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals $25. B) There is a shortage that will cause the price to increase; quantity supplied will then decrease and quantity demanded will increase until the price equals $25. C) There will be a shortage that will cause the price to increase; demand will then decrease and supply will increase until the price equals $25. D) There is a shortage that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals $25. Answer: A Diff: 2 Page Ref: 79/79 Topic: Shortage Objective: LO3: Use a graph to illustrate market equilibrium. Figure F-5 7

8 Figure F-5 shows the market for granola. The market is initially in equilibrium at a price of P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2 in order to raise the price to P2. 10) Refer to Figure F-5. What area represents consumer surplus at P2? A) A B) A + B C) B + C D) A + B + D + F Answer: A Diff: 1 Page Ref: / Topic: Economic Surplus Objective: LO2: Understand the concept of economic efficiency. Figure F-6 8

9 Figure F-6 shows the market for cigarettes. tax in this market. The government plans to impose a unit 11) Refer to Figure F-6. How much of the tax is paid by buyers? A) $8 B) $5 C) $4 D) $3 Answer: D Diff: 2 Page Ref: 113/113 Topic: Tax Incidence Objective: LO4: Analyze the economic impact of taxes. 12) Refer to Figure F-6. As a result of the tax, is there a loss in producer surplus? A) Yes, because producers are not selling as many units now. B) No, because the consumer pays the tax. C) No, because the market reaches a new equilibrium 9

10 D) No, because producers are able to raise the price to cover their tax burden. Answer: A Diff: 2 Page Ref: 113/113 Topic: Tax Incidence Objective: LO4: Analyze the economic impact of taxes. 13) To calculate the price elasticity of demand we divide A) the percentage change in quantity demanded by the percentage change in price. B) the percentage change in price by the percentage change in quantity demanded. C) rise by the run. D) the average price by the average quantity demanded. Answer: A Diff: 1 Page Ref: / Topic: Price Elasticity of Demand Objective: LO1: Define price elasticity of demand and understand how to measure it. AACSB: Reflective Thinking Figure F-7 10

11 14) Refer to Figure F-7. The section of the demand curve labeled "A" represents A) the inelastic section of the demand curve. B) the unit-elastic section of the demand curve. C) the elastic section of the demand curve. D) the perfectly elastic section of the demand curve. Answer: C Diff: 1 Page Ref: 169/169 Topic: Elastic and Inelastic Demand Objective: LO1: Define price elasticity of demand and understand how to measure it. AACSB: Reflective Thinking 15) Suppose when Nablom's Bakery raised the price of its breads by 10 percent, the quantity demanded fell by 15 percent. What was the effect on sales revenue? A) Sales revenue increased. B) Sales revenue remained unchanged. C) Sales revenue decreased. D) It cannot be determined without information on prices. 11

12 Answer: C Diff: 2 Page Ref: / Topic: Price Elasticity of Demand and Total Revenue Objective: LO3: Understand the relationship between the price elasticity of demand and total revenue. AACSB: Reflective Thinking Table F-1 Price Quantity Quantity Demanded Supplied $6 5,000 2, ,000 2, ,000 2, ,000 2, ,000 2,000 The town of Bloomfield is well known for its basketball team. The price of basketball game tickets is determined by market forces. Table F-1 above shows the demand and supply schedules for basketball games tickets. 16) Refer to Table F-1. What is the most distinctive feature of the supply curve? A) The supply curve is perfectly inelastic. B) The supply curve is horizontal. C) The supply curve is upward sloping. D) The supply curve is perfectly elastic. Answer: A Diff: 2 Page Ref: /

13 Topic: Price Elasticity of Supply Objective: LO6: Define price elasticity of supply and understand its main determinants and how it is measured. Table F-2 Steak & Cheese Steak & Cheese Grilled Chicken Grilled Chicken Quantity MU MU/P MU MU/P ) Refer to Table F-2. For steak and cheese and grilled chicken sandwiches, the table contains the values of the marginal utility (MU) and marginal utility per dollar (MU/P) for Mabel Jarvis. Mabel has $14 to spend on steak and cheese and grilled chicken sandwiches. Which of the following statements is false? A) The price of steak and cheese sandwiches is $4. The price of grilled chicken sandwiches is $2. B) If Mabel maximizes her utility she will buy three grilled chicken sandwiches. C) If Mable maximizes her utility she will buy two steak and cheese sandwiches. D) We do not have enough information to determine how many sandwiches Mabel will buy to maximize her utility. Answer: D Diff: 2 Page Ref: / Topic: Marginal Utility 13

14 Objective: LO1: Define utility and explain how consumers choose goods and services to maximize their utility. Table F-3 Italian Sub Italian Sub Taco Taco Taco Quantity MU MU/$4 MU MU/$2 MU/$ ) Refer to Table F-3, which lists the values of Harry Taber's marginal utility and marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's income is $14 he buys two Italian sub sandwiches and three tacos. The last column lists the values of the marginal utility per dollar for tacos when the price of tacos decreases to $1. Complete this statement: As a result of the change in price A) Harry's purchasing power has increased. He will reduce his consumption of tacos so he can buy one more sub. This is an example of the substitution effect of a price change. B) Harry's purchasing power has increased. If tacos are a normal good for Harry he will buy fewer tacos. This is an example of the income effect of a price change. C) Harry's purchasing power has increased. If tacos are a normal good for Harry he will buy more tacos. This is an example of the income effect of a price change. D) Harry's purchasing power has increased. Harry buys fewer tacos. This is an example of the substitution effect of a price change 14

15 Answer: C Diff: 3 Page Ref: / Topic: Income and Substitution Effects Objective: LO1: Define utility and explain how consumers choose goods and services to maximize their utility. 19) Refer to Table F-3, which lists the values of Harry Taber's marginal utility and marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's income is $14 he buys two Italian sub sandwiches and three tacos. The last column lists the values of the marginal utility per dollar for tacos when the price of tacos decreases to $1. Complete this statement: As a result of the change in price, the marginal utility of each taco Harry consumes increases and A) the substitution effect of the price change will cause Harry to buy more tacos and fewer subs. B) the substitution effect of the price change will cause Harry to buy more tacos if they are a normal good, and fewer tacos if they are an inferior good. C) the substitution effect will cause Harry to buy another sub because his purchasing power has increased. D) the substitution effect will cause Harry to buy fewer tacos. Answer: A Diff: 3 Page Ref: / Topic: Income and Substitution Effects Objective: LO1: Define utility and explain how consumers choose goods and services to maximize their utility. 15

16 20) Gertrude Stork's Chocolate Shoppe normally employs 4 workers. When the Chocolate Shoppe hired a 5th worker the Shoppe's total output decreased. Therefore, A) the marginal product of the 5th worker is negative. B) the total output of Gertrude Stork's Chocolate Shoppe is negative. C) the average product of the 5th worker is negative. D) the 5th worker should be hired only if he is willing to accept a wage lower than the wage paid to the other 4 workers. Answer: A Diff: 2 Page Ref: 331/331 Topic: Marginal Product of Labor Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor. AACSB: Reflective Thinking Figure F-8 Fancy Footwear manufactures shoes. Figure F-8 shows Fancy Footwear's marginal product of labor and average product of labor curves in the short run. 16

17 21) Refer to Figure F-8. Which of the following statements correctly describes the curves in the figure? A) The marginal product of labor curve is represented by curve A and the average product of labor curve is represented by curve B. B) The marginal product of labor curve is represented by curve B and the average product of labor curve is represented by curve A. C) Curve A could represent either the average product curve or the marginal product and curve. Curve B represents the total product curve. D) Curve B could represent either the average product curve or the marginal product curve. Curve A represents the total product curve. Answer: B Diff: 1 Page Ref: / Topic: Average Product of Labor Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor. AACSB: Reflective Thinking Figure F-9 17

18 22) Refer to Figure F-9. The figure above illustrates the long-run average cost curve for a firm that produces picture frames. The graph in Figure 10-7 also includes short-run average cost curves for three firm sizes: ATCa, ATCb and ATCc. The minimum efficient scale of output is reached at what rate of output? A) 10,000 workers B) 5,000 picture frames C) 20,000 picture frames D) 10,000 picture frames Answer: D Diff: 1 Page Ref: / Topic: Minimum Efficient Scale Objective: LO6: Understand how firms use the long-run average cost curve in their planning. 23) Refer to Figure F-9. The figure above illustrates the long-run average cost curve for a firm that produces picture frames. The graph in Figure 10-7 also includes short-run average cost curves for three firm sizes: ATCa, ATCb and ATCc. For output rates greater than 20,000 picture frames per month A) the firm will not make a profit because the average cost of production will be too high. B) the firm will experience diseconomies of scale. C) the firm will experience diminishing returns. D) the short-run average total cost will equal the long-run average total cost of production. Answer: B Diff: 1 Page Ref: /

19 Topic: Long-Run Average Cost Objective: LO6: Understand how firms use the long-run average cost curve in their planning. 24) If a perfectly competitive firm raises the price it charges to consumers, which of the following is the most likely outcome? A) The firm's revenue will not change because some consumers will refuse to pay the higher price. B) The firm will not sell any output. C) The firm's total revenue will increase only if the demand for its product is inelastic. D) The firm's total revenue will increase only if the demand for its product is elastic. Answer: B Diff: 2 Page Ref: 369/369 Topic: Characteristics of Perfectly Competitive Firms Objective: LO1: Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve. AACSB: Reflective Thinking 25) For a perfectly competitive firm, average revenue is equal to A) marginal cost. B) the market price. C) total revenue. D) average fixed cost. Answer: B Diff: 1 Page Ref: /

20 Topic: Average Revenue and Marginal Revenue Objective: LO2: Explain how a firm maximizes profits in a perfectly competitive market. AACSB: Reflective Thinking Table F-4 Apples Total Market Price Revenue Average Revenue Marginal Revenue (pounds) per Pound (TR) (AR) (MR) 0 $3 $ ) Refer to Table F-4. Table F-4 lists the various pounds (lbs.) of apples that Margie Stattler can sell. Assume that Margie operates in a perfectly competitive market. Use Table F-4 to answer the following question. What is Margie's total revenue if she sells 250 pounds of apples? A) $250 B) $500 C) $750 D) There is not enough information in the table to determine Margie's total revenue. Answer: C Diff: 1 Page Ref: 372/372 20

21 Topic: Total Revenue Objective: LO2: Explain how a firm maximizes profits in a perfectly competitive market. Figure F-10 27) Refer to Figure F-10. If the firm is producing 500 units, A) it is making a profit. B) it is making a loss. C) it should maintain its output to maximize profit. D) it should increase its output to maximize profit. Answer: C Diff: 1 Page Ref: / Topic: Profit-Maximizing Level of Output Objective: LO2: Explain how a firm maximizes profits in a perfectly competitive market. 21

22 Figure F-11 28) Refer to Figure F-11. Which panel best represents the perfectly competitive organic produce market in which some firms are experiencing short-run losses, and consumers are displaying an increased preference for organic produce? A) Panel A B) Panel B C) Panel C D) Panel D Answer: D Diff: 3 Page Ref: / Topic: Long-Run Equilibrium 22

23 Objective: LO5: Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run. Figure F-12 29) Refer to Figure F-12. What is the marginal revenue of the sixth unit of output? A) $4 B) $5 C) $9 D) $54 Answer: A Diff: 2 Page Ref: / Topic: Demand and Marginal Revenue Objective: LO1: Explain why a monopolistically competitive firm has downwardsloping demand and marginal revenue curves. Table F-5 23

24 Quantity Total Marginal Total Marginal Sold Price Revenue Revenue Cost Cost Profit 0 $10 $ $ $ ) Refer to Table F-5. The table above estimated revenues and costs (per week) for plastic vials (100 vials per box) for the Victoria Biological Supplies Company. Victoria sells plastic vials to university and private research laboratories. Victoria's profit-maximizing quantity sold (Q) and price (P) are: A) Q = 3; P = $7. B) Q = 4; P = $6. C) Q = 5; P = $5. D) Q = 6; P = $4. Answer: B Diff: 2 Page Ref: / Topic: Short-Run Profit Maximization Objective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run. Figure F-13 24

25 Figure F-13 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market. 31) Refer to Figure F-13. Which of the following statements describes the best course of action for the firm depicted in the diagram? A) The firm should exit the industry because its price is less than its average total cost. B) The firm should minimize its losses by producing Qy units and charging a price of P0. C) The firm should minimize its losses by producing Qy units and charging a price of P2. D) The firm should minimize its losses by producing Qy units and charging a price of P1. Answer: D Diff: 2 Page Ref: / Topic: Short-Run Profit Maximization Objective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run. 25

26 32) Refer to Figure F-13. Which of the following is the area that represents the profit or loss experienced by the firm? A) A loss represented by the rectangle P2uvP1. B) A loss represented by the rectangle P2uwP0. C) A loss represented by the rectangle P1vwP0. D) An accounting profit equal to P1vwP0. Answer: A Diff: 2 Page Ref: / Topic: Short-Run Profit Maximization Objective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run. 33) Economists use game theory to analyze oligopolies because A) real markets are too complicated to analyze without using games. B) it is more enjoyable for economists and students to learn by playing games. C) game theory helps us to understand why interactions among firms are crucial in determining profitable business strategies. D) game theory is useful in understanding the actions of firms that are price takers. Answer: C Diff: 1 Page Ref: / Topic: Game Theory Objective: LO2: Use game theory to analyze the strategies of oligopolistic firms. AACSB: Reflective Thinking Table F-6 26

27 Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table F-6 shows the payoff matrix for this advertising game. 34) Refer to Table F-6. Does Alistair have a dominant strategy and if so, what is it? A) Yes, Alistair should increase its advertising budget. B) Yes, Alistair should keep its advertising budget as is. C) There are two dominant strategies: if Baine increases its advertising budget, then Alistair's best bet is to keep its budget the same but if Baine does not increase its spending then Alistair should raise its advertising budget D) No, there is no dominant strategy. Answer: A Diff: 2 Page Ref: / Topic: Business Strategy Objective: LO2: Use game theory to analyze the strategies of oligopolistic firms. Special Feature: Solved Problem: Is Advertising a Prisoner's Dilemma for Coca- Cola and Pepsi? 35) Refer to Table F-6. What is the Nash equilibrium in this game? 27

28 A) There is no Nash equilibrium. B) Baine increases its advertising budget, but Alistair does not. C) Alistair increases its advertising budget, but Baine does not. D) Both Alistair and Baine increase their advertising budgets. Answer: D Diff: 2 Page Ref: / Topic: Nash Equilibrium Objective: LO2: Use game theory to analyze the strategies of oligopolistic firms. Special Feature: Solved Problem: Is Advertising a Prisoner's Dilemma for Coca- Cola and Pepsi? Figure F-14 A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market. Figure F-14 shows the decision tree for the Netflix-Blockbuster entry game. 28

29 36) Refer to Figure F-14. Does it make sense for Netflix to lower its price in order to deter Blockbuster's entry into the online DVD rental market? A) Yes, because Netflix stands to make a profit of $7 million by lowering its price and keeping Blockbuster out of the market. B) No, because Netflix will make a higher profit by keeping its subscription price unchanged, whether Blockbuster enters the market or not. C) Yes, because it is always profitable to remain a monopoly. D) No, because Blockbuster will enter the market regardless of Netflix's decision about its subscription price. Answer: B Diff: 3 Page Ref: / Topic: Sequential Games and Business Strategy Objective: LO3: Use sequential games to analyze business strategies. 37) Some economists argue that Microsoft become a monopoly in the market for computer software by developing MS-DOS, an operating system used for the first IBM personal computers. The more people who used MS-DOS-based programs, the greater the usefulness of a using a computer with an MS-DOS operating system. The explanation for Microsoft's monopoly is A) the development of new technology that other firms could not copy. B) control of a key resource which, in this case, is the MS-DOS operating system. C) network externalities. D) patents Microsoft obtained when it developed the MS-DOS operating system. Answer: C Diff: 2 Page Ref: / Topic: Network Externalities 29

30 Objective: LO2: Explain the four main reasons monopolies arise. AACSB: Reflective Thinking Figure F-15 Figure F-15 shows the cost and demand curves for a monopolist. 38) Refer to Figure F-15. The profit-maximizing output and price for the monopolist are A) output = 62; price = $24. B) output = 62; price = $18. C) output = 83; price = $22. D) output = 104; price = $ Answer: A Diff: 1 Page Ref: 471/471 Topic: Profit Maximization Objective: LO3: Explain how a monopoly chooses price and output. 30

31 39) Refer to Figure F-15. The monopolist earns a profit of A) $0. B) $170. C) $248. D) $372. Answer: C Diff: 2 Page Ref: 471/471 Topic: Profit Maximization Objective: LO3: Explain how a monopoly chooses price and output. 40) Baxter International, a manufacturer of hospital supplies, acquired American Hospital Supply, a distributor of hospital supplies. This is an example of A) a conglomerate merger. B) a horizontal merger. C) a vertical merger. D) a two-dimensional merger. Answer: C Diff: 1 Page Ref: / Topic: Mergers Objective: LO5: Discuss government policies toward monopoly. AACSB: Reflective Thinking 31

Total Hours Revenue Open (dollars) 1 $35 2 60 3 80 4 92 5 100 6 105

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