Sample Final Questions
Below is a final I wrote for Econ 1104. Below that final are two finals written by a previous Econ 1101 lecturer, Michael Rolleigh. Econ 1104 has a calculus requirement, so a few of the questions on the Econ 1104 final reference calculus. Econ 1101 has no calculus requirement so of course the Econ 1101 final will not require calculus. The below finals should only be taken as examples of possible questions, of course I can ask questions not listed here. The final will be cumulative. You should review lecture notes from the entire course, recitation notes, the relevant textbook chapters, all homeworks, online notes I have posted, Midterm I and Midterm II, and the guest lectures of Patrycja, Jarek and Christos (there will not be any questions on the guest lectures of Katya or Roozbeh). The format of the test will be short answer questions (about 14 to 20 questions). The format will be similar to the format of the finals below. Again, the test will be closed book and closed note and no calculators are allowed (you can leave numerical answers in fractional form).
Final Exam 120 minutes Econ 1104: Principles of Microeconomics Michael Walrath December 17, 2004
Name: _______________________________________________
On the following pages, please show all of your work. If you need more space, use the back of the page. Clearly state where your work/answer are. Clearly highlight/circle solutions. Calculators are NOT allowed. You may leave answers as fractions. Fully label all graphs. Read each question carefully and be sure to answer all parts of every question. ***Choose two problems from Questions 15, 16 and 17.*** There should be 17 pages including the cover sheet.
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Question 1 (20 points): You are given the market data that when average income is $500 the quantity demanded for movie tickets is 500 and the quantity demanded of novels is 2,000. The data also says that when average income is $750 the quantity demanded for novels is 1,500 and the quantity demanded of movie tickets is 750. (a) Give the income elasticity of demand for movie tickets and novels.
(b) Suppose Matt can only purchase movie tickets and novels. Matt has $150. A movie ticket costs $10 and a novel costs $15. Putting movies on the X-axis, draw Matts budget constraint. Illustrate Matts optimum consumption bundle (using indifference curves like those seen in class).
(c) Now suppose the price of movies decreases to $7.50. Assume Matts preferences are the same as those represented in the market data. Graphically illustrate the effects of this price change using the diagram above. Clearly illustrate the income and substitution effects. (d) Give the marginal rate of substitution of good x for good y for both the original optimum consumption bundle and the final optimum consumption bundle above.
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Question 2 (20 points): Consider the market for bicycles in Minneapolis in late December. For each of the following situations, clearly state what happens to equilibrium price and equilibrium quantity and why. State any assumptions that you need to make. Although it may help you to draw a picture, it is not required for full credit. (a) A major bike producer goes bankrupt (leaves the market immediately) and the price of rubber and aluminum falls.
(b) More people move to Minneapolis and a new (more efficient) assembly process for making bikes is discovered.
(c) The price of bikes is expected to increase (Hint: think about both sides of the market).
(d) A large, new firm starts producing bikes and average income in Minneapolis increases. Make any assumptions you feel are necessary.
(e) The price of mopeds increases and weather for January through March is predicted to be unseasonably warm (no snow, 50 degrees). Again, make any assumptions you feel are necessary.
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Question 3 (16 points): Suppose the firm with the costs shown below is operating in a perfectly competitive market. The market equilibrium price is $4. With this information, complete the following table:
Q 0 1 2 3 4
FC
VC
TC
ATC
AVC 3
MC
TR
Profit -2
2 2 3
For this particular firm, comment on the relationship between Marginal Revenue and Average Revenue (you do not need to fill out a table with this data, but it may help you answer the question).
Does the production function for this firm illustrate diminishing marginal product of its inputs? Explain how you came up with your answer.
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Question 4 (14 points): Consider the following diagram for a firm. MC P
ATC
MR
Q
(a) Assume every firm in this market has the same cost curves as above. The firm in the diagram above is in what type of market? How do you know?
(b) Label either profit or loss for the firm. Make it clear if it is a profit or a loss. (c) What does the firm do in the short run (make any necessary assumptions/additions)? Why?
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Question 5 (10 points): Consider a monopolist with market demand curve given by PD (Q) = 100 Q and average total cost for the firm is given by ATC (Q) = Q . Determine the profit maximizing quantity for this firm. What is the maximum level of profit?
Question 6 (16 points): (a) Define Nash Equilibrium.
(b) What are the three necessary components of a game?
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Think of the Cournot Game. There are two firms, Firm 1 and Firm 2. For Firm 1, the 2 profit function is Firm1 (QFirm1 , QFirm 2 ) = 48QFirm1 QFirm1QFirm 2 QFirm1 . For Firm 2 the
2 profit function is Firm 2 (QFirm1 , QFirm 2 ) = 48QFirm 2 QFirm1QFirm 2 QFirm 2 . Firm 1 maximizes profits, taking the quantity Firm 2 produces ( QFirm 2 ) as given, when it
QFirm 2 . Similarly, Firm 2 maximizes profits, 2 taking the quantity Firm 1 produces ( QFirm1 ) as given, when it produces a quantity such Q that QFirm 2 = 24 Firm1 . 2
produces a quantity such that QFirm1 = 24
(c) First verify that this really is a game. For the three necessary components of a game you listed in part (b), what objects of the Cournot game fulfill these components.
(d) What is the Nash Equilibrium for this particular game? (be exact)
(e) In words, justify why it is a Nash Equilibrium.
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Question 7 (12 points): Consider the following game: Firm 2
Price 1
Firm 2 gets payoff
Price 2
Firm 2 gets payoff Firm 1 gets payoff 5 Firm 2 gets payoff Firm 1 gets payoff 6 5 4
Firm 1
Price 1
Firm 1 gets payoff 4
5
Firm 2 gets payoff
Price 2
Firm 1 gets payoff 3
4
What are ALL of the Nash Equilibria for this game? Justify your answer.
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Question 8 (14 points):
(a) Fill in the blanks in the following statement: A profit-maximizing firm will produce a _________________________ such that _____________________________ is equal to ___________________________.
(b) Prove the above statement (Hint: there are two different ways of doing this, either way is fine).
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Question 9 (12 points): Derive a relationship between tax size and tax revenue (the Laffer Curve). Your derivation should include 4 graphs. One graph is the relationship you are deriving. The other 3 generate the relationship. Be sure to indicate where the coordinates for the points on your relationship graph come from.
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Question 10 (6 points): The following questions relate to Patrycjas guest lecture:
(a) True or False: For the major American pharmaceutical companies the largest expense is research & development.
(b) Give two (specific economic) reasons why drug prices are lower in Poland than in America.
Question 11 (6 points): The following questions relate to Costas guest lecture:
(a) Are diamonds rare? Justify your answer.
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(b) DeBeers is currently controlled by the A. B. C. D. E. Rhodes family Oppenheimer family Tarhan family DeBeer family Gates family
Question 12 (6 points): The following questions relate to Tatyanas guest lecture:
(a) What is a major import for the Ukraine? Why?
(b) What is a major export for the Ukraine? Why?
Question 13 (6 points): (a) Give an example of a good which is both rival and excludable (briefly justify).
(b) Give an example of a good which is both rival and non-excludable (briefly justify).
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Question 14 (10 points): Consider the market for education. Suppose there is an external benefit of B per unit of education consumed in the market.
(a) Draw a diagram representing the market for education. Be sure to label QMKT , the quantity the market provides, and QEff , the efficient quantity (clearly show how you find
QEff ).
(b) What can the government do so that the market arrives at the efficient quantity, Q Eff ? Be very precise. Illustrate this policy on your diagram above.
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****NOTE: Choose two problems from Questions 15, 16 and 17.****
Question 15 (16 points): Consider a slightly different market for flour in the U.S. Suppose demand for this good in the U.S. is given by the equation PDUS (Q) = 40 2Q . Supply for the good in the U.S.,
by U.S. firms, is given by the equation PSUS (Q) = 7 + Q . (a) Sketch the U.S. market for flour, clearly labeling the equilibrium price and quantity in this market.
(b) Suppose the U.S. government now opens up the flour market to trade. The world price for flour is Pw = 12 . Using the diagram above illustrate the current situation in the U.S. flour market. (c) Fully illustrate all surpluses before and after free trade. Point out the deadweight loss on your diagram.
(d) Now suppose the U.S. government imposes a quota of q = 14 on all traded goods. Using the diagram above, illustrate the current situation in the U.S. flour market, labeling very specifically. (e) Fully illustrate all surpluses comparing free trade and trade with a quota. Point out the deadweight loss of the quota on your diagram.
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Question 16 (16 points): Consider the market for flour. Suppose demand for this good in the U.S. is given by the equation PDUS (Q) = 30 2Q . Supply for the good in the U.S., by U.S. firms, is given by
1 the equation PSUS (Q) = 5 + Q . 2 (a) Sketch the U.S. market for flour, clearly labeling the equilibrium price and quantity in this market.
(b) Suppose the U.S. government now opens up the flour market to trade. The world price for flour is Pw = 16 . Using the diagram above illustrate the current situation in the U.S. flour market. (c) Fully illustrate all surpluses before and after free trade. Point out the deadweight loss on the diagram.
(d) Now suppose the U.S. government imposes a quota of q = 10 on all traded goods. Using the diagram above, illustrate the current situation in the U.S. flour market, labeling very specifically. (e) Fully illustrate all surpluses comparing free trade and trade with a quota (only illustrate, do not calculate any surpluses numerically). Point out the deadweight loss of the quota on the diagram.
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Question 17 (16 points): Consider the market for DVD players. Suppose demand for this good in the U.S. is given by the equation PDUS (Q) = 20 3Q . Supply for the good in the U.S., by U.S. firms, is
given by the equation PSUS (Q) = 4 + Q . (a) Sketch the U.S. market for DVD players, clearly labeling the equilibrium price and quantity in this market.
(b) Suppose the U.S. government now opens up the DVD market to trade. The world price for DVD players is Pw = 6 . Using the diagram above illustrate the current situation in the U.S. DVD market. (c) Fully illustrate all surpluses before and after free trade. Point out the deadweight loss on your diagram.
(d) Now suppose the U.S. government imposes a tariff of = 5 on all traded goods. Using the diagram above, illustrate the current situation in the U.S. DVD market, labeling after tariff quantities and prices very specifically. (e) Fully illustrate all surpluses comparing free trade and trade with a tariff. Point out the deadweight loss of the tariff on your diagram.
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Bonus Question 1 (5 points):
Consider the market for laptops. The demand for laptops is given by the equation 1 QD ( P) = 20 P . Suppose Linda sells laptops. At what price and quantity is Linda 2 maximizing her total revenues? What is the maximum level of revenues?
Bonus Question 2 (5 points):
State the Coase Theorem. Do you think the Coase Theorem easily applies to the real world? Why or why not?
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Final Exam 120 minutes 215 points Introduction to Microeconomics 1101 Lecture 1 Michael Rolleigh
Name: _______________________________________________
Section Number: ____________________ TA Name: _______________________________________ The above is worth 5 points (not bonus).
On the following pages, please show all of your work. If you need more space, use the back of the page. Calculators are allowed. Fully label all graphs.
Question 1 (20 points) Al Pacino and Ray Liotta are trapped on a desert island. Only two production possibilities exist on the island, gangster movies and drug movies. The table below shows the time required to produce a good for each person: Gangster Movies Al Pacino Ray Liotta 1 hours 3 hour Drug Movies 2 hours 5 hours
Assuming that Al Pacino and Ray Liotta are endowed with 60 hours each, sketch a Production Possibility Frontier for Al and sketch a Production Possibility Frontier for Ray, putting gangster movies on the X-axis. Hint Pay attention to how many hours each actor gets because it is not 40.
Calculate their opportunity costs and fill in the table below with your answers:
Gangster Movies Al Pacino Ray Liotta
Drug Movies
Who has a comparative advantage in Gangster movies (according to the above data, not their actual acting talents)? Why?
Question 2 (20 points) Consider the perfectly competitive market for cases of Coca-Cola. Sketch a demand/supply diagram for the market for cases of Coca-Cola. Label the equilibrium price and quantity on your diagram.
You study survey data and observe that if Coca-Cola costs $8 per case, then 5 cases of Dr. Pepper are demanded, while if Coca-Cola costs $16 per case, 11 cases of Dr. Pepper are demanded. Calculate the Cross Price Elasticity of Demand for cases of Dr. Pepper and cases of Coca-Cola. How are these two goods related?
Suppose the price of cases of Dr. Pepper decreases. Draw and label the effects of this shift on your diagram from above. Label the new equilibrium price and quantity. In a sentence or two, explain why you changed your diagram in this manner. Explicitly state what happened to equilibrium price and quantity.
Question 3 (25 points) Consider the consumers choice between NFL tickets and XFL tickets. Assume that Income = $1000. Price of NFL ticket = $250 Price of XFL ticket = $25 Draw a budget line and the consumers optimal consumption bundle, putting XFL tickets on the X-axis.
Assume that the consumers Income Elasticities of Demand for the goods are: XFL Tickets = -2.3 (be sure to note the negative sign) NFL Tickets = 1.2 What type of good is an XFL Ticket?
What of type good is an NFL Ticket?
Graphically illustrate the effects of a decrease in price of NFL tickets from $250 to $200 on the consumers optimal consumption bundle (use your graph above). Be sure to use all of your relevant assumptions. Be sure to clearly illustrate the income effect and the substitution effect.
Question 4 (15 points) Consider the perfectly competitive market for labor. Graphically illustrate the market in equilibrium. Assume that supply of labor (people willing to work) is very inelastic. Assume that demand of labor (firms who wan to hire people) is relatively elastic.
Suppose the government imposes a tax on labor to support Social Security (we could call in F.I.C.A.). Illustrate the effects of this tax in you r diagram. The government says that the tax is shared equally between the employer and employee. Is this true? Who bears more of the tax burden? Why?
Question 5 (10 points) Perfectly competitive firms maximize profits by choosing ________ to set ___________ equal to __________.
Why? (7 of the 10 points)
Question 6 (10 points) Graphically illustrate the perfectly competitive market for sugar. Assume that the market equilibrium price is $.06 a pound (this is the recent world price for large orders of sugar).
Suppose sugar farmers organize and lobby the government to provide price supports (price floors) at $.225 a pound. Show the effects of this on your diagram, including quantity demanded at the floor (Qd), quantity supplied at the floor (Qs), and whether there is a surplus or a shortage. Who is helped by this legislation?
Who is hurt by this legislation?
Did total surplus rise or fall because of the price floor?
Question 7 (25 points) Consider the perfectly comp etitive market for minivans. Assume that the U.S. is a price taker in the world market for minivans (changes in US production do not change the world price). Furthermore, assume that the foreign price is lower than the U.S. price. Assume that transport costs are zero. Graphically illustrate the U.S. market for minivans when there is free trade. Label quantity of minivans consumed in U.S. as QC. Label foreign price as PF. Label quantity of exports/imports as QE or QI. (you determine whether the good is exported or imported) Label the quantity of minvans produced in the U.S. as QP .
Who in the U.S. benefits from the trade (as compared to NO trade)?
Who in the U.S. is hurt by the trade (as compared to NO trade)?
Suppose a tariff is imposed on imported/exported minivans. Assume that trade still occurs after the tariff. Label the effects of this tariff on your diagram ABOVE (you may draw another if you really want to). Label quantity of exports/imports after the tariff as QE T or QIT. Label the quantity of minivans produced in the U.S. after the tariff as QP T. Label the price of minivans after the tariff as P T. Who in the U.S. benefits from the tariff (as compared to FREE trade)?
Who in the U.S. is hurt by the tariff (as compared to FREE trade)?
Question 8 (10 points) Consider the market for paper. The market for paper is perfectly competitive, but it exhibits externalities. Specifically, paper makers produce a strong, unpleasant smell (this is the ONLY external effect of making paper). Citizens (consumers) do NOT like the smell and value the effects of this smell at $-75 per unit of paper. Graphically illustrate the market for paper. Label the market price as P* . Label the market quantity as QM. Label the efficient quantity as QEff . Be sure to label social/private costs.
Using taxes or subsidies, how could the government generate the efficient outcome? Be brief but specific in your answer.
Question 9 (15 points) Fill in the following cost table: You do not need to calculate numbers, simply write them as fractions. Assume that the price = 55. Output Fixed Cost Variable Cost 0 X 1 100 40 X X Total Cost Average Fixed Cost Average Total Cost Marginal Cost Profits
0
100
2
100
85
3
100
135
4
100
190
5
100
250
Question 10 (6 points): (3 each) Select the best answer from each of the following. Who benefits from government price ceilings on prescription drugs? a) Young people who do not want new drugs developed. b) Young people who do want new drugs developed. c) Older people who desire new drug therapies for their children. d) Older people who do not desire new drug therapies for their children. e) Both a and c f) Both b and d Why do black markets arise in former Soviet Republics? a) Consumers are evil and want to do bad things b) Suppliers are evil and want to corrupt everyone c) The government places restrictions on price and quantity d) Black is a cool color. e) Former Soviet republics often have new capitalists who start black markets.
Question 11 (24 points): Graphically represent a firm in a perfectly competitive market. Be sure to include MC, ATC, and AVC in your diagram.
Suppose the market price is below the minimum ATC. Label the MR curve. Label the firms profits/losses (all in your diagram above). Should the firm stay in business or shut down in the short run? Why?
What will happen to the industry in the long run?
Question 12 (15 points): Graphically represent a single-price monopolistic firm that is earning a profit. Be sure to include MC, ATC, and MR in your diagram. Label the quantity the monopolist will produce as QM. Label the price the monopolist will charge as PM. Label the efficient quantity (the one that maximizes total surplus) as Qeff. Label the monopolists profits.
Question 13 (10 points): Find all Pure Strategy Nash Equilibria in the following game (what we did in class):
Up Down
Left 7,5 6,12
Right 15,4 5,13
Bonus: (15 points) Derive the Laffer Curve. Your answer should consist of 4 pictures. One of the Laffer Curve and another 3 for the derivation. Make sure to relate your Laffer Curve to the pictures you used to derive it.
Final Exam White 120 minutes Introduction to Microeconomics 1101 Lecture 1 Michael Rolleigh
Name: _______________________________________________
Section Number: ____________________ TA Name: _______________________________________ The above is worth 5 points (not bonus).
On the following pages, please show all of your work. If you need more space, use the back of the page. Be sure to indicate when you want us to look at work on the back of pages!! Calculators are allowed. Fully label all graphs.
Question 1 (20 points) Mugatu and Hansel are trapped on a desert island. Only two production possibilities exist on the island, modeling and clothing design. The table below shows the time required to produce one unit of each good for each person: Modeling Hansel Mugatu 4 hours 3 hours Clothing Design 6 hours 4 hours
Assuming that Hansel and Mugatu are endowed with 30 hours each, sketch a Production Possibility Frontier for Hansel and sketch a Production Possibility Frontier for Mugatu, putting Modeling on the Xaxis.
Calculate their opportunity costs and fill in the table below with your answers:
Modeling Hansel Mugatu
Clothing Design
Who has a comparative advantage in modeling (according to the above data, not the actual movie)? Why (what numbers did you compare?)?
Question 2 (15 points) Consider the perfectly competitive market for mechanical pencils. Sketch a demand/supply diagram for the market for mechanical pencils. Label the equilibrium price and quantity on your diagram.
You study survey data and observe that if mechanical pencils cost $5, then 5 wooden pencils are demanded, while if mechanical pencils cost $10, 20 wooden pencils are demanded. Calculate the Cross Price Elasticity of Demand for mechanical pencils and wooden pencils. How are these two goods related?
Suppose the price of wooden pencils decreases. Draw and label the effects of this shift on your diagram from above. Label the new equilib rium price and quantity. In a sentence or two, explain why you changed your diagram in this manner. Explicitly state what happened to equilibrium price and quantity.
Question 3 (10 points) Sketch indifference curves for Gold Medal Flour and Pillsbury Flour. How are these two goods related?
Sketch indifference curves for left shoes and right shoes. How are these two goods related?
Question 4 (5 points) Guest lecture questions Choose the BEST response Which of the following would result from a law limiting the price of drugs in the United States? Fewer of the existing drugs would be used More of the existing drugs would be used Fewer Drugs would be developed More drugs would be developed A and D B and C
a) b) c) d) e) f)
Which of the following benefits do follow from switching to a unified currency (Europe and the Euro) a) elimination of currency risk b) pretty money c) more independent countries d) more stable dollar e) there are no advantages
Question 5 (15 points) Consid...