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ECONOMICS 100 (Carr)
Practice Term Test 3 Answer ALL of the following multiple-choice questions. 1. The Lorenz Curve presents all of the following information except:
a. The percentage of income received by the top 5 percent of families.
b. The percentage of income received by the poorest 30% of families.
c. The level of inequality for an income distribution.
d. The dollar income of the poorest 20% of families.
The Lorenz curve graphs the distribution of income for all households in the society
by plotting cumulative % of households against cumulative % of income. The more
bowed the Lorenz curve the higher the level of inequality.
2. A “binding minimum wage”…
a. …protects suppliers from having to pay high wages.
b. …reduces the labour turnover rate.
c. …is below the labour market’s equilibrium wage rate.
d. …must be commissioned by the Supreme Court.
e. …increases wage rates above the current equilibrium rate.
A binding minimum wage is a type of regulation that sets the smallest wage an
employer can legally pay an employee. Specifically, a binding minimum wage is set
above the equilibrium rate (where supply = demand).
3. Tradable emissions permits…
a. …combine the virtues of decentralized decision-making with the setting of
maximum permissible levels of pollution
b. …do not effect pollution levels, but raise tax revenues for the government who
uses those monies to repair the environment
c. …are more effective that pollution taxes when you can’t measure pollution levels
d. …is an example of protectionist policy
e. All of the above
Tradable emissions permits build social costs into profit maximizing decisions. It
does not centralize control in the hands of the government, since firms are still free to
produce as they please, as long as they can find and afford these emission permits.
Moreover, if pollution can be measured and a permissible level identified, the permits
can restrict emissions to this level. Only if one can measure pollution levels are
tradable permits more effective than pollution taxes. © Prep101 http://www.prep101.com/freestuff 4. The virtues of international trade are extolled throughout economic literature. Among
other things, trade allows a country to…
a. …shift its production possibilities boundary outward.
b. …expand its production possibilities while holding constant its consumption possibilities.
c. …produce and consume beyond its production possibilities boundary.
d. …consume beyond its production possibilities boundary.
e. …lower the per-unit production costs of all goods which it is producing.
One’s production potential is limited by its technology and resource stocks, both of
which are essentially unaffected by bilateral trade. Further, it does not affect
production costs, which are also determined by available technology and
capital/labour stocks. However, by exploiting the gains from exporting a product in
which it has a comparative advantage, it can consume more units than it could in
5. In perfect competition, firms continue to hire additional units of variable inputs up to
the point that…
a. …marginal revenue is zero.
b. …there is positive economic profits
c. …marginal cost is zero
d. …the contribution to cost is the same as to revenue
e. …the contribution to profit is the same as to revenue
Firms hire additional units of variable input until marginal cost = marginal revenue,
after which the contribution to profits is negative (MC > MR).
6. A progressive tax system is one in which…
a. …marginal and average tax rates are constant for all levels of income.
b. …marginal and average rates are equal, but increase with levels of income.
c. …marginal rates are constant, while average tax rates rise with income levels.
d. …marginal rates are higher than average tax rates for most levels of income.
e. …marginal rates are lower than average tax rates for most levels of income.
A progressive tax rate is one in which the effective tax rate increases with levels of
income. Therefore the affective tax rate for the next (marginal) dollar of income is
higher than the average of the tax rates for the previous dollars of income.
7. Which of the following are transfer payments?
a. Construction costs for crown corporations (government-owned businesses)
b. Wages for government employees
c. Employment insurance benefits
d. Welfare payments
e. both C and D
Transfer payments are those made by the government NOT in exchange for some
good or service. Refer to your textbook for a complete definition. © Prep101 http://www.prep101.com/freestuff 8. Suppose the market for ding-dongs is perfectly competitive. If the price of dingdongs is above equilibrium level, what is true about the market?
a. There will be a rightward shift of the demand curve.
b. Buyers will accept and begin paying the higher price.
c. There will be a surplus of demand.
d. The quantity supplied will be greater than the quantity demanded.
e. There will be a leftward shift of the supply curve.
If the price is above its equilibrium level, producers will be willing to produce more
than buyers want (at that price) – a production surplus. Seeing that they are unable to
sell their merchandise, firms will begin to lower prices, thus incurring more sales
until the equilibrium price is realized.
9. What is the main justification for protectionist policies?
a. To create a level playing field between domestic and foreign producers.
b. To protect foreign producers’ profits from falling international prices.
c. To help local firms enter domestic industries with large barriers to entry.
d. To protect domestic producers from foreign competition.
e. To protect the employees of foreign firms from poor working conditions.
Protectionists argue that tariffs, subsidies, quotas, etc. serve to protect domestic
industries from international competition. For example, if country A is new to the
production of cars, it is unlikely that they will be able to compete with country B’s
imports, since they (the foreign company) have been producing cars for decades (and
have thus become very efficient at doing so). Protecting the domestic firms in the
short run, will allow them to improve their processes so that, eventually they will be
able to compete in the domestic/international market without protection.
10. Suppose Hartoom Inc. produces widgets. The last hour of labour was hired for $10,
and that hour produces 5 widgets, which sell for $3 each. That hour of labour adds
____ to the firm’s profit and ____ labour should be hired.
a. $-40, less
b. $15, more
c. $5, more
d. $-10, less
$10 worth of labour produces 5 widgets, which sell for $15 (5 x $3). Therefore the
additional hour generates $5 ($15 - $10) of profit. The marginal revenue ($15) is
greater than the cost ($10), so the firm should hire more labour. © Prep101 http://www.prep101.com/freestuff 11. Suppose Canada and Mexico are the only two economies in the universe. Further,
suppose neither country has an absolute advantage in the production of clocks.
Which of the following statements is true?
a. Neither country will import clocks from the other.
b. Neither country will enjoy a comparative advantage in the production of clocks.
c. One country will produce and export clocks as long as one has a comparative
advantage in its production.
d. The opportunity cost of producing clocks will be the same in both countries.
e. Neither country will produce clocks.
The existence of an absolute advantage has little to say about the existence of a
comparative advantage. As long as one country has a comparative advantage in the
production of clocks, clocks will be traded.
12. What is the fundamental coordinating mechanism of a free-market economy?
a. Allocative efficiency
b. Productive efficiency.
c. Profit maximization.
d. The price system.
e. Opportunity cost.
The uninhibited adjustment of prices offers the free-market the virtue of efficiency.
13. Why is public defence considered the classic example of a public good?
a. It is morally inappropriate for the private sector to provide an essential commodity.
b. Public defence is too important to be left to the private sector.
c. Public defence is too expensive a venture for private firms to provide.
d. One cannot keep the benefits of public defence from those who do not pay.
e. The entire populace wants public defence.
A good is a public good when no one can be excluded from enjoying it and one
person’s use does not prevent another from using it.
14. Which of the following is NOT an example of market failure due to externalities?
a. Traffic jams due to rush hour congestion
b. Environmental damage caused by pollution from private industry.
c. The high salaries enjoyed by Hollywood celebrities.
d. The low revenues of university radio stations, funded only by voluntary
donations, because access thereto is not restricted.
Market failure is the failure of unregulated markets to achieve allocative efficiency. In
the case of externalities, this failure occurs when the absence of property rights cannot
facilitate exchange such that marginal social benefit equals marginal social cost.
Option c) does not exemplify a disparity between marginal social benefit and cost. © Prep101 http://www.prep101.com/freestuff 15. Assume Meighoo Inc. produces dog leashes in a perfectly competitive industry. This
industry is not subject to any pollution control measures. Moreover, we know that
Meighoo Inc. is a major polluter. From the perspective of an environmental
economist, which of the following is true.
a. The price of the product is too high.
b. Marginal social cost is less than marginal social benefit.
c. Private costs are less than social costs.
d. Pollution is below the optimum level.
Pollution creates external cost that is not borne by Meighboo. Thus, marginal social
cost= marginal private cost + marginal external cost. Meighboo maximizes profit
where MPC=MB. Since MSC = MPC+ external costs, in unregulated market, in the
equilibrium, private costs are less than social costs.
16. An economist’s position on allocating resources to control pollution would be that:
a. All forms of water and air pollution should be eliminated
b. Government policies to reduce pollution have zero economic cost.
c. The reduction of pollution should proceed up to the point where the marginal cost
of pollution control equals the marginal benefit to society.
d. The extent of pollution control should be based only on a comparison of total
costs and total benefits.
e. It is not allocatively efficient to reduce pollution.
The economists’ position on pollution control is that emissions need to be internalized
into the business decision model. The added variable cost would then act as a typical
cost, and encourage production up to the level where MR=MC. The only difference
now is that the concept of cost and benefit are considered at the social level, as
opposed to an isolated business. In application the difficulty is calculating the cost to
society, since our ecological understanding is limited to offering a subjective
17. A product is susceptible to the free-rider problem when the good is…
a. rivalrous and excludable
b. rivalrous and non-excludable
c. non-rivalrous and excludable
d. non-rivalrous and non-excludable
e. None of the above
The free-rider problem occurs when a person can consume a good without paying.
This is typically the case for public goods which are non-rivalrous and nonexcludable.
18. Using the income approach to calculating gross national product, we include:
a. the values of the final products of all the firms in the economy.
b. the rent, wages and salaries, interest and profits accruing to all households and
firms in the economy, as well as depreciation. © Prep101 http://www.prep101.com/freestuff c. the value-add of all firms in the economy.
d. the rents, wages and salaries, and interest accruing to all households and firms but
exclude profits since these are a return on capital.
The value of the production of an economy is equivalent to the income of all agents
therein. Thus the income approach includes all forms of income enjoyed by
constituents, and does NOT include the value of production, otherwise there would be
a case of double counting. Use the following table for questions 19 and 20. This table shows the output potential for
Guyana and Jamaica with the use of one unit of input (i.e. 1 hour of labour). Guyana
Jamaica Sugar Cane (bushels)
14 Cocoa (bushels)
3 19. If Guyana transferred 1 hour of labour from cocoa to sugar cane production and
simultaneously, Jamaica did the opposite…
a. Total sugar cane production would increase by 9 bushels.
b. Total sugar cane production would fall by 11 bushels.
c. Total sugar cane production would fall by 9 bushels.
d. Total cocoa production would increase by 17 bushels.
e. Total cocoa production would fall by 9 bushels
Guyana’s switch would loose 14 bushels of cocoa in favour of 5 bushels of sugar
cane. Jamaica’s would loose 14 bushels of sugar cane in favour of 3 units of cocoa.
Overall, 9 units of sugar cane and 11 units of cocoa are lost. Both countries are better
off focusing their resources in the industry they have a comparative advantage in.
20. To reap the benefits of trade and specialization…
a. Guyana should produce both products and not trade with Jamaica.
b. Jamaica should produce both products and not trade with Guyana.
c. Jamaica should export cocoa and import Guyanese sugar cane.
d. Jamaica should export sugar cane and import Guyanese cocoa.
e. Jamaica should reduce/eliminate its consumption of cocoa.
Jamaica has a comparative advantage (the root of the benefits of trade) in sugar cane.
They should export sugar cane, and import Guyanese cocoa. © Prep101 http://www.prep101.com/freestuff 21. If all of the firms in a given industry operate where _______, there is no reason for
a. there are no positive externalities
b. there are no negative externalities
c. price is equal to private marginal cost
d. marginal social benefit is equal to marginal social cost
e. the demand curve is perfectly elastic
If marginal social benefit is equal to marginal social cost, there are no peripheral
burdens borne by uncompensated parties, therefore the government need not
intervene. The absence of externalities (positive or negative) does not guarantee this
equality. Options c) and d) do not even consider social costs.
22. If, for a given period of time, real national income increased by more than nominal
national income, then we know…
b. the entire populace is worse off.
c. the price level has increased - inflation
d. the price level has decreased – deflation
e. the price level has not changed - stagnation
f. exports are more than imports – a positive trade balance
Real national income measures (approximately) the number of product units generated
by the economy. Nominal national income, measures the dollar value of those
product units. If the number of product units increased by more than the dollar value
of the larger number of units, then price levels have fallen.
23. Suppose interest rates are 6 percent in Lebanon and 8 percent in Switzerland. The
current exchange rate is 1,300 Lebanese liras per Swiss franc. Expectations are that
in one year the exchange rate will become 1,274 liras per franc. Suddenly, new
information changes expectations towards a constant exchange rate (it will remain
1,300 liras per franc). What will happen?
a. Everything will stay the same.
b. Savings in liras will be sold, and francs will be bought and loaned in Switzerland
c. People will borrow in Lebanon and lend in Switzerland
d. The demand for Swiss francs will increase
e. b), c), and d)
Lebanese investments offer a lower rate of return, but the liras is expected to
appreciate by 2% so to cover this difference; thus the interest rate parity holds. The
new information - that suggests there will be no change in the exchange rate –
confirms that Swiss investments offer a higher return. Therefore, people will borrow
the lira at 6% to buy Swiss francs and lend them in the Swiss market – so to earn the
higher interest rate. The selling of Lebanese lira decreases the demand thereof, the
opposite will occur for the Swiss franc. © Prep101 http://www.prep101.com/freestuff 24. In a hypothetical country, a miner takes $0 worth of inputs to mine bauxite, which she
sells to the smelter for $100,000. The smelter then sells sheets of aluminium to the
car manufacturer for $350,000. The car manufacturer then sells her entire inventory
of cars for $575,000, to the car salesman. The car salesman then sells these cars for
$750,000. The GDP for this economy is
The GDP counts the sales price of finished goods, and does not double count
25. Suppose an American company imports 7 hundred tonnes of bauxite from a Guyanese
exporter at $100,000 per tonne. If nothing else changes, what is the effect in currency
a. increased supply of Guyanese dollars in the foreign exchange market.
b. increased number of Guyanese dollars in the foreign exchange market.
c. increased demand for American dollars in the foreign exchange market.
d. increased demand for Guyanese dollars in the foreign exchange market
e. decreased number of American dollars needed to buy one American dollar.
In order to buy a Guyanese product, a country must first exchange/buy Guyanese
dollars (in exchange for their domestic currency). As in any market an increased
tendency to purchase a product is reflected by an increased demand for that product.
Because the Guyanese dollar is the intermediate medium of exchange, the increased
demand for Guyanese bauxite causes an increase in the demand for Guyanese dollars.
26. If a production process results in a negative externality…
a. a competitive market will over-produce the good.
b. a competitive market will produce less than the socially optimal level.
c. marginal social benefit is more than marginal social cost.
d. marginal social cost is less than marginal private cost
e. a subsidy to firms could bring production to the socially optimal level.
An externality is the effect the production or use of a commodity has on parties not
involved in either of those processes (i.e. environmental pollution is suffered by
people who may not produce or consume the product whose production is causing the
pollution). A negative externality is one that presents a cost to that third party (i.e.
noise pollution). One way of reducing this social cost is to reduce production,
meaning that in its unabated state, there is an over-production of the good, and thus the
negative externality. © Prep101 http://www.prep101.com/freestuff 27. What is meant by the expression “the cost has been internalized”?
a. The opportunity cost of production is borne by the producer.
b. The private cost of production is fully covered by revenues.
c. The producer bears the external costs that it imposes.
d. The consumer bears the net social benefits imposed by the producer.
An externality identifies the effect a transaction between 2 parties have on an
otherwise uninvolved third party. If this third party incurs a cost with no
compensation, quite frankly it’s unfair. All costs should be borne by the parties
enjoying the benefit. Internalizing the social cost means that the producer bears the
immediate cost and builds it into the price faced by the consumer.
28. In 2001, the Kangol Corp. produced $1 million worth of hats but only sold $750,000
worth. With respect to GDP, what happens to the remaining $250,000 worth of
g. They are counted towards 2002’s GDP, when the rest of the inventory is sold.
h. They are “disappear” from national accounts since they were not sold in the year
they were produced.
i. They are counted towards 2001’s GDP.
j. None of the above.
The GDP attempts to measures the economy’s output in a given year. The fact that
the hats were produced in 2001 means that they will be counted towards 2001’s GDP,
irrespective of the year they are sold in.
29. Economically speaking, a tariff will…
a. discourage the development of new products and production levels, making the
industry more able to compete in the global market.
b. discourage the development of new products and production levels, disabling the
industry’s competitiveness in the global market.
c. encourage the development of new products and production levels, making the
industry more able to compete in the global market.
d. encourage the development of new products and production levels, disabling the
industry’s competitiveness the global market.
A tariff is a tax on foreign imports. Suppose Canada produces computers, and Japan
(who also producers computers) would like to sell in the Canadian market.
Moreover, suppose Japan is able to produce and sell their computers for less than
Canadians. A tariff forces Japan to sell their computers for more than they would
unabated; so to cover the newly imposed tax/tariff cost. This makes the Canadian
computers relatively more competitive in the Canadian market (now the price for
Japanese and Canadian computers are about the same). Protected by this tax,
Canadian firms have no incentive to improve their product or production methods.
But, in the world market, where Canadian computers are not protected by the tariff,
they will be more expensive than Japanese computers, and thus less competitive in
the world market. © Prep101 http://www.prep101.com/freestuff 30. Syria produces 50 units of yogurt and 15 units of olive oil; to produce 5 more units of
olive oil, it must sacrifice 10 units of yogurt. Palestine produces 30 units of yogurt
and 25 units of olive oil; to produce 10 more units of olive oil, it must sacrifice 5
units of yogurt. From this information, we can conclude…
a. Palestine has an absolute advantage in the production of both yogurt and olive oil.
b. Syria has an absolute advantage in the production of both yogurt and olive oil.
c. Palestine has an absolute advantage in the production of yogurt and Syria has an
absolute advantage in the production of olive oil.
d. Syria has a comparative advantage in the production of yogurt.
e. Palestine has a comparative advantage in the production of yogurt.
The opportunity cost of producing 1 unit of yogurt in Syria = 5/10 =1/2 units of olive oil.
The opportunity cost of producing 1 unit of yogurt in Palestine = 10/5 =2 units of olive
oil. Thus, the opportunity cost of producing 1 unit of yogurt in Syria < The opportunity
cost of producing 1 unit of yogurt in Palestine.
Comparative advantage looks at how many units of the production alternative that must
be sacrificed in order to produce a marginal unit of the other. In this case, for Syria the
production of one more unit of yogurt is less “costly” than it is for Palestine. ...
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This note was uploaded on 09/18/2010 for the course ECON 100 taught by Professor Carr during the Spring '10 term at University of Toronto- Toronto.
- Spring '10