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Unformatted text preview: SECTION I: Multiple Choice Write the letter of the choice that best completes the statement or answers the question on your answer sheet. 1. If education produces external benefits for society, which of the following might be an appropriate policy for society to establish regarding education? a. public subsidies of education b. mandatory minimum levels of education c. tax incentives for schooling d. all of the above 2. A country's consumption possibilities frontier can be outside its production possibilities frontier a. with trade. b. by allocating resources differently. c. by producing a greater variety of goods and services. d. by lowering unemployment in the country. Figure 1 Labor hours needed Amount produced to make one unit of in 40 hours Cheese Bread Cheese Bread England 1 2 40 20 Spain 2 8 20 5 3. Refer to Figure 1. If England and Spain trade based on the principle of comparative advantage, Spain will export which product to England? a. bread b. both bread and cheese c. cheese d. Spain cannot benefit from trade with England. 4. Suppose that demand decreases AND supply decreases. What would you expect to occur in the market for the good? a. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. c. Both equilibrium price and equilibrium quantity would increase. d. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. 5. If a tax is imposed on a market with inelastic demand and elastic supply, a. buyers will bear most of the burden of the tax. b. sellers will bear most of the burden of the tax. c. the burden of the tax will be shared equally between buyers and sellers. d. it is impossible to determine how the burden of the tax will be shared. Figure 2 The city Freeport, U.S.A., has only privately owned schools in their city. The school system has a virtually unlimited capacity, and accepts all applicants. The schools operate on both tuition and private donations. Every resident places value on having an educated community. Lately, the school's revenues have suffered due to a large decline in private donations from the elderly population. 6. Refer to Figure 2. Which of the following is the "free‐rider" explanation for the decline in donations from the elderly population? a. The elderly do not approve of people who ride for free. b. Social benefits received from education are not excludable. c. Elderly people are tired of riding for free. d. None of the above adequately explains the free‐rider phenomenon. Columbia University…..Principles of Economics……S. Gulati…..Regular Mid‐Term Examination…..October 28, 2009 1 Figure 3 7. According to the Figure 3, the quantity of saddles exported from Argentina is a. Q0 minus Q1. b. Q2 minus Q1. c. Q2 minus Q0. d. Q0. Figure 4 8. In Figure 4, consumer surplus after the tariff would be a. A. b. A + B. c. A + C + G. d. A + B + C + D +E + F. 9. An externality exists when a. the government intercedes in the operation of private markets by forcing the market to adjust to the balance of supply and demand. b. markets are not able to reach equilibrium. c. a firm sells its product in a foreign market. d. a person engages in an activity that influences the well‐being of a bystander and yet neither pays nor receives payment for that effect. 10. In some cases, pollution permits may be better than a Pigovian tax because a. pollution permits allow for a market solution while a Pigovian tax does not. b. pollution permits generate more revenue for the government than a Pigovian tax. c. pollution permits are never preferred over a Pigovian tax. d. the government can set a maximum level of pollution using permits. Columbia University…..Principles of Economics……S. Gulati…..Regular Mid‐Term Examination…..October 28, 2009 2 11. Tradable pollution permits may be preferred to Pigovian taxes in cases where (i) they internalize the externality of pollution. (ii) regulatory agencies (like the EPA) do not know the demand curve for pollution. (iii) the government is interested in generating maximum revenue from polluting firms. a. (i) only b. (ii) only c. (ii) and (iii) only d. all of the above 12. Total revenue equals a. total output multiplied by sales price of output. b. total output multiplied by profit. c. (total output multiplied by sales price) ‐ inventory surplus. d. (total output multiplied by sales price) ‐ inventory shortage. 13. The efficient scale of the firm is the quantity of output that a. maximizes marginal product. b. minimizes average total cost. c. minimizes average fixed cost. d. minimizes average variable cost. Figure 5 Tony is a wheat farmer, but also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. 14. Refer to Figure 5. Tony's economic profit equals a. ‐80. b. 130. c. 170. d. 300. 15. When a firm has market power, it can a. sell as much as it wants at any market price. b. control the number of firms that will operate in an industry. c. influence the market price of the good it sells. d. choose to disregard government regulation. 16. A profit maximizing firm in a competitive market will always make marginal adjustments to production as long as a. average revenue is greater than average total cost. b. price is above or below marginal cost. c. average revenue is equal to marginal cost. d. marginal cost is greater than average total cost. 17. Profit maximizing firms enter a competitive market when a. total revenue for existing firms in the market exceeds their total fixed costs. b. total revenue for existing firms in the market exceeds their total variable costs. c. price exceeds average total cost for existing firms in the market. d. average revenue is less than average total cost for existing firms in the market. 18. When all firms and potential firms in a market have the same cost curves, the long‐run equilibrium of a competitive market with free entry and exit will be characterized by firms a. operating at efficient scale. b. earning small levels of profit. c. facing the prospect of future losses. d. that band together to raise market prices. Columbia University…..Principles of Economics……S. Gulati…..Regular Mid‐Term Examination…..October 28, 2009 3 19. In long‐run equilibrium of a competitive market, the number of firms in the markets adjusts so that all of the market demand is satisfied at a price equal to a. maximum marginal cost. b. minimum average total cost. c. minimum average variable cost. d. sunk cost. 20. The exit of existing firms from a competitive market will a. decrease market supply and increase market prices. b. increase market supply and increase market prices. c. increase market supply and decrease market prices. d. decrease market supply and decrease market prices. Figure 6 As part of an estate settlement, Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk free bond fund, she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business. Her salary at Lucky.Com Inc. was $75,000 per year. 21. Refer to Figure 6. What are Mary's opportunity costs of operating her new business? a. $25,000 b. $75,000 c. $100,000 d. $175,000 22. A monopoly that arises from exclusive ownership of a key resource results in a. too much of the resource being used (resource exploitation). b. a price that exceeds marginal cost of production. c. a price that is unrelated to costs. d. a price that reflects the best interests of society. 23. As a monopolist raises the price of its good, consumers a. buy more. b. buy less. c. continue to buy the same amount. d. may buy more or less, depending on elasticity of demand. 24. The marginal revenue curve for a monopoly firm starts (i) at the same point on the vertical axis as the average revenue curve. (ii) at the same point on the vertical axis as the demand curve. (iii) below the demand curve. a. (i) only b. (i) and (ii) c. (i) and (iii) d. (iii) only 25. When firms have agreements among themselves on the quantity to produce and the price to sell output they are organized as a. a Nash arrangement. b. competitive scale firms. c. competitive oligopolists. d. a cartel. 26. Profit‐maximizing production decisions will drive price to equal marginal cost when a. there are only a few sellers. b. many sellers sell products that are slightly differentiated. c. there is only one seller. d. many sellers sell products that are identical. Columbia University…..Principles of Economics……S. Gulati…..Regular Mid‐Term Examination…..October 28, 2009 4 27. 28. 29. 30. Figure 7 Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil fields. Under the fields is a common pool of oil worth $12 million. Drilling a well to recover oil costs $1 million per well. If each company drills one well, each will get half of the oil and earn a $5 million profit ($6 million in revenue ‐ $1 million in costs). Assume that if you have X percent of the total wells then you will collect X percent of the total revenue. Refer to Figure 7. Gargantuan Gas's dominant strategy would lead to what sort of well drilling behavior? a. Gargantuan Gas will drill a second well only if Big Petro Inc. drills a well. b. Gargantuan Gas will drill a second well only if Big Petro Inc. does not drill a well. c. Gargantuan Gas will never drill a second well. d. Gargantuan Gas will always drill a second well. Which of the following market structures do not have barriers to entry that restrict firms from entering the market? (i) perfect competition (ii) monopolistic competition (iii) monopoly (iv) oligopoly a. (ii) only b. both (i) and (ii) c. both (iii) and (iv) d. all of the above are possible As in a competitive market, monopolistically competitive firms a. earn zero economic profit in the long run. b. sell their product at a price that equals marginal cost. c. are generally driven by altruistic motives. d. both a and b. When a consumer experiences a price increase for a strongly inferior good, it is possible that a. the demand curve will be upward sloping. b. the supply curve will be downward sloping. c. the income effect will not occur. d. the budget constraint will rotate outward from the origin. Columbia University…..Principles of Economics……S. Gulati…..Regular Mid‐Term Examination…..October 28, 2009 5 FINAL EXAM Fall 2002 Answer Section MULTIPLE CHOICE 1. D 2. A 3. C 4. D 5. A 6. B 7. B 8. B 9. D 10. D 11. B 12. A 13. B 14. A 15. C 16. B 17. C 18. A 19. B 20. A 21. D 22. B 23. B 24. B 25. D 26. D 27. D 28. B 29. A 30. A Columbia University…..Principles of Economics……S. Gulati…..Regular Mid‐Term Examination…..October 28, 2009 6 ...
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