Econ Practice Finals

An example of piece rate work is paying workers:

$0.25 for every pound of apples picked.

(Figure: Producer Surplus) Refer to the figure. What is the change in producer surplus if the price rises from $2 to $3 per unit?

$15

(Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of the value of wasted time if a price ceiling of $4 is implemented and the good is allocated via queues?

$160

In the diagram, for a market price of $4, total consumer surplus equals:

$30

(Figure: Water Market) Refer to the figure. If a price floor gets set at $8 per gallon, what is the deadweight loss?

$30,000

You are given a ticket to a Bob Dylan concert with a face value of $50. You value the ticket at only $40, sell it to a friend for $40, and attend a U2 concert priced at $60. The opportunity cost of attending the U2 concert is:

$60 worth of alternative goods and services, plus the value of the time spent at the concert.

Buddy decides to buy one share of Boeing stock for $75 which has an annual dividend of $2.50, and sells his stock one year later for $64. What was his approximate annual return?

-11.33%

If the price of Good Y falls from $10 to $8, and the quantity demanded of it rises from 1,000 units to 1,200 units, the price elasticity of demand expressed in absolute value is:

0.82

(Figure: Foreign Trade) Refer to the figure. What quantity would be traded in the absence of any international trade?

1,000

. The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand

1.22

Suppose you invest $1,000 in a mutual fund. If the annual return of that fund is 7%, approximately how many years will it take before your fund is worth $2,000?

10 years

(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profitmaximizing quantity for this monopolist?

110

Suppose you invest $1,000 in a mutual fund. If the annual return of that fund is 5%, how many years will it take before your fund is worth $2,000?

14 years

(Figure: Wage Subsidy) Consider the use of wage subsidies versus the minimum wage. Employment with a wage subsidy is ________, versus employment with an $8 minimum wage, which is ________.

180; 120

At the beginning of the fiscal year, stocks in Sanchez Snail Emporium were $17. The stock was $20 at the end of the fiscal year, and the dividend rate over the course of the year was 7%. What was the approximate rate of return of this stock?

24.6%

) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. If the countries create a cartel and agree to mimic monopoly-like behavior, what level of output would each firm produce?

400

Clark starts a coffee shop and begins hiring employees. The first employee's marginal product of labor (MPL) is $128 an hour, and the MPL for each employee beyond the first adds half of the previous employee's ($64 for the second, $32 for the third, etc.). If the market wage for employees is $7 an hour, how many employees should Clark hire?

5

Which is a positive economic statement? A) A government-imposed price of $0 for kidneys helps create a black market in kidneys. B) We should encourage the importation of kidneys from less-developed countries. C) All people have a right to low-cost, high-quality health care. D) A market for kidneys is fundamentally immoral.

A government-imposed price of $0 for kidneys helps create a black market in kidneys.

Which of the following is a market risk for a Chinese solar energy company? A) The European Union increases tariffs on solar panels imported from abroad. B) China decides to heavily subsidize solar energy. C) A massive earthquake along the Pacific Rim drags the global economy into recession. D) Scientists working for the company demand raises and more vacation time.

A massive earthquake along the Pacific Rim drags the global economy into recession.

(Figure: International Trade 1) Refer to the figure. According to the figure, which of the following statements is TRUE? A) After international trade, price falls by $4 and consumption decreases by 4 units. B) After international trade, price rises by $4 and consumption increases by 8 units. C) After international trade, price falls by $4 and consumption increases by 4 units. D) After international trade, price stays the same and consumption increases by 8 units.

After international trade, price falls by $4 and consumption increases by 4 units.

A major difference between a private good and a public good is that private goods: A) All of the answers are correct. B) can be produced in efficient quantities by markets, while public goods are generally not. C) are rival, while public goods are not. D) are excludable, while public goods are not.

All of the answers are correct

Why does economic efficiency not always result in fair and equal treatment? A) Efficiency demands cost-minimization, which may cause the nonproduction of expensive items or adjustments designed to ensure that disadvantaged members of society are catered for. B) Market efficiency does not always allow firms to hire disadvantaged members of society in instances where there is significant pre-market discrimination, so labor and governments sometimes have to step in to demand the hiring of some of these individuals. C) Market efficiency requires that only profitable goods be produced in order to maximize the return from using scarce resources, and some goods for the disadvantaged may not always yield profits. D) All of these explanations are correct.

All of these explanations are correct

How do stock prices act as a signal for the future value of the firm? A) If stock prices fall, they could be indicating declining economic conditions. B) If news of a potential merger causes stock prices of both firms to rise, it could indicate that the merger may result in greater profitability. C) If stock prices rise, they could be indicating future profitability for the firm. D) All of these possibilities are correct

All of these possibilities are correct

An example of adverse selection is:

An unhealthy person buying health insurance

Anita is a wonderful baker and can bake 10 cakes in a day, but then she has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies but can make only seven cakes or 100 cookies in a day. Based on this information, which of the following statements is TRUE? A) Anita should bake cookies, and John should bake cakes. B) Anita and John should split their time equally between cakes and cookies. C) Anita should split her time between cakes and cookies. John should bake cookies. D) Anita should bake cakes, and John should bake cookies.

Anita should bake cookies, and John should bake cakes

Which statement is TRUE on average across all markets? A) Investing in real estate is more lucrative than investing in stocks. B) Investing in art is more lucrative than investing in stocks and bonds. C) Because there is a fun factor associated with owning art, the returns to investing in art are reduced by this fun factor. D) Investing in bonds is more lucrative than investing in stocks.

Because there is a fun factor associated with owning art, the returns to investing in art are reduced by this fun factor

(Table: Maple Syrup and Bacon Production) According to the table on maple syrup and bacon production, which of the following is TRUE about Canadian and U.S. comparative advantages? A) Canada has a comparative advantage in producing both maple syrup and bacon. B) Canada has a comparative advantage in producing maple syrup, and the United States has a comparative advantage in producing bacon. C) Canada has a comparative advantage in producing bacon, and the United States has a comparative advantage in producing maple syrup. D) The United States has a comparative advantage in producing both maple syrup and bacon.

Canada has a comparative advantage in producing bacon, and the United States has a comparative advantage in producing maple syrup.

In the eighteenth century, the British Crown instituted a Stamp Tax, a commodity tax on, among other things, newspapers. During this period in history, newspapers were one of the few ways people could learn about world events, and entering the newspaper industry was relatively easy. With this in mind, who likely paid more of the tax: consumers or producers?

Consumers were more likely to pay more of the tax because the demand for newspapers was more inelastic than the supply.

(Table: Cecil and Lou) Refer to the table. This society's utility (U) is given by the equation U = sqrt(Cecil's income) + sqrt(Lou's income). Which society is MOST preferred based on the principles of utilitarianism?

D

(Table: Maximin Principle) Refer to the table. If income is shown in thousands of dollars, according to Rawls's maximin principle, society ________ is preferred to society

D; B

Which of the following best explains why cartel agreements are hard to maintain? A) Cartels are typically very profitable for firms in the short run, but not in the long run. B) Each firm in the cartel has the incentive to increase production and earn larger profits. C) It is hard for each firm in the cartel to maintain a level of production equal to that of the other firms. D) Each firm in the cartel has the incentive to raise prices and earn larger profits.

Each firm in the cartel has the incentive to increase production and earn larger profits.

On average, workers in Firm A are twice as risk averse as workers in Firm B. All else being equal, a performance pay scheme would be more effective in:

Firm B, because less risk averse workers allow the employer to increase average salary by a lesser amount, meaning that increased costs are lower relative to the firm's productivity boost.

Which statement(s) about price ceilings is/are TRUE? I. Price ceilings cause quantity demanded to exceed quantity supplied. II. When including time costs and bribes, consumers pay a total price in excess of the price ceiling. III. All else equal, it is more wasteful to allocate goods based on bribes than on waiting time costs.

I and II only

Which statements are TRUE? I. The price system solves the information problem by telling us the highest-valued uses for a product. II. The price system solves the incentive problem by giving consumers an incentive to seek out substitutes when the price of a product rises. III. The price system solves the social-equity problem by making most products affordable to middle-class households.

I and II only

(Figure: Weekly Pay) Firms A and B are radio stations that hire salespeople to sell advertising slots. The firms' compensation schemes appear in the figure. Which of the following statements is TRUE? I. A worker who could sell seven ads per week would want to work for Firm A. II. A worker who could sell five ads per week would be willing to work for either firm. III. A worker who could sell only three ads per week would want to work for Firm B.

I and III only

Which of the following statement(s) is/are TRUE? I. Because monopolistically competitive firms sell differentiated products, their demand curves are downward sloping. II. Monopolistically competitive firms earn above-normal profits because of high entry barriers. III. As firms enter a monopolistically competitive industry, the demand curves of the existing firms shift down and to the left.

I and III only

Which of the following statements is FALSE? I. If the demand curves are different, it is more profitable to set a single price than different prices in markets. II. To maximize profit the firm should set a lower price in markets with more elastic demand. III. The presence of arbitrage makes it easy for a firm to price discriminate.

I and III only

Which of the following statements is TRUE? I. If a competitive firm sells its product at a price of $80, the firm should increase production from 100 to 101 units if the total cost rises from $2,000 to $2,066. II. If the marginal cost of the tenth unit is $14 and the marginal revenue is $10, the firm should produce the tenth unit to increase profits by $4. III. For competitive firms, profits are maximized at MR = MC or P = MC, since P = MR.

I and III only

Which of the following statements is TRUE? I. A free market minimizes the total costs of producing output. II. In a free market, P = MC1 = MC2 = . . . MCN. III. Every firm faces the same price in a competitive market.

I, II and III

Suppose that GSK sells one of its drugs for $25/pill in the United States and $13/pill in Canada. Which of the following statements is TRUE? I. The price discrimination benefits the Canadians, since they pay a lower price. II. The price discrimination may also benefit Americans, since GSK's larger profits could be used to fund more research and development of new drugs for Americans. III. Price discrimination is beneficial in industries with large fixed costs, since price discrimination increases the size of the market, helping to spread large costs over a greater number of consumers.

I, II, and III

The benefits of stock markets for the economy include: I. serving as an intermediary between savers and investors. II. revealing information about firm performance. III. increasing the efficiency of resource allocation among firms.

I, II, and III

Workers earn higher wages: I. when the demand for labor rises in an industry. II. the greater the amount of human capital they possess. III. the more dangerous the job they perform.

I, II, and III

Refer to the table. Which of the following outcomes is NOT a Nash equilibrium? I. (12, 12) II. (4, 4) III. (8, 8) IV. (3, 3)

II and IV only

Which statement is TRUE? I. Economics can answer questions about which value judgments are most important. II. Economics cannot answer questions about what is sacred. III. Economists fail to distinguish between normative and positive economics.

II only

If job A and job B are identical in all aspects, except that job B pays higher wages, what will happen over time?

Job A workers will become job B workers, decreasing the supply of labor to job A and increasing the supply of labor to job B until wages are equal.

(Table: Salaries) For the data in this table, most workers would prefer:

Job B ($100,000; $100,000)

Job X pays a yearly salary of $50,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would a risk-neutral person prefer?

Job Y because the expected payoff of $52,000 is greater than $50,000.

(Figure: Monopoly Profits) Refer to the figure. What is the monopolist's optimal price and output level?

P = $16.50; Q = 40

In a competitive market with four firms (indicated as Firm 1, Firm 2, Firm 3, and Firm 4), which of the following is the condition that enables all sellers to maximize profit? A) P = MC1 = MC2 = MC3 = MC4 B) Profit = Total Revenue - Total Cost for all firms C) P = ATC for all firms D) MC is minimized in all firms

P = MC1 = MC2 = MC3 = MC4

(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making an economic loss?

Panel A

Which is an example of meddlesome preferences?

People lobby politicians for laws restricting the wearing of head scarfs for religious purposes.

Land used to grow corn can also grow soybeans. As the demand for corn used in ethanol began to increase the price of corn, what happened to the price of soybeans?

The price of soybeans rose, since farmers began planting corn instead of soybeans, thus decreasing the supply of soybeans.

A paper company decides to implement a piece rate system to pay their salespeople. Which of the following scenarios would make the piece rate system LESS effective? A) The paper company has their employees make sales individually, with only one salesman working with each client throughout the process. B) The paper company has an easy way of determining which employee sold advertising slots to each client. C) Teamwork between salespeople is relatively unimportant D) The process of buying an advertising slot is largely automated, with differences in employee competence playing a small role in clients' decisions to buy advertising.

The process of buying an advertising slot is largely automated, with differences in employee competence playing a small role in clients' decisions to buy advertising.

The central planning approach proved ________ because ________.

a failure; central planners lack information and incentives to allocate resources efficiently

Monopolistically competitive firms create:

a small deadweight loss that may be partially or fully offset by increased product variety.

(Figure: Imposition of a Tax) Refer to the figure. Consumer surplus before the $4 tax is ________, and consumer surplus after the $4 tax is ________.

abc; a

A doctor who provides a second opinion knows she will not be performing any other service. This solves moral hazard by:

aligning the incentives of the buyer and sellers.

Which of the following investments would you expect to have the highest rate of return in the long run? A) art B) owning your own Major League Baseball franchise C) real estate D) an index fund (such as the S&P 500)

an index fund (such as the S&P 500)

A speculative bubble is when:

assets are priced much higher than is warranted by the profitability of the assets.

Refer to the figure. Suppose that a German manufacturer can sell its kidney lithotripter in two markets: country X and country Y. If this firm is interested in maximizing profits, it should set a price of ________ in country X and ________ in country Y.

b; z

People who accept the efficient markets hypothesis should:

buy a large number of stocks from different companies and hold them for a long period.

Grading on a curve reduces ________ but increases ________.

environment risk; ability risk

The adverse selection death spiral refers to the process of _____ people increasingly finding the price of health insurance to be _____ and dropping out of the market, with the market eventually dying as a result.

healthy; too high

Signaling creates benefits by: A) reducing inefficiencies. B) increasing information without creating any inefficiencies. C) increasing information, but it also can result in costly, non-productive activity by economic actors. D) decreasing moral hazard.

increasing information, but it also can result in costly, non-productive activity by economic actors.

If only sick people buy health insurance:

insurance companies must raise the price of policies

The major difference between active and passive mutual funds is that active funds:

involve stock picks by managers, while passive funds match the movements of a broad market index

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too:

low, and the product will be overproduced.

Utilitarians advocate redistributing income from rich people to poor people only up to the point that the:

marginal change in utility created from the redistribution is no longer positive.

The efficient markets hypothesis implies that in the stock market:

no one can systematically earn more than the average market return.

Entitlement theory argues for equality:

of process

Which of the following is a list of club goods ONLY? A) national defense, a lighthouse, smog reduction, cable Internet service B) a public beach, soup kitchen meals, public roads, smog reduction C) cable Internet service, rural toll highways, public roads, soup kitchen meals D) online video games, an uncrowded private beach with limited access points, rural toll highways, cable Internet service

online video games, an uncrowded private beach with limited access points, rural toll highways, cable Internet service

Robert Nozick's direct criticism of the importance of income equality is that:

peaceful trade should not be condemned even when it leads to large differences in wealth.

All of the following are examples of signaling EXCEPT: A) expensive engagement rings. B) prisoners using cigarettes as money. C) women taking the last name of their husbands. D) offering warranties on products.

prisoners using cigarettes as money

Diversification is an investment strategy to:

reduce the risk of a given investment portfolio.

(Figure: Basic Supply and Demand) In the diagram, if the market price is $2, then there is a:

shortage of 20 units

All else being equal, which of the following investment instruments would be expected to have the highest return?

stock from a very new company that has high growth potential but also a high degree of market uncertainty

Stocks typically earn a higher average rate of return than bonds because:

stocks are riskier than bonds.

When a doctor recommends unnecessary surgery to a patient, this is an example of:

the Principal-Agent Problem

Rational ignorance occurs when:

the benefit of becoming fully informed is lower than the cost.

The Centers for Disease Control and Prevention (CDC) wants at least 90% of the population vaccinated against preventable diseases, since the chance of a disease outbreak decreases as vaccine coverage increases. We can conclude that:

the external benefits of vaccination likely decrease as more and more people are vaccinated.

If the government eliminated tariffs:

the gains in consumer surplus would outweigh the losses in producer surplus.

What is the "invisible hand"?

the idea that people pursuing their own self-interest actually benefit the public at large

A plumber tells a homeowner that they will have to replace a very expensive part to fix a leak, even though only a minor fix is needed. This is an example of:

the principal-agent problem.

Antitrust authorities have a difficult time with network goods because:

they know that with network goods, only a few firms will always dominate the market.

During the Middle Ages, many villages had areas reserved for families to take their cows or sheep to graze. All families were welcome to use this land without charge. This situation likely led to a(n):

tragedy of the commons.

Refer to the figure. If price falls from $60 to $40, total revenue goes ________, so demand is ________.

up by $120; elastic

All else equal, when are hourly rates preferred to piece rates?

when it is difficult to measure output

(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of __

Q0; gh

Refer to the table. According to the maximin principle, which of the societies is ranked highest?

Society B

Refer to the table. Assume that the societal utility of income is given by the sum of the square roots of each person's income. Which society would a utilitarian say is best?

Society B

Which of the following best explains why special interest groups maintain so much power in the U.S. political process? A) Both special interest groups and voters lobby politicians hard regarding certain legislation; however, special interest groups typically win out because they have more money. B) Special interest groups stand to gain millions if particular laws are passed and lobby very hard for them, whereas each voter stands to lose only a little and don't find opposing them worth their effort. C) Special interest groups have been powerful in the past because of their ties to wealth; however, their power has been dwindling in recent years. D) Special interest groups typically represent the largest U.S. companies, so they get a lot of media attention.

Special interest groups stand to gain millions if particular laws are passed and lobby very hard for them, whereas each voter stands to lose only a little and don't find opposing them worth their effort.

For most of human history, salt was a rare and valuable commodity that had to be either mined or extracted from the ocean through evaporation. This changed when modern chemistry allowed humans to produce it in factories. How did this development affect the market for salt?

Supply increased, causing the price to fall.

If consumers pay 100 percent of a commodity tax, what could one conclude?

The commodity in question has a perfectly elastic demand curve

As part of the American Recovery and Reinvestment Act, $7 million was earmarked to build a bridge over a railroad crossing so that 168 Nebraska town residents wouldn't have to wait for the trains to pass. Which of the following best explains why this proposal was passed?

The costs were highly diffused, while the benefits were very concentrated.

You make a $1,000 bet with your friend that he will climb Mount Everest before he turns 30, but at the age of 25 he decides that he wants to back out of the bet. He offers you $750 to end the bet at that time, rather than pay the full $1,000 five years later. If you are absolutely sure that you will win the bet and that your friend will pay the $1,000 in five years, which payment option should you take to maximize present value if the interest rate is 5%?

The payment in five years because the present value of $784 is greater than $750

Which of the following is NOT a source of bond risk?

The possibility that the nominal return of the bond decreases over time

After the Great Recession, the government provided bailouts to banks to keep them from going bankrupt. If banks have reason to assume that the government would do the same in the wake of another recession, which of the following statements is TRUE? A) Banks will no longer be able to make profits after governmental intervention, an example of the failures of central planning. B) Banks will invest efficiently because there is no longer an information asymmetry in the market. C) Banks will begin asking for bailouts unnecessarily, an example of adverse selection. D) There is now a moral hazard problem in financial industries, and banks will make riskier investments than they would otherwise because they know the government will protect them against catastrophic losses.

There is now a moral hazard problem in financial industries, and banks will make riskier investments than they would otherwise because they know the government will protect them against catastrophic losses.

Which statement about network goods is TRUE? A) They are goods whose value to one consumer increases the greater the total number of consumers. B) All of the answers are correct. C) They are goods that are usually sold by large firms with a great deal of market power. D) They are goods that tend to have a large number of users or consumers.

They are goods whose value to one consumer increases the greater the total number of consumers

Which of the following would make signaling MORE effective?

Tightened academic standards make it more difficult to maintain a high college GPA without expending effort

In 2005, Ireland began taxing residents on how much garbage they threw away in an effort to promote recycling. In response, residents began burning trash (which is environmentally more harmful and resulted in an increase in burn victims as people accidentally set themselves on fire). This story suggests that the elasticity of demand for trash collection was more ______ than lawmakers believed because ______ than previously thought.

elastic; there were more substitutes for trash collection