EC101A1FinalExamVersion2

EC101A1FinalExamVersion2 - Boston University Version 0 Q...

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Unformatted text preview: Boston University Version 0 Q EC101, Fall 2009 Professor Todd Idson Final Exam INSTRUCTIONS: Mark on your scantron the letter of the choice that best completes the statement or answers the question. Please fill in your ID and NAME information on the scantron (be sure to write this information in the boxes AND fill in the bubbles). Also be sure to mark the version of the exam (listed in the upper right-hand portion of the first page). There are 70 questions on the exam (all questions carry equal weight). You may keep the exam and use it as scrap paper. 1. Suppose that a small county is considering adding a guard rail to a dangerous curve by a river. The guard rail will cost $70,000. The average damage done to vehicles that slide off the road at the curve is $10,000. It is expected that the guard rail will prevent 5 vehicles from sliding off the road during its usable life. What should the county do? a. Install the guard rail because the benefits exceed the costs. b. Install the guard rail because safety is priceless. 0. Do not install the guard rail at any cost because drivers can purchase private insurance for their vehicles. d. Do not install the guard rail because the costs exceed the benefits. 2. The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an) a. perfectly competitive market. b. oligopoly. c. monopoly. d. monopolistically competitive market. 3. A positive extemality occurs when a. Jack's receives a loss from John’s consumption of a certain good. b. Jack receives a benefit from John's consumption of a certain good. c. J ack's benefit exceeds J ohn's benefit when they each consume the same good. d. Jack receives personal benefits from his own consumption of a certain good. 4. For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which a. average revenue is zero. b. total revenue is maximized. c. profit is maximized. d. marginal cost is zero. 5. Equilibrium price will unambiguously decrease when a. demand decreases and supply does not change, when demand does not change and supply increases, and when demand increases and supply decreases simultaneously. b. demand increases and supply does not change, when demand does not change and supply decreases, and when demand increases and supply decreases simultaneously. c. demand decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously. d. demand increases and supply does not change, when demand does not change and supply decreases, and when demand decreases and supply increases simultaneously. 6. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government impose a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. The after—tax equilibrium quantity is less than the socially optimal quantity. b. They are equal. c. The after-tax equilibrium quantity is greater than the socially optimal quantity. (1. There is not enough information to answer the question. Table 17-12. This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). B Right Left A Up Down 7. Refer to Table 17-12. Which of the following statements about this game is true? a. Up is a dominant strategy for A and Left is a dominant strategy for B. b. Down is a dominant strategy for A and Right is a dominant strategy for B. 0. Up is a dominant strategy for A and Right is a dominant strategy for B. d. Down is a dominant strategy for A and Left is a dominant strategy for B. 8. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $15 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is less than the socially optimal quantity. 0. The equilibrium quantity is greater than the socially optimal quantity. d. There is not enough information to answer the question. 9. 10. ll. 12. Table 17-8. For a certain small town, the table shows the demand schedule for water. Assume the marginal cost of supplying water is constant at $4 per bottle. Quantity (bottles) 200 400 700 -_ -_ Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, then what will be their combined level of output when a Nash equilibrium is reached? a. 400 b. 200 c. 600 d. 800 A long-run supply curve is flatter than a short-run supply curve because a. firms can enter and exit a market more easily in the long run than in the short run. b. competitive firms have more control over demand in the long run. 0. long—run supply curves are sometimes downward sloping. (1. firms in a competitive market face identical cost structures. George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and the other advertises on radio, then the one advertising on TV will earn $4,000 and the other will earn $2,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $8,000 and the other will earn $5,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $9,000 and the other will earn $6,000. If both follow their dominant strategy, then George will a. advertise on radio and earn $5,000. b. advertise on TV and earn $3,000. c. not advertise and earn $10,000. d. advertise on TV and earn $8,000. When firms are neither entering nor exiting a perfectly competitive market, a. economic profits must be zero. b. total revenue must equal total cost for each firm. 0. price must equal the minimum of marginal cost for each firm. d. Both a and b are correct. 13. A corporation has been steadily losing money on one of its product lines, Wally’s Widgets. The firm produces Wally’s Widgets in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is 14. 15. correct? a. The $20 million spent on the factory is a sunk cost; that cost should not affect the decision. b. The firm should sell the factory only if it can reduce its costs elsewhere by $5 million. 0. The $20 million spent on the factory is an implicit cost, which should be included in the decision. (1. The firm should turn down the purchase offer because the factory cost more than $15 million to build. Suppose that workers immigrate to Minnesota from Canada. Which of the following correctly describes what would happen in the market for labor in Minnesota? a. b. The equilibrium wage would increase, and the quantity of labor would increase. With more workers, the added output from an extra worker is larger. The equilibrium wage would decrease, and the quantity of labor would increase. With more workers, the added output from an extra worker is smaller. The equilibrium wage would decrease, and the quantity of labor would increase. With more workers, the added output from an extra worker is larger. The equilibrium wage would decrease, and the quantity of labor would decrease. With fewer workers, the added output from an extra worker is smaller. In the long-run equilibrium of a competitive market, the number of firms in the market adjusts until the market demand is satisfied at a price equal to the minimum of a. b. c. d. average fixed cost for the marginal firm. average total cost of the marginal firm. marginal cost of the marginal firm. average variable cost of the marginal firm. 16. A corrective tax a. b. c. d. assigns a legal pollution limit for firms. costs society more than pollution regulations. causes each factory to reduce pollution by the same amount. places a price on the right to pollute. Table 17-13. This table shows a game played between tWo players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). 'B Left Center Right Up A Middle Down 17. Refer to Table 17-13. Which of the following outcomes represents a Nash equilibrium in the game? a. Middle-Right b. Up—Center c. Down-Center d. Down-Left Figure 16-4 Price MC ATC Quantity Quantity (5) Price Price MC ATC D I | I I l I Quantity Quantity 18. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the exit of some firms from a monopolistically competitive industry? a. panel c b. panel b 0. panel (1 d. panel a 19. 20. Figure 18-4 This figure below shows the labor market for automobile workers. The curve labeled S is the labor supply curve, and the curves labeled D1 and D2 are the labor demand curves. On the horizontal axis, L represents the quantity of labor in the market. Refer to Figure 18-4. Which of the following is a possible explanation of the shift of the labor-demand curve from D1 to D2? a. The wage earned by automobile workers increased. b. Large segments of the population changed their tastes regarding leisure versus work. c. The opportunity cost of leisure, as perceived by automobile workers, decreased. d. The price of automobiles increased. Name brand drugs are able to continue capitalizing on their market power even after generic drugs enter the market because (i) almost all people fear the generic drug companies are devoting too few resources to research and development. (ii) some people fear that generic drugs are inferior. (iii) some people are loyal to the name brand. a. (i), (ii), and (iii) b. (ii) and (iii) only 0. (i) and (iii) only d. (i) and (ii) only Table 18-6 Marginal Product Value of Marginal Marginal Labor Out I ut of Labor Product of Labor Wa_e Profit 21. Refer to Table 18-6. The price of output is a. $1. b. $3. 0. $2. d. $400. 22. Tom is a non-union employee at General Power. The majority of the employees at General Power are unionized. The union at General Power has negotiated very good benefits. Even though he is not a union member and he does not have to pay union dues, Tom receives all the benefits that the union has negotiated. Tom’s behavior is an example of a. free riding. b. rivalry. c. Taft—Hartley opposition. d. a barrier to entry. 23. A firm in a competitive market has the following cost structure: Total Costs If the market price is $8, how many units should the firm produce to maximize profit? a. 7 units b 6 units 0. 8 units d 5 units 24. 25. Figure 10-9 Q 1 Quantity Social cost P4 P5 P4 Social value Q2 Q3 Quantity Q4 Q5 Quantity Refer to Figure 10-9, Panel (b) and Panel (c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the external benefit of smokestack scrubber installation is represented by a. P4a - P4b. b. P3a — P3b. c. Q5 — Q4. d. Q3 — Q2. Since a firm in a monopolistically competitive market faces a a. downward-sloping demand curve, it will always operate with excess capacity. b downward-sloping demand curve, it will always operate at its efficient scale. c. perfectly inelastic demand curve, it will always operate at efficient scale. d perfectly elastic demand curve, it will always operate with excess capacity. 26. 27. 28. 29. Hot-dog vendors on the beach fail to cooperate with one another on the quantity of hot-dogs they should sell to earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like, (i) the quantity of hot dogs supplied is closer to the socially optimal level. (ii) the price of hot dogs is closer to marginal cost. (iii) the hot-dog market at the beach is less competitive. a. (i) and (ii) b. (ii) and (iii) 0. (iii) only (1. (i) and (iii) When a profit—maximizing firm in a competitive market has zero economic profit, accounting profit a. is at least zero. b. could be positive, negative or zero. 0. is negative. d. is also zero. A profit-maximizing firm will shut down in the short run when a. average revenue is greater than average fixed cost. b. price is less than average total cost. 0. price is less than average variable cost. d. average revenue is greater than marginal cost. Figure 4-8 100 200 300 400 500 600 700 800 quantity Refer to Figure 4-8. Equilibrium price and quantity are, respectively, a. $15 and 200. ‘ b. $25 and 400. 0. $25 and 600. d. $35 and 200. 30. 31. 32. 33. Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $5,000. If they both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $8,000 and the other will earn $3,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $15,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Barb will a. advertise on TV and earn $5,000. b. advertise on radio and earn $7,000. 0. not advertise at all and earn $10,000. (1. None of the above is correct. Barb and Sue do not have dominant strategies. Beef is a normal good. You observe that both the equilibrium price and quantity of beef have fallen over time. Which of the following explanations would be most consistent with this observation? a. The demand curve for beef must be positively sloped. b. New medical evidence has been released that indicates a negative correlation between a person’s beef consumption and his or her longevity. 0. Consumers have experienced an increase in income and beef—production technology has improved. d. The price of chicken has risen and the price of steak sauce has fallen. Suppose that a college physics experiment goes horribly wrong and releases an electronic pulse that renders all electronic equipment in the city of San Francisco, California permanently useless. No people are hurt, and no buildings are damaged. Which of the following statements correctly describes the wages earned by California workers after the accident? a. The marginal productivities of workers will increase and wages will decrease. b. The marginal productivities of workers will increase and wages will increase. 0. The marginal productivities of workers will decrease and wages will increase. d. The marginal productivities of workers will decrease and wages will decrease. Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should a. operate his business as long as he rents at least 7 boats per month. operate his business as long as he rents at least 1 boat per month. operate his business as long as he rents all 10 boats each month. raise the price he charges per boat rental. 9.0.0“ 10 34. 35. 36. 37. Scenario 15-5 Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its market area. Let's assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the sports channel. Since Mega Media has already installed cable to all of the homes in its market area, the marginal cost of delivering the sports channel to subscribers is zero. The manager of Mega Media needs to know what price to charge for the sports channel service to maximize her profit. Before setting price, she hires an economist to estimate demand for the sports channel. The economist discovers that there are two types of subscribers who value premium sporting channels. First are the 3,000 die—hard sports fans who will pay as much as $150 a year for the new channel. Second, the premium sports channel will appeal to about 20,000 occasional sports viewers who will pay as much as $25 a year for a subscription to it. Refer to Scenario 15—5. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate? a. $350,000 b. $850,000 0. $950,000 (1. $400,000 Which of the following statements is correct? a. A firm operates with excess capacity when, in the long run, its level of output is below the efficient scale. b. In the long run, both perfectly competitive firms and monopolistically competitive firms operate with excess capacity. c. For any firm, efficient scale is the level of output at which the average-total-cost curve is tangent to the demand curve. d. All of the above are correct. The deadweight loss that arises from a monopoly is a consequence of the fact that the monopoly a. quantity is lower than the socially-optimal quantity. b. price equals marginal revenue. 0. price is the same as average revenue. d. earns positive profits. Suppose that a firm is currently maximizing its short-run profit at an output of 50 units. If the current price is $9, the marginal cost of the 50th unit is $9, and the average total cost of producing 50 units is $4, what is the firm's profit? a. $250 b. $200 0. $0 d. $450 11 38. 39. 40. 41. Table 18-5 -_—-ll-l Workers Out nut of Labor Product of Labor Wae Profit “n_——— —-—-—— _-§-—_— _-“—“ -_——- —_—_—— Refer to Table 18-5. To maximize its profit, the firm will hire workers as long as the value of the marginal product of labor equals or exceeds H U.) H LII a. $500. b. $400. 0. $100. (1. $200. Suppose a firm has a monopoly on the sale of widgets and faces a downward-sloping demand curve. When selling the 100‘11 widget, the firm will always receive a. more total revenue on the 100 widgets than it received on the first 99 widgets. b. less marginal revenue on the 100’“ widget than it received on the 99th widget. c. a lower average cost per unit at 100 units output than at 99 units of output. (1. more average revenue on the 100th widget than it received on the 99th widget. Which of the following is not a characteristic of a public good? a. Its benefits cannot be withheld from anyone. b. Because it is a free good, there is no opportunity cost. 0. It is nonexcludable. d. It is not diminished or depreciated as additional people consume the good. Suppose that Sonny and Cher are duopolists in the music industry. In January, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next? a. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease. b. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will decrease, and the new equilibrium price will increase. 0. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase. d. Sonny and Cher will determine that it is in each singer’s best self interest to maintain the agreement. 12 42. 43. 44. 45. Table 16-5 Traci’s Hairstyling is one salon among many in the market for hairstyling. The following table presents cost and revenue data for hair cuts at Traci’s Hairstyling. ------ Produced Cost Cost Demanded Price Revenue Revenue “__—-_-— __--_-— _—_——__ ___—_-— —-___—_ ______— “__—-___ ___———— “___“—— Refer to Table 16-5. If the government required Traci’s to produce at the efficient scale of output, how many haircuts...
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