ECON 205 Final
Consider the steak market above and suppose an $8 tax is imposed on steaks. How big is the resulting dead weight loss triangle? a) $32 b) $16 c) $8 d) $64
$16
Suppose that total cost rises from $200 to $220 when a firm increases its production from 5 to 6. What is the marginal cost of the 6th unit? a) $220 b) $220/6 c) $20 d) $40
$20
Suppose that the demand for Filet Mignon steaks starts at $100 (per steak) and slopes down with a slope of 1. Also suppose that the supply starts at $60 and slopes up with a slope of 1. That implies the equilibrium will be at P = $80 and Q = 20 steaks. How much is consumer surplus in the equilibrium? (a sketch will help with this one and #33- use the space here) a) $800 b) $400 c) $200 d) None of the above
$200
Consider the steak market above and suppose a $10 tax is imposed on steaks. How big is the resulting dead weight loss triangle? a) $50 b) $25 c) $10 d) $100
$25
A $1 tax per unit on the buyer of a good shifts demand upward (vertically) by $1
False
Now assume Jack and Jill are in the NASH equilibrium (which involves 40 gallons each) and then Jack increases his output to 41. What is Jack's marginal revenue? a) 1 b) 39 c) 40 d) -1 e)19
-1
Which answer shows the price elasticity of demand based on the following points on a demand curve (Qd = 70 when P = $10, but Qd = 90 when P = $6) using the midpoint method a) 20/70 divided by 4/10 b) 2 c) .5 d) None of the above
.5
What will happen to the value of the Dollar (Yen/$ let's say) if the Fed decides to raise interest rate? Why is that?
1) More demand for the dollar makes the value of the dollar stronger 2) If interest rates rise in the US, investors in Japan might want to buy bonds now
Now assume Jack and Jill are at the cooperative equilibrium and then Jack cheats and increases his output by 1 gallon. What is Jack's marginal revenue? a) 1 b) 39 c) 40 d) -1 e)29
29
Consider that exact same water duopoly example with Jack and Jill (from lecture and the text with demand shown below and slope = 1). P Qd 120 0 110 10 100 20 90 30 80 40 70 50 60 60 50 70 40 80 30 90 Assuming Jack and Jill collude/cooperate, what will Jack's output be? a) 80 b) 20 c) 40 d) 30
30
In 1989, the CPI was 124.0. In 1990, it was 130.7. What was the rate of inflation over this period?
5.4 percent ((Year 2 CPI - Year 1 CPI)/Year 1 CPI) * 100
Consider that exact same water duopoly example with Jack and Jill (from lecture and the text with demand shown below and slope = 1). P Qd 120 0 110 10 100 20 90 30 80 40 70 50 60 60 50 70 40 80 30 90 Assuming Jack and Jill collude/cooperate? What will total output be? (total, not per person) a) 80 b) 60 c) 40 d) 20
60 (for max total revenue, and recall 0 cost in that example)
As the number of firms in an oligopoly grows the outcome is more like a) A competitive market b) the cartel outcome c) a duopoly
A competitive market
Define consumer price index
A measure of the overall cost of the goods and services bought by a typical consumer
Which of the following shifts the demand for watches to the right? a) A rise in income (assuming watches are a normal good) b) A rise in the supply of watches c) An increase in the price of watch batteries if watch batteries and watches are complements
A rise in income (assuming watches are a normal good)
A price ceiling below the equilibrium P level will lead to which of the following a) A surplus b) A shortage c) No effect on the outcome d) None of the above
A shortage
Which of the following is NOT a barrier to entry in a monopolized market? a) A key resource is owned by a single firm. b)The government gives a single firm the exclusive right to produce some good. c)The costs of production make a single producer more efficient than a large number of producers. d) A single firm is very large.
A single firm is very large
What does/might the following diagram represent? | | | | $ | | ____________________________________________ | | |____________________________________________________ Q a) Demand and Marginal Cost for a competitive firm b) ATC and MC (below ATC) for a natural monopoly c) Demand and ATC for a natural monopoly d) MR DARP and Total cost for a competitive firm
ATC and MC (below ATC) for a natural monopoly
Which cost curves do these look? X-axis = Q Y-axis = $ a) MC and AVC b) AVC and ATC c) Total Cost and Marginal Cost d) Total Cost and ATC
AVC and ATC
Which of the following has positive externalities? a) Vaccines b) Flowers I plant in my front yard c) Education d) All of the above
All of the above
When marginal cost is below average total cost for the next unit of output a) Average total cost is rising b) Average total cost is fixed c) Average total cost is falling d) Average cost is minimized
Average total cost is falling
Monop Comp ain't too much like perfect competition
Because the firms all set their prices when demand has got a slope
The surplus caused by a binding price floor will be greatest if a) Both S and D are inelastic b) Both S and D are elastic c) S is elastic and D is inelastic d) None of the above
Both S and D are elastic
Now imagine that they (England and Portugal) specialize and trade according to the situation above. Which is true? a) Only Portugal gains because of their superior production ability b) Only England gains because they get access to goods from a more productive country c) Both gain if the ratio of trade is 5 bottles of wine per bushel of wheat d) Both gain if the ratio of trade is 4 bottles of wine per bushel of wheat
Both gain if the ratio of trade is 4 bottles of wine per bushel of wheat
The law of demand states that an increase in the price of a good a) Decreases the demand for that good b) Decreases the quantity demanded for that good c) None of the above
Decreases the quantity demanded for that good
A monopolist's supply curve a) Is MC above ATC b) Does not exist (because optimal output depends on shape of demand rather than just p) c) Is MC above AVC d) Is the upward sloping portion of ATC
Does not exist (because optimal output depends on shape of demand rather than just p)
Suppose that Portugal can make 100 bottles of wine per year or 20 bushels of wheat while England can make 45 bottles of wine or 15 bushels of wheat (linear PPFs with those intercepts). I will use this for #8 and #9. Who has a comparative advantage in wheat? a) England b) Portugal c) Neither d) Both
England
For a perfectly competitive firm, marginal revenue is a) Equal to the price b) Less than the price c) More than the price d) Equal to total cost
Equal to the price
A decrease (leftward shift) in the supply for a good will tend to cause a) Equilibrium quantity to rise and p to fall b) Equilibrium quantity to fall and p to rise c) Both Equilibrium P and Q to fall d) None of the above
Equilibrium quantity to fall and p to rise
A good with few close substitutes (or none) is likely to have a more elastic demand
False
If a market is in equilibrium, then the quantity demanded exceeds the quantity supplied
False
True or False- In the long run for perfect competition (with cost curves from #15) the MR line would be tangent to the minimum of AVC
False
True or False- Perfectly Competitive firms have zero accounting profit in the long run
False
True or False- a monop comp firm has no deadweight loss and no efficiency problems
False
True or false cotton is more likely to be monopolistically competitive than breakfast cereal
False (cotton is more homogenous)
True or False- price discrimination causes more deadweight loss
False (it actually reduces DWL)
For monopolistic competition, if P is above ATC a) Firms are losing money and exit occurs b) Firms have good profits and entry occurs c) Firms have good profits and exit occurs d) Firms have losses and entry occurs
Firms are losing money and exit occurs
How do you calculate GDP?
GDP = C + I + G + NX (consumption + investment + government expenditure + net exports)
Compared to a competitive industry, a monopoly will usually generate a) Higher prices and lower output b) Higher prices and higher output c) Lower prices and lower output d) Lower prices and higher output
Higher prices and lower output
Which is accurate for monop. comp. ? a) MR and D must intersect at the optimal output b) MR and ATC must intersect at the optimal output c) If D is tangent to ATC then MR and MC intersect at that same output level d) If D is above ATC then the firm cannot make a profit
If D is tangent to ATC then MR and MC intersect at that same output level
Economic Profit is Total Revenue minus a) Accounting costs b) Implicit costs and explicit costs c) Implicit costs d) Variable costs
Implicit costs and explicit costs
How can you measure real GDP?
In base year prices and nominal GDP is in current prices
A price decrease will decrease total revenue when demand is a) Elastic b) Inelastic c) Unit elastic
Inelastic
Income Elasticity of demand is negative for a) Normal goods b) Inferior goods c) Complements d) Substitutes
Inferior goods
A perfectly competitive firm maximizes profit in the short run at the output where a) Price equals average cost b) Marginal revenue equals marginal cost c) Marginal revenue is below marginal cost d) Marginal product is equal to marginal cost
Marginal revenue equals marginal cost
Which of the following statements is true about a market economy? a) With a large enough computer, central planners could guide production more efficiently than markets b) Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being. c) Taxes help prices communicate costs and benefits to producers and consumers d) The strength of a market system is that it tends to distribute resources evenly across consumers
Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.
Which of the following is an example of a price floor? a) Rent Control b) Minimum Wage laws c) Both of the above
Minimum Wage laws
Which best explains how a perfectly competitive industry with positive economic profits would be driven to a long run equilibrium a) Firms exit as the price falls until profits are zero b) More firms enter and market supply shifts rightward so that prices fall c) More firms enter and market demand shifts rightward so that prices rise d) Firms maintain the high economic profits and that sustains supply at the present level
More firms enter and market supply shifts rightward so that prices fall
Using government regulations to force a natural monopoly to charge a price equal to its marginal cost will a) Raise the price of the good b) Attract more entrants c) Motivate the company to exit the market d) Lead to more profit c
Motivate the company to exit the market
Which is a standard example of a public good a) Fish in the ocean b) National Defense c) Cheeseburgers d) None of the above
National Defense
Define real interest rate
Nominal interest rate that is corrected for the effects of inflation
What are the features of a public good? a) Rival and Excludable b) Rival and Non-Excludable c) Non-Rival and Non-Excludable d) More expensive than a private good
Non-rival and Non-excludable
A monopolist maximizes profit where a) Price equals marginal cost b) Marginal revenue equals marginal cost c) Marginal Revenue exceeds marginal cost d) None of the above
None of the above
The market for hand tools that is dominated by Black and Decker, Stanley, and Craftsman is best described as a) Monopoly b) monop comp c) oligopoly d) perfectly competitive
Oligopoly
Which of the following is NOT a feature of monopolistic competition? a) Differentiated products b) Easy entry and exit c) Many sellers d) Positive economic profit in the long run
Positive economic profit in the long run (only in the short run)
Trade-offs are required because wants are unlimited and resources are a) Efficient b) Scarce c) Marginal d) Unlimited
Scare
Define inflation
Situation where the economy's overall price level is rising
Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent, a) Fewer students will attend college b) Some students will switch majors from accounting to education c) Some students will switch majors from education to accounting d) None of the above
Some students will switch majors from education to accounting
Cross price elasticity is positive for a) Complements b) Substitutes c) Normal goods d) Unrelated goods
Substitutes
If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are a) Substitutes b) Complements c) Normal goods d) Inferior goods
Substitutes
The short run supply curve for a perfect competitor is a) The MC curve above the minimum of ATC b) The MC curve above the minimum of AVC c) Does not exist d) The ATC curve to the right of its minimum
The MC curve above the minimum of AVC
Define internal rate of return (IRR)
The annual rate of growth that an investment is expected to generate
What does diminishing marginal product imply about a production function? a) The slope gets flatter as you add more inputs (like labor) b) The slope gets steeper as you add more inputs (like labor) c) The production function is horizontal d) The production function is linear
The slope gets flatter as you add more inputs (like labor)
Define net present value
The difference between the present value of all cash inflows and the present value of all cash outflows
Suppose that we decided each gallon of gas has $3 of harm based on health and climate change impacts. Which of the following is accurate? a) The social cost curve is $3 above the supply curve (private cost curve) b) The private cost curve is $3 above the social cost curve c) The social value curve is above the demand curve d) None of the above
The social cost curve is $3 above the supply curve (private cost curve)
Define opportunity cost of capital
The incremental return on investment that a business foregoes when it elects to use funds for an internal project, rather than investing cash in a marketable security (what shareholders give up by not buying other stocks instead of shares in their own company)
Define nominal interest rate
The interest rate usually reported and not corrected for inflation
In the above situation (#35), a $3 gas tax will internalize the externality so that a) The new equilibrium quantity matches the optimal output b) The optimal quantity will exceed the equilibrium quantity c) The optimal quantity is below the new equilibrium quantity d) None of the above
The new equilibrium quantity matches the optimal output
According to the Coase theorem, private parties can solve the problem of negative health externalities if a) There are a large number of affected parties b) The harmed parties have the right to protect themselves c) There are no transactions costs d) In all circumstances
There are no transaction costs
Which of the following is NOT a feature of perfect competition? a) There are many firms b) There is free entry c) There are positive economic profits in the long run d) The firm's demand curve is horizontal
There are positive economic profits in the long run
A $1 tax per unit on the seller of a good shifts supply upward (vertically) by $1
True
A PPF is usually drawn with a bowed shape because resources like labor/workers have different skill levels and you move the suitable resources into a sector first as you start to make more in that sector. True or False?
True
If S and D both shift rightward then the new equilibrium price could rise or fall based on the size of the shifts
True
Increasing productivity is the main thing that usually supports a rising standard of living. True or False?
True
Markets are a good way to allocate resources and taxes reduce the total surplus and create an outcome where the marginal benefit of some unprovided units would have exceeded the marginal cost of producing.
True
Supply shifts left (ie up vertically) when costs of production rise
True
The demand for gasoline is more elastic in the long term
True
The efficiency of markets only applies to a situation without externalities (or other examples of market failure)
True
The tragedy of the commons involves resources that are somewhat rival since they can be depleted and hard to exclude people from using
True
To model comparative advantage, we used linear PPFs to make the analysis easier
True
True or False- D is tangent to ATC for monopolistic competition in the long run and that also means that firms produce below their efficient scale (and ATC is not at its minimum)
True
True or False- MR is below D for a monopolistic competitor
True
True or False- McGee described implicit costs and normal accounting profits in terms of an adequate level of return to shareholders who fund a company
True
True or False- Perfectly Competitive firms have zero economic profit in the long run a) True b) False
True
True or False- The Sherman Anti-Trust act allows the govt to prevent price fixing and collusion by oligopolies (including limits on when mergers are allowed)
True
True or False- a Monopoly can maintain high profit if it isn't regulated because of barriers to entry
True
True or False- breaking a natural monopoly (like a water company) into several smaller firm will increase average cost since you duplicate infrastructure with more than one firm
True
True or False-- A Nash Equilibrium for duopoly is when each firm is choosing its best output given the current output of the other firm
True
True or False- it makes sense for a perfectly competitive firm to keep producing (in the short term) as long as total revenue exceeds total variable cost. a) True b) False
True (note shutting down involves loss = fixed costs)
The "basket" on which the CPI is based is composed of:
Typical consumer goods
The inefficiency associated with a monopoly is due to a) Overproduction of the good b) Underproduction of the good c) The monopoly's losses d) The monopoly profits
Underproduction of the good
Which of the following defines average variable cost (AVC)? a) Total Cost / quantity of output b) Variable Cost / quantity of output c) Variable Cost / labor d) The change in total cost for one more unit of output
Variable Cost / quantity of output
Which of the following is a variable cost in the short run? a) Salaries paid to upper level managers b) Rent on an office building with a 2 year lease c) Wages to hourly workers d) Interest owed to the bank on a loan
Wages to hourly workers
If borrowers and lenders agree on a nominal interest rate and inflation turns out to be less than they had expected: a) borrowers will gain at the expense of lenders b) lenders will gain at the expense of borrowers c) neither borrowers nor lenders will gain because the nominal interest rate has been fixed by contract
b) lenders will gain at the expense of borrowers
General Electric has the opportunity to purchase a new factory today that will provide them with a $50 million return four years from now. If prevailing interest rates are 6 percent, what is the maximum that the project can cost for General Electric to be willing to undertake the project? a) $53,406,002 b) $34,583,902 c) $43,456,838 d) $50,000,000 e) $39,604,682
e) $39,604,682
The amount of money today needed to produce a particular sum in the future, given prevailing interest rates, is known as: a) compound value b) beginning value c) fair valued) future value e) present value
e) present value
PPF stands for what
production possibility frontier
What is GDP (gross domestic product)?
the market value of final goods and services