Economics:Final Exam

NOTE: THIS EXAM WAS GIVEN IN THE SPRING OF 2007. FOR THE FINAL EXAM FOR THE 2009-10 COURSE, SEE Economics Final Exam.

Name: __________________________ Score (circle one):____/15, 30 or 40 Circle your level above: “15” (introductory), “30” (intermediate) or “40” (honors).

Economics final exam. Closed book. Time allowed: 40 minutes. No points deducted for wrong answers. Complete through your level; then do extra credit above your level.

Introductory:

1. The following illustrate basic principles of economics EXCEPT:
(a) The parable of the talents given to three persons: two invest their talents successfully while the third buries his talent in the ground. Upon return the master is angry with the third for burying it. Matt 25:14-30.
(b) “There’s no free lunch.”
(c) “A bird in the hand is worth two in the bush.”
(d) The multiplication of a few fish and loaves by Christ to feed many thousands, with much left over. Matt 14:13-21.
(e) “Build a better mousetrap, and the world will beat a path to your door.”

2. “I am going to graduate from college, and then law school, and then pass the bar exam, and then obtain a license to practice law. What term applies to that plan?
(a) The short run.
(b) The long run.
(c) The intermediate run.
(d) Perfect competition.
(e) Unregulated free trade.

3. An example of a complement for the computerized Nintendo “Wii” is:
(a) scrambled eggs.
(b) video games.
(c) airports.
(d) a lawnmower.
(e) golf clubs.

4. A man dying of thirst probably has high marginal utility for:
(a) McDonald’s French Fries.
(b) a 1000-page book.
(c) salty crackers.
(d) a glass of water.
(e) running in a marathon.

5. The biggest, richest and meanest cartel in the world is:
(a) Microsoft.
(b) OPEC.
(c) Wendy’s.
(d) Wii.
(e) Mr. Schlafly’s homeschool courses.

6. A variable cost of the owner of an ice cream store is:
(a) his rent.
(b) his property taxes.
(c) his refrigerator.
(d) his ice cream cones.
(e) his cash register.

7. For breakfast many people like eggs or cereal. An increase in the price of eggs will have which effect on the demand for cereal?
(a) there will be less demand for cereal.
(b) there will be the same demand for cereal.
(c) there will be more demand for cereal.
(d) there will be less, then more, demand for cereal.
(e) can’t tell.

8. When you are shopping to buy something, you hope for much ____ among the sellers.
(a) demand.
(b) returns to scale.
(c) competition.
(d) income effect.
(e) marginal cost.

9. The definition of an inferior good is something that:
(a) can’t sell.
(b) does not last as long as it competitors.
(c) people demand less of when their income increases.
(d) people demand more of when their income increases.
(e) people demand less of when a substitute good increases its price.

10. Suppose your company spends $2,000 on labor and $1,000 on equipment for an output of 300 widgets. You increase your labor costs to $4,000 and your equipment costs to $2,000, and your output increases to 500 widgets. Describe your return to scale:
(a) decreasing
(b) constant
(c) increasing
(d) increasing, then decreasing
(e) decreasing, then increasing

11. Suppose P = $10 - Q, where P is price and Q is quantity. Also suppose the price supply curve is P = $4 + Q. In a free market without government price controls, at what price and quantity do goods sell?
(a) P = $10, Q = 6.
(b) P = $8, Q = 2.
(c) P = $6, Q = 2.
(d) P = $12, Q = 8.
(e) P = $7, Q = 3.

12. The curve that illustrates how much a company or country can produce of multiple items is called the:
(a) indifference curve.
(b) production possibility curve.
(c) demand curve.
(d) supply curve.
(e) marginal revenue curve.

13. Suppose that in one year the price of gasoline doubled, but the number of gallons sold decreased by only 10%. How would you describe the demand curve for gasoline?
(a) inelastic.
(b) unit elasticity.
(c) elastic.
(d) flat.
(e) can’t tell.

14. “I like unregulated monopolies!” Of the following, who are you likely to be?
(a) A buyer.
(b) An employee of Microsoft.
(c) A new company just starting out.
(d) The owner of a small company.
(e) The author of the antitrust laws.

15. You are the owner of a business that was successful last year in a perfectly competitive market. You increased your output this year, but find that your marginal cost (MC) is greater than your selling price (P), which is your marginal revenue (MR). What should you do next?
(a) increase price
(b) decrease price
(c) increase output
(d) decrease output
(e) shut down your business

Intermediate (extra credit for introductory students):

16. Economic rent is properly described by each of the following EXCEPT:
(a) the increased payment for a good due to its very limited supply.
(b) the increased payment for a good due to its higher cost of production.
(c) the amount that payment exceeds supply cost.
(d) the increased payment for an input that is in perfectly inelastic supply.
(e) the increased payment for a factor of production in excess of its opportunity cost.

17. An oligopoly has which of these characteristics:
I. Few firms.
II. Barriers to entry.
III. Perfect competition.

(a) I, II, and III.
(b) I only.
(c) II only.
(d) I and II only.
(e) III only.

18. Price discrimination helps whom the most?
(a) the government.
(b) the seller.
(c) the buyer.
(d) the worker.
(e) the consumer.

19. A firm would maximize total revenue by doing which of the following:
(a) selling where MR=MC.
(b) selling where P=MC.
(c) selling where MR=0.
(d) selling where demand equals supply.
(e) selling where P=ATC.

20. The cross-elasticity of demand of good A and B is -1. Which statement is true?
(a) the goods are complements because an increase in the price of one causes an increase in demand for the other.
(b) the goods are complements because an increase in the price of one causes a decrease in demand for the other.
(c) the goods are substitutes because an increase in the price of one causes an increase in demand for the other.
(d) the goods are substitutes because an increase in the price of one causes a decrease in demand for the other.
(e) can’t tell.

21. The marginal cost (MC) of a firm in terms of the wage per unit of labor (W), assuming no other inputs, where marginal product of that labor is MP, is:
(a) MC = W / MP
(b) MC = W
(c) MC = MP
(d) MC = W x MP
(e) MC = MP / W

22. “I’m not going to sell to Wal-Mart if it wants a price so low that my MR=MC for every unit I sell to it!” Why might you disagree with that statement?
(a) There is no reason to disagree with it.
(b) You can still make a marginal profit at MR=MC.
(c) Even though MR=MC, you do well because P>MC.
(d) When MR=MC, AFC < MC so you still profit.
(e) Even at MR=MC, you can pay your salaries to yourself and your workers.

23. All of the following equations are true, where “T” means “total”, “A” means “average”, “F” means “fixed” and “V” means variable, EXCEPT:
(a) At Q = 0, TC = TFC
(b) At Q = 1, MC = TVC
(c) At all Q > 0, AVC > TVC / Q
(d) At all Q > 0, AFC = TFC / Q
(e) At all Q, ATC = AVC + AFC

24. A master called his servants. “To one he gave five talents of money, to another two talents, and to another one talent, each according to his ability. Then he went on his journey. The man who had received the five talents went at once and put his money to work and gained five more. So also, the one with the two talents gained two more. But the man who had received the one talent went off, dug a hole in the ground and hid his master's money. "After a long time the master of those servants returned and settled accounts with them. … Then the man who had received the one talent came. 'Master,' he said, 'I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. So I was afraid and went out and hid your talent in the ground. See, here is what belongs to you.' "His master replied, 'You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? …” Matt 25:15-26. We learned how the master was hurt by this due to the time value of money. But why might the master also be angry about how the burial of the talents (reduction in output) hurt others, as expressed in economics?
(a) Law of Demand
(b) the loss in consumer surplus
(c) Coase Theorem
(d) Nash Equilibrium
(e) the Law of Equiproportional Marginal Benefit

25. At a given Q, the long run average costs (LRAC) compare to the short run average costs (SRAC) as follows:
(a) LRAC > SRAC
(b) LRAC = SRAC
(c) LRAC < SRAC
(d) LRAC/SRAC > 1
(e) LRAC/SRAC = 1

26. The economic concept closest to the Passion and Resurrection of Christ, as accepted by Christians, is:
(a) positive externalities.
(b) negative externalities.
(c) diminishing marginal utility.
(d) time value of money.
(e) competition.

27. On Conservapedia, a “benefit” of new editors is new entries in the encyclopedia, but a “cost” is time spent blocking new editors who actually are vandals hurting the site. Conservapedia should allow new editors:
(a) By increasing the number of new editors until marginal benefits equal marginal costs.
(b) By taking a vote to see if current editors want additional editors.
(c) By only accepting new editors if the legitimate ones outnumber the vandals.
(d) By only allowing new editors if they do not include any vandals.
(e) By allowing new editors regardless of vandalism.

28. “Lack of money is no excuse for failure.” What supports that statement?
(a) The Law of Demand.
(b) The Coase Theorem.
(c) The Law of Equiproportional Marginal Benefit.
(d) The Law of Diminishing Marginal Utility.
(e) The income effect.

29. Which of the following is NOT a barrier to entry?
(a) licensing
(b) copyright law
(c) control of natural resources
(d) large economies of scale
(e) labor-intensive jobs

30. The Democrats just announced their intention to increase the federal minimum wage. Which of the following will be an effect of this?
(a) more students will drop out of school.
(b) employers will hire more workers.
(c) goods will become more price elastic.
(d) illegal immigrants will lose jobs.
(e) consumers will be better off.

Honors:

31. When Bill Gates increased the price of his Microsoft Office from its marginal cost of $20 to the higher price of $200, there were 1 million people who would have bought Microsoft Office for as much $100 but could not do so. What was their social loss or social cost due to this monopoly?
(a) $200 million
(b) $100 million
(c) $80 million
(d) $20 million
(e) nothing

32. The price elasticity of the demand curve P = 2/Q is what?
(a) 4
(b) 2
(c) 1
(d) 0.5
(e) can’t tell

33. How might one best measure the elasticity of input demand?
(a) the absolute change in quantity of the output divided the absolute change in the price of its input.
(b) the percent change the price of the output divided by the percent change in the quantity of an input demanded.
(c) the percent change in output demanded divided by a percent change in the input’s price.
(d) the percent change in quantity of an input demanded divided by a percent change in the input’s price.
(e) the percent change in an input’s price divided by the percent change in output.

34. What can be said about the marginal revenue (MR) of a monopoly?
(a) MR < P, because the monopoly has to lower its price on all its goods to sell one more.
(b) MR < P, because the monopoly has to lower its price on only one good to sell one more.
(c) MR = P, because the marginal revenue of the next good sold is going to be its price.
(d) MR = P, because MR=MC and MC=P.
(e) MR > P, because a monopoly can earn more profit than just its price.

35. A perfectly contestable market has which of the following characteristics?
(a) no barriers to entry
(b) medium barriers to entry
(c) high barriers to entry
(d) few competitors
(e) P > MC.

36. Suppose Katrina starts a business to walk persons’ dogs for them. Her monthly demand for walking persons’ dogs is P = $400 - 50Q. She has no cost for this activity. How many times does she walk someone’s dog each month?
(a) twice
(b) four times
(c) six times
(d) eight times
(e) ten times

37. If China spends 3 units to produce a tennis racket but 5 units to produce a pair of tennis shoes, and the United States spends 9 units to produce a tennis racket but 10 units to produce a pair of tennis shoes, then how should China allocate its production (assuming “free trade”)?
(a) China should produce half tennis rackets and half tennis shoes.
(b) China should produce only tennis rackets.
(c) China should produce only tennis shoes.
(d) China should produce two-third tennis rackets and one-third tennis shoes.
(e) can’t tell.

38. The motivation for the model of a kinked demand curve is to show:
(a) price rigidity or stickiness rather than the Law of Demand.
(b) how monopolies price their goods.
(c) how OPEC prices oil.
(d) the flaws in monopolistic competition.
(e) how well perfect competition functions.

39. What can be said about the supply curve for a monopoly?
(a) It does not exist, because the monopoly will sell goods at any price.
(b) It does not exist, because the only possible price is set by the monopoly itself.
(c) It exists, because there is always a supply and demand curve.
(d) It exists, because if there is no supply curve, then there is no supply.
(e) It exists, because even a monopoly has competitors.

40. All of the following are characteristics of monopolistic competition EXCEPT:
(a) many firms
(b) low barriers to entry
(c) agreements among firms about the selling price
(d) similar but not identical products
(e) pricing where MR=MC

THE END

CONGRATULATIONS!!!!