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PART I Multiple Choice Questions 1. Why is democracy associated with capitalism?

PART I Multiple Choice Questions
1. Why is democracy associated with capitalism? Consider the impact of the capitalistic free market on the following:
-The mobility of Capital and Labor
-The affect of less government regulation which is characteristic of capitalism
-The impact of the free market on the level of government ownership of firms.
-The affect of government regulation on non-capitalistic nations.

2. In contrast to a socialist economic organization, how would a capitalist system differ?
Consider who owns the capital (means of production) in the two models.

3. When do assumptions made in conjunction with economic theorizing have to be realistic? Can unrealistic assumptions provide useful outcomes?

4. What basic principles does the production possibilities (or transformation) curve illustrate? Consider whether an increase in the production of one good requires an increase or decrease in the production of other goods when K and L are held constant.

5. When does the concept of opportunity cost indicate? Consider how the production of one good affects the possible production level of other goods.

6. Will a change in the price of good x the demand for X, a normal good, to change?

7. What entity establishes a price ceiling and does it require government sanction for violators? Will it result in a surplus or a shortage?

8. If a producer overproduces and sets the price of his product too high to allow him to sell all of his production, does this cause a surplus or an excess supply condition?

9. What entity establishes a price floor and does it require government sanction for violators? Will it result in a surplus or a shortage?

10. An increase in the supply of a good is expected to have what effect on its price? What will be the effect on the demand for substitutes?

11. If the own-price elasticity of demand for gasoline is -.2 and there is a 10% increase (+.10) in the price of gasoline, what will be the percentage change to the equilibrium demand for gasoline?

12. Define a black market in terms of a Price Ceiling.

13. A regulated transportation monopoly is losing money. The Monopoly goes to its government regulators with a request to raise their rates (price). An economist on the regulatory commission says that raising rates will bring in less revenue as customers change to substitute forms of transportation. The Monopoly and the economist have different views of the elasticity of demand for the monopoly’s transportation services. Which one thinks the demand is inelastic and which one thinks it is elastic?

14. In the graph to the right, which portion
of the demand curve is relatively elastic
(P1 to P2) or (P3 to P4)? Which range is
relatively inelastic?

16. Define utility.

17. Define equilibrium in terms of the following:
-The plans of suppliers and demanders
-The budget line and the indifference curve.

18. Does the marginal rate of substitution increase or decrease as a point moves downward and to the right along a given indifference curve?

19. Recognize the supply and demand graph for a price floor and (separately) a price ceiling.

20. Be able to recognize a graph which depicts excess supply in the graph. Given quantity demanded and quantity supplied are labeled at the excess supply level, state the quantity of the excess supply. [The equilibrium quantity demanded and quantity supplied will also be labeled.


PROBLEM 1. Own Price elasticity or cross-price elasticity. Given a table of the price(s) and quantities before the price rises, compute the POINT (or ARC) elasticity of demand of a good as its price rises.
SHOW FORMULA AND WORK (No credit for magic numbers).
This will be one problem. The possible forms of this problem will be:
-Own-Price elasticity by point method
-Own-Price elasticity by arc method
-Cross-Price elasticity by point method
-Cross-Price elasticity by arc method

For own-price elasticity, state whether the demand for this good is elastic or inelastic.
For cross-price elasticity, state whether the goods are substitutes or complements.

PROBLEM 2. A table like the one below is given, plus a wage and a cost of capital. The problem is to fill in the BLANKS. Put formulas in the cells above the variable names. Do not enter formulas in cells with "///" in them.

/// Given
0 0
1 3
2 6


a. Determine whether the typical firms depicted below are earning profits or losses then show graphically how economic forces will cause the industry to move to a zero economic profit for the typical firm. Be sure your graph indicates whether firms will enter or leave the industry and shows how the equilibrium industry price and quantity are changed.

Note that there are two possible versions of the graph below, one of which will appear on the exam. In the graph below, the typical firms “A” and “B” are earning a profit. In the other graph, they will suffer losses.

In parts b through e below, answer in writing what you answered graphically above. Answers that address two or more possibilities will receive half credit if both answers are correct.

b) In the above graph, do new firms enter the industry or do existing firms leave the industry? What causes them to do so?

c) As the number of firms in the industry changes what happens to the industry supply curve? Why? [More or less firms or because each firm produces more or less at the new equilibrium price]

d) As the industry supply curve shifts, does price go up or down?

e) As the price changes, what happens to the profit or loss situation in the industry?

PROBLEM 4. Complete the graphs below:

a) Draw the line representing the profit-maximizing level of output, q*.

b) Label ATC at output level q*.

c) Draw and shade in, the profit or loss rectangle.

d) Label rectangles "profit" or "loss" or "Zero Economic Profit."

On the test, these graphs will be the same but they may be in a different order or position right to left.

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