December FINAL
Tuesday, 11th, 2007 Econ 1
Last Name: ______________________________ First Name: ______________________________ Student ID: ______________________________
DO NOT OPEN YOUR EXAM UNTIL INSTRUCTED TO DO SO!!!
DO NOT WRITE IN BOX INSTRUCTIONS 1. Make sure you have all pages (40 multiple choice, 5 short answer). 2. Answer all multiple choice questions in the space provided below. 3. For the short answer, show all work. We reserve the right to deduct points from answers that are hard to read. 4. You may NOT use a calculator. 5. There are a total of 100 points. Question MC Q1 Q2 Q3 Q4 Q5 Total Points
MULTIPLE CHOICE ANSWERS (1 point each) 1. ______ 2. ______ 3. ______ 4. ______ 5. ______ 6. ______ 7. ______ 8. ______ 9. ______ 10. ______ 11. ______ 12. ______ 13. ______ 14. ______ 15. ______ 16. ______ 17. ______ 18. ______ 19. ______ 20. ______ 21. ______ 22. ______ 23. ______ 24. ______ 25. ______ 26. ______ 27. ______ 28. ______ 29. ______ 30. ______ 31. ______ 32. ______ 33. ______ 34. ______ 35. ______ 36. ______ 37. ______ 38. ______ 39. ______ 40. ______
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Larry consumes at a point on his budget line where his marginal rate of substitution is less than the magnitude of the slope of his budget line. As Larry moves toward his optimum point, he will move to a A) lower indifference curve. B) lower budget line. C) higher budget line. D) higher indifference curve.
2) The average total cost curves for plants A, B, C and D are shown in the above figure. Which plant is best to use to produce 80 units per day? A) plant A B) plant B C) plant C D) plant D 3) A competitive firm is more likely to shut down during a recession, when the demand for its product declines, than during an economic expansion, because during the recession it might be unable to cover its A) external costs. B) depreciation due to machinery becoming obsolete. C) fixed costs. D) variable costs. 4) If the federal government is concerned primarily with efficiency, it is likely to impose taxes on goods that have A) close substitutes. B) low elasticity of demand. D) negatively sloped supply curves. C) high elasticity of demand.
1
5) In the above figure, the firms initial average total cost curve is SRAC. If the price is P1 ., in the long run the firm will A) reduce its plant size. C) expand its plant size. B) retain the same plant size. D) exit the industry.
6) In the above figure, the firms initial average total cost curve is SRAC with an initial marginal cost curve of SRMC. The price of the product is P1 . In the short run the firm will produce output equal to the amount A) Q1 . B) Q3 . C) Q2 . D) Q4 .
Cost schedule Total variable Labor Output cost (workers) (units per day) (dollars) 0 0 0 1 3 20 2 8 40 3 12 60 4 14 80 5 15 100 7) In the above table, the total fixed cost is A) $20. B) $0.
Total cost (dollars) 30 50 70 90 110 130
C) $30.
D) $50.
8) In the above table, when output increases from 8 to 12 units, the marginal cost of one of those 4 units is A) $2.00. B) $1.20. C) $5.00. D) $15.00. 9) The vertical distance between a firms average total cost curve, ATC, and its average variable cost curve, AVC, A) is equal to its total fixed cost, TFC. B) decreases as output increases. C) is equal to its marginal cost, MC. D) is equal to its average product.
2
10) In the figure above, the demand curve shifts rightward from D0 to D1 so that D1 is the relevant demand curve. Suppose the government imposes a rent ceiling of $300 per month. In the short run there will be a A) an elimination of a black market. B) an increased number apartments rented. D) a reduction in renters search activities. C) a deadweight loss created. 11) On a linear demand curve that intersects both axes, A) the elasticity equals 1.00 at all prices. B) the elasticity is less than 1.00 at all prices. C) the elasticity decreases as the price falls and quantity increases. D) the elasticity exceeds 1.00 at all prices. 12) New reports indicate that eating turnips helps people remain healthy. The news shifts the demand curve for turnips rightward. In response, new farms enter the turnip industry. During the period in which the new farms are entering, the price of a turnip ________ and the profit of each existing firm ________. A) falls; rises B) falls; falls C) rises; rises D) rises; falls 13) Teddy buys only chocolate chip cookies and hot chocolate and spends all of his income on the two items. Suppose that Teddys marginal utility per dollar spent on cookies exceeds that spent on hot chocolate. According to marginal utility theory, Teddy can make himself better off if he buys B) an equal amount of cookies and hot chocolate. A) fewer cookies and more hot chocolate. C) only hot chocolate. D) more cookies and less hot chocolate.
3
14) In the above figure, the average product of labor at point c is A) 10. B) 5. C) 2. D) None of the above answers are correct. 15) Blank tapes and prerecorded tapes are substitutes in production. An increase in the price of a blank tape will cause A) a decrease in the supply of prerecorded tapes. B) a decrease in the quantity supplied of prerecorded tapes but not in the supply. C) an increase in the supply of prerecorded tapes. D) an increase in the quantity supplied of prerecorded tapes but not in the supply. 16) The law of diminishing returns implies that, with the use of capital fixed, as the use of labor rises, A) the marginal product of labor will fall eventually. B) total product will fall eventually. C) the production process will become technologically inefficient eventually. D) the total product of labor will fall below the marginal product of labor. 17) Jane produces only corn and cloth. Taking account of her preferences for corn and cloth A) makes her production possibilities frontier flatter. B) does not affect her production possibilities frontier. C) makes her production possibilities frontier steeper. D) makes her production possibilities frontier straighter. 18) Sharmila has a budget line for CDs and books. CDs are on the vertical axis and books on the horizontal. Her budget line becomes steeper as A) the price of a CD falls. B) the price of a CD rises. C) her income decreases. D) her income increases.
4
19) Economies to scale refer to A) a feature of short-run production functions but not long-run production functions. B) the fact that in the long run, fixed costs remain constant as output increases. C) the point at which marginal cost equals average cost. D) the range of output over which the long-run average cost falls as output increases. 20) Suppose a rise in the price of peaches from $5.50 to $6.50 per bushel decreases the quantity demanded from 12,500 to 11,500 bushels. The price elasticity of demand is A) 0.5. B) 1000.0. C) 2.0. D) 1.0. 21) An effective minimum wage is a price A) ceiling that results in a shortage of low-skilled labor. B) floor that results in a surplus of low-skilled labor. C) ceiling that results in a surplus of low-skilled labor. D) floor that results in a shortage of low-skilled labor. 22) If a 1 percent decrease in the price of a pound of squash results in a larger percentage decrease in the quantity supplied, A) supply is elastic. B) demand is inelastic. C) demand is elastic. D) supply is inelastic. 23) Increasing marginal returns to labor might occur at low levels of labor input because of A) increasing average costs. B) differing factor proportions. C) decreasing use of machinery and increasing use of technology. D) increasing specialization of tasks. 24) The magnitude of the slope of an indifference curve is the marginal B) rate of substitution. A) utility of substitution. C) rate of utility of income. D) rate of relative prices. 25) A perfectly competitive firms marginal revenue exceeds its marginal cost at its current output. To increase its profit, the firm will A) lower its price. B) increase its output. C) decrease its output. D) raise its price. 26) If a firms marginal product of labor is less than its average product of labor, then an increase in the quantity of labor it employs definitely will A) increase its marginal product of labor. B) decrease its total product. C) not change its average product of labor. D) decrease its average product of labor. 27) Outlawing the sale of a good shifts the supply curve A) leftward and raises the price. C) rightward and raises the price.
B) rightward and lowers the price. D) leftward and lowers the price.
28) The substitution effect A) is always smaller than the income effect. B) is always larger than the price effect. C) increases purchases of the good as the price rises if the product is a normal good. D) always decreases purchases of a good as the price of a good rises.
5
29) In perfect competition, A) there are few buyers. B) each firm can influence the price of the good. C) there are significant restrictions on entry. D) all firms in the market sell their product at the same price. 30) Demand is inelastic if A) the smaller angle between the vertical axis and the demand curve is less than 45 degrees. B) large shifts of the supply curve lead to only small changes in price. C) the good in question has close substitutes. D) a leftward shift of the supply curve raises the total revenue. 31) Gina is eating two slices of pizza. Which of the following statements is true? A) Gina can not have any consumer surplus from the second slice of pizza. B) Ginas marginal benefit from the second slice of pizza equals the maximum she is willing to pay for the second slice. C) Ginas marginal from benefit the second slice of pizza is equal to the sum of the benefit from the first slice plus the benefit from the second slice. D) Gina must have some consumer surplus from the second slice of pizza. 32) The marginal product of labor is the increase in total product from a A) one percent increase in the wage rate, while also increasing the price of capital by one percent. B) one dollar increase in the wage rate, while holding the price of capital constant. C) one unit increase in the quantity of labor, while holding the quantity of capital constant. D) one unit increase in the quantity of labor, while also increasing the quantity of capital by one unit. 33) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 pounds of butter. In an eight -hour day, Bob can produce either 8 loaves of bread or 8 pounds of butter. We know that Andy has a comparative advantage in the production of A) bread and neither has a comparative advantage in the production of butter. B) bread, while Bob has a comparative advantage in the production of butter. C) butter, while Bob has a comparative advantage in the production of bread. D) both bread and butter. 34) When the price of a normal good rises, the income effect results in a ________ in the quantity demanded and the substitution effect results in a ________ in the quantity demanded. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase 35) Suppose people buy more of good 1 when the price of good 2 falls. These goods are A) inferior. B) substitutes. C) normal.
D) complements.
6
36) In the above figure, if the budget line shifts from RT to RS, the income effect is illustrated by the move from A) T to S. B) b to c. C) a to c. D) a to b. 37) The short run is a time frame in which A) the quantities of all resources are fixed. B) the quantities of some resources are fixed and the quantities of other resources can be varied. C) the quantities of all resources can be varied. D) all costs are sunk costs. 38) Assume that beef and pork are substitutes for consumers. There is a drought in the cattle grazing areas. The drought will cause the A) supply curve for pork to shift rightward. B) demand curve for pork to shift rightward. C) demand curve for pork to shift leftward. D) supply curve for pork to shift leftward. 39) If two goods are perfect complements, the shapes of the indifference curves are A) bowed away from the origin. B) straight lines. C) right-angled lines. D) bowed toward the origin.
7
40) In the above figure, if the price is P1 and the firm behaves optimally, the firm will A) break even. C) shut down. B) incur an economic loss. D) make an economic profit.
8
Answer Key Testname: FINALAMC
1) D 2) C 3) D 4) B 5) C 6) C 7) C 8) C 9) B 10) C 11) C 12) B 13) D 14) B 15) A 16) A 17) B 18) A 19) D 20) A 21) B 22) A 23) D 24) B 25) B 26) D 27) A 28) D 29) D 30) D 31) B 32) C 33) B 34) A 35) D 36) B 37) B 38) B 39) C 40) D
9
Short Answer 1. Consider the market for beer. a. (3 points) Use a simple supply and demand graph to show the equilibrium price (P*) and quantity (Q*) of beer. Clearly label the supply curve, the demand curve and the axes. b. (8 points) Recently, the beer industry has been hit by a shortage of hops, which are used to make beer. At the same time, consumer income has been steadily increasing. On your graph, illustrate what will happen to the equilibrium price and quantity of beer as a result of the shortage of hops and the increase in consumer income. If you need to make additional assumptions in order to answer this question, clearly state what those assumptions are. a. See below. b. Assume that beer is a normal good. The equilibrium price will rise, but equilibrium quantity could increase or decrease depending on the size of the shifts in supply and demand.
Price S2 S1
P2*
P1*
D2 D1 Q1* Quantity
2. Suppose Leo likes to drink milk and apple juice. Suppose the price of a gallon of milk is $3 and the price of a gallon of apple juice is $6. In addition, suppose Leo has $30 per month to spend on milk and apple juice. a. (3 points) Sketch Leo's monthly budget constraint for milk and apple juice, placing milk on the x-axis and apple juice on the y-axis. Be sure to label the yintercept, the x-intercept and the slope. b. (2 points) Show how Leo's budget constraint changes when the price of milk increases to $5 per gallon. Be sure to label the y-intercept and the x-intercept. c. (5 points) Assuming that both milk and apple juice are normal goods, graphically show how Leo's optimal consumption of milk will change when the price of milk increases. Label the income effect, the substitution effect and the total effect of the price change. d. (3 points) Explain in your own words the income effect and how it influences the consumption of milk when the price of milk increases. Your explanation should not refer to your graph and should be understandable to someone who has never taken an economics course. a. b. c. d. See below. See below. See below. When the price of milk increases, Leo's purchasing power goes down. This reduction in purchasing power influences Leo's consumption choices. Since milk is a normal good, the reduction in purchasing power will reduce the quantity of milk he consumes Apple Juice |slope|=1/2
5
C
B
A
IE
SE 6 TE 10 Milk
3. Suppose that Ellen and Gabe live on separate islands. To feed themselves, they gather guavas and catch frogs. Gabe's daily PPF is given by G=18-F and Ellen's daily PPF is given by G=22-2F, where G stands for guava and F stands for frogs. a. (3 points) On the same graph, sketch Gabe's and Ellen's PPF. Put G on the y-axis and F on the x-axis. For each PPF, label the x-intercept, the y-intercept and the slope. b. (4 points) If Gabe and Ellen specialize the producing the good in which they have a comparative advantage, how much of each good will Gabe produce? How much of each good will Ellen produce? c. (4 points) Draw the combined PPF for Gabe and Ellen. That is, assuming that Gabe and Ellen join forces, draw the PPF for their two-person economy? Be sure to label the x-intercept, the y-intercept, the slope and the point at which they are both specializing in the good in which they have a comparative advantage. a. See below b. Gabe: 18 frogs and 0 guavas. Ellen: 22 guavas and 0 frogs. c. See below. G
40
|slope|=1
22 Ellen's PPF |slope|=2 18
(18,22)
|slope|=2
Gabe's PPF |slope|=1
11 18
29
F
4. Suppose that the government decides to impose a tax on textbook publishers of $10 for each textbook produced in order to finance college scholarships for students from lowincome families. Assume that the elasticity of supply for textbooks is 1.4 while the elasticity of demand for textbooks is .39. a. (3 points) Using a graph, label the equilibrium price (P*) and equilibrium quantity (Q*) of textbooks before the imposition of the tax. Clearly label the supply curve, the demand curve and both axes. b. (4 points) On your graph, label the equilibrium price (PT*) and the equilibrium quantity (QT*) after the imposition of the tax. c. (1 point) On your graph, label the amount textbook publishers receive after taxes for each textbook. d. (3 points) On the same graph, label consumer surplus, producer surplus and tax revenue after the imposition of the tax. e. (2 points) Do students or textbook publishers pay for most of the tax? Explain. a. b. c. d. e. See below See below. Textbook publishers receive PT*-$10. See below. See below. Students pay for most of the tax since the elasticity of demand is less than the elasticity of supply. Price Tax Revenue S+$10 CS $10 PT* P* PT*-10 PS D QT* Q* Textbooks S
DWL
5. Suppose that the market for calculators is perfectly competitive. The diagram below depicts the cost curves for a typical firm that produces calculators. P
LRAC MC
P*
ATC
Q
a. (3 points) On the graph above carefully label the firm's profit maximizing level of output and the firm's economic profit/loss when the equilibrium price is P* and when the firm's MC and ATC are as shown above. Be sure to indicate whether this firm is earning an economic profit or loss. b. (3 points) What will happen to the number of firms in this industry in the long run? Explain briefly. c. (3 points) What will happen to the equilibrium number of calculators bought and sold in the market in the long run? Explain briefly. d. (3 points) What will happen to the price of calculators in the long run? Explain briefly. a. See below. b. The number of firms will increase as firms enter to take advantage of the existing profit opportunity. c. As the number of firms in this market goes up, the supply of calculators will increase. As a result, the number of calculators bought and sold will increase. d. The increase in the supply of calculators will drive down the equilibrium price of calculators in the long run. Eventually, the price will be equal to the minimum of the long-run average cost curve.
P
Profit > 0 MC LRAC
P*
ATC
Q*
Q
STUDENT CONSENT FOR RELEASE OF STUDENT INFORMATION (Buckley Waiver)
I hereby authorize the UCSD Economics Department to return my graded final examination/research paper by placing it in a location accessible to all students in the course. I understand that the return of my examination/research paper as described above may result in disclosure of personally identifiable information, that is not public information as defined in UCSD PPM 160-2, and I hereby consent to the disclosure of such information.
Quarter Fall 2007
Course
Econ 1
Date
12/11/07
Instructor
Kate Antonovics
Student ID#
_________
Print Name
Signature