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