PLEASE
NOTE THAT AN ANNOTATED ANSWER KEY IS AT THE END OF THIS FILE. ALSO, NOT ALL OF THE GRAPHICS ARE AVAILABLE
ONLINE.
EACH
QUESTION IN THIS SECTION IS WORTH FOUR POINTS
103.FIRST EXAM
1. IF THE AVERAGE SALES PER WORKER DECLINES AFTER WE HIRE ONE MORE SALESPERSON, WE KNOW THAT HIS/HER MARGINAL SALES ARE
A. MORE THAN THE AVERAGE.
B. EQUAL TO THE AVERAGE.
C. LESS THAN THE AVERAGE.
D. TOO LOW TO JUSTIFY HIS/HER CONTINUED EMPLOYMENT.
2. IN ECONOMIC ANALYSIS, THE MARGINAL INDIVIDUAL IS
A) THE LEAST IMPORTANT.
B) THE ONE WHO IS LEAST QUALIFIED.
C. THE ONE WHO IS MOST LIKELY TO REACT TO A SMALL CHANGE IN CIRCUMSTANCES.
D. THE ONE WHO IS LEAST LIKELY TO REACT TO A SMALL CHANGE IN
CIRCUMSTANCES.
E. THE MOST QUALIFIED.
3. WHAT PROPERTY DO ALL ECONOMISTS DEMAND OF A GOOD THEORY?
A. IT SHOULD BE AS SIMPLE AS POSSIBLE.
B. IT SHOULD BE AS COMPLICATED AS POSSIBLE.
C. ITS ASSUMPTIONS SHOULD BE REALISTIC.
D. ITS ASSUMPTIONS SHOULD BE UNREALISTIC.
E. NONE OF THE ABOVE.
4. CONSUMER SURPLUS IS:
A. WHAT THE CONSUMER HAS LEFT OVER AFTER BUYING A PRODUCT.
B. WHAT THE SELLER HAS LEFT OVER AFTER SELLING A PRODUCT.
C. THE GAIN TO A CONSUMER FROM PARTICIPATING IN A VOLUNTARY
TRANSACTION.
D. THE AREA UNDERNEATH THE PRICE LINE.
5. A FACTOR OF PRODUCTION IS SOMETHING WHICH
A. LASTS LESS THAN ONE YEAR.
B. CANNOT BE REPLACED.
C. IS USED TO PRODUCE SOMETHING ELSE.
D. IS USED BY CONSUMERS.
6. WHEN USING THE PRODUCTION POSSIBILITIES BOUNDARY, A POINT WHICH REPRESENTS A COMBINATION OF GOODS THAT SOCIETY CANNOT PRODUCE MUST LIE
A. INSIDE THE BOUNDARY.
B. ON THE BOUNDARY.
C. OUTSIDE OF THE BOUNDARY.
D. NONE OF THE ABOVE IS NECESSARILY CORRECT.
7. THE POINT LABELED A IN THE PRODUCTION POSSIBILITIES CURVE BELOW:
A. IS UNATTAINABLE, IT IS BEYOND THE PRODUCTION CAPABILITIES
OF THIS COUNTRY.
B. REPRESENTS THE MOST DESIRABLE OUTPUT LEVEL.
C. REPRESENTS EITHER UNEMPLOYED OR INEFFICIENTLY UTILIZED RESOURCES.
D. REPRESENTS THE MAXIMUM SUSTAINABLE OUTPUT LEVEL FOR THIS
NATION IN THE LONG RUN.
PRODUCTION POSSIBILITIES CURVE
DONUT PRODUCTION |
|-
| .
| * A .
| .
| .
| .
| .
| : >
PIZZA PRODUCTION
8. WHICH OF THE FOLLOWING IS AN EXAMPLE OF NORMATIVE ECONOMICS?
A. THE WEALTH OF ONE'S PARENTS SEEMS TO INFLUENCE ONE'S
EXPECTED LIFETIME INCOME.
B. DOCTORS DO NOT DESERVE ALL THE MONEY THEY GET FROM
MEDICARE PAYMENTS FROM THE GOVERNMENT.
C. READING ABILITY IS HIGHLY CORRELATED WITH INCOME.
D. A REDUCTION IN RACIAL DISCRIMINATION WOULD MAKE INCOMES
MORE EQUAL.
9. ACCORDING TO ECONOMIC ANALYSIS, IF PETE BUYS SOMETHING FROM MARY
A. PETE BECOMES BETTER OFF AND MARY BECOMES WORSE OFF.
B. MARY BECOMES BETTER OFF AND PETE BECOMES WORSE OFF.
C. BOTH PETE AND MARY GAIN FROM THE TRANSACTION.
D. BOTH PETE AND MARY LOSE BECAUSE OF THE TRANSACTION.
E. THEY LIVE HAPPILY EVER AFTER.
10. WHICH OF THE FOLLOWING WOULD MOST LIKELY CAUSE THE DEMAND FOR SUGAR TO INCREASE?
A. A DECREASE IN THE PRICE OF NUTRASWEET, A SUBSTITUTE GOOD.
B. A DECREASE IN CONSUMER INCOME.
C. A DECREASE IN THE PRICE OF SUGAR.
D. A DECREASE IN THE PRICE OF COFFEE, A COMPLEMENTARY GOOD.
11. AN INCREASE IN THE COST OF PRODUCING PIZZA WILL TEND TO CAUSE A(AN)
A. INCREASE IN THE QUANTITY SUPPLIED.
B. DECREASE IN THE QUANTITY SUPPLIED.
C. INCREASE IN SUPPLY.
D. DECREASE IN SUPPLY.
E. THE DOUGH TO RISE.
PAGE BREAK
12. IF A DECREASE IN THE PRICE OF MOVIE TICKETS CAUSES A DECREASE IN THE DEMAND FOR MCDONALD'S PRODUCTS, THEN
A. BOTH GOODS ARE NORMAL.
B. BOTH GOODS ARE INFERIOR.
C. THE TWO GOODS ARE SUBSTITUTES.
D. THE TWO GOODS ARE COMPLEMENTS.
E. MOVIES ARE A COMPLEMENT AND BURGERS ARE A SUBSTITUTE.
F. HAMBURGERS ARE A COMPLEMENT AND MOVIES ARE A SUBSTITUTE.
G. YOU DESERVE A BREAK TODAY.
13. IF THE QUANTITY OF DON MATTINGLY T‑SHIRTS DEMANDED IS MORE THAN THE QUANTITY SUPPLIED, THEN THE
A. PRICE WILL RISE.
B. PRICE WILL FALL.
C. DEMAND WILL INCREASE.
D. SUPPLY WILL INCREASE.
14. AN INCREASE IN THE SUPPLY OF LABOR, CAUSED BY AN INCREASED NUMBER OF STUDENTS FAILING OUT OF INDIANA UNIVERSITY (BECAUSE OF CERTAIN UNSPECIFIED ECONOMICS INSTRUCTORS) WILL RESULT IN A(AN)
A. INCREASE IN THE DEMAND FOR LABOR.
B. DECREASE IN THE DEMAND FOR LABOR.
C. INCREASE IN THE QUANTITY OF LABOR DEMANDED.
D. DECREASE IN THE QUANTITY OF LABOR DEMANDED.
15. IF THE DEMAND AND THE SUPPLY FOR PARTY FOOD BOTH INCREASE THEN
A. EQUILIBRIUM QUANTITY AND PRICE WILL INCREASE.
B. EQUILIBRIUM QUANTITY AND PRICE WILL DECREASE.
C. EQUILIBRIUM QUANTITY WILL RISE AND THE EFFECT ON EQUILIBRIUM PRICE IS UNCERTAIN.
D. EQUILIBRIUM PRICE WILL RISE AND THE EFFECT ON EQUILIBRIUM
QUANTITY IS UNCERTAIN.
16. DISCRIMINATION IS MOST LIKELY TO HAPPEN WHEN A PRICE IS
A. HIGH.
B. AT EQUILIBRIUM.
C. LOW.
D. REGULATED.
17. MARGINAL UTILITY IS A MEASURE
A. OF TOTAL UTILITY DERIVED FROM CONSUMING A GOOD.
B. COMPUTED BY DIVIDING TOTAL UTILITY BY THE NUMBER OF
UNITS OF A GOOD CONSUMED.
C. DETERMINED BY SUPPLY AND DEMAND.
D. OF THE ADDITIONAL UTILITY RECEIVED FROM CONSUMING AN
ADDITIONAL UNIT OF THE GOOD.
PAGE BREAK
18. IN THE DIAGRAM BELOW, THE BUDGET CONSTRAINT HAS SHIFTED
FROM AB TO AC. THIS SHIFT IS THE RESULT OF:
A. A REDUCTION IN THE CONSUMER'S INCOME.
B. A DECREASE IN THE PRICE OF ORANGES.
C. AN INCREASE IN THE PRICE OF APPLES.
D. AN INCREASE IN THE PRICE OF ORANGES.
│
QORANGES │
│
│B
│
│
│
│
│
│C
│
│
│
│
│
│
│ A
└───────────────────────────────────────────
QAPPLES
19. IN THE DIAGRAM BELOW, IDENTIFY A COMBINATION THAT YOU KNOW THE PERSON SITTING NEXT TO YOU WOULD LIKE MORE THAN COMBINATION A. ASSUME THAT HE/SHE IS NOT WORRIED ABOUT CALORIES OR CHOLESTEROL AND PREFERS MORE OF EACH OF THE GOODS TO LESS. DO NOT FEEL GUILTY ABOUT PRYING SO DEEPLY INTO HIS/HER INNER SOUL. HE OR SHE IS PROBABLY DOING THE SAME THING TO YOU RIGHT NOW.
│ .
QICE CREAM │ .
│ .
│ C . D
│ .
│ .
32 │....................A....................
│ .
│ .
│ .
│ B . E
│ .
│ .
│ .
└───────────────────────────────────────────
714 QDONUTS
PAGE BREAK
20. IF A 20% RISE IN THE PRICE OF STEREOS CAUSES THE QUANTITY SOLD TO FALL BY 40%, THE DEMAND FOR THESE STEREOS IS:
A. PERFECTLY INELASTIC.
B. ELASTIC.
C. INELASTIC.
D. UNITARY ELASTIC.
E. CROSS ELASTIC
21. TOO MANY STUDENTS ARE TOO NARROW MINDED WHEN THEY STUDY ECONOMICS. TO SHOW THAT THIS CRITICISM DOES NOT APPLY TO YOU AND THAT YOU DO HAVE SOME APPRECIATION FOR WORLD CULTURE, IDENTIFY THE NUMBER ONE ROCK AND ROLL SONG ON THIS YEAR'S MEMORIAL DAY 500 SURVEY.
A. YESTERDAY.
B. ARE YOU LONESOME TONIGHT?
C. TWIST AND SHOUT.
D. CAN'T HELP FALLING IN LOVE.
SUMMER 1993(103) 20 POINTS SHOW AND EXPLAIN HOW RECENT PRICE INCREASES IN THE AIR TRAVEL INDUSTRY WILL AFFECT THE MARKET FOR HOTEL ROOMS IN FLORIDA. BE SURE TO EXPLICITLY IDENTIFY EACH OF THE IMPORTANT VALUES FOR EACH OF THE IMPORTANT VARIABLES AND TO EXPLAIN ANY OF THE CHANGES YOU MAY CLAIM. USING YOUR CONCLUSION, IDENTIFY THE GOODS INVOLVED AS COMPLEMENTS, SUBSTITUTES, NORMAL, OR INFERIOR.
PAGE BREAK
EACH
QUESTION IN THIS SECTION IS WORTH FOUR POINTS
103 SECOND EXAM
1. VENTURE CAPITAL IS
A. MONEY USED TO COVER FIXED COSTS.
B. MONEY USED TO CREATE A NEW FIRM.
C. MONEY USED TO PAY WORKERS.
D. PROFIT REMAINING AFTER THE PAYMENT OF ALL COSTS.
2. SUPPOSE THAT THE IMBIT RATTLESNAKE COMPANY EARNS A REPORTED PROFIT OF THREE HUNDRED THOUSAND DOLLARS NEXT YEAR. ITS ECONOMIC PROFIT IS MOST LIKELY TO BE
A. MORE THAN THREE HUNDRED THOUSAND DOLLARS.
B. EQUAL TO THREE HUNDRED THOUSAND DOLLARS.
C. LESS THAN THREE HUNDRED THOUSAND DOLLARS.
D. MORE INFORMATION IS NECESSARY.
E. I WOULD BE HAPPY TO DISCUSS THIS LATER. HOWEVER, UPON THE ADVICE OF COUNSEL, I REGRET THAT I MUST INVOKE MY PRIVILEGES UNDER THE FIFTH AMENDMENT TO THE UNITED STATES CONSTITUTION.
3. AN INCREASE IN SUNK COST WOULD CAUSE THE PROFIT MAXIMIZING FIRM TO
A. INCREASE PRODUCTION.
B. MAINTAIN PRODUCTION AT CURRENT LEVELS.
C. DECREASE PRODUCTION.
D. MORE INFORMATION IS NECESSARY.
4. MARGINAL COST IS DEFINED AS
A. TOTAL COST DIVIDED BY QUANTITY
B. THE CHANGE IN TOTAL COST RESULTING FROM THE PRODUCTION OF AN ADDITIONAL UNIT OF OUTPUT
C. TOTAL VARIABLE COST DIVIDED BY QUANTITY
D. AVERAGE FIXED COST DIVIDED BY QUANTITY
5. IF THE PRODUCTION OF AN ADDITIONAL TON OF OUTPUT CAUSES TOTAL (NOT AVERAGE) COST TO INCREASE BY $200, THE $200 REPRESENTS
A. ONLY ADDITIONAL FIXED COST.
B. ONLY ADDITIONAL SUNK COST.
C. ONLY ADDITIONAL VARIABLE COST.
D. A LOSS OF ECONOMIC PROFITS.
6. IF A FIRM IS EXPERIENCING ECONOMIES OF SCALE,
A. AVERAGE COST IS RISING.
B. TOTAL COST IS FALLING.
C. AVERAGE COST IS FALLING.
D. PRICES ARE FALLING.
PAGE BREAK
7. IF A FIRM IS CHARACTERIZED AS BEING A PRICE TAKER, THEN
A. PRICES ARE SET BY INDIVIDUAL FIRMS IN ORDER TO MAXIMIZE PROFITS.
B. FIRMS ACCEPT THE GOING MARKET PRICE FOR THEIR PRODUCTS.
C. FIRMS CHARGE THE HIGHEST PRICE POSSIBLE FOR THEIR PRODUCTS.
D. FIRMS WILLINGLY ACCEPT BELOW MARKET PRICES IN AN ATTEMPT TO SELL ALL OF THEIR OUTPUT.
8. IN THE SHORT RUN, THE CURVE WHICH IS USED TO IDENTIFY HOW MUCH A FIRM SHOULD PRODUCE IS THE
A. AVERAGE TOTAL COST.
B. MARGINAL COST.
C. AVERAGE VARIABLE COST.
D. AVERAGE FIXED COST.
9. IN THE SHORT RUN, IF A PRICE TAKING FIRM IS ABLE TO COVER ITS VARIABLE COSTS BUT IS STILL SUFFERING ECONOMIC LOSSES IT SHOULD
A. TRY TO REDUCE COSTS.
B. TRY TO INCREASE PRICE.
C. LEAVE THE INDUSTRY.
D. PRODUCE AT THE QUANTITY FOR WHICH PRICE EQUALS MARGINAL COST.
E. PRODUCE NOTHING.
10. WITH THE RECENT REDUCTION IN OIL PRICES, MANY FIRMS PRODUCING ALTERNATIVE FUELS NOW FACE THE PROSPECT OF LONG‑RUN LOSSES. IF THESE INDUSTRIES ARE COMPETITIVE, AS DEFINED IN THE TRADITIONAL MODEL, WE WOULD EXPECT THE NUMBER OF FIRMS TO AND THE SHORT RUN SUPPLY TO .
A. RISE INCREASE
B. RISE DECREASE
C. FALL INCREASE
D. FALL DECREASE
11. WITH THE RECENT INCREASE IN OIL PRICES, MANY FIRMS PRODUCING ALTERNATIVE FUELS NOW FACE THE PROSPECT OF UNEXPECTED PROFITS. IF THESE INDUSTRIES ARE COMPETITIVE, AS DEFINED IN THE TRADITIONAL MODEL, WE WOULD EXPECT THE NUMBER OF FIRMS TO AND THE SHORT RUN SUPPLY TO .
A. RISE INCREASE
B. RISE DECREASE
C. FALL INCREASE
D. FALL DECREASE
PAGE BREAK
12. FOR THE COMPETITIVE FIRM, AS DEFINED IN THE TRADITIONAL MODEL, THE MARGINAL COST CURVE ABOVE THE AVERAGE VARIABLE COST CURVE IS KNOWN AS
A. MARGINAL REVENUE
B. DEMAND
C. THE FIRM'S SHORT RUN SUPPLY CURVE
D. THE AVERAGE TOTAL COST FUNCTION
E. THE FIRM'S LONG RUN SUPPLY CURVE
13. A DECREASING COST INDUSTRY GETS ITS NAME BECAUSE COSTS DECREASE WHEN
A. COSTS FALL.
B. OUTPUT DECREASES.
C. THE NUMBER OF FIRMS INCREASES.
D. AVERAGE TOTAL COST DECREASES.
14. IN AN AUSTRIAN COMPETITIVE MODEL,
A. ECONOMIC PROFITS ARE POSSIBLE IN BOTH THE SHORT RUN AND THE LONG RUN.
B. THERE ARE NO SHORT RUN PROFITS, ONLY LONG RUN PROFITS ARE
POSSIBLE.
C. THERE ARE NO LONG RUN PROFITS, ONLY SHORT RUN PROFITS ARE
POSSIBLE.
D. THERE ARE NEVER ANY ECONOMIC PROFITS.
15. IN THE TRADITIONAL MODEL OF A CONSTANT COST COMPETITIVE INDUSTRY, AN INCREASE IN DEMAND WILL LEAD TO
A. A SHORT RUN INCREASE IN PRICE, FOLLOWED BY A LONG RUN PRICE REDUCTION BACK TO THE ORIGINAL PRICE LEVEL.
B. A SHORT RUN INCREASE IN PRICE, FOLLOWED BY A LONG RUN PRICE REDUCTION, BUT NOT ALL THE WAY BACK TO THE ORIGINAL PRICE LEVEL.
C. A SHORT RUN INCREASE IN PRICE, FOLLOWED BY ANOTHER INCREASE IN THE LONG RUN.
D. A SHORT RUN INCREASE IN PRICE, FOLLOWED BY A LONG RUN PRICE REDUCTION BELOW THE ORIGINAL PRICE LEVEL.
16. IN AN INCREASING COST INDUSTRY THE ENTRY EFFECT IS TO
A. INCREASE SHORT RUN SUPPLY.
B. DECREASE SHORT RUN SUPPLY.
C. INCREASE LONG RUN SUPPLY.
D. DECREASE LONG RUN SUPPLY.
17. ASSUME THAT INDUSTRIAL COKE IS AN INCREASING COST, PERFECTLY COMPETITIVE INDUSTRY, AS DEFINED IN THE TRADITIONAL MODEL. AN INCREASE IN DEMAND WILL LEAD TO A(N)
A. INCREASE IN PRICE IN BOTH THE SHORT AND LONG RUNS.
B. SHORT RUN INCREASE IN PRICE, BUT IN THE LONG RUN THE
PRICE WILL RETURN TO ITS ORIGINAL LEVEL.
C. LONG RUN INCREASE IN PRICE, BUT THE SHORT RUN PRICE WILL NOT CHANGE.
D. NONE OF THE ABOVE.
PAGE BREAK
18. ASSUME THAT THE COMMUNICATIONS INDUSTRY IS A DECREASING COST INDUSTRY. A DECREASE IN THE NUMBER OF FIRMS WILL LEAD TO A(AN)
A. INCREASE IN THE FIRM'S COSTS, BUT NO CHANGE IN INDUSTRY DEMAND.
B. DECREASE IN THE FIRM'S COSTS, BUT NO CHANGE IN INDUSTRY DEMAND.
C. INCREASE IN INDUSTRY DEMAND, BUT NO CHANGE IN THE FIRM'S COSTS.
D. DECREASE IN INDUSTRY DEMAND, BUT NO CHANGE IN THE FIRM'S COSTS.
E. DECREASES IN BOTH INDUSTRY DEMAND AND THE FIRM'S COSTS.
19. ASSUME THAT THE COMMUNICATIONS INDUSTRY IS A CONSTANT COST INDUSTRY. A DECREASE IN THE NUMBER OF FIRMS WILL LEAD TO A(AN)
A. INCREASE IN THE FIRM'S COSTS, BUT NO CHANGE IN INDUSTRY DEMAND.
B. DECREASE IN THE FIRM'S COSTS, BUT NO CHANGE IN INDUSTRY DEMAND.
C. INCREASE IN INDUSTRY DEMAND, BUT NO CHANGE IN THE FIRM'S COSTS.
D. DECREASE IN INDUSTRY DEMAND, BUT NO CHANGE IN THE FIRM'S COSTS.
E. NO CHANGE IN EITHER INDUSTRY DEMAND OR THE FIRM'S COSTS.
20. CONSUMERS ARE BETTER OFF IN A COMPETITIVE MARKET BECAUSE
A. LOWER PRICES WOULD LEAD TO SHORTAGES OF THE GOODS
THEY CONSUME.
B. HIGHER PRICES WOULD MAKE THEM LESS ABLE TO AFFORD THE GOODS THEY ENJOY.
C. FIRMS WOULD NOT BE ABLE TO PRODUCE GOODS IN THE LONG RUN
IF PRICES WERE LOWER.
D. ALL OF THE ABOVE ARE TRUE.
21. NOW THAT THE YANKEES ARE ABOUT TO SUFFER THE RETURN OF THE TYRANNICAL AND IRRATIONAL RULE OF A CERTAIN NAMELESS AND
BRAINLESS INDIVIDUAL, THE NEW YORK YANKEES WILL AGAIN
A. HIRE BILLY MARTIN.
B. FIRE BILLY MARTIN.
C. RESURRECT BILLY MARTIN.
D. WHO CARES? ANYTHING THEY DO NOW WILL BE A SIGNIFICANT
IMPROVEMENT. THEY WILL RETURN TO THEIR LONG LOST GLORY AND REGAIN THE RESPECT THEY SO OBVIOUSLY DESERVE.
PAGE BREAK
SUMMER 1993.2 THIS QUESTION IS WORTH 20 POINTS. BECAUSE OF THE DYNAMIC LEADERSHIP OF THE BUSH-QUAYLE ADMINISTRATION, THE AMERICAN POLICY ON DECK SHOES HAS BEEN CLEARLY STATED ON A NUMBER OF OCCASIONS AND HAS THE FULL AND BIPARTISAN SUPPORT OF BOTH THE CONGRESS AND OF THE AMERICAN PEOPLE. ASSUMING THAT THE DECK SHOE INDUSTRY IS COMPETITIVE IN THE TRADITIONAL SENSE, DRAW THE INITIAL PRICE AND QUANTITY EQUILIBRIA FOR BOTH THE INDUSTRY AND FOR A REPRESENTATIVE FIRM. CLEARLY LABEL EACH OF THE IMPORTANT CURVES IN BOTH DIAGRAMS. SHOW AND EXPLAIN THE SHORT RUN EFFECT OF A GROWING AWARENESS IN 1993 THAT THE WEARING OF DECK SHOES IS SEEN AS A SIGN OF SUPPORT FOR ADMINISTRATION POLICY. ILLUSTRATE THE EFFECTS ON PRICE AND OUTPUT FOR BOTH THE FIRM AND THE INDUSTRY. SHOW AND EXPLAIN THE EFFECTS ON SHORT TERM PROFITS FOR THE FIRM. FINALLY, SHOW AND EXPLAIN HOW BOTH THE FIRM AND THE INDUSTRY WILL ADJUST IN THE LONG RUN. BE SURE TO CLEARLY EXPLAIN THE ADJUSTMENT PROCESS. USING A DIFFERENT COLOR OR STYLE, ADD THE LONG RUN INDUSTRY SUPPLY CURVE TO THE DIAGRAM.
EACH
QUESTION IN THIS SECTION IS WORTH FOUR POINTS
103 THIRD EXAM
1. TELEPHONE COMPANIES CHARGE LOWER RATES AFTER 5 P.M. THIS PRICING BEHAVIOR INDICATES THAT, AFTER 5 P.M., THE DEMAND FOR TELEPHONE SERVICES BECOMES
A. MORE ELASTIC
B. LESS ELASTIC.
C. GREATER.
D. LESS.
2. THE SURVIVORSHIP PRINCIPLE ASSERTS THAT
A. ONLY COMPETITIVE FIRMS WILL PRODUCE WHERE MR = MC.
B. FIRMS THAT DO NOT MAXIMIZE PROFITS WILL MAXIMIZE MARKET
SHARE IN THE LONG RUN.
C. PROFIT IS MAXIMIZED WHEN THE FIRM PRODUCES AT MR = MC.
D. FIRMS WILL PRODUCE AT MR = MC IN THE LONG RUN.
3. ECONOMISTS SAY THAT MANY PEOPLE ARE UNINFORMED ABOUT POLITICAL ISSUES BECAUSE THEY ARE
A. NOT PUBLIC SPIRITED.
B. LAZY.
C. NOT INTERESTED IN THE POLITICAL PROCESS.
D. LOGICAL.
PAGE BREAK
4. THE LONG JOHN SILVER CRUISE CORPORATION IS IN A MONOPOLISTICALLY COMPETITIVE INDUSTRY. THE MINIMUM AVERAGE TOTAL COST OF A BERTH, COMPLETE WITH A MONOGRAMMED PLANK, IS $900.00. IF THE PRICE OF A BERTH IS CURRENTLY $880.00, WE WOULD EXPECT THAT THE ECONOMIC LOSS PER UNIT IS $20.00 PER BERTH. ASSUME THAT THE INDUSTRY IS IN SHORT RUN EQUILIBRIUM.
A. MORE THAN
B. EQUAL TO
C. LESS THAN
D. NONE OF THE ABOVE
5. A NUMBER OF SHOPS IN THIS AREA SELL JUNK WITH THE CHICAGO BULLS INSIGNIA ON IT TO FOOLISH INDIVIDUALS WHO KNOW LITTLE ABOUT BASKETBALL (OR ANYTHING ELSE). IF A STORE CAN SELL NINE SWEATSHIRTS FOR A PRICE OF $20.00 PER SWEATSHIRT, OR TEN SWEATSHIRTS FOR A PRICE OF NINETEEN DOLLARS, CALCULATE THE MARGINAL REVENUE OF THE TENTH SWEATSHIRT.
A. $10.00
B. $19.00
C. $20.00
D. $180.00
E. $190.00
F. MORE INFORMATION IS NECESSARY.
6. IF A MONOPOLY FACES AN INCREASE IN ITS FIXED COSTS, AS LONG AS IT IS STILL ABLE TO EARN AT LEAST A NORMAL PROFIT,
A. THE QUANTITY PRODUCED AND THE PRICE WILL BOTH RISE.
B. THE QUANTITY PRODUCED WILL RISE AND THE PRICE WILL BE REDUCED.
C. THE QUANTITY PRODUCED WILL FALL AND THE PRICE WILL BE INCREASED.
D. THE QUANTITY PRODUCED AND THE PRICE WILL BOTH BE REDUCED.
E. THERE WOULD BE NO CHANGE EXPECTED IN EITHER PRICE OR QUANTITY.
7. A PRICE SETTING FIRM IS SELLING SIMULTANEOUSLY IN CALIFORNIA, FLORIDA, AND MEXICO. THE PRICES ARE CURRENTLY $4.00 IN CALIFORNIA, $3.00 IN FLORIDA, AND $2.00 IN MEXICO. AS THE NEW MARKETING STRATEGIST, YOU SHOULD RECOMMEND THAT THE FIRM
A. CHARGE MORE IN CALIFORNIA AND MEXICO AND LESS IN FLORIDA.
B. CHARGE MORE IN CALIFORNIA AND LESS IN MEXICO AND FLORIDA.
C. CHARGE LESS IN CALIFORNIA AND MEXICO AND MORE IN FLORIDA.
D. MORE INFORMATION IS NEEDED TO MAKE A DECISION.
8. WHICH OF THE FOLLOWING INDUSTRIAL STRUCTURES WOULD BE EXPECTED TO STOP PRODUCTION BEFORE SOCIAL WELFARE HAS BEEN MAXIMIZED?
A. MONOPOLISTIC COMPETITION
B. OLIGOPOLY
C. MONOPOLY
D. ALL OF THE ABOVE
PAGE BREAK
9. ASSUME THAT A FIRM FACES THE COST AND DEMAND CONDITIONS SHOWN BELOW. IN THE SHORT RUN, THE FIRM SHOULD
A. PRODUCE QUANTITY Q1 AND CHARGE PRICE P4.
B. PRODUCE QUANTITY Q2 AND CHARGE PRICE P3.
C. PRODUCE QUANTITY Q3 AND CHARGE PRICE P2.
D. PRODUCE QUANTITY Q4 AND CHARGE PRICE P4.
E. LEAVE THE INDUSTRY.
10. THE PRICES OFFERED BY A FIRM IN A COMPETITIVE INDUSTRY ARE BETTER THAN THOSE OFFERED BY A MONOPOLISTICALLY COMPETITIVE FIRM BECAUSE THE PRICES OFFERED BY THE COMPETITIVE FIRM
A. ARE LOWER.
B. MORE ACCURATELY REPRESENT MARGINAL COST.
C. INCREASE THE DEMAND FOR THE PRODUCT.
D. INCLUDE A NORMAL PROFIT.
11. OLIGOPOLISTIC INDUSTRIES ARE CHARACTERIZED BY MUTUAL INTERDEPENDENCE. THIS MEANS THAT
A. OLIGOPOLIES ENGAGE IN PRICE‑FIXING AGREEMENTS.
B. THE ACTIONS OF ONE FIRM AFFECT THE ACTIONS OF OTHER FIRMS IN THE INDUSTRY.
C. NEW OLIGOPOLIES IMITATE THE PRODUCTS OF FIRMS ALREADY ESTABLISHED IN THE INDUSTRY.
D. THE SAME INDIVIDUALS SET ON THE BOARD OF DIRECTORS OF
SEVERAL DIFFERENT FIRMS IN THE INDUSTRY.
PAGE BREAK
12. WHICH OF THE FOLLOWING MARKET STRUCTURES WOULD HAVE THE SMALLEST NUMBER OF FIRMS?
A. PERFECT COMPETITION
B. MONOPOLISTIC COMPETITION
C. OLIGOPOLY
D. MONOPOLY
13. IN THE PRISONERS' DILEMMA MODEL
A. EACH FIRM SETS ITS OWN PRICE INDEPENDENTLY.
B. FIRMS FAIL TO TRUST EACH OTHER ENOUGH TO MAXIMIZE INDUSTRY PROFITS.
C. ONE FIRM, USUALLY THE LARGEST, MAKES PRICE DECISIONS FOR THE WHOLE INDUSTRY.
D. FIRMS PRICE A LITTLE LOWER THAN NORMAL IN ORDER TO KEEP NEW FIRMS OUT OF THE INDUSTRY.
14. THE TYPE OF INDUSTRY WHICH IS LEAST LIKELY TO SHOW PRICE CHANGES OVER TIME IS
A. PERFECT COMPETITION, AS DEFINED IN THE TRADITIONAL MODEL.
B. PURE COMPETITION, AS DEFINED IN THE AUSTRIAN MODEL.
C. MONOPOLISTIC COMPETITION
D. OLIGOPOLY
E. MONOPOLY
15. IF A MONOPOLY IS ABLE TO REDUCE ITS OWN VARIABLE COSTS
A. THE QUANTITY PRODUCED AND THE PRICE WILL BOTH RISE.
B. THE QUANTITY PRODUCED WILL RISE AND THE PRICE WILL BE REDUCED.
C. THE QUANTITY PRODUCED WILL FALL AND THE PRICE WILL BE INCREASED.
D. THE QUANTITY PRODUCED AND THE PRICE WILL BOTH BE REDUCED.
16. THE ECONOMIC THEORY OF ADVERTISING SAYS THAT A FIRM SHOULD
A. ONLY TELL CONSUMERS THE OBJECTIVE TRUTH ABOUT ITS PRODUCT.
B. LIE ABOUT THE QUALITY OF COMPETING PRODUCTS.
C. EXAGGERATE AS MUCH AS POSSIBLE ABOUT COMPETING PRODUCTS.
D. LIMIT ITS EXAGGERATION ABOUT THE QUALITY OF ITS OWN PRODUCTS.
17. ONE PROBLEM WITH CURRENT MEASURES OF MONOPOLY POWER IS THAT THEY
A. ARE TOO BIG.
B. CONCENTRATE ON ONLY A FEW INDUSTRIES.
C. FAIL TO ALLOW FOR THE POSSIBILITY OF FOREIGN COMPETITION.
D. OVERESTIMATE THE ROLE OF JUNK BONDS.
PAGE BREAK
18. WITH WHICH FORM OF CORPORATE MERGER IS AN INDUSTRY'S DEGREE OF CONCENTRATION MOST LIKELY TO INCREASE?
A. CONGLOMERATE
B. HORIZONTAL
C. VERTICAL
D. INDUSTRY CONCENTRATION IS NOT AFFECTED BY CORPORATE MERGER ACTIVITY.
19. ASSUME THAT A FIRM DOES BUSINESS ON A LINE FROM BALTIMORE, THROUGH CLEVELAND, AND ENDING IN MILWAUKEE. THE MOST EXPENSIVE SHIPMENT WEST FROM BALTIMORE OR EAST FROM CLEVELAND ADDS $34.00 TO TOTAL COST, AND THE MOST EXPENSIVE SHIPMENT EAST FROM MILWAUKEE OR WEST FROM CLEVELAND ADDS $22.00 TO TOTAL COST. IN THE LONG RUN, THIS FIRM SHOULD
A. REPLACE THE CLEVELAND DISTRIBUTION POINT WITH ONE THAT IS FURTHER EAST.
B. REPLACE THE CLEVELAND DISTRIBUTION POINT WITH ONE THAT
IS FURTHER WEST.
C. REPLACE THE BALTIMORE DISTRIBUTION POINT WITH ONE THAT
IS FURTHER EAST.
D. REPLACE THE MILWAUKEE DISTRIBUTION POINT WITH ONE THAT
IS FURTHER EAST.
20. ASSUME THAT THE COMMUNICATIONS INDUSTRY IS A DECREASING COST MONOPOLISTICALLY COMPETITIVE INDUSTRY. AN INCREASE IN THE NUMBER OF FIRMS WILL LEAD TO A(AN)
A. INCREASE IN THE FIRM'S COSTS, BUT NO CHANGE IN DEMAND FOR
PREVIOUSLY ESTABLISHED FIRMS.
B. DECREASE IN THE FIRM'S COSTS, BUT NO CHANGE IN DEMAND FOR
PREVIOUSLY ESTABLISHED FIRMS.
C. INCREASE IN DEMAND FOR THE PRODUCTS OF PREVIOUSLY
ESTABLISHED FIRMS, BUT NO CHANGE IN THEIR COSTS.
D. INCREASE IN DEMAND FOR THE PRODUCTS OF PREVIOUSLY
ESTABLISHED FIRMS, AND A REDUCTION IN THEIR COSTS.
E. DECREASES IN BOTH THE DEMAND FOR THE PRODUCTS OF PREVIOUSLY ESTABLISHED FIRMS AND IN THEIR COSTS.
SUMMER 1993.3 ON MY HOME PLANET OUR CLEAN AIR ACT INCLUDES WHAT IS EFFECTIVELY A TAX ON THE USE OF COAL IN ORDER TO FIGHT THE ACID RAIN PROBLEM. ASSUME THAT THE STEEL INDUSTRY USES COAL AS ITS MAJOR SOURCE OF ENERGY, THAT THE STEEL INDUSTRY IS NOW IN LONG RUN EQUILIBRIUM, AND THAT THE STEEL INDUSTRY IS MONOPOLISTICALLY COMPETITIVE. SHOW AND EXPLAIN BOTH THE LONG RUN AND SHORT RUN EFFECTS OF THIS LEGISLATION ON THE STEEL INDUSTRY.
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EACH
QUESTION IN THIS SECTION IS WORTH FOUR POINTS
103 FINAL EXAM
1. WHICH OF THE FOLLOWING IS TRUE OF A PUBLIC GOOD?
A. THE BENEFITS FROM THE GOOD ARE ENJOYED EXCLUSIVELY BY THOSE WHO PURCHASE THE GOOD.
B. IT IS DIFFICULT TO EXCLUDE NONPAYERS FROM USING THE GOOD. C. EVERYONE PAYS TO PRODUCE THE GOOD AND FEW BENEFITS ARE REALIZED.
D. THE GOOD IS CONSUMED BY THE MAJORITY OF PEOPLE.
2. ACCORDING TO ECONOMISTS, WHICH OF THE FOLLOWING MAY REPRESENT A SOURCE OF SOCIAL PROBLEMS THAT MAY DEMAND GOVERNMENT ACTION?
A. INDUSTRIAL CONCENTRATION
B. EXTERNALITIES
C. PUBLIC GOODS
D. ALL OF THE ABOVE
3. TO AN ECONOMIST, THE BEST SOLUTION TO A POLLUTION PROBLEM WOULD BE TO
A. REGULATE THE PRODUCERS.
B. PUT A TAX ON THE PRODUCTS INVOLVED.
C. SELL PERMITS TO POLLUTE.
D. SHUT DOWN ALL POLLUTING COMPANIES.
4. A TAX ON A GOOD TENDS TO CAUSE
A. LESS OF THE GOOD TO BE PURCHASED.
B. PROLONGED SURPLUSES OF THE GOOD.
C. PROLONGED SHORTAGES OF THE GOOD.
D. BUYERS TO PAY LOWER PRICES FOR THE GOOD.
5. MARGINAL FACTOR COST IS DEFINED AS
A. THE EXTRA COST INCURRED IN HIRING AN ADDITIONAL UNIT OF A FACTOR.
B. THE MARGINAL COST OF A COMPETITIVELY PRODUCED OUTPUT.
C. THE CHANGE IN COST GENERATED BY ADDITIONAL REVENUE.
D. MARGINAL REVENUE TIMES MARGINAL PRODUCT.
6. IMPERFECT COMPETITION IN THE OUTPUT MARKETS RESULTS IN
A. MORE LABOR HIRED THAN IF THE OUTPUT MARKET WERE COMPETITIVE.
B. LESS LABOR HIRED THAN IF THE OUTPUT MARKET WERE COMPETITIVE.
C. ABOVE EQUILIBRIUM WAGES PAID BY MONOPOLIES.
D. EFFICIENCY IN THE ALLOCATION OF INPUTS.
7. THE CAPITAL LABOR RATIO
A. IS THE SAME AS THE SUBSTITUTION EFFECT.
B. REPRESENTS THE AMOUNT OF AVAILABLE EQUIPMENT PER WORKER.
C. IS EQUAL TO THE AMOUNT OF HUMAN CAPITAL.
D. IS THE QUANTITY OF CAPITAL TIMES THE QUANTITY OF LABOR.
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8. RELATIVE TO PRICE TAKING FIRMS, FIRMS WHICH ARE PRICE SETTERS IN THEIR INPUT MARKETS TEND TO
A. HIRE MORE WORKERS.
B. HIRE LABOR UP TO THE POINT WHERE MRP = WAGE
C. SELL OUTPUT AT PRICES EXCEEDING LABOR'S MARGINAL REVENUE PRODUCT.
D. PAY LOWER WAGES
9. EMPLOYMENT DISCRIMINATION IS MOST LIKELY TO OCCUR WHEN
A. A MARKET IS TAXED.
B. THERE IS A LACK OF COMPETITION IN SOME MARKETS.
C. THERE IS A FREE LABOR MARKET.
D. THERE IS NO GENERAL ECONOMIC PATTERN TO DISCRIMINATION.
10. IF WAGES ARE ADJUSTED ACCORDING TO COMPARABLE WORTH
A. MEN WILL GET PAID MORE THAN WOMEN.
B. WOMEN WILL GET PAID MORE THAN MEN.
C. MEN AND WOMEN WILL ALL RECEIVE THE SAME PAY.
D. MEN AND WOMEN WILL RECEIVE THE SAME PAY IF THEIR JOBS ARE OF EQUAL DIFFICULTY AND REQUIRE EQUAL TRAINING.
11. WHICH OF THE FOLLOWING FACTORS SEEMS TO HAVE AN INFLUENCE ON INCOME DISTRIBUTION IN THE UNITED STATES?
A. PARENT'S WEALTH
B. AGE
C. EDUCATION
D. RACE
E. SEX
F. ALL OF THE ABOVE MAY INFLUENCE THE DISTRIBUTION OF INCOME.
12. MEDIAN INCOME REPRESENTS
A. OUTPUT DIVIDED BY THE NUMBER OF WORKERS.
B. THE LEVEL OF INCOME WHICH IS EQUAL TO OR LESS THAN THAT
EARNED BY HALF OF THE FAMILIES IN THE POPULATION.
C. THE LORENZ CURVE.
D. THE CURRENT POVERTY STANDARD.
13. COMPARED TO THE 22 OTHER INDUSTRIALIZED NATIONS, THE UNITED STATES RANKS IN INFANT AND PRENATAL HEALTH CARE, AS MEASURED BY INFANT MORTALITY RATES.
A. FIRST, WE HAVE THE BEST HEALTH RECORD
B. THIRD, BEHIND ONLY JAPAN AND GERMANY
C. IN THE MIDDLE
D. DEAD LAST
14. VENTURE CAPITAL IS
A. MONEY USED TO COVER FIXED COSTS.
B. MONEY USED TO CREATE A NEW FIRM.
C. MONEY USED TO PAY WORKERS.
D. PROFIT REMAINING AFTER THE PAYMENT OF ALL COSTS.
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15. BASED UPON AVAILABLE STATISTICAL EVIDENCE, WHICH OF THE FOLLOWING STATEMENTS IS TRUE?
A. INCOME MAINTENANCE PROGRAMS HELP THE POOR RISE TO MIDDLE
INCOME LEVELS.
B. INCOME MAINTENANCE PROGRAMS TRAP THE POOR IN A PERMANENT
CYCLE OF POVERTY.
C. BOTH OF THE ABOVE.
D. NONE OF THE ABOVE IS ACCEPTED BY ALL ECONOMISTS.
16. CONSUMER SURPLUS IS
A. WHAT THE CONSUMER HAS LEFT OVER AFTER BUYING A PRODUCT.
B. WHAT THE SELLER HAS LEFT OVER AFTER SELLING A PRODUCT.
C. THE GAIN TO A CONSUMER FROM PARTICIPATING IN A VOLUNTARY
TRANSACTION.
D. THE AREA UNDERNEATH THE PRICE LINE.
17. IF THE AVERAGE SALES PER WORKER DECLINES AFTER WE HIRE ONE MORE SALESPERSON, WE KNOW THAT HIS/HER MARGINAL SALES ARE
A. MORE THAN THE AVERAGE.
B. EQUAL TO THE AVERAGE.
C. LESS THAN THE AVERAGE.
D. TOO LOW TO JUSTIFY HIS/HER CONTINUED EMPLOYMENT.
18. JUDGE THE FOLLOWING BEFORE AND AFTER SITUATION. IF FRED BUYS A USED CAR ON WHICH THE CAR SALESPERSON MAKES A LARGE ECONOMIC PROFIT
A. BOTH FRED AND THE SALESMAN ARE BETTER OFF.
B. THE SALESMAN IS BETTER OFF BUT FRED IS WORSE OFF.
C. FRED IS BETTER OFF BUT THE SALESMAN IS WORSE OFF.
D. THEY ARE BOTH WORSE OFF.
19. FOR A PRICE TAKING FIRM, WHEN MARGINAL COST IS GREATER THAN PRICE
A. ECONOMIC PROFIT IS GREATER THAN ZERO.
B. ECONOMIC PROFIT IS EQUAL TO ZERO.
C. ECONOMIC PROFIT IS LESS THAN ZERO.
D. PROFIT IS BEING MAXIMIZED.
E. PROFIT IS NOT BEING MAXIMIZED.
20. AN INCREASE IN THE PRICE OF DUKE UNIVERSITY BASKETBALL TICKETS WILL LEAD TO A(N)
A. INCREASE IN THE QUANTITY DEMANDED.
B. DECREASE IN THE QUANTITY DEMANDED.
C. BOTH DEMAND AND QUANTITY DEMANDED WILL RISE.
D. BOTH DEMAND AND QUANTITY DEMANDED WILL FALL.
E. ANOTHER NATIONAL CHAMPIONSHIP FOR THE MOST NOBLE, UNSELFISH, AND DESERVING TEAM IN COLLEGE SPORTS.
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21. IN THE SHORT RUN, IF A PRICE TAKING FIRM IS UNABLE TO COVER ITS VARIABLE COSTS, IT SHOULD
A. TRY TO REDUCE COSTS.
B. TRY TO INCREASE PRICE.
C. LEAVE THE INDUSTRY.
D. PRODUCE AT THE QUANTITY FOR WHICH PRICE EQUALS MARGINAL COST.
E. PRODUCE NOTHING.
22. THE LONG RUN SUPPLY CURVE OF A PRICE SETTING FIRM CORRESPONDS MOST CLOSELY TO WHICH OF THE FOLLOWING CURVES?
A. DEMAND
B. MARGINAL REVENUE
C. COST
D. AVERAGE COST
E. MARGINAL COST
F. NONE OF THE ABOVE
23. A PRICE SETTING FIRM IS SELLING SIMULTANEOUSLY IN CALIFORNIA, FLORIDA, AND MEXICO. THE PRICES ARE CURRENTLY $4.00 IN CALIFORNIA, $3.00 IN FLORIDA, AND $2.00 IN MEXICO. AS THE NEW MARKETING STRATEGIST, YOU SHOULD RECOMMEND THAT THE FIRM
A. CHARGE MORE IN CALIFORNIA AND MEXICO AND LESS IN FLORIDA.
B. CHARGE MORE IN CALIFORNIA AND LESS IN MEXICO AND FLORIDA.
C. CHARGE LESS IN CALIFORNIA AND MEXICO AND MORE IN FLORIDA.
D. MORE INFORMATION IS NEEDED TO MAKE A DECISION.
24. MR. JACOBS, A PRICE TAKER, IS CURRENTLY PRODUCING POPCORN AT A PROFITABLE OUTPUT LEVEL WHERE MARGINAL REVENUE IS LESS THAN MARGINAL COST. TO FURTHER IMPROVE PROFITABILITY MR. JACOBS SHOULD
A. RAISE THE PRICE OF HIS POPCORN.
B. LOWER THE PRICE TO INCREASE SALES.
C. INCREASE PRODUCTION.
D. DECREASE PRODUCTION.
E. MORE INFORMATION IS NECESSARY.
25. IF A MONOPOLY IS ABLE TO REDUCE ITS OWN VARIABLE COSTS
A. THE QUANTITY PRODUCED AND THE PRICE WILL BOTH RISE.
B. THE QUANTITY PRODUCED WILL RISE AND THE PRICE WILL BE REDUCED.
C. THE QUANTITY PRODUCED WILL FALL AND THE PRICE WILL BE
INCREASED.
D. THE QUANTITY PRODUCED AND THE PRICE WILL BOTH BE REDUCED.
26. DR. SHINGLETON IS MOST LIKELY A(AN)
A. COMMUNIST.
B. SOCIALIST.
C. DEMOCRAT.
D. REPUBLICAN.
E. FASCIST.
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EXPLANATORY KEY
103 FIRST EXAM
1. C IF THE AVERAGE (OF ANYTHING) IS DECLINING, THEN THE MARGINAL IS BELOW THE AVERAGE. THIS DOES NOT PROVIDE ANY INFORMATION ON WHICH DIRECTION THE MARGINAL IS HEADED, ONLY THAT IT IS BELOW THE AVERAGE.
2. C AS A CONTRIBUTION OF ALFRED MARSHALL (OR MAYBE HIS WIFE HARRIET, WHO IS RUMORED TO BE NEARLY AS INSIGHTFUL), IN ECONOMIC ANALYSIS, THE MARGINAL INDIVIDUAL IS THE MOST IMPORTANT BECAUSE HE/SHE IS THE ONE WHO IS MOST LIKELY TO REACT TO A SMALL CHANGE IN CIRCUMSTANCES.. MARSHALL SAID WE DO NOT NEED TO WASTE OUR TIME STUDYING THE BEHAVIOR OF PEOPLE WHO DO NOT CHANGE THEIR WAYS.
3. E ALL ECONOMISTS AGREE ON LITTLE, SO THAT WAS THE FIRST CLUE. FURTHER, THERE IS CONSIDERABLE DISAGREEMENT ABOUT HOW MUCH REALISM IS REQUIRED IN A GOOD THEORY. SOME THINK REALISM IS IMPORTANT, OTHERS BELIEVE IT IS IRRELEVANT. ANY THEORY REQUIRES SOME SIMPLICITY, BUT THE TRICK IS TO DECIDE HOW MUCH IS ENOUGH, SINCE EACH STEP TOWARD GREATER SIMPLICITY IS A STEP AWAY FROM GREATER ACCURACY. THE COMMENT LEFT OUT OF THE ANSWER KEY IS THAT ALL THEORIES SHOULD BE ABLE TO PREDICT OR EXPLAIN SOMETHING.
4. C THIS IS A DEFINITION. NO INDIVIDUAL WILL PARTICIPATE IN A VOLUNTARY TRANSACTION UNLESS HE/SHE WILL BENEFIT FROM THE ACTIVITY, SINCE VOLUNTARY MEANS THAT THE INDIVIDUAL ALWAYS HAS THE OPTION TO JUST SAY, "NO." CONSUMER SURPLUS, AS THE GAIN TO THE BUYER, IS THE DIFFERENCE BETWEEN WHAT HE/SHE PAYS AND WHAT HE/SHE WOULD HAVE BEEN WILLING TO PAY. PRODUCER SURPLUS IS THE GAIN TO THE SELLER AND IS OFTEN CONFUSED WITH THE CONCEPT OF "PROFIT".
5. C THIS IS A DEFINITION. A FACTOR OF PRODUCTION IS USED TO PRODUCE SOMETHING ELSE. IF IT IS MANMADE AND LASTS MORE THAN ONE TIME PERIOD, IT IS USUALLY REFERRED TO AS CAPITAL.
6. C THE PRODUCTION POSSIBILITIES BOUNDARY, BY DEFINITION, IDENTIFIES THE COMBINATIONS OF GOODS THAT SOCIETY HAS THE ABILITY TO PRODUCE. THOSE COMBINATIONS ARE ALL EITHER (1) ON THE FRONTIER, AS IN THE CASE IN WHICH A SOCIETY IS USING ALL OF ITS RESOURCES EFFICIENTLY,; OR (2) INSIDE THE FRONTIER, AS IN THE CASE WHEN THERE ARE SOME IDLE OR INEFFICIENTLY USED RESOURCES.
7. C THIS QUESTION IS ANOTHER APPLICATION OF THE IDEAS FROM QUESTION 6. SINCE A IS INSIDE THE FRONTIER, IT REPRESENTS EITHER UNEMPLOYED OR INEFFICIENTLY UTILIZED RESOURCES.
8. B NORMATIVE ECONOMICS IS OFTEN A VALUE LADEN APPROACH TO QUESTIONS THAT CANNOT BE OBJECTIVELY TESTED. WHO GETS TO DECIDE HOW MUCH INCOME DOCTORS DESERVE? WHAT STANDARD IS APPROPRIATE?
9. C ECONOMIC ANALYSIS ASSERTS THAT BOTH PARTIES IN A VOLUNTARY TRANSACTION MUST BENEFIT FROM THE TRANSACTION. IF EITHER ONE DID NOT, "VOLUNTARY" MEANS THAT HE/SHE WOULD HAVE THE OPTION TO NOT PARTICIPATE.
10. D THE DEMAND FOR SUGAR WOULD INCREASE IF CONSUMERS WOULD BUY MORE, EVEN IF THE PRICE DID NOT CHANGE. THAT TEST RULES OUT C (A DECREASE IN THE PRICE OF SUGAR) AS AN ANSWER. A DECREASE IN INCOME (B) GENERALLY CAUSES PEOPLE TO BUY LESS, NOT MORE, WHILE A CHEAPER SUBSTITUTE (A) WOULD CAUSE PEOPLE TO BUY MORE OF THE SUBSTITUTE AND LESS OF THE SUGAR. (D) A DECREASE IN THE PRICE OF COFFEE, A COMPLEMENTARY GOOD, MEANS THAT PEOPLE WILL BUY MORE COFFEE AND THEREFORE BUY MORE SUGAR TO PUT INTO THEIR COFFEE.
11. D AN INCREASE IN COST WILL CAUSE A DECREASE IN SUPPLY, SINCE PRODUCERS WOULD SUPPLY LESS, EVEN IF THE PRICE DID NOT CHANGE. AN INCREASE IN PRICE WOULD INCREASE THE QUANTITY SUPPLIED, BUT ONE OF THE IMPORTANT CONCEPTS BEING TESTED IN THE QUESTION IS THAT PRICE AND COST ARE NOT SYNONYMS.
12. C A DECREASE IN THE PRICE OF MOVIE TICKETS WOULD CAUSE AN INCREASE IN THE NUMBER OF TICKETS SOLD, WHILE A DECREASE IN THE DEMAND FOR MCDONALD'S PRODUCTS WOULD INDICATE THAT PEOPLE WERE BUYING FEWER MCDONALD'S PRODUCTS. WHEN A PRICE CHANGE IN ONE GOOD CAUSES PEOPLE TO BUY MORE OF ONE (MOVIES) AND LESS OF THE OTHER (MCDONALDS), BY DEFINITION, THE TWO GOODS ARE SUBSTITUTES OF EACH OTHER.
13. A WHEN THE QUANTITY DEMANDED IS MORE THAN THE QUANTITY SUPPLIED, A SHORTAGE EXISTS AND THE PRICE WILL RISE. BY ITSELF, THE SHORTAGE (OR THE RESULTANT PRICE INCREASE) CANNOT CAUSE A CHANGE IN EITHER DEMAND OR SUPPLY. THE FACT THAT DON MATTINGLY IS A GOLD GLOVE FIRST BASEMAN AND A FEARED CLUTCH HITTER HAS NOTHING TO DO WITH THE ANSWER.
14. C THIS ANSWER REQUIRES YOU TO PUT SOME PIECES TOGETHER. AN INCREASE IN SUPPLY WILL RESULT IN A SURPLUS AT THE OLD PRICE; THE SURPLUS WILL CAUSE A DECREASE IN THE EQUILIBRIUM PRICE; AND THE DECREASE IN THE EQUILIBRIUM PRICE WILL INCREASE THE QUANTITY DEMANDED. TWO LESSONS FOLLOW FROM THIS CONCLUSION. FIRST, DEMAND IS NOT AFFECTED BY THE CHANGE IN SUPPLY. SECOND, STUDY VERY HARD FOR THIS EXAM.
15. C THE BEST WAY TO DEAL WITH THIS ONE IS TO TAKE IT APART. BY ITSELF, THE INCREASE IN DEMAND WOULD RAISE THE PRICE AND INCREASE THE QUANTITY. BY ITSELF, THE INCREASE IN THE SUPPLY WOULD REDUCE THE PRICE AND INCREASE THE QUANTITY. SINCE BOTH OF THE EFFECTS INCLUDE AN INCREASE IN QUANTITY, THE FINAL RESULT HAS TO INCLUDE AN INCREASE IN QUANTITY. BUT SINCE THE TWO EFFECTS ARE PUSHING THE PRICE IN OPPOSITE DIRECTIONS, THE EFFECT ON THE EQUILIBRIUM PRICE IS UNCERTAIN.
16. D WHEN THE PRICE IS AT EQUILIBRIUM, DISCRIMINATION COSTS MONEY BECAUSE EITHER THE BUYER OR THE SELLER (WHOEVER IS DOING THE DISCRIMINATING) IS DISMISSING POTENTIAL (AND SCARCE) PARTNERS. HIGH AND LOW ARE RELATIVE TERMS THAT ARE MEANINGLESS WITHOUT A RELEVANT STANDARD. REGULATION CAUSES AN IMBALANCE BETWEEN THE NUMBER OF BUYERS AND SELLERS AND PROVIDES AN OPPORTUNITY FOR THOSE WITH THE ADVANTAGE TO DISCRIMINATE WITHOUT COST.
17. D THIS ONE IS A DEFINITION.
18. D THE SWITCH SHOWS NO CHANGE IN THE NUMBER OF APPLES THE CONSUMER CAN AFFORD, SO THE CHANGE COULD NOT HAVE BEEN CAUSED EITHER BY AN INCREASE IN THE PRICE OF APPLES OR BY A REDUCTION IN THE CONSUMER'S INCOME. A DECREASE IN THE PRICE OF ORANGES WOULD INCREASE THE NUMBER THAT HE/SHE COULD AFFORD, WHICH LEAVES D AS THE ONLY VIABLE ANSWER. NOTE THAT A BUDGET CONSTRAINT REFERS TO WHAT THE CONSUMER CAN AFFORD, NOT WHAT HE/SHE WILL ACTUALLY BUY.
19. D COMPARED TO THE REFERENCE POINT A, ONLY POINT D REPRESENTS MORE OF BOTH GOODS. IN ALL OF THE OTHER CASES, THE CONSUMER IS GIVING SOMETHING UP. SINCE YOU CANNOT PRESUME TO KNOW HOW VALUABLE THESE LOST ITEMS WILL BE, THERE IS NO WAY TO CONCLUDE THAT ANY OF THEM COULD BE BETTER THAN A.
20. B WHEN THE PERCENTAGE CHANGE IN QUANTITY IS MORE THAN THE PERCENTAGE CHANGE IN PRICE, THE DEMAND IS DEFINED AS ELASTIC.
21. B THIS MAY HAVE BEEN THE GREATEST LOVE SONG OF ALL TIME. THE SURVEY WAS DONE SOMETIME IN THE EARLY 1990s.
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103 SECOND EXAM
1. B AS A MATTER OF DEFINITION, VENTURE CAPITAL IS MONEY USED TO CREATE A NEW FIRM.
2. C SINCE SOME PROFIT IS ALWAYS NORMAL, THE ECONOMIC PROFIT IS ALWAYS LESS THAN WHAT IS REPORTED.
3. B THE PROFIT MAXIMIZING PRODUCTION RATE OCCURS AT THE LEVEL OF PRODUCTION AT WHICH THE MARGINAL REVENUE AND MARGINAL COST ARE EQUAL. SINCE AN INCREASE IN SUNK COST WOULD NOT AFFECT EITHER THE MARGINAL COST OR THE MARGINAL REVENUE, ANY CHANGE IN SUNK COST WOULD HAVE NO EFFECT ON OUTPUT. PLEASE NOTE THAT THE SAME LOGIC, AND THE SAME ANSWER WOULD PERTAIN IF THE QUESTION REFERRED TO FIXED COST RATHER THAN SUNK COST.
4. B AS A MATTER OF DEFINITION, MARGINAL COST IS DEFINED AS THE CHANGE IN TOTAL COST RESULTING FROM THE PRODUCTION OF AN ADDITIONAL UNIT OF OUTPUT.
5. C AS A MATTER OF DEFINITION, ANY INCREASE IN TOTAL COST THAT IS RELATED TO A CHANGE IN OUTPUT IS VARIABLE COST. IT REPRESENTS THE MARGINAL COST OF THE ADDITIONAL PRODUCTION.
6. C AS A MATTER OF DEFINITION, IF A FIRM IS EXPERIENCING ECONOMIES OF SCALE, AVERAGE COST IS FALLING.
7. B AGAIN, AS A MATTER OF DEFINITION, IF A FIRM IS CHARACTERIZED AS BEING A PRICE TAKER, THEN IT ACCEPTS THE GOING MARKET PRICE FOR ITS PRODUCTS.
8. B SINCE PROFIT MAXIMIZATION REQUIRES THAT MARGINAL REVENUE EQUAL MARGINAL COST, THE MARGINAL COST (AND THE MARGINAL REVENUE) ARE THE ELEMENTS THAT DETERMINE THE RATE OF OUTPUT.
9. D THIS ONE IS A LITTLE MORE COMPLEX. ALL FIRMS WANT TO TRY SOME VERSION OF A OR B ALL THE TIME, SO NEITHER HAS MUCH TO DO WITH THE FACT THAT WE ARE RESTRICTING OURSELVES TO A CONSIDERATION OF A PRICE TAKING FIRM. SIMILARLY, AS A MATTER OF DEFINITION, NO FIRM EVER HAS THE ABILITY TO LEAVE THE INDUSTRY IN THE SHORT RUN, WHICH ELIMINATES C AS A POSSIBILITY. IF A PRICE TAKING FIRM IS ABLE TO COVER ITS VARIABLE COSTS, THEN PRODUCING AT AN OUTPUT RATE FOR WHICH THAT IS POSSIBLE IS BETTER THAN PRODUCING NOTHING, SO D IS THE ANSWER. IN ADDITION, D REPRESENTS PROFIT MAXIMIZATION (OR LOSS MINIMIZATION).
10. D FIRMS THAT SUFFER THE PROSPECT OF LONG‑RUN LOSSES LEAVE THEIR INDUSTRIES, VOLUNTARILY OR OTHERWISE. WHEN THEY LEAVE, THEY TAKE THEIR CONTRIBUTIONS TO SUPPLY WITH THEM, SO SUPPLY IS DECREASED.
11. A THIS QUESTION IS THE MIRROR IMAGE OF THE PREVIOUS ONE. THE PROSPECT OF UNEXPECTED PROFITS WILL ATTRACT NEW FIRMS TO THE INDUSTRY, AND THEY WILL ADD THEIR SUPPLIES TO THE SUPPLY THAT PREVIOUSLY EXISTED.
12. C THE KEY HERE IS WHERE THE RELEVANT RANGE OF THE CURVE BEGINS. IF THE SAME QUESTION HAD BEEN ASKED, BUT THE STARTING POINT HAD BEEN THE AVERAGE TOTAL COST CURVE, WE WOULD HAVE BEEN REFERRING TO THE FIRM'S LONG RUN SUPPLY CURVE.
13. C THIS ONE IS A DEFINITION.
14. A IN AN AUSTRIAN COMPETITIVE MODEL, ECONOMIC PROFITS ARE POSSIBLE IN BOTH THE SHORT RUN AND THE LONG RUN BECAUSE, WHILE FIRMS ALL CHARGE THE SAME PRICE, THEY EACH FACE THEIR OWN UNIQUE COST STRUCTURES. YOU SHOULD NOTE THAT THIS IS ONE OF THE TOPICS THAT IS COVERED ONLY ON AN OCCASIONAL BASIS, SO YOU MAY NOT BE RESPONSIBLE FOR IT. ASK DR. SHINGLETON ABOUT THE CURRENT SEMESTER, OR CHECK THE CLASS NOTES FILE USING THE SEARCH COMMAND.
15. A AN INCREASE IN DEMAND WILL LEAD TO AN INCREASE IN THE SHORT RUN EQUILIBRIUM PRICE IN MOST MODELS. THE DEFINING CHARACTERISTIC IN THIS QUESTION IS THE FACT THAT IN THE TRADITIONAL MODEL OF A CONSTANT COST COMPETITIVE INDUSTRY, AN INCREASE IN PRICE WILL INCREASE PROFITS AND ATTRACT OTHER FIRMS TO THE INDUSTRY. THESE NEW FIRMS DO NOT AFFECT THE COST STRUCTURE (THAT IS THE IMPORTANCE OF THE CONSTANT COST INDUSTRY CHARACTERISTIC) SO THE ENTRY CONTINUES UNTIL THE PROFITS ARE ELIMINATED, BACK AT THE ORIGINAL PRICE.
16. A THE ENTRY EFFECT IS THE EFFECT OF HAVING NEW FIRMS ADD THEIR SUPPLIES TO THE PREVIUOSLY ESTABLISHED SUPPLY, SO IT IS ALWAYS AN INCREASE IN SHORT RUN SUPPLY. THE OTHER DIMENSION OF THE CHANGE IS THE COST EFFECT. IN AN INCREASING COST INDUSTRY, THE EFFECT OF HAVING NEW FIRMS IS TO RAISE COSTS AND THEREFORE TO DECREASE SHORT RUN SUPPLY.
17. A AN INCREASE IN DEMAND WILL LEAD TO AN INCREASE IN THE SHORT RUN EQUILIBRIUM PRICE IN MOST MODELS. THE DEFINING CHARACTERISTIC IN THIS QUESTION IS THE FACT THAT IN THE INDUSTRY IS ASSUMED TO BE AN INCREASING COST INDUSTRY. THE ENTRY OF NEW FIRMS WILL RAISE COSTS, SO IN THE LONG RUN, WHEN PRICES DRIFT TO THE NEW LOW POINT ON THE NEW ATC CURVE, THEY CANNOT GO ALL THE WAY BACK TO THE ORIGINAL PRICE.
18. A INDUSTRY DEMAND IS NEVER AFFECTED BY THE NUMBER OF FIRMS IN THE INDUSTRY, WHICH ELIMINATES C AND D AS POSSIBILITIES. BY DEFINITION, IN A DECREASING COST INDUSTRY, A DECREASE (NOT AN INCREASE) IN THE NUMBER OF FIRMS WILL LEAD TO AN INCREASE IN THE COSTS FACED BY THE PRE-EXISTING FIRMS.
19. E BY DEFINITION, IN A CONSTANT COST INDUSTRY. A DECREASE IN THE NUMBER OF FIRMS WILL HAVE NO EFFECT ON COSTS, AND INDUSTRY DEMAND IS NEVER AFFECTED BY THE NUMBER OF FIRMS IN THE INDUSTRY.
20. D EACH OF THE IDENTIFIED CHARQACTERISTICS IS ASSOCIATED WITH THE BENEFITS OF A COMPETITIVE MARKET.
21. THIS QUESTION IS JUST A SAD COMMENTARY ON THE STATE OF THE GREATEST SPORTS FRANCHISE OF ALL TIME. THE TYRANNICAL, IRRATIONAL, NAMELESS, AND BRAINLESS INDIVIDUAL IS STILL THERE.
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THIRD EXAM 103
1. A WHEN DEMAND IS MORE SENSITIVE TO PRICE IT IS ELASTIC. A DEMAND THAT IS SENSITIVE TO PRICE IS ONE FOR WHICH THE FIRMS WILL CHARGE LOWER PRICES.
2. D IN THE SHORT RUN FIRMS CAN DO STUPID THINGS AND NOT HAVCE THEIR ACTIONS BE FATAL. BUT IN THE LONG RUN, ANYTHING OTHER THAN PROFIT MAXIMIZATION WILL RESULT IN EITHER BANKRUPTCY OR TAKEOVER.
3. D EVEN HUMANS ARE SOMETIMES LOGICAL. THE PUBLIC CHOICE MODEL SAYS THAT MANY PEOPLE ARE UNINFORMED ABOUT POLITICAL ISSUES BECAUSE THEY DON'T THINK THEY COULD CHANGE ANYTHING ANYWAY, SO THEY SEE THE PROCESS AND COST OF GATHERING INFORMATION ON PUBLIC ISSUES AS A WASTE OF TIME AND MONEY. THIS TOPIC IS NOT COVERED EACH SEMESTER.
4. A A MONOPOLISTICALLY COMPETITIVE FIRM IN SHORT RUN EQUILIBRIUM PRODUCES WHERE MARGINAL REVENUE EQUALS MARGINAL COST AND THEN PRICES FROM THE DEMAND CURVE. IF THE PRICE IS $880.00, THE MARGINAL REVENUE IS LESS THAN THAT, SO THE FIRM CANNOT BE PRODUCING AT THE LOW POINT ON THE AVERAGE COST CURVE. (WHY? BECAUSE AT THE LOW POINT ON THE AVERAGE TOTAL COST CURVE, THE MARGINAL COST IS $900, EQUAL TO THE AVERAGE.) SINCE IT IS NOT PRODUCING AT THE LOW POINT, ITS AVERAGE COST MUST BE MORE THAN $900. WITH A PRICE OF $880, THE LOSS MUST BE GREATER THAN THE DIFFERENCE BETWEEN THE TWO.
5. A THE MARGINAL REVENUE OF THE TENTH SHIRT IS THE DIFFERENCE BETWEEN THE FIRM'S TOTAL REVENUE WHEN IT SELLS TEN SHIRTS (EQUAL TO 10 SHIRTS * $19.00/SHIRT = $190.00) AND ITS TOTAL REVENUE WHEN IT SELLS NINE SHIRTS (EQUAL TO 9 SHIRTS * $20.00/SHIRT = $180.00). THE MARGINAL REVENUE OF THE TENTH SWEATSHIRT IS $190 - $180 = $10.00.
6. E THE PROFIT MAXIMIZING QUANTITY IS THE ONE FOR WHICH MARGINAL REVENUE EQUALS MARGINAL COST. SINCE A CHANGE IN FIXED COST AFFECTS NEITHER ONE, THE PROFIT MAXIMIZING QUANTITY DOES NOT CHANGE, AND SINCE THE PRICE IS SET BY TAKING THE QUANTITY TO THE DEMAND CURVE, THE PRICE IS ALSO UNAFFECTED.
7. D A PRICE SETTING FIRM MAXIMIZES PROFITS BY SETTING MARGINAL REVENUES (AND MARGINAL COSTS) EQUAL ACROSS ITS DIFFERENT MARKETS. THIS PROBLEM PROVIDES NO INFORMATION ON EITHER ONE.
8. D SOCIAL WELFARE IS MAXIMIZED WHEN MARGINAL COST EQUALS MARGINAL BENEFIT. FOR THE CONSUMER, THAT MEANS MARGINAL BENEFIT EQUALS PRICE, BUT EACH OF THESE FIRMS MAXIMIZES PROFITS AT MARGINAL REVENUE EQUALS MARGINAL COST. SINCE MARGINAL REVENUE IS LESS THAN PRICE FOR EACH ONE, THEY ALL STOP PRODUCTION TOO SOON.
9. A USING THE DIAGRAM BELOW, MARGINAL REVENUE EQUALS MARGINAL COST AT Q1. FOR Q1, THE BEST PRICE THE FIRM CAN CHARGE IS P4.
10. B PRICES THAT REFLECT MARGINAL COST ALLOW SOCIAL WELFARE TO BE MAXIMIZED (SEE QUESTION 8). LOWER PRICES, BY THEMSELVES ARE NOT TERRIBLY HELPFUL, SINCE IF PRICES ARE TOO LOW, NOTHING WILL BE PRODUCED.
11. B THIS IS A DEFINITION.
12. D SINCE A MONOPOLY IS DEFINED AS AN INDUSTRY WITH ONLY ONE FIRM, A MONOPOLY HAS THE SMALLEST NUMBER OF FIRMS OF ANY EXISTING INDUSTRY.
13. B IN THE PRISONERS' DILEMMA MODEL FIRMS FAIL TO TRUST EACH OTHER ENOUGH TO MAXIMIZE INDUSTRY PROFITS. ANSWER C IS REPRESENTATIVE OF THE PRICE LEADERSHIP MODEL, AND ANSWER D IS THE LIMIT PRICING MODEL. THE PRISONERS' DILEMNA IS NOT INCLUDED EACH SEMESTER, CHECK THE CLASS NOTES FILE.
14. D THE TYPE OF INDUSTRY WHICH IS LEAST LIKELY TO SHOW PRICE CHANGES OVER TIME IS OLIGOPOLY BECAUSE, IN AN OLIGOPOLY, AS LONG AS THE MARGINAL COST CURVE CONTINUES TO PASS THROUGH THE GAP IN THE MARGINAL REVENUE CURVE, THE PROFIT MAXIMIZING PRICE AND QUANTITY ARE UNAFFECTED BY ANY SHIFTS.
15. B A REDUCTION IN VARIABLE COSTS TRANSLATES INTO A DOWNWARD SHIFT IN THE MARGINAL COST CURVE. SUCH A SHIFT WILL CAUSE THE INTERSECTION OF MARGINAL REVENUE AND MARGINAL COST TO OCCUR AT A LARGER QUANTITY. SINCE THE DEMAND IS APPARENTLY UNAFFECTED, A LARGER QUANTITY WILL YIELD A LOWER PRICE.
16. C THE ECONOMIC THEORY OF ADVERTISING SAYS THAT A FIRM SHOULD EXAGGERATE AS MUCH AS POSSIBLE ABOUT COMPETING PRODUCTS, SINCE, IF THE ADVERTISING IS SUCCESSFUL, NO ONE WILL EVER KNOW THAT WHAT YOU SAID WAS AN EXAGGERATION. LYING, ON THE OTHER HAND, IMPLIES COMMENTS WHICH CAN BE DISPROVEN AND THEREFORE MAY DISCREDIT YOUR FIRM. THE ECONOMIC THEORY OF ADVERTISING IS NOT INCLUDED EACH SEMESTER, CHECK THE CLASS NOTES FILE.
17. C SOME DAY, I WOULD HOPE THAT THIS ANSWER WILL NO LONGER BE ACCURATE.
18. B THE OTHER FORMS OF MERGER DO NOT AFFECT THE NUMBER OF FIRMS IN AN PARTICULAR INDUSTRY.
19. A A FIRM MINIMIZES TRANSPORTATION COSTS WHEN THE MARGINAL COST OF THE LAST SHIPMENT FROM EACH DISTRIBUTION POINT IS THE SAME. HERE, IT IS CHEAP TO SHIP BETWEEN MILWAUKEE AND CLEVELAND, BUT EXPENSIVE TO SHIP BETWEEN CLEVELAND AND BALTIMORE. THE ECONOMIC THEORY OF TRANSPORTATION IS NOT INCLUDED EACH SEMESTER, CHECK THE CLASS NOTES FILE.
20. E IN ANY DECREASING COST INDUSTRY, AN INCREASE IN THE NUMBER OF FIRMS RESULTS IN A COST REDUCTION (A DOWNWARD SHIFT IN THE COST CURVES). IN A MONOPOLISTICALLY COMPETITIVE INDUSTRY, AN INCREASE IN THE NUMBER OF FIRMS WILL RESULT IN THE NEW FIRMS TAKING SOME CUSTOMERS AWAY FROM THE OLD FIRMS.
WHERE IS QUESTION 21?
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103.FINAL
1. B THIS IS KNOWN AS THE FREE RIDER PROBLEM, AND IS A MAJOR REASON WHY PUBLIC GOODS WOULD NORMALLY BE UNDERPRODUCED IN THE PRIVATE MARKET.
2. D LOTS OF THINGS MAY REPRESENT SOCIAL PROBLEMS. IT IS OFTEN A MATTER OF CONTENTION HOW MANY OF THESE ACTUALLY DO REPRESNT SOCIAL PROBLEMS WORTHY OF GOVERNMENT ACTION.
3. C SELLING PERMITS FORCES FIRMS TO CONSIDER THE COST OF THE POLLUTION JUST AS THEY WOULD CONSIDER THE COST OF LABOR OR ENERGY. A PROFIT MAXIMIZING FIRM WOULD TRY TO KEEP ITS COSTS DOWN BY REDUCING THE NEED FOR THE PERMITS. THE PRICE OF THE PERMITS, IF SET COMPETITIVELY, CAN BE AFFECTED BY ENVIRONMENTAL GROUPS WHO COULD JUST BUY THEM IN ORDER TO ADD TO THE DEMAND AND FORCE UP THE PRICE. A GOVERNMENT THAT THOUGHT THERE WAS STILL TOO MUCH OF A PROBLEM COULD REDUCE THE SUPPLY.
4. A A TAX ON A GOOD TENDS TO CAUSE HIGHER PRICES TO THE BUYERS AND LOWER PRICES TO THE SELLERS, AND BOTH OF THESE LEAD TO FEWER PURCHASES OF THE GOOD. IF THE MARKET PRICE IS ALLOWED TO ADJUST (IF THE TAX IS NOT ACCOMPANIED BY A PRICE CONTROL) THERE WILL BE NO SHORTAGE OR SURPLUS.
5. A THIS ONE IS A DEFINITION, ALTHOUGH DIFFERENT TEXTS USE SLIGHTLY DIFFERENT TERMS FOR THIS CONCEPT. BAUMOL AND BLINDER USE THE EXAMPLE OF MARGINAL LABOR COST IN CHAPTER 16, RATHER THAN THE GENERIC MARGINAL FACTOR COST USED HERE. THE MARGINAL FACTOR CONCEPT IS NOT INCLUDED EACH SEMESTER, CHECK THE CLASS NOTES FILE.
6. B A FIRM IN IMPERFECT COMPETITION IN THE OUTPUT MARKET CHARGES A HIGHER PRICE FOR ITS PRODUCTS THAN A SIMILAR FIRM IN A COMPETITIVE MARKET. SINCE THE IMPERFECTLY COMPETITIVE FIRM CHARGES A HIGHER PRICE, IT SELLS A SMALLER QUANTITY, AND IT PRODUCES A SMALLER QUANTITY. ANY FIRM PRODUCING A SMALLER QUANTITY USES FEWER RESOURCES THAN A FIRM PRODUCING A LARGER QUANTITY.
7. B THIS ONE IS A DEFINITION.
8. D FIRMS WHICH ARE PRICE SETTERS IN THEIR INPUT MARKETS TEND TO HIRE FEWER WORKERS, SINCE THEY ARE REACTING TO A MORE COMPLEX MARGINAL LABOR COST, NOT JUST THE WAGE. IF THEY ARE DEALING WITH THE SAME LABOR SUPPLY CURVE, HIRING A SMALLER NUMBER OF WORKERS ALLOWS THEM TO PAY LOWER WAGES. IN CONTRAST, FOR A COMPETITIVE FIRM, THE MARGINAL LABOR COST IS THE WAGE, SO THEY HIRE LABOR UP TO THE POINT WHERE MRP = WAGE.
9. B EMPLOYMENT DISCRIMINATION IS EXPENSIVE WHEN THERE IS COMPETITION IN ALL MARKETS.
10. D THIS ONE IS A DEFINITION. COMPARABLE WORTH IS NOT INCLUDED EACH SEMESTER, CHECK THE CLASS NOTES FILE.
11. F EACH OF THE ANSWERS HAS SOME SUPPORT FROM SOME ECONOMISTS AS A POSSIBLE CAUSE, BUT NOBODY KNOWS.
12. B THIS ONE IS A DEFINITION.
13. D THIS ONE IS A DISGRACE.
14. B THIS ONE IS A DEFINITION.
15. D EACH OF THE ANSWERS HAS SOME SUPPORT FROM SOME ECONOMISTS AS A POSSIBLE CAUSE, BUT NOBODY KNOWS, SO NEITHER IS TRUE, ALTHOUGH EITHER MAY BE TRUE.
16. C THIS ONE IS A DEFINITION.
17. C IF ANY AVERAGE DECLINES, WE KNOW THAT THE MARGINAL IS LESS THAN THE AVERAGE.
18. A THE NATURE OF A VOLUNTARY TRANSACTION IS THAT BOTH PARTIES MUST GAIN, BECAUSE EACH PARTY HAS THE OPTION TO REFUSE TO PARTICIPATE. ON THE OTHER HAND, THE DIVISION OF THE GAINS BETWEEN THE TWO PARTIES IS IRRELEVANT TO THE QUESTION OF WHETHER OR NOT EACH PARTY HAS SOME GAIN.
19. E FOR A PRICE TAKING FIRM, PROFIT IS AT A MAXIMUM WHEN MARGINAL COST EQUALS THE PRICE. WHETHER OR NOT THE MISTAKE GIVEN IN THE QUESTION IS ENOUGH TO ELIMINATE ANY ECONOMIC PROFIT THAT MAY EXIST IN THE SHORT RUN CANNOT BE DECIDED HERE BECAUSE WE DO NOT HAVE THE SPECIFIC DATA.
20. B AN INCREASE IN PRICE WILL LEAD TO A DECREASE IN THE QUANTITY DEMANDED. DEMAND DOES NOT CHANGE WHEN THE PRICE OF THE ITEM ITSELF CHANGES. IN ADDITION, IF THERE IS ANY JUSTICE IN THE WORLD, DUKE WILL WIN YET ANOTHER NATIONAL CHAMPIONSHIP FOR THE MOST NOBLE, UNSELFISH, AND DESERVING TEAM IN COLLEGE SPORTS.
21. E IF A PRICE TAKING FIRM IS UNABLE TO COVER ITS VARIABLE COSTS, ITS LOSSES AT ANY LEVEL OF OUTPUT WILL EQUAL THE UNCOVERED PORTION OF ITS VARIABLE COSTS, PLUS THE FIXED COST. IN THE SHORT RUN, PRODUCING NOTHING ELIMINATES THE VARIABLE COSTS, SO THE LOSSES WOULD ONLY EQUAL THE FIXED COST. IN CONTRAST, IF THIS QUESTION HAD BEEN SET IN THE LONG RUN, THE CORRECT ANSWER WOULD HAVE BEEN TO LEAVE THE INDUSTRY. ALL FIRMS TRY TO REDUCE THEIR COSTS OR TRY TO INCREASE PRICES.
22. F A PRICE SETTING FIRM HAS NO SUPPLY CURVE, SINCE ITS PRICE AND QUANTITY CHOICE REFLECTS THE INTERACTION OF DEMAND AND COST.
23. D A PRICE SETTING FIRM MAXIMIZES PROFITS BY MATCHING ALL OF ITS MARGINAL REVENUES WITH ALL OF ITS MARGINAL COSTS. THIS QUESTION GIVES YOU NO INFORMATION ON EITHER ONE.
24. D A PRICE TAKER HAS A CONSTANT MARGINAL REVENUE (EQUAL TO THE PRICE), WHILE MARGINAL COST IS NORMALLY A RISING FUNCTION. IF MARGINAL REVENUE IS LESS THAN MARGINAL COST, HE ISLOSING MONEY ON THE LAST FEW UNITS, AND CAN IMPROVE HIS BALANCE SHEET BY NOT BOTHERING TO PRODUCE THEM. NOTE, BY DEFINITION, A PRICE TAKER DOES NOT HAVE THE ABILITY TO RAISE THE PRICE.
25. B IF A MONOPOLY IS ABLE TO REDUCE ITS OWN VARIABLE COSTS, THE MARGINAL COST IS SHIFTED DOWN. THAT MEANS THAT THE NEW MARGINAL COST WILL INTERSECT THE OLD MARGINAL REVENUE (THE MARGINL REVENUE DOES NOT MOVE) AT A LARGER QUANTITY. TO SELL THE LARGER QUANTITY WHILE FACING THE SAME DEMAND CURVE, THE FIRM HAS TO REDUCE ITS PRICE.
26. CLASSIFIED