Economics Final Exam

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Closed book. 50 questions. 45 minutes. BE SURE TO READ THE QUESTION CAREFULLY. No points are deducted for wrong answers, SO ANSWER EVERY QUESTION.

1. Suppose a friend asked you, “Did your Economics course have homework questions on the topic of prayer?” You would best reply might be, “No, there were not many Economics questions about prayer, because …

(a) prayer is free and the subject of Economics focuses on goods and services that have “scarcity”, meaning they actually cost something
(b) prayer is no longer meaningful
(c) prayer is not helpful
(d) prayer is not something people do anymore
(e) prayer is illegal, even for homeschoolers

2. “Invent a better mousetrap, and the world will beat a path to your door” no matter who you are, how much money you have, who likes or does not like you, what age you are, or what school you went to. What principle in Economics does this famous quote illustrate, in the absence of transaction costs?

(a) Gresham’s Law
(b) Law of Demand
(c) Law of Diminishing Marginal Utility
(d) Coase Theorem
(e) Time value of money

3. What is one cause of unemployment?

(a) an increase in the minimum wage.
(b) a decrease in the minimum wage.
(c) an undersupply of labor.
(d) Gresham’s Law.
(e) school.

4. An example of increasing returns to scale is __________; an example of decreasing returns to scale is ___________.

(a) a hot dog stand … an airport.
(b) an average restaurant … a football stadium for a big college.
(c) Wal-Mart … a typical gas station.
(d) a typical gas station … Home Depot.
(e) Congress … United States.

5. Salt is a __________ for eggs; cereal is a _________ for eggs.

(a) complement … substitute
(b) substitute … complement
(c) substitute … substitute
(d) utility … marginal utility
(e) elasticity … inelasticity

6. If you are given a graph showing the supply and demand curves in a free market, how do you determine the price and quantity of the good sold?

(a) The equilibrium price and quantity are where the supply curve intersects the demand curve, or “supply meets demand.”
(b) The price is set by only the demand curve; the quantity is determined solely by the supply curve.
(c) The price is determined by only the supply curve; the quantity is determined by only the demand curve.
(d) Price and quantity are determined by the government in a free market.
(e) Price and quantity have nothing to do with supply and demand.

7. Why is a firm’s demand for labor called a “derived demand”?

(a) Because you “derive” it from elasticity.
(b) Because you “derive” it from the demand for the goods produced by that labor.
(c) Because you “derive” it from the Nash Equilibrium for a free market.
(d) Because you “derive” it from the supply of labor.
(e) Because you “derive” it from the demand of capital.

8. Suppose that the law requires you to apply for a permit in order to chop down a tree in your own yard. How would an honest economist describe that requirement?

(a) This has no economic significance unless there is an application fee.
(b) This adds a transaction cost that interferes with your efficient use of your land.
(c) This is a good thing if people elected the government officials who require this.
(d) This helps the economy because it prevents you from wasting trees.
(e) This is beneficial because it makes you think twice before chopping down trees.

9. Why does Economics predict that someone with a college degree, with a major in a useful field, will earn more money than someone who lacks that degree?

(a) Because what is taught in school is always helpful.
(b) Because college professors make more money than anyone else.
(c) Because all schools know best how the free market works.
(d) Because college teachers understand the truth better than anyone else.
(e) Because “long run” planning – like completing college – is usually more profitable than “short run” planning.

10. Suppose a firm hires John and then there is an increase in output of the firm from 0 to 20 units, and afterwards the firm hires Suzie at the same wage and sees the output increase by 15 units. When is the marginal cost of the firm the lowest?

(a) Before the firm hires John.
(b) Any time after the firm hires John.
(c) After the firm hires John and Suzie.
(d) After the firm hires John, but before it hires Suzie.
(e) Impossible to tell.

11. Cigarette smoking is a terrible addiction that is expensive and shortens people’s lives. Based on that information, what is the price elasticity of cigarettes?

(a) zero
(b) inelastic
(c) unit elasticity
(d) elastic
(e) infinite

12. Supposedly in order to reduce the price of health care, Congress passes a law making it illegal to charge more than $1000 for any surgery. What effect would such a law have?

(a) It would cause fewer people to become doctors.
(b) It would create a waiting list for these surgeries, and some people would not obtain what they need when they need it.
(c) The most complex surgeries would not be done because doctors and hospitals would lose money by performing them.
(d) The demand for surgeries that previously cost more than $1000 would increase because the price is lower now.
(e) All of the above.

13. A politician might emphasize the Lorenz curve if he wanted to claim that:

(a) the government should not raise taxes.
(b) the government should regulate less.
(c) the government should increase sales taxes.
(d) the government should redistribute wealth from the rich to the poor.
(e) the government should shut down.

14. The Law of Demand means what?

(a) When price goes up, demand goes down.
(b) The public will always demand things.
(c) When price goes down, demand goes down.
(d) There will always be scarcity.
(e) There will always be poverty.

Use the following table to answer questions 15 through 18. The total costs for a firm are listed alongside the number of units (output) level for each cost figure.

Output Total Costs
0 $10,000
1 $17,000
2 $20,000
3 $22,000
4 $24,000
5 $25,000

15. What are the fixed costs for this firm?

(a) $25,000
(b) $5,000
(c) $0
(d) $20,000
(e) $10,000

16. What is the marginal cost for the 4th unit?

(a) $24,000
(b) $6,000
(c) $1,000
(d) $2,000
(e) $1,400

17. What is the average total cost for 2 units?

(a) $3,000
(b) $10,000
(c) $20,000
(d) $25,000
(e) there is insufficient information to answer this question

18. What is the average variable cost for 5 units?

(a) $5,000
(b) $25,000
(c) $3,000
(d) $1,000
(e) $0

19. An example of a good or service that is price inelastic for teenagers but is price elastic for adults is:

(a) alcohol for alcoholics
(b) movies
(c) rice
(d) broccoli
(e) 25th year high school reunions

20. Consider the following graph:

Consumer and Producer Surplus.png

Suppose a price ceiling is set at $2. What is the surplus or shortage of goods in the market?

(a) Surplus: 100 units.
(b) Shortage: 200 units.
(c) Shortage: 400 units.
(d) Shortage: 600 units.
(e) Shortage: 800 units.

21. A research study found that people who gossip on “Facebook” on the internet tend to have lower grades than people who avoid Facebook. Which principle of Economics does that conclusion best illustrate?

(a) opportunity costs: time spent on internet gossip is time not spent learning
(b) caveat emptor: if Facebook is available, then it must be good
(c) carpe diem: by seizing the day of Facebook, people are improving themselves
(d) maximizing personal utility: do whatever you like most and you’ll get ahead
(e) efficiency: the internet is efficient, so everything on the internet must be good

22. “Public schools were better when there was classroom prayer and students often discussed the Bible. But now that prayer and the Bible are excluded from public school, our friend Jenna tells us that there is much profanity and foul language even by the teachers themselves and nobody feels comfortable talking about Jesus anymore.” What does this illustrate in Economics?

(a) Marginal Utility
(b) Production Possibilities
(c) Comparative Advantage
(d) Gresham’s Law
(e) Coase Theorem

23. Suppose interest is at 5% per year, and there is no compounding of interest. If you loan me $1000 today, how much money will you require me to pay back to you in two years so that you receive back the same real (time-adjusted) value of money that you started with?

(a) $1000
(b) $1025
(c) $1050
(d) $1100
(e) $5000

The next two questions refer to the following scenario. Suppose that are going to take this Sunday off and do whatever you like. Your marginal utility for the first hour of hiking is 10 units; for the second hour, 6 units, and for the third hour, 2 units. Your marginal utility for reading for the first hour of reading is 7 units, for the second hour, 5 units, and for the third hour, 4 units.

24. Assuming you maximize your utility, how do you spend the first 5 hours in the above scenario?

(a) An hour each in this order: hiking, reading, hiking, reading and reading.
(b) An hour each in this order: hiking, reading, reading, hiking and reading.
(c) An hour each in this order: hiking, reading, hiking, hiking and reading.
(d) An hour each in this order: hiking, reading, hiking, reading and hiking.
(e) All hiking because reading is boring.

25. In the scenario described above, at what point will you have maximized your overall utility?

(a) after 1 hour
(b) after 3 hours
(c) after 5 hours
(d) when your marginal utility for hiking decreases to zero
(e) when your marginal utility for hiking and reading decreases to zero

26. Suppose Bill Gates sits down now to decide how much he is going to charge in 2010 for his Microsoft Word product, which has a monopoly for word processors on computers. Where does he set his price?

(a) P=MC
(b) price is set where MR=MC
(c) price is set where supply equals demand
(d) price is increased each year without limit
(e) price never changes for a monopoly

27. A barber or hair stylist in a big city who gives a unique haircut is an example of someone who has a market of:

(a) a monopoly
(b) monopolistic competition
(c) perfect competition
(d) an oligopoly
(e) a cartel

28. Which of the following equations correctly describes the relationship between average total cost, average fixed costs, and average variable costs, where Q is output?

(a) AFC = ATC + AVC
(b) ATC= AVC + (FC/Q)
(c) TC*Q = AFC + AVC
(d) TC = FC - AVC
(e) AVC = AFC - ATC

29. Imagine an oligopoly consisting of two gas stations located across the street from each other in a small town, and that both are selling gas at $2 per gallon when their marginal cost is only $1 per gallon. Where is the Nash Equilibrium, assuming they do not engage in illegal price fixing?

(a) $2 per gallon, because each owner maximizes his own profits that way.
(b) $1.75 per gallon, because each owner will lower his price to pick up new customers from each other.
(c) $1.50 per gallon, because at that point neither party can make more money by changing his price.
(d) $1 per gallon, because each owner keeps reducing his price below his competitor’s price to attract more customers until hitting the level of marginal cost, and then each owner will not reduce it further because he’d lose money.
(e) $1 per gallon, because an oligopoly is never different from perfect competition.

30. Which of the following is true about cartels?

(a) They are legal because they are more efficient.
(b) They are legal because they improve competition.
(c) They are illegal because they reduce output by increasing competition.
(d) They are illegal because they reduce output by agreeing to raise prices.
(e) They are illegal because they increase output and pollution.

31. A firm shuts down in the “short run” where:

(a) P>AVC
(b) P=AVC
(c) P<AVC
(d) P>ATC
(e) P>AFC

32. The slope of a perfectly elastic demand curve is ____; the slope of a perfectly inelastic demand curve is ____.

(a) vertical … horizontal.
(b) 45 degrees … 45 degrees.
(c) negative one … positive one.
(d) horizontal … vertical.
(e) zero … zero.

33. National defense – our armed forces – is an example of:

(a) a private good because only individuals can enlist.
(b) a private good because the servicemen receive salaries.
(c) a public good because no American can be excluded from benefiting from it.
(d) a public good because it is free and costs nothing.
(e) a public good because it is decided by public elections.

34. A positive externality of buying and reading the Bible is:

(a) you learn more.
(b) others learn more from you as you learn more.
(c) it harms the environment by requiring the destruction of trees to print the book.
(d) the seller of the Bible makes money with your purchase.
(e) the activity of reading the Bible increases global warming by wasting energy.

The next three questions are based on the following graph, which displays a market consisting of a U-shaped curve for average total costs (ATC), a straight-line demand curve, then below it a straight-line marginal revenue (MR) curve, and rising upward towards the right is the marginal cost (MC) curve: Econ13c.jpg

35. Assuming that the above curves are a complete representation of the market, what type of industry does this graph most likely represent?

(a) perfect competition
(b) cartel
(c) imperfect competition
(d) oligolopy
(e) monopoly

36. At what price does the firm sell its products at? The price level at:

(a) Point A
(b) Point B
(c) Point C
(d) Point D
(e) Point E

37. Suppose the government imposes a regulation that forces the firm to sell at a price no higher than the price level at point B. How does the firm react once this regulation is enforced?

(a) It increases its quantity more than the level at Point B.
(b) It increases its quantity as much as possible.
(c) It decreases its quantity to the level at Point A.
(d) It stays in business in the long run.
(e) It shuts down in the long run.

38. Suppose in a free market that P=30-2Q for demand, and that P=10+2Q for supply. At which price do the goods sell at?

(a) 10
(b) 20
(c) 30
(d) 40
(e) 50

39. The difference between a normal and an inferior good is:

(a) a normal good has a negative income elasticity; an inferior good has a positive income elasticity
(b) a normal good has a positive income elasticity; an inferior good has a negative income elasticity
(c) a normal good has a positive income elasticity less than one; an inferior good has a negative income elasticity greater than one
(d) a normal good has a positive income elasticity more than one; an inferior good has a negative income elasticity less than one
(e) a normal good has many substitutes; an inferior good has no substitutes

40. What is needed to shift a production possibilities frontier (curve) outward?

(a) a loss in efficiency
(b) a natural disaster
(c) a technological improvement
(d) a shift in production from good to another
(e) higher taxes

41. Suppose that Mexico can produce widget A at 50 cents a pound, and widget B at $1 a pound. Suppose that the United States can produce widget A at $1.25 a pound and widget B at $1.50 a pound. What should Mexico do?

(a) produce as much of widget A as possible, and trade for widget B, due to Mexico’s comparative advantage
(b) produce 50% each of widgets A and B, because Mexico makes each more cheaply than the United States does
(c) produce as much of widget B as possible, and trade for widget A, due to Mexico’s comparative advantage
(d) produce as much of widget A as possible due to the production possibilities curve
(e) there is insufficient information to make a recommendation

42. Suppose you like hamburgers twice as much as chicken. If you place hamburgers on the y-axis and chicken on the x-axis, what is the slope of your indifference curve for hamburgers and chicken? (The slope of a line between two points on a line is the change in the y-values divided by the change in x-values)

(a) 0.5
(b) 1
(c) 2
(d) -2
(e) -0.5

43. You really want to go on the bus to D.C. to participate in the March for Life. You saved $50 for the bus trip, and that is what you were willing to spend to go. When it came time to buy seats, you learned that by reserving a seat early it would cost you only $15, so that is what you bought a seat for. The last-minute cost for people who did not plan ahead was $20 per seat. What is your consumer surplus?

(a) $50
(b) $30
(c) $35
(d) $20
(e) $15

44. An illustration of the income effect is which of the following?

(a) when your income goes up, you save more money.
(b) when the price of a good goes up, your income goes up.
(c) when the price of a good goes down, you buy more substitutes for it.
(d) when the price of a good goes up, it causes the same effect as a reduction in your income, causing you to buy less of the good.
(e) when your income goes down, you usually buy more goods.

45. Suppose the price elasticity of demand for hamburgers is 0.5 (-0.5), and the price of hamburgers doubles. What is the decrease in demand for hamburgers? (Don’t try any super-fancy calculations using midpoints here.)

(a) by 100%
(b) by 75%
(c) by 50%
(d) by 25%
(e) by 5%

46. Suppose that the cross-elasticity of demand for good X with respect to good Y is -0.2 in the short run and -1.0 in the long run. Next suppose that the price for good Y increases by 50%. How much does the demand for good X change?

(a) In the short run, demand for good X increases by 10%; in the long run, demand for good X increases by 100%.
(b) In the short run, demand for good X decreases by 20%; in the long run, demand for good X decreases by 50%.
(c) In the short run, demand for good X decreases by 100%; in the long run, demand for good X increases by 50%.
(d) In the short run, demand for good X decreases by 50%; in the long run, demand for good X increases by 20%.
(e) In the short run, demand for good X decreases by 10%; in the long run, demand for good X decreases by 50%.

47. Where is the long run equilibrium for a firm in monopolistic competition?

(a) where price equals marginal revenue
(b) where price equals average variable cost
(c) where price equals average total cost
(d) where price is significantly above average total cost
(e) where the government sets the price

48. Suppose a firm can produce 100 units with 5 workers and 200 units with 10 workers. Its fixed cost is $50 and its wage rate is $20 per worker. What is its total cost and average variable cost to produce 100 units?

(a) Total cost is $250; average variable cost is $1 per unit
(b) Total cost is $200; average variable cost is $2 per unit
(c) Total cost is $150, average variable cost is $1 per unit
(d) Total cost is $150; average variable cost is $2 per unit
(e) Total cost is $50; average variable cost is $20 per unit

49. Consider the following graph:

IndifferenceCurve2.gif

What does the above graph represent?

(a) supply and demand curves for goods X and Y
(b) production possibility frontiers for goods X and Y
(c) utility curves for goods X and Y
(d) indifference curves for two substitutes
(e) indifference curves for two complements

50. Assume a perfectly competitive market for both inputs and output. If capital is fixed and the price for the output increases, then a firm in the short run will increase its production by which of the following ways:

(a) increase capital until price equals marginal revenue.
(b) increase labor until the value of the marginal product for workers equals the wage rate.
(c) increase capital until its average product equals the price of the additional capital.
(d) increase labor until its marginal product equals the wage rate .
(e) increase labor until the ratio of the price of the output to labor's marginal product equals the wage rate.

Extra credit (boys only):

Suppose a football coach needs to fill three positions on the team: quarterback, running back and wide receiver. But the coach makes mistakes and puts the player with the best throwing arm at the position of wide receiver, the player with the quickest running moves at the position of quarterback, and the skinniest person at the position of running back. What’s the opportunity cost of these bad coaching decisions?

(a) None, because football does not cost money.
(b) None, because the players will try their best anyway.
(c) The team won’t win as many games as it would with better coaching.
(d) There is no opportunity cost as long as the games are played anyway.
(e) None, because players win games, not coaches.

Extra credit (girls only):

How might the principle of the “time value of money” be applied to prayer?

(a) Saying prayers earlier rather than later is more beneficial.
(b) Often prayer is a waste of time.
(c) It is a good thing public schools censor and ban classroom prayer.
(d) Lack of prayer is no different from saying prayers.
(e) Prayers should be said only in church.

THE END. CONGRATULATIONS!!!

Post your answers for grading in a template at Economics Final Answers.

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