Econ101(UofA)PExamSolutions - ©Prep101...

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Unformatted text preview: ©Prep101 SOLUTIONS TO ECONOMICS 101 PRACTICE EXAM 1) Answer: B. A, C and D are country-wide indicators and are studied by macroeconomics. 2) Answer: D. Rationality means promoting self-interest. Self-interest ensures that people do not want to be made worse off as a result of their decisions. 3) Answer: B. Positive issue is an issue that can be tested. A, C & D are stating opinion. There is no certain way to check if number of poor families in the USA is too high. How much is too high? Different economists will disagree on this number. The same subjectivity is observed in two other statements. 4) Answer: D. PPC assumes efficiency of resource use, fixed period of time, fixed resources and technology. 5) Answer: C. New natural resource allows the economy to increase its overall production, reaching production combinations not possible before (the production possibilities curve shifts up and to the right). 6) Answer: B. Comparative advantage of E in painting means that E can trade painting for carpentry for less than F who does painting less efficiently. 7) Answer: A. Law of demand says that more is bought at a lower price (or less is bought at a higher price). The only statement that reflects this relationship is given in A. 8) Answer: D. Because pork and chicken are substitutes, a reduction in the price of pork prompts some people to switch from chicken to pork, thus causing the demand curve for chicken to shift inwards. 9) Answer: B. Because normal goods are defined in terms of consumer income changes (goods whose consumption increases with income), they exhibit normal upward sloping supplies. 10) Answer: C. Q=70-90=-20 and p=0.60-0.50=0.10. Qm=(90+70)/2=80 and pm=(0.50+0.60)/2=0.55. By definition =( Q/Q)/( p/p)=(-20/80)/(0.10/0.55)=-1.375. Page 1 of 6 ©Prep101 11) Answer: C. The demand is elastic if >1 and inelastic if perfectly inelastic =0. 0.25 <1, so the demand is inelastic. <1. If it is 12) Answer: B. The lower is the budget share spent on the good, the lower is its price elasticity of demand. Out of all the items mentioned above, the lowest share is most likely to be for toothpaste. 13) Answer: D. If two goods are unrelated than the change in the price of good one does not produce any effect on the consumption of the second good, or in other words, Q2/ p1=0. 14) Answer: B. Because there is technological progress over time, it reduces the cost of production and that in turn shifts supply to the right. On the new curve, at any quantity supplied lower price is charged, meaning that the denominator in ( Q/Q)/( p/p) drops in absolute value and thus elasticity increases in absolute value. 15) Answer: C. MU= U/ Q. If U<0 and Q>0, then MU must be negative. 16) Answer: D. John receives only 40 utils of satisfaction from the second pizza, 30 utils from the third one etc., so his MU diminishes right after the first pizza. 17) Answer: A. ICs reflect person’s preferences for goods and are not directly affected by prices. If prices change, they do not change preferences and thus do not shift ICs. 18) Answer: B. Rent is not a profit as it is simply earned because the resource in the person’s possession happens to be very productive and/or scarce. 19) Answer: A. Implicit costs are opportunity costs not considered by accounting. In fact, if owner could earn a salary but prefer to work in his own business, the cost of his work there is implicit. 20) Answer: C. PVt=FVt/(1+i)t. Since when t=1, 100=110/(1+i) => i=(110/100)-1=0.1. Then when t=2, 100=FV2/(1+0.1)2 or FV2=100*(1.1)2=121. Page 2 of 6 ©Prep101 21) Answer: C. MC=w/MPP, thus when diminishing returns kick in, implying MPP steady decrease, the denominator is reduced, causing the MC expression to increase. 22) Answer: B. We can see that production of 1 more unit changes costs by $5, implying marginal change or MC=$5. Because we do not know the decomposition of total costs into total variable costs and fixed costs, we cannot say anything about them or their average values. Also ATC=50/10=5 for 10 units and ATC=55/11=5 for 11 units. 23) Answer: C. Economies of scale are significant in the long run when all production factors can be changed and do not have any bearing in the short run. In the short run the impossibility of changing some factors (like capital) causes productivity of labour to fall (more and more people operating limited equipment) and thus AVC to increase. 24) Answer: B. Because each competitive firm cannot influence the market price but can produce and sell whatever it considers necessary at this price, it faces a horizontal demand curve, which is perfectly elastic. 25) Answer: C. In the short run p=MC & p=MR, the MR=MC. Because MR=$9>MC=$8, then MC needs to increase. To achieve it, the output has to go up (since the production is always on the upward sloping part of the MC curve). 26) Answer: B. In the long run p=MC and MC=LAC or p=MR=MC=LAC. Notice the only condition not included in it is MC>LAC. 27) Answer: D. To sell more at a uniform price, the monopolist has to reduce the price on all units since it is facing a downward-sloping supply. 28) Answer: C. When MR=MC, Q*=30,000 and from the demand p*=0.60 and ATC=0.55. Then total revenue is 0.60 30,000=18,000 and total cost is 0.55 30,000=16,500 (since ATC=Cost/Q) and profit is 18,000-16,500=1,500. 29) Answer: C. Since price cannot be equated to MC at this quantity, the monopolist simply takes price from the demand, p=40. Its total revenue is 0.40 50,000=20,000 and its total cost is 0.55 50,000=27,500 (since ATC=0.55 at Q=50,000 and ATC=Cost/Q). Then its profit is 20,000-27,500=-7,500 (a loss). Page 3 of 6 ©Prep101 30) Answer: C. For a monopolistically competitive firm, p=ATC=AC and not p=MC. Since ATC or AC touches the demand curve before it crosses the MC curve, the resulting price is above the MC. 31) Answer: C. The dominant strategy is about doing the best player can, given the possible responses by its rival. 32) Answer: C. If they follow only price decreases, then they believe in facing more elastic demand for higher prices and less elastic for lower prices, i.e. overall demand has a kinked point at a certain price. 33) Answer: D. Because for natural monopoly marginal cost pricing (where MC crosses demand) causes losses (MC is under ATC), the government instead chooses to ask for average cost pricing (where ATC crosses demand). 34) Answer: B. With time, the actions by regulators are inevitably influenced by the industry under regulation. 35) Answer: C. Because its sales of copying equipment are conditional on further purchases of its supplies and maintenance services, it is an example of tied sales. 36) Answer: B. A competitive firm keeps hiring people till its MFC=w=$8. 37) Answer: A. If the price increases, then MRP=MPP MR=MPP p is going to increase for any given level of labour input, meaning a rightward shift in MRP curve. 38) Answer: C. The monopolist faces a downward-sloping demand curve for its product and does not want to produce a greater output to sustain its price high. This leads to lower demand for labour input. 39) Answer: B. By increasing wages, unions create a surplus in the labour market (when more labour is offered than demanded). This implies that higher wages come at the expense of fewer jobs. 40) Answer: D. Unions tend to give workers a collective voice to which administration is more likely to listen. This, in turn, reduces conflicts between both sides. Page 4 of 6 ©Prep101 41) Answer: C. MFC= total wage bill/ quantity of labour supplied, where total wage bill is required wage rate quantity of labour supplied. Then MFC5=(3.00 5-2.50 4)/(54)=(15-10)/1=5.00. 42) Answer: D. The distance between 45 line and the Lorenz curve indicates inequality gap. The greater gap shows uneven income distribution in the society. 43) Answer: B. The age-earning cycle predicts that earnings rise with experience up to the age of around 50 and decrease after that. This means this age sees the peak of the earnings. 44) Answer: D. Training, talent and education do affect marginal productivity. However, inheritance of money or other valuables does not contribute to a worker’s marginal productivity as it does not really constitute any asset for a job. 45) Answer: B. The producers while making their production decisions fail to consider those because of their absence in their production costs. 46) Answer: C. The public park is a common property, so when all flowers are gone, no one is going to replant them again (as opposed to your property that you are responsible for and interested in fixing). 47) Answer: B. Common property implies non-exclusiveness and thus no limits on its use. This causes increase in externalities as such pollution. 48) Answer: B. Negative externalities mean harmful influences. If government wants to reduce them, it has to make the responsible party pay for them, e.g. increase the party’s direct costs related to its externality-causing activities. 49) Answer: A. Tax system is progressive if MTR>ATR. MTR= Taxes due/ Taxable Income=(3,500-1,500)/(40,000-20,000)=2,000/20,000=0.1 and ATR=Taxes due/Taxable Income=(1,500+3,500)/(20,000+40,000)=5,000/60,000=0.083. Clearly MTR=0.1>ATR=0.083. Then it cannot be regressive and proportional. (Notice that the family does not pay the same proportion of its income in taxes. First it is 1,500/20,00=0.075 and then it is 3,500/40,000=0.0875). Page 5 of 6 ©Prep101 50) Answer: C. Tax incidence is the measure of the proportion of tax borne by a certain group of people (commonly, by consumers as opposed to producers). Page 6 of 6 ...
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