Principles of Economics Final Exam
In the labor discipline model, the firm's feasible frontier shifts upwards if:
It becomes easier to monitor the worker
Which of the following characterizes business cycles?
They are fluctuations in real GDP and related variables over time
BASE MONEY IS BROAD MONEY MINUS BANK MONEY
BASE MONEY IS BROAD MONEY MINUS BANK MONEY
Suppose the yearly nominal wage of an employee, in thousands of euros, is 20, 22, and 23. In year 1, 2, and 3, respectively, Year-on-year inflation was 5% in year 2, and 11% in year 3.
Between year 1 and year 3, the worker lost purchasing power
the main characteristic of a fractional reserve banking system is:
Commerical banks lend a fraction of the deposits
Consider a local economy comprising of just two firms, Firm A and Firm B. Currently both firms have low capacity utilization. The following table shows the profits (or losses if negative) when the firms invest or do not invest:Based on this information, which of the following statements is correct? 1. Investing is a dominant strategy for both firms .2. The only Nash equilibrium is for both firms to invest. 3. Firm A investing and Firm B not investing is a Pareto-inefficient Nash equilibrium. 4. To achieve the Pareto-efficient Nash equilibrium, the firms have to coordinate in some way or develop business confidence.
To achieve the pareto-efficient Nash equilibrium, the firms have to coordinate in some way or develop business confidence
6. A tax on the consumers (collected from buyers) of alcohol, would lead to: a. A decrease in the market price of alcohol. b. A decrease in the final price paid by consumers of alcohol. c. A rise in the price sellers receive for alcohol. d. A rise in the market price of alcohol.
a. A decrease in the market price of alcohol
An expansionary fiscal or monetary policy could be implemented by
Reducing taxes
Indicate which of the following statements about Game Theory is not correct a. Altruism and coordination can solve social dilemmas b. There can be more than one Nash equilibrium in a game c. In the Prisoner's Dilemma game there is no dominant strategy, and therefore there is not a dominant strategy equilibrium
c. In the Prisoner's dilemma game there is no dominant strategy, and therefore there is not a dominant strategy equilibrium
8. The encrypted signals of cable television of a film: a. Is a rival good and excludable. b. Is a rival good but not excludable. c. Is not a rival good but is excludable. d. Is not a rival good and not excludable.
c. Is not a rival good but is excludable
10. The demand for bicycles in a town is given by D = 100 - P and the supply of bicycles is S = 9P. The municipality decides to subsidise bicycles with 10 monetary units per bike. a. The bicycles will be free with the subsidy. b. With the subsidy 90 bicycles will be sold. c. With the subsidy the sale of bikes will increase by 9 units d. None of the above.
c. With the subsidy the sale of bikes will increase by 9 units
9. Suppose that the consumption of cigarrettes produces negative externalities. One form of recovering market efficiency would be to: a. Fix a tax, the total amount of which is equal to the damages the consumption of cigaretters causes to the smokers. . b. Fix a tax, the total amount of which is equal to the damages the consumption of cigarrettes cause on all the agents in the economy. c. Fix a subsidy for alternative uses of tobacco. d. Fix a pigouvian tax.
d. Fix a pigouvian tax
As a student, Sandra earned about 1,800 euros a year working in summertime. Upon graduating and starting to work, he earns 25,000 euros a year. The increase in her income leads Sandra to give away her old bicycle and buy a motorcycle. We can understand from this fact that: Select one: a. The bicycle is not an inferior good for Sandra. b. Only the motorcycle is a complementary good for Sandra. c. Bicycles and motorcycles are complementary goods for Sandra. d. The bicycle is an inferior good for Sandra.
d. The bicycle is an inferior good for Sandra.
Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. Suppose that the firm decides to switch from P* = $5,440 and Q* = 32 to a higher price, and chooses the profit-maximizing level of output at the new price. Which of the following statements is correct?
firms profit is reduced
zero marginal cost means:
non-rival
The added value in an economy is
output minus the value of all intermediate goods
income effect
the change in consumption resulting from a change in real income
In the Malthusian Model:
the gains from technological progress provoke population growth
Carlos has just finished school and started looking for a job, but has not yet found one. Which group(s) does Carlos belong to?
unemployed and labor force
substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
Julia's endowment is 2500 euros in period 2 and zero euros in period 1. She has decided to spend 1000 euros in consumption in period 1 by borrowing at a 10% interest rate. Julia's maximum expenditure on consumption in period 2 will be:
1400 euros
Julia's endowment is 1000 euros in period 2 and zero euros in period 1. She has decided to spend 500 euros in consumption in period 1 by borrowing at a 10% interest rate. Julia's maximum expenditure on consumption in period 2 will be:
450 euros
Mr Bond has wealth of £500,000. He has a market income of £40,000 per year, on which he is taxed 30%. Mr Bond's wealth includes some equipment, which depreciates by £5,000 every year. Based on this information, which of the following statements is correct?
60% of his net income is £13,800, leaving £9,200 to spend on investment.
Using the labor market model, if a country restricts its trade of goods with foreign countries:
A fall of real wage and rise of unemployment, due to a lower competition level that downwards price-setting curve
One-shot game:
A player chooses an action taking into account the possible actions that other players can take.
The case of a banker that is uncertain about the profitability of the business plan that corresponds to a loan is:
A problem of adverse selection
Consider the following two alternative definitions of recession: 1. Period of negative output growth 2. period when the output level is below the country's potential, or normal, level. Country produces alot of coal. There is a resulting failure of potential and actual output.
According to the first definition, the country is unambiguously in a recession
Which of the next factors implies a decrease in autonomous consumption?
All consumers become more patient
If we could classify discouraged workers as unemployed, this would lead to:
An increase in the unemployment rate
Figure 9.12 depicts the labour market when there has been a negative aggregate demand shock. Based on this information, which of the following statements is correct? a) The new equilibrium B is a Nash equilibrium. b) At B, unemployment is purely cyclical. c) At B, the firms are able to make higher profits by lowering the wage. d) The adjustment back from B to X is immediate.
At B, the firms are able to make higher profits by lowering the wage
Figure 9.12 depicts the labour market when there has been a negative aggregate demand shock. Based on this information, which of the following statements is correct?
At B, the firms are able to make higher profits by lowering the wage.
The following diagram depicts the price-setting curve. Based on this information, which of the following statements is correct?
At point C, the real wage is too low and the markup is too high. Therefore the firm is able to increase profit by lowering prices and hiring more workers.Point B is the profit-maximizing point. Therefore the firm is able to increase its profit by moving from C to B, by lowering its price (which reduces the markup and increases the real wage) and hiring more workers.
Supposed John earns an hourly wage of 20 euros, but, because he does not like the job that much, he faces a disutility from working 10 euros/hour. If John is fired, he knows that he will be unemployed for some time, but he will receive unemployment benefits corresponding to 12 euros/hour.
At this moment, John would prefer to be fired
Which of the following statements is true? Select one: a. If an employee's disutility of effort increases, the reservation wage will rise. b. If unemployment benefits are increased, the minimum cost of a unit of effort for the employer will rise. c. If workers continue to receive benefits however long they remained unemployed, an increase in the level of unemployment will have no effect on the best response curve. d. If the wage doesn't change, employees will work harder in periods of low unemployment.
B. If unemployment benefits are increased, the minimum cost of a unit of effort for the employer will rise
3 In what sense are a high price elasticity and low costs linked in a model of trade for a low cost airline? a. The demand elasticity and the costs of the firm are interdependent. b. It is necessary for the firm to maintain a low cost in order to take advantage of the high elasticity of demand. c. The high elasticity of demand and the high costs of the firm are incompatible. d. The changes in the costs of production generate shifts of the demand curve.
B. It is necessary for the firm to maintain a low cost in order to take advantage of the high elasticity of demand
Which of the following is not a reason why employment contracts are incomplete? Select one: a. The firm cannot contract an employee not to leave. b. The contract is unfinished. c. The firm cannot specify every eventuality in a contract. d. The firm is unable to observe exactly how an employee is fulfilling the contract.
B. The contract is unfinished
The following graph plots the real wage growth of different countries against their unemployment rate, averaged over the period 1970-2011.
If you only cared about wage growth, then European countries have outperformed North American countries.
Which of the following statements is correct? Select one: a. Deadweight loss is the loss incurred by the producer for not selling more cars. b. All possible gains from trade are achieved when the firm chooses its profit-maximizing output and price. c. Consumer surplus is the difference between the consumers' willingness to pay and what they actually pay. d. Producer surplus equals the firm's profit.
C. Consumer surplus is the different between the consumers' willingness to pay and what they actually pay
The following is a table of the British pound (GBP) exchange rate against the dollar (USD) and euro (Source: Bank of England):24 Nov 2014 23 Nov 2015USD/GBP 1.5698 1.5131euro/GBP 1.2622 1.4256In this table, the exchange rates are defined as the number of USD or euro per GBP. Based on this information, which of the following statements are correct?
C. Exports of British goods were cheaper in the US in November 2015 than a year before.
Robinson can collect one kilo of bananas in one hour or he can fish one kilo of fish in half an hour. Each day he can dedicate 10 hours to obtaining food. a. Producing more than 10 kilos of food exceeds his production possibility frontier or his feasible set. b. His opportunity cost of producing one kilo of fish is equal to 2 kilos of bananas. c. His opportunity cost of producing one kilo of bananas is equal to 2 kilos of fish. d. Producing 5 kilos of bananas and 5 kilos of fish is efficient.
C. His opportunity cost of producing one kilo of fish is equal to 2 kilos of bananas
Which of the following statements about the separation of ownership and control is true? Select one: a. When the ownership and control of a firm is separated, the managers become the residual claimants. b. Managers always work to maximize the firm's profit. c. One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm's share price. d. It is effective for shareholders to monitor the performance of the management, in a firm owned by a large number of shareholders.
C. One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm's share price
4. Suppose there is no fixed cost in the production of a certain good and the marginal cost is constant and equal to 10 euros. Suppose also that the demand for this good is given by the function Q=20-‐P (where P is the price in euros and Q is the quantity). The model of perfect competition predicts that: a. The consumer surplus is 10 euros for each unit and producer surplus cannot be determined. b. The consumer surplus and the producer surplus are 50 euros each and hence total surplus is 100 euros. c. The consumer surplus is 50 euros and the firms do not earn profits. d. None of the above.
C. The consumer surplus is 50 euros and the firms do not earn profits
Which of the following is an economic rent? Select one: a. The amount you pay to hire a car for a weekend. b. The extra profit that a firm makes when it doubles in size and there are no changes to costs or the price for each unit of its output. c. The extra profit that a successful innovator makes on bringing a new product to the market before its competitors. d. The amount you pay your landlord for the use of an apartment.
C. The extra profit that a successful innovator makes on bringing a new product to the market before its competitors
Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct?
C. The local protestors argue that the close substitutability of some of the goods sold between the new retailer and existing ones means that the new retailer faces inelastic demand for those goods, giving it excessive market power.
The following technologies are available to produce 1 basketball: A: Minutes per worker; 10. Grams of plastic; 2 B: Minutes per worker; 12. Grams of plastic; 3 C. Minutes per worker; 5. Grams of plastic; 4 D. Minutes per worker; 7. Grams of plastic; 5
D is preferred to A for any relative price of labor to plastic is greater than 1, even though it is inefficient.
Four farmers are deciding whether to contribute to the maintenance of an irrigation project. For each farmer, the cost of contributing to the project is $10. But for each farmer who contributes, all four of them will benefit from an increase in their crop yields, so they will each gain $8. Which of the following statements is false? Select one: a. If one of the farmers, Kim, cares about her neighbour Jim just as much as herself, she will contribute $10. b. If all the farmers are selfish, none of them will contribute. c. If the farmers have to reconsider this decision every year, they might choose to contribute to the project even if they are selfish. d. If Kim is altruistic and contributes $10, the others might contribute too, even if they are selfish.
D. If Kim is altruistic and contributes $10, the others might contribute too, even if they are selfish
Which of the following statements is correct regarding the model of the labour market?
In the short- and medium-run models the amount of capital is fixed, while in the long-run model the amount of capital can vary.
Phillips curve may shift downwards because:
Inflation expectations
You are a taxi driver in Melbourne who earns A$50 for a day's work. You have been offered a one-day ticket to the Australian Open for A$40. As a tennis fan, you value the experience at A$100. With this information, what can we say? Select one: a. You would have paid up to A$100 for the ticket. b. The economic cost of the day at the Open is A$40. c. The opportunity cost of the day at the Open is A$40. d. The economic rent of the day at the Open is A$10.
D. The economic rent of the day at the Open is A$10
A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements is correct? Select one: a. When the price increases from $10 to $12, demand increases by 25%. b. The demand for hats is inelastic. c. The elasticity of demand is approximately 2.5. d. A 20% increase in the price causes a 25% fall in demand.
D. a 20% increase in the price causes a 25% fall in demand
13.3: Which of the following statements is correct regarding measuring GDP?
GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production.
Imagine living in a country whose economy is experiencing a positive inflation rate between 2019 and 2020 of 2430% per year and its salary in 2019 amounted to 30,000 monetary units. If the year 2020 you recieve the same salary in monetary units, it can be said that in relation to 2019 that:
His salary in real terms has changed and his purchasing power has suffered a serious deterioration
Which of the following statements is correct? To maximize profits, firms set the wage at the level where the workers are indifferent between working and not working. Firms aim to set as high a price as possible. In equilibrium, the wage clears the labour market, so there is no unemployment. If all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup
If all firms set the same price and pay the same nominal wage, then the higher the real wage that they can pay, the lower is their markup
Consider the choice between consumption today and consumption in the future and an interest rate increase
If only the substitution effect existed, current consumption would decrease.
Which of the following statements regarding monetary policy is NOT correct?
If the European Central Bank cuts interest rates, the demand for European bonds increases and the Euro appreciates.
13.7: The following diagram shows the path of income for a household that receives news about an expected rise and fall in future income at the depicted times. Assume that the household prefers to smooth out its consumption if it can. Based on this information, which of the following statements is correct?
If the household is credit-constrained and has 'weakness of will', then its consumption will match precisely its income path.
Consider a scenario where the European Central Bank views the European economy to be overheating and is attempting to slow the economy down using monetary policy. Which of the following statements regarding the effects of an interest rate is correct?
It leads to a higher demand for the Euro, which results in an appreciation of the Euro
The following table shows the nominal interest rate and the annual inflation rate (the GDP deflator) of Japan in the period 1996-2015 (Source: World Bank).1996-2000 2001-2005 2006-2010 2011-2015Interest rate 1.5% 1.4% 1.3% 1.2%Inflation rate -1.9% -0.9% -0.5% 1.6%Based on this information, which of the following statements are correct?
Japan's real interest rate turned from being positive to negative during the period.
An economy where the share of credit constrained households rises during recessions, it holds that:
Lower income households are less able to smooth consumption when negative shocks occur
Figure 16.9b depicts the long-run adjustment process in the labour market after technological progress. Based on this information, which of the following statements is correct?
Lower unemployment at E implies a higher wage required to induce workers to exert high effort, resulting in the higher real wage at B.
Supposed that the Federal Reserve in the U.S. increases the policy interest rate. This is likely to lead to a:
None of the other alternatives is correct
According to our model of workers and firms, an increase in transportation cost for workers should:
Reduce the employment rent and shift the wage-setting curve up, thereby decreasing employment
If the health crisis reduces the number of foreign tourists in the Spanish beaches, the Spanish entreprenuers that already paid the full rent of the chiringuito for the summer will open the chiringuito if...
Revenues are higher than variable costs
Figure 14.16 shows the effects of France's increased government spending and tax cuts in 1982 on the economies of France and Germany. Based on this information, which of the following statements are correct? 1. The French budget balance worsened by more than 3% as a result of the fiscal expansion. 2. The fiscal expansion successfully resulted in a long-run shift in the French GDP growth rate to above 2%. 3. The German economy benefitted from the spillover effect of higher French imports of German goods. 4. Fiscal expansionary policy should never be adopted by European economies, as they have high levels of trade with each other.
The German economy benefitted from the spillover effect of higher French imports of German goods EXPLANATION: (Explanation: In 1983, G − T was below −3%, compared with 0 in 1980.German exports were much higher in 1982-1983 than in 1979-1980.)
Figure 4.10 depicts the average number of late-coming parents per week in day-care centres, where a fine was introduced in some centres and not in others. The fines were eventually abolished, as indicated on the graph. Based on this information, which of the following statements is correct?
The graph suggests that the experiment may have permanently increased the parents' tendency to be late.
A farmer gets 5 kilos of grain per hour worked for the first 10 hours worked, and nothing for any hour beyond that
The marginal rate of transformation between consumption and leisure is 10 euros/hour when leisure is 15 hours and the price of grain is 2
Which of the following statements about banks and money is NOT true
The net worth of a bank (equity) is equal to assets (bank lending) plus liabilities (bank borrowing)
Imagine a competitive market for bread. Market demand is Q=1000-200P and market supply is Q=800P. Which of the following statements is true? In equilibrium.
The price of bread is P=1
According to the model of the monopolist, the more inelastic the demand is,
The smaller is the deadweight loss
Figure 16.1 is a graph of unemployment rates for 16 OECD countries from 1960 to 2014.Based on this information, which of the following statements is correct?
The unemployment rates of different countries were affected very differently by the oil shocks of the 1970s.
(The Economy Question 10.12) In an economy with a population of 100, there are 80 farmers and 20 lenders. The farmers use the funds to finance the planting and tending of their crops. The rate of profit for the harvest is 12.5%, while the interest rate charged is 10%. Compare the following two cases: Case A: All farmers are able to borrow. Case B: Only 50 farmers are able to borrow. Based on this information, which of the following statements is correct?
There is a 10% increase in the Gini coefficient in Case B compared to Case A.
Which of the following assertions is not correct? a. Income effect is the change in optimal choice when the wage changes, keeping income constant b. Because a wage increase raises the opportunity cost of free time there is an incentive to increase hours worked c. Substitution effect is the change in optimal choice when the opportunity cost changes, at the new level of utility
a. Income effect is the change in optimal choice when the wage changes, keeping income constant
5. If the demand curve and the supply curve in a market are given by, D=10-‐2P and S=1+P, respectively, then: a. The equilibrium price is P=3. b. If the price is 2, there is excess supply. c. If the price is 1, the consumer surplus is smaller than in equilibrium. d. If the price is higher than 5, the problem does not make sense.
a. The equilibrium price is P=3
2. Suppose that the figure on the right represents the marginal utilities of an individual for each unit he consumes. If this individual enters a shop where the price is 4, but there is an offer of 3 units for the price of 2, how many units is he going to buy? a. 1. b. 2. c. 3. d. 4.
c. 3
7. Suppose a monopolist has a demand curve given by Q=10-‐P. What is the marginal revenue when moving from selling 3 units to selling 4 units? a. 1 b. 2 c. 3 d. 4
c. 3