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Introduction to Probability and Statistics
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Chapter 10 / Exercise 15
Introduction to Probability and Statistics
Beaver/Mendenhall
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Unformatted text preview: Final Exam Principles of Microeconomics – Econ1014 Fall 2011 Yellow version Fill out the front page of your scantron form as soon as you get the form. You will include your name, student ID and exam version on the scantron form. You will not be given time to do this after time is called, so make sure to do this before you start answering the exam questions. You will have 120 minutes to answer the following questions. Be sure to read directions carefully, use your exam copy to help you solve the problems and transfer all your answers to the scantron form. You will not be given time to fill out any scantron answers after time is called, so make sure to do this before time is called. You must stop writing and put down your pen or pencil immediately when you are told it is time to stop the exam. Failure to follow these directions is considered cheating and will result in a grade of zero for this exam. You are allowed to use only a pencil, eraser and ruler for the exam. Any other materials used or in sight are prohibited. In particular, you are NOT allowed the use of a calculator or any translation device. Failure to follow these directions is considered cheating and will result in a grade of zero for this exam. 1 Multiple Choice Section 1. Suppose the free market equilibrium outcome is the most economically efficient outcome. In this case, when the government decides to subsidize buyers or sellers, we can predict: (1) A better allocation of society’s scarce resources. (2) A reduction in economic efficiency since the subsidy encourages a greater level of market activity. (3) A gain in the size of the economic pie. (4) All of the above. (5) None of the above. 2. Assuming employers are responsive to wage changes and that the labor market is characterized by perfect information, no externalities and perfect competition, a binding minimum wage can be predicted to result in: (1) More jobs for unskilled workers. (2) An increase in economic surplus for society. (3) Lower prices for consumers buying products produced by minimum wage workers. (4) All of the above. (5) None of the above 3. Suppose the government needs to raise more revenue and is considering taxing a market. Which of the following will result in the most resource misallocation and deadweight loss? (1) Taxing markets with less price elastic demand and supply. (2) Taxing markets with unitary price elastic demand and supply. (3) Taxing markets with more price elastic demand and supply. (4) Taxing inferior goods. (5) Taxing complementary goods. 4. Suppose the government decides to make buyers pay a $500 tax for each car purchased and this results in a $400 reduction in the market equilibrium price of a car. Based on this information, we can state that buyers of cars are _____ responsive to price changes than are sellers of cars, since we found that buyers pay ____ of the tax. (1) more; exactly half (2) more; more (3) less; less (4) less; more (5) more; less 5. Suppose the country of Norway is currently producing on its Production Possibilities Frontier (PPF). If this is the case, then we can say that: (1) An earthquake that destroys half of Norway’s highways will result in a shift outwards of its PPF. (2) Norway is currently using all its resources as efficiently as possible. (3) Norway can produce more of one good without reducing its production of another good. (4) All of the above. (5) None of the above. 2 6. Suppose the United States decides to reduce trade restrictions for sugar (an industry for which the United States does not have a comparative advantage with respect to many other countries). According to this information, which of the following groups will be the “losers” from this policy? (1) U.S. firms that use sugar as an input in the production of the product they sell. (2) U.S. consumers of sugar. (3) U.S. sugar workers. (4) All of the above. (5) None of the above. 7. Which of the following statements about tariffs and binding quotas are true? (1) Both tariffs and quotas create a deadweight loss for society. (2) Both tariffs and quotas increase producer surplus. (3) Both tariffs and quotas result in higher domestic prices. (4) All of the above. (5) None of the above. 8. Suppose the U.S. currently imports 1 million car tires. A Presidential candidate trying to garner support for his/her campaign proposes an import quota of 200,000 on car tires. According to this information, (1) Total surplus will increase in the United States. (2) Buyers of car tires in the United States should be indifferent, since their economic surplus will remain the same. (3) The price of car tires in the United States will increase. (4) U.S. producers of car tires will most probably oppose this idea. (5) All of the above. Table 1: Suppose the following table provides information relevant to a plumbing business you operated during the previous year. Use this information to answer the following questions. During the year, you earned $90,000 in revenue from your customers. A local construction company is willing to hire you to work for it as a plumber for a wage of $55,000 per year. You would have to close your company to do this. You paid $5,000 during the year to advertise your business in the local newspaper. You used a truck to carry your tools and to get to and from your job locations. You paid $20,000 for the vehicle. It depreciates at a rate of 5% per year. You took $30,000 of your own money out of the bank to buy the truck. Your money was earning 2% per year in interest. You paid $10,000 over the year for plumbing supplies. You paid $3,000 to an accountant to submit your taxes. You paid $5,000 in taxes. 9. Refer to Table 1. Based on this information, your total explicit costs amount to: (1) $24,000. (2) $30,000. (3) $23,000. (4) $89,600. (5) $89,000. 3 10. Refer to Table 1. Based on this information, your total implicit costs amount to: (1) $65,600. (2) $24,000. (3) $89,600. (4) $75,400. (5) $55,600. 11. Refer to Table 1. Based on this information, your accounting profit is: (1) $10,400. (2) – $24,400. (3) $65,000. (4) $66,000. (5) None of the above 12. Refer to Table 1. Based on this information, your economic profit is: (1) – $5,400. (2) $30,000. (3) $10,400. (4) – $25,400. (5) None of the above. 13. Refer to Table 1. Based on this information, your rate of return is _____, which means that you are earning a(n) ____ normal rate of return. (1) positive; below (2) positive; above (3) negative; above (4) negative; below (5) zero; below 14. Suppose that your local bakery has only one variable input (labor) and that it decides to hire a new worker. If workers are identical in skill level and work effort, and if this worker adds more extra output than the previously hired worker, then (1) The marginal productivity of the last worker is negative. (2) The bakery is benefiting from increased teamwork and specialization when it hires this worker. (3) The bakery is experiencing constant marginal productivity of labor. (4) The bakery may be adding too many workers to its bakery and suffering from crowding of its fixed inputs. (5) None of the above. 15. Suppose a firm produces and sells 200 batteries with an average total cost of production of $10, an average variable cost of production of $7 and total revenue of $1,800. According to this information, this firm earns a profit equal to ____ when it produces 200 batteries. (1) –$400 (2) $2,000 (3) $1,800 (4) –$200 (5) None of the above 4 16. Suppose a firm produces and sells 200 batteries with an average total cost of production of $10, an average variable cost of production of $7 and total revenue of $1,800. According to this information, this firm’s fixed cost of production when it produces 200 batteries is equal to: (1) $400 (2) $200 (3) $600 (4) $1,200 (5) None of the above. 17. Suppose a producer finds that as it hires workers it experiences constant positive marginal productivity of labor over all hiring levels. Based on this information we can say that: (1) This firm does not benefit from teamwork and specialization nor does it suffer from crowding of its fixed inputs. (2) The average productivity of labor exceeds the marginal productivity of labor for all hiring levels. (3) The short run production function is a horizontal straight line (i.e. it has a zero slope). (4) All of the above. (5) None of the above. 18. Suppose a farmer produces corn in a perfectly competitive market. According to this information, (1) This farmer’s total revenue will always increase as it produces more corn. (2) This farmer’s profit maximizing production strategy will be to produce the level of corn for which the marginal revenue equals the marginal cost. (3) If this farmer decides to produce less corn, it will not affect the market equilibrium price of corn. (4) All of the above. (5) None of the above. 19. Suppose the orange juice market is perfectly competitive with a market equilibrium price of $4 per gallon. For a single firm producing in this market: (1) Marginal revenue is always less than $4.00. (2) The profit maximizing production level is where the difference between MR and MC is greatest. (3) Total revenue earned will be $3,000 if the firm produces 400 gallons of juice. (4) All of the above. (5) None of the above. 20. Which of the following statements is consistent with a perfectly competitive market? (1) In the long run firms earn a normal rate of return. (2) New firms can easily enter this market. (3) Little to no advertising is done by individual firms advertising their product. Most advertising is done by industry groups looking to increase market demand. (4) All of the above. (5) None of the above. 5 21. Which of the following is true about monopoly markets versus perfectly competitive markets? (1) Both the monopolist and the perfectly competitive firm are able to earn positive profits in the long run. (2) A monopolist will produce the same quantity of output that would be produced in a perfectly competitive market (3) A monopolist is able to charge a markup for its product while a perfectly competitive firm does not charge a markup. (4) All of the above. (5) None of the above. 22. Which of the following statements can be considered a positive statement? (1) When the government produces more money, inflation rates always fall. (2) Smoking increases the risk of lung cancer. (3) As the price of rice decreases, consumers buy more rice. (4) Workers with more years of education earn higher wages than workers with fewer years of education earn. (5) All of the above 23. Which of the following statements about economics is true? (1) Economists use the scientific method to devise and test their theories. (2) Economics is a social science that focuses primarily on how corporations can increase their profits. (3) Economists generally assume that consumers make inconsistent decisions. (4) Good economic models depict real life events as accurately as possible. (5) All of the above 24. Suppose you are considering taking a one month trip to Europe with your roommate during the winter break. You also have a job in Columbia, Missouri that would pay you $1000 for working over winter break. You also have an internship offer in New York for the winter break that would pay you $2000. You could also spend the winter break with your family in San Francisco; you place a $4500 value on the happiness you would get from spending your break with family. According to this information, the opportunity cost of taking the vacation to Europe is: (1) $3,000. (2) $7,500. (3) $4,500. (4) $1,000. (5) $2,500. 25. Which of the following statements about the concept of economic efficiency are true? (1) A society is said to achieve economic efficiency if it is able to share the wealth it generates equally among all its members. (2) A society is said to achieve economic efficiency if it is able to create the greatest amount of economic surplus possible with the limited resources it has available. (3) Societies that implement policies to achieve social equity always increase economic efficiency. (4) All of the above (5) None of the above 6 26. Which of the following is most likely an example of a Pigovian Tax or Pigovian Subsidy? (1) Trade tariffs. (2) The state sales tax. (3) Subsidies offered by the U.S. and E.U. to domestic sugar producers to help them compete in the international sugar market. (4) Scholarships and grants to college students. (5) None of the above. 27. Suppose medical research indicates that each time someone smokes a pack of cigarettes, he or she imposes a $4 external cost on those around him or her. The best way to bring the cigarette market to the economically efficient smoking outcome would be for the government to: (1) Provide a Pigovian subsidy of $4 per pack to cigarette producers. (2) Impose a Pigovian tax of $4 per pack on smokers. (3) Provide a Pigovian subsidy of $4 per pack to smokers. (4) Ban smoking. (5) None of the above. 28. Suppose the price of a restaurant meal rises from $15 to $20. If Mary likes to eat out but reduces her restaurant meals as a result of the price increase, we would say that she is eating out less often because of the: (1) Substitution effect and income effect. (2) Substitution effect. (3) Demand effect. (4) Supply effect. (5) Income effect. 29. Suppose the price of oranges falls from $4 per pound to $3 per pound. As a result, consumers increase their weekly quantity of oranges demanded from 100 pounds to 150 pounds. According to this information, the price elasticity of demand for oranges is approximately: (1) ‐0.50 (2) ‐0.67 (3) 1.50 (4) ‐2.00 (5) 0.67 30. Suppose the price elasticity of demand for flat screen TV’s is equal to ‐0.8. If the price of these TV’s rises by 10%, we would expect the quantity demanded to: (1) decrease by 10%. (2) increase by 8%. (3) decrease by 0.8%. (4) decrease by 8%. (5) remain unchanged. 7 31. Suppose the price elasticity of demand for flat screen TV’s is equal to ‐0.8. Based on this information we can predict that a decrease in the price of flat screen TVs will result in: (1) no change in total revenue. (2) an increase in total revenue. (3) an increase or decrease in total revenue, but there is no information to tell the direction of the change. (4) a decrease in total revenue. (5) none of the above. 32. Suppose the price elasticity of supply for laptops is equal to +2.50. Based on this information we can predict that a 20% increase in the price of laptops will result in: (1) a 20% decrease in the supply of laptops. (2) a 50% increase in the quantity supplied of laptops. (3) a 25% increase in the quantity supplied of laptops. (4) a 10% increase in the quantity supplied of laptops. (5) a 10% decrease in the quantity supplied of laptops. 33. Suppose the price of a backpack rises from $40 to $50 but the revenue earned by backpack sellers remains unchanged. Which of the following statements is consistent with this information? (1) The price elasticity of demand for backpacks equals ‐1.67. (2) The quantity demanded of backpacks increased. (3) The price elasticity of demand for backpacks equals ‐1.00. (4) The quantity demanded of backpacks remained the same. (5) None of the above. 34. Suppose you work as an economic consultant for a raincoat producer. Using data collected from your customers, you are able to determine that when customer income rises by 10%, demand for your raincoats rises by 30%. Based on this information, you conclude that the income elasticity of demand for your company’s raincoats is equal to: (1) 2.0 (2) ‐2.0 (3) 0.5 (4) 3.0 (5) ‐3.0 35. Suppose the income elasticity of demand for pizza is negative. Based on this information, you would conclude that: (1) Consumers consider pizza to be an inferior good. (2) Consumers consider pizza to be a normal good. (3) As the income of consumers of pizza increases, the demand for pizza also increases. (4) Consumers consider pizza to be a complementary good. (5) None of the above. 8 36. Suppose the cross‐price elasticity of demand between rice and beans is +0.25. Based on this information you would conclude that: (1) Rice and beans are complements and there is a strong relationship between the two. (2) Rice and beans are substitutes but there is a weak relationship between the two. (3) Rice and beans are substitutes and there is a strong relationship between the two. (4) Rice and beans are complements but there is a weak relationship between the two. (5) None of the above. 37. Suppose that you work as a consultant for a company that produces apple juice. You estimate that a 10% increase in the price of breakfast sandwiches results in a 20% decrease in the demand for apple juice. According to this information, the cross‐price elasticity of demand between apple juice and breakfast sandwiches is equal to: (1) ‐2.00 (2) ‐0.67 (3) ‐0.50 (4) 2.00 (5) 1.00 38. Which of the following would result in an increase in the demand for potatoes? (1) An increase in consumer income if consumers consider potatoes to be a normal good. (2) An announcement by the American Medical Association that increased potato consumption helps to reduce the incidence of obesity, diabetes and high blood pressure. (3) An increase in the number of potato consumers. (4) A decrease in the price of beef if consumers consider beef and potatoes to be complements. (5) All of the above. 39. Which of the following would directly result in a decrease in the quantity of corn supplied? (1) An increase in the price of gas, which increases the cost of producing and transporting corn. (2) A particularly rainy season that reduces the harvest of corn per acre. (3) A decrease in the price of corn. (4) An increase in the price of fertilizers used to produce corn. (5) All of the above. 40. Suppose the market equilibrium price of a house is $150,000. Based on this market price we would predict that: (1) A consumer with a reservation price of $150,000 would earn a consumer surplus of $0 regardless of whether or not the consumer chooses to purchase a house. (2) A consumer with a reservation price equal to $200,000 will buy a house and will earn consumer surplus equal to $200,000. (3) A consumer with a reservation price equal to $130,000 will buy a house and will earn consumer surplus equal to $20,000. (4) All of the above. (5) None of the above. 9 Short Answer/Problem Solving Section In the following questions, please use your exam copy to work out your answers, but then put your answers on the scantron form by answering the following multiple choice questions. 1. Impact of a Price Control Suppose the following graph represents the market for low‐skill labor. Use the graph to answer the following questions about the impact of a minimum wage law on the market. Price (U.S. dollars) 10 9 8 Market Supply of Labor 7 Price Floor 6 5 DWL 4 Pe= 3 2 RM and job loss 1 Market Demand for Labor 0 0 4 8 12 16 Qd 20 24 28 32 36 40 Qs Qe 44 48 52 Quantity (millions of hours of labor) a. Suppose the labor market is characterized by perfect information, no externalities and perfect competition. What will be the market outcome if we allow the free market to allocate labor without any government intervention? In other words, what will be the equilibrium wage paid, the equilibrium number of hours of labor bought and sold and the amount of economic surplus earned by workers, by employers and by society overall? Pe=$4 Qe=24 million hours of labor bought and sold (workers are offering to work for 24 million hours and employers are offering to hire workers to work for 24 million hours) CS=(1/2)x(6)x(24 million)=$72 million PS=(1/2)x(3)x(24 million)=$36 million TS=CS+PS=$108 million 10 41. Market equilibrium price is equal to _____ and market equilibrium quantity bought and sold is equal to ______. (1) $1; 36 million hours (2) $6; 40 hours (3) $4; 24 (4) $4; 24 million hours (5) Impossible to determine with the information provided 42. Workers will earn economic surplus equal to ______ and employers will earn economic surplu...
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