Economics:Midterm Exam

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Name: ________________________

Economics Midterm exam. No books or notes allowed. Time allowed: 27 minutes. Tip: if you cannot figure out a problem, then just move on to the next one. But answer every question at least up to your level, because no points are deducted for wrong answers.


1. Which of the following is NOT a scarce good?
(a) bottled water
(b) pennies
(c) air
(d) sugar
(e) diamonds

2. Which of the following is a “positive” rather than a “normative” statement:
(a) This is an economics exam.
(b) You should do well on this exam.
(c) You should study harder.
(d) All students should be homeschooled.
(e) People should eat less fast food.

3. A good typically sells at the price and quantity where:
(a) supply exceeds demand
(b) demand exceeds supply
(c) supply and demand are zero
(d) demand equals supply
(e) demand is twice the supply

4. Which of the following is a substitute for a hamburger:
(a) a slice of cheese.
(b) a chicken sandwich.
(c) mustard.
(d) pickles.
(e) tomatoes.

5. Which of the following is a complement for watching a movie in a theater:
(a) eating popcorn
(b) watching television
(c) going on the internet
(d) doing homework
(e) going jogging

6. The Law of Demand states that:
(a) when price goes up, demand goes up
(b) when price goes up, demand goes down
(c) when price goes up, demand is unchanged
(d) people demand more and more laws
(e) in some cases it is illegal for there to be demand

7. What is the shape of the demand curve for a good that is addictive?
(a) a flat, horizontal line
(b) an upward-sloping line (positive slope)
(c) impossible to have any idea
(d) a downward-sloping line that is almost vertical (negative slope)
(e) a circle

8. Your “opportunity costs” for watching three hours of television are:
(a) zero.
(b) the money you could have made, or things you could have learned, in those 3 hours
(c) the amounts paid by the advertisers on the programs
(d) the salaries paid to the persons who appeared on the programs
(e) the cost paid to buy the television set

9. Your “transaction costs” for going to a restaurant include everything EXCEPT:
(a) the cost of the food itself
(b) the time spent looking for a good restaurant
(c) the time spent traveling to it
(d) the gas used traveling to it
(e) the tip to the waitress

10. A “short run” way to accommodate many more students who enroll in this class would be:
(a) to move to a larger space on a permanent basis
(b) to buy more tables and chairs
(c) to tear down the Church and build a bigger one
(d) to buy new computers and convert to an electronic class for the future
(e) to exclude the students from the class.

11. Going to church (does, does not) maximize your overall utility because ___________:
(a) does, because church services are very useful in learning economics.
(b) does, because worshiping God increases your overall satisfaction.
(c) does, because church services are an elastic service.
(d) does not, because you do not make any money from it.
(e) does not, because you donate money when you go.

12. A monopoly is a company that:
(a) lacks good sense.
(b) lacks good management.
(c) lacks customers.
(d) lacks competition.
(e) lacks a market with a demand curve.

13. The reaction of demand to changes in price is known as:
(a) the price elasticity of demand.
(b) Giffen’s law of demand.
(c) the Coase Theorem.
(d) the elasticity of supply.
(e) where MR=MC.

14. One difference between accounting expenses and economic expenses is that
(a) accounting expenses do not include cash paid
(b) accounting expenses do not include opportunity costs
(c) economic expenses do not include variable costs
(d) economic expenses do not include fees paid to accountants
(e) economic expenses do not include the cost of money, such as interest


15. When you do chores by yourself, you don’t take many breaks. But when you do chores with the help of a family member or friend, you notice that you talk more than work, and together you accomplish even less than if you worked alone. What can you say about the marginal product?
(a) small
(b) positive
(c) zero
(d) negative
(e) can’t say

16. An easy way to determine your fixed costs is:
(a) ask the government.
(b) subtract your marginal cost from your overall costs.
(c) divide your total output by your total costs.
(d) see where the supply and demand curves intersect.
(e) set your output to zero and see what your costs are.

17. An example of an “inferior service” is
(a) golf lessons.
(b) legal services for people who go bankrupt.
(c) food delivery services.
(d) travel agent services.
(e) expensive wedding services.

18. Your company currently sells widgets at a price equal to marginal cost. The industry is highly competitive. Your employees unanimously vote to increase the price by 20%, because they say that will give the company greater profits. You should:
(a) do what the majority wants
(b) increase the price by 10%
(c) keep the price at marginal cost
(d) reduce the price by 10%
(e) reduce the price by 20%

Questions 19-20 use the following information. Suppose you owns a widget factory with the following cost structure:
Output Total Cost
0 $1000
1 $1400
2 $1600
3 $1700
4 $1800
5 $2200
6 $2600

19. What is your marginal cost for producing your 3rd unit?
(a) $1600
(b) $1000
(c) $800
(d) $200
(e) $100

20. What is your average fixed cost for producing 4 units?
(a) $1700
(b) $566.66
(c) $333.33
(d) $233.33
(e) $250.00

Questions 21 and 22 refer to a market having the following supply and demand curves:

Demand curve: P = $100 – 2Q
Supply curve: P = $10 + 4Q

21. In a competitive market, what is the price and quantity at which the goods are sold?
(a) P = $70, Q = 15
(b) P = $100, Q = 30
(c) P = $10, Q = 20
(d) P = $90, Q = 5
(e) impossible to determine

22. Suppose a price control is imposed by government at P=$50. What is Q?
(a) 25
(b) 10
(c) 15
(d) 20
(e) impossible to determine

23. Why is the second piece of chocolate cake not as good when you’ve already eaten your first piece?
(a) diminishing returns to scale
(b) Law of Demand
(c) Law of Diminishing Marginal Utility
(d) Coase Theorem
(e) Nash Equilibrium

24. You hired a classmate and he reduced costs for your company so that MC < P. In a competitive market, what do you do next?
(a) increase your price
(b) increase your output
(c) decrease your output
(d) increase your utility
(e) move along your indifference curve

25. Calculate your price elasticity of demand if increasing your price from $100 to $200 causes a decrease in demand from 100 to 0.
(a) 100
(b) 50
(c) 2
(d) 1
(e) 0.5


26. Where is the Nash Equilibrium for an oligopoly of only two gas stations in a small town?
(a) the same as for a monopoly
(b) the same as for a cartel
(c) the same as for a perfectly competitive market
(d) the same as under price controls
(e) can’t say

27. Suppose you have a monopoly. Under which conditions should you shut down your company?
(a) in the short run, if MC > P; in the long run, if ATC > P
(b) in the short run, if ATC > P; in the long run, if AVC > P
(c) in the short run, if AVC > P; in the long run, if ATC > P
(d) in the short run, if MR < MC; in the long run if ATC < P
(e) in the short run, if MR > MC; in the long run if ATC < P

28. Is it possible to have increasing returns to scale even though the marginal products are decreasing?
(a) yes
(b) no
(c) can’t say
(d) yes, then no
(e) no, then yes

29. Foreign countries tax companies in the form of a “value-added tax.” A Value Added Tax (VAT) is a national sales tax paid by companies based on the value they add to a product at various stages of production or distribution. But when goods are shipped to America, those foreign countries rebate (give back) the tax to the companies to make those products cheaper in America. These rebates total $200 billion.

   Those same foreign countries also impose the VAT tax on goods imported to them by America, making them less competitive. That VAT tax raises $100 billion.  The overall burden on American suppliers is $300 billion: $200 billion in lower prices by foreign competitors and $100 in extra expenses on what they ship to foreign countries.
   A columnist recently suggested that our government correct this unfair VAT advantage by (A) taxing imports from other nations in the amount equal to their VAT rebate, and by (B) giving U.S. producers a rebate on their exports exactly equal to the VAT charge imposed on them by the foreign countries.  
   The columnist claimed that the former (A) would more than pay for the latter (B), so this plan should be cost-free to U.S. taxpayers. Assuming competitive markets, is that conclusion true?

(a) Yes, because $200 billion is more than $100 billion.
(b) Yes, because $300 billion is more than $100 billion.
(c) Yes, because $300 billion is more than $200 billion.
(d) No, because the new import fee could decrease the government revenue much below $200 billion, its rebate could be much more than $100 billion.
(e) No, because the imports will continue to exceed the exports.

30. The best way to prove the truth of the Law of Demand is by using:
(a) indifference curves
(b) opportunity costs
(c) Law of equiproportional marginal benefit
(d) elasticity
(e) scarcity

31. A monopolist will continue to purchase a particular factor of production (e.g., inputs such as land, labor and/or capital) until:
(a) marginal factor cost equals marginal revenue
(b) marginal factor cost equals marginal revenue product
(c) average factor cost equals average revenue product
(d) average factor cost equals marginal favor cost
(e) marginal factor cost equals price

32. “There will be poor always,” Jesus once said. That statement is the converse (e.g., flip side) of which principle of economics?
(a) Law of Demand
(b) Coase Theorem
(c) Declining Marginal Utility
(d) Opportunity Cost
(e) MR=MC

33. Suppose you own a monopoly having marginal costs of $5 for all your units. If you sells only one, then you receive $11; selling two fetches a price of $10 piece; selling 3 attains a price of $9; selling four reaps $8; Q=5 would have P=$7; Q=6 has P=$6, etc. Your market price is $9. What is the social cost of your monopoly?
(a) $10
(b) $6
(c) $3
(d) $2
(e) $1

34. Why is the price elasticity of demand always converted to a positive number while cross elasticity of demand (demand change for one good compared to the price change of another) is not always expressed as a positive number?
(a) price elasticity of demand is not always converted to a positive number
(b) price elasticity of demand is always negative, so there is no point in always saying “negative”, while the cross elasticity of demand may actually be positive or negative
(c) cross-elasticity of income is always negative
(d) price elasticity of demand is always less than price elasticity of demand
(e) it is necessary to distinguish price elasticity of demand from price elasticity of supply

35. The indifference curves for faith and works (deeds) for Martin Luther, who adhered to the doctrine of salvation by faith alone, would look like which of the following if faith graphed on the y-axis and works (deeds) is on the x-axis:
(a) slanted upward-sloping straight lines (positive slope)
(b) curves like a portion of a circle
(c) vertical lines
(d) horizontal lines
(e) slanted downward-sloping straight lines (negative slope)