Econ 1, Final Exam

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Friday, December 9th, 2011

First Name: ______________________________
Student ID: ______________________________
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received unauthorized assistance in the completion of this exam. My integrity and that of the
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Signature
Date
INSTRUCTIONS
1. Make sure you have all pages (25
multiple choice, 4 short answer).
2. Answer all multiple choice questions
in the space provided below.
3. For short answer, show all work. We
reserve the right to deduct points if
your answers are hard to read.
4. You may NOT use a calculator.
5. There are a total of 100 points.

Question

Points

MC (50 points)
SA1 (21 points)
SA2 (8 points)
SA3 (7 points)
SA4 (14 points)
Total

MULTIPLE CHOICE ANSWERS (2 points each)

1. ______

8. ______

15. ______

22. ______

2. ______

9. ______

16. ______

23. ______

3. ______

10. ______

17. ______

24. ______

4. ______

11. ______

18. ______

25. ______

5. ______

12. ______

19. ______

6. ______

13. ______

20. ______

7. ______

14. ______

21. ______

DO NOT OPEN YOUR EXAM UNTIL INSTRUCTED TO DO SO!!!

Fall 2011 Final Exam

Version #1

1.

Suppose a government is considering imposing either a tariff or a quota on imported grain, and either policy will result in
exactly 750 tons of grain being imported. How do these policies differ?
A. The price of grain under the tariff will be higher than the price under the quota.
B. The quota will generate revenue for the government while the tariff will generate revenue for those who hold import
licenses. Only tariff generates revenue for the government
C. Domestic production will be higher with the quota than with the tariff.
D. The quota will generate revenue for those who hold import licenses while the tariff will generate revenue for the
government.

2.

If income elasticity for a particular good has a negative sign,

A. as income increases, consumers will tend to purchase more of the good.
B. the good is a normal good.
E
C. the good is a luxury good.
D. as income increases, consumers will tend to purchase less of the good.

Q
= P

P inc Q demanded dec

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a
personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and
utilities, $1,000 per year for advertising and $3,000 per year for equipment. Income aerobics instructor $35,000

Direct payments to others Income personal trainer $50,000

run a business
Rent and utilities $12,000
advertising $1000
equiptment $3000

3.

What is Pat's explicit cost?

to
A. $16,000
B. $12,000
C. $35,000
D. $15,000

4.

Refer to the figure above. At the point of profit maximization, the monopolist
A. incurs a loss of $38.50.
B. earns a profit of $11.20.
C. incurs a loss of $11.20.
D. earns a profit of $38.50.

5.

Refer to the figure above. The socially efficient price and output combination is
A. $5 and 7.
B. $5 and 3.5.
C. $19.30 and 7.
D. $22.50 and 3.5.

Ceiling

6.

Refer to the figure above. Assume that a price ceiling is imposed at the price represented by point G. As a result of the price
ceiling, producer surplus _________ and is represented by the area _______.
A. increases; 0GFQ2
B. decreases; 0DFQ2
C. increases; DBC
D. decreases; DGF

7.

Refer to the figure above. Assume that a price ceiling is imposed at the price represented by point G. The deadweight loss due
to the price ceiling is represented by the area
A. DAC.
B. FEC.
C. GJEF.
D. JAE + DGF.

8.

Economies of scale exist when

A. a 10% increase in all inputs causes a 9% increase in output.
B. input prices are falling.
C. firms become extremely large.
D. average costs fall as the scale of production grows.

9.

One complaint of Occupy Wall Street protesters is that corporations have too much influence on the government. If
corporations can influence governmental policy, then this will lead to inefficient outcomes if
A. the government takes steps to promote economic growth.
B. the government allows some corporations to have market power.
C. corporations are not required to pay very much in taxes.
D. corporations are allowed to lay off large numbers of workers during economic recessions.

10. Refer to the figure above. If this monopolistic firm's marginal cost is constant at $30, its profit maximizing output is
A. 20 units.
B. 40 units.
C. 50 units.
D. 30 units.
11. Suppose a competitive firm and a monopolist are both charging $5 for their respective outputs. One can infer that
A. marginal revenue is $5 for both firms.
B. marginal revenue is $5 for the competitive firm and less than $5 for the monopolist.
C. the competitive firm is charging too much and the monopolist too little.
D. marginal revenue is less than $5 for both firms.

S + T
inelastic demand
Supply
12. If a per unit tax is imposed, the more inelastic demand is, the
A. larger the deadweight loss to producers.
B. less likely the deadweight loss will be affected.
C. smaller the deadweight loss.
D. larger the deadweight loss.
13. Suppose Blair likes to buy shoes and dresses. If the price of shoes increases from $75 to $100 per pair, but the price of dresses
Afford less shoes
Shoes P $75 -> $100
remains fixed, then we know that
A. Blair will not change her consumption of dresses. Dress P fixed
So to buy 1 dress
B. The opportunity cost of shoes in terms of dresses will fall.
you give up less shoes
C. The opportunity cost of dresses in terms of shoes will fall.
OC of dress falls
D. Blair will consume fewer dresses since the opportunity cost of dresses in terms of shoes rises.
14. Accounting profits are
A. equal to total revenues minus explicit and implicit costs.
B. less than economic profits.
C. equal to total revenues minus implicit costs.
D. the difference between total revenues and explicit costs.
15. If a monopolist finds that its marginal revenue exceeds its marginal costs at the current level of output, it should
A. do nothing; it has maximized profits.
B. expand output until marginal revenue equals marginal costs.
C. expand output until price equals marginal costs.
D. contract production until the difference between marginal revenues and marginal costs is larger.
16. Suppose Fiona buys 15 gumdrops and 7 lollipops from her local bulk candy store. The marginal utility she gets from the
15th gumdrop is twice the marginal utility she gets from the 7th lollipop. Assuming Fiona is a rational and is maximizing her
utility, it must be the case that MUg = 2MUl
MUg
MUl 2MUl
MUl
A. Gumdrops are half the price of lollipops.
--- = --- ---- = --- Pg = 2Pl
B. Gumdrops and lollipops are complementary goods for Fiona.
Pg
Pl Pg
Pl
C. Gumdrops are twice as expensive as lollipops.
D. Fiona must really want lollipops if she buys them even though they give her less marginal utility than gumdrops.
17. Which ordering best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the
product if it is an increasing cost industry? The market demand function will shift to the right causing the market
A. price to increase, and a new stable equilibrium to be established at a higher price and higher quantity.
B. price to increase, and all firms in the industry will earn higher profits at lower quantities of output.
C price to increase. Increased profits will encourage new firms to enter shifting the market supply function to the
. right. Long-run market equilibrium will be at a higher quantity and higher price than before the surge in popularity.
D price to increase. Increased profits will encourage new firms to enter shifting the market supply function to the right.
. Long-run market equilibrium will be at a higher quantity but at the same price as before the surge in popularity.
18. Perfect competition is efficient and monopoly is not because in perfect competition __________ while in monopoly
__________.
A. P = MC; P > MC
B. P < MR; P = MR
C. P = MC; P < MC
D. P = MR; P < MR
19. If the price of a good increases by 20% and that leads to a decrease in quantity demanded by 60%, what is the price elasticity
of demand for that good?
A. 1/6.
Q
B. 1/3.
E = 60/20 = 3
C. 3.
D. 30.
P
20. The more elastic supply is, the ______ the burden of the tax borne by ______.
A. smaller; consumers and producers
B. smaller; consumers
C. larger; consumers
D. larger; producers
21. Suppose the government imposes a quota on imported cars. The winners from the quota are the ________, and the losers are
the______.
A. government; domestic consumers of cars
B. domestic producers of cars; domestic consumers of cars
Charge higher price
C. importers of cars; domestic producers of cars
cause low supply
D. domestic consumers of cars; domestic producers of cars

Supply and Demand Curve for Jeans in Gallania Mall.

22. In the figure above, the equilibrium price will NOT lead to the largest possible total economic surplus when
A. the production of jeans generates air pollution.
B. jeans are purchased by consumers with reservation prices greater than $40.
C. the jeans market is perfectly competitive.
D. the production of jeans experiences diminishing marginal returns to inputs.
23. Suppose that jeans initially sell for $60 each. If the seller lowers price to $40 each it would create an extra ____ of economic
surplus. Thus, selling jeans for $60 each is _______.
At $40 for sure inefficient
A. $160; inefficient
Consuper surplus increases
B. $80; the equilibrium price
60
C. $80; efficient
40
D. $160; efficient
The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.

24. Assume that the market is currently as shown in the graph on the left (i.e., price of $8). What is true of the number of firms?
A. There are currently ten firms in this industry, and that number will remain stable until there is a change in demand or in
technology.
B. There are currently ten firms in this industry, and that number is likely to increase in the near future. Profit > 0
C. There are currently 30 firms in the industry, and that number will remain stable until there is a change in demand or in
technology.
D. It is impossible to tell how many firms currently exist in this industry, but you can tell that the number of firms is likely to
increase in the near future.
25. For entertainment, suppose Rachel likes to read books and rent movies. Given the number of movies she currently rents and
the number of movies she currently buys, her marginal utility from renting movies is 5 and her marginal utility from reading
books is 4. It costs Rachel $12 to rent a movie and $10 to buy a book. Given this information we know that Rachel is willing
to give up _________ of a movie to get an additional book and that she should buy ___________________.
A. 5/4; more movies and fewer books.
B. 4/5; more movies and fewer books.
C. 5/4; more books and fewer movies.
D. 4/5; more books and fewer movies

MUmovie = 5, Movie $12

MUbooks = 4, Books $10

MUbooks
MUmovie
------- = 0.416 ------- = 0.400
Pbooks
Pmovie
Rachel likes movies more than books,
so she will give up less than 1 movie to get 1 book


1. Consider the following three individuals: Horton, Cindy, and Sam. Each produces green eggs and ham.
Hortons PPC is given by G=10-H, where G denotes the number of green eggs and H denotes the number
of slices of ham. Similarly, Cindys PPC is given by G=10-2H and Sams PPC is given by G=5-(1/2)H.
a. (4.5 points) Sketch each individuals PPC, putting green eggs on the y-axis and ham on the x-axis.
For all three graphs, clearly label the x-intercept, the y-intercept and the slope.
b. (1.5 points) For each individual, calculate the opportunity cost of producing ham.
c. (1.5 points) For each individual, calculate the opportunity cost of producing green eggs.
d. (2 points) Who has a comparative advantage in the production of ham? Briefly explain.
e. (2 points) Who has a comparative advantage in the production of green eggs? Briefly explain.
f. (3.5 points) Construct the joint PPC for Horton, Cindy and Sam. As above, place green eggs on the y-
axis and ham on the x-axis. Clearly label the y-intercept, the x-intercept, the slope of the PPC along
each segment, and the coordinates of each kink point.
g. (4 points) Suppose that Horton, Cindy and Sam (who all live in Whoville) decide to start trading
with the rest of the world. If the world price of ham is 30 cents per slice and the world price of
green eggs is 40 cents per egg, then where along their joint PPC will Horton, Cindy and Sam
produce? Also, at this point, how many eggs and slices of ham will each individual produce? [For
example, how many eggs and how many slices of ham does Horton produce? What about Cindy?
What about Sam?]
h. (2 points) Suppose that Horton, Cindy and Sam decide they only want to eat ham (because they
dont like green eggsand certainly not with ham!). Once they are open to trade (at the prices
above), how many slices of ham can they consume?
G = green eggs
Horton
Cindy Sam

H = ham slices
Horton: G=10-H
Cindy: G=10-2H
Sam: G=5-(1/2)H

G | H
----0 |10
10| 0

G | H
----0 | 5
10| 0

G | H
----0 | 10
5 | 0
G

G
10

10

Horton
slope = 1

Cindy
slope = 2

10

Sam
slope = 1/2
5

10

B) Opporunity cost of producing ham

Horton

Cindy

Sam

10 g egg
1 ham x -------- = 1 g egg
10 ham

10 g egg
1 ham x -------- = 2 g egg
5 ham

5 g egg
1 ham x -------- = 0.5 g egg
10 ham

C) Opportunity cost of producing green eggs

Horton

Cindy

Sam

10 ham
1 egg x ------ = 1 ham
10 egg

5 ham
1 egg x ------ = 0.5 ham
10 egg

10 ham
1 egg x ------ = 2 ham
5 egg

D) Sam has the comparitive advantage in making ham cause his OC is the lowest
E) Cindy has the comparitive advantage in making eggs cause her OC is the lowest

PAGE INTENTIONALLY LEFT BLANK

F) Joint PPC
Green eggs
25
20

slope = 1/2
slope = 1

10
slope = 2
10

20

25

Ham

G) World price ham: $0.30

World price green eggs: $0.40
At (10H, 20G) Revenue = 3 + 8 = $11
At (20H, 10G) Revenue = 6 + 4 = $10
Will produce 10H and 20G
Sam will make 10 ham
Cindy will make 10 green eggs
Horton will make 10 green eggs
H) Trade
Will sell 20G for $0.40 = $8
Will buy ham for $0.30 and recieve 26.6 ham
They will have a total of 10 + 26.6 = 36.7 ham


2. Let the supply of ham be given by Q=3/2P-3, and let the demand for ham be given by Q=5-1/2P, where
Q denotes the number of pounds of ham and P denotes the price per pound.
a. (2 points) Sketch the supply curve and the demand curve. For each curve, label the y-intercept and
the slope.
b. (2 points) How many pounds of ham will be bought and sold in equilibrium? And, what will be the
equilibrium price of ham? Label equilibrium price and quantity on your graph.
c. (2 points) In an effort to appease the pork lobby, suppose the government imposes a price floor on
ham of $4.63 per pound. Will this price floor be successful at increasing the revenue of ham
producers? Explain.
d. (2 points) Explain why the price floor generates deadweight loss. That is, with the price floor in
place, why is the new equilibrium quantity of ham inefficient?
Supply
Demand
Demand
Supply curve
B) Equilibrium

P | Q
Q = 5 - (1/2)P
P | Q
Q = (3/2)P - 3
(3/2)P - 3 = 5 - (1/2)P

P = (2/3)Q + 2

P = -2Q + 10

Price
slope = 2/3

----2 | 0

----10| 0
0 | 5

2P = 8
P = 4
Q = 3

10
4.63
4

floor

2
3

slope = 2
Quantity

C) Elasticity = 1 at midpoint (2.5Q, 5P)

E = 1 (midpoint) is where revenue is the best
Raising 4 to 4.63 will increase revenue
because we are approaching elasticity of 1
D) Customers value the last unit sold more than
the cost of producers making the last unit.
They both can benefit from increasing quanitity.


3. Consider the market for thneeds (the fictional garment in Dr. Seusss The Lorax).

A Thneed's a Fine-Something-That-All-People-Need!
It's a shirt. It's a sock. It's a glove. It's a hat.
But it has OTHER uses. Yes, far beyond that.
You can use it for carpets. For pillows! For sheets!
Or curtains! Or covers for bicycle seats!

Thneeds are substitutes

a. (2.5 points) Draw a simple supply and demand graph for the market for thneeds. Label the
equilibrium price and quantity of thneeds. In addition, be sure to clearly label the supply curve, the
demand curve and the axes.
b. (2.5 points) Suppose that the price of truffula trees (which are used to make thneeds) suddenly
increases. At the same time, suppose the price of sweaters decreases. On your graph, illustrate
what will happen to the supply and demand for thneeds as a result of these two factors. Be sure to
clearly state any assumptions you are making.
c. (2 points) What will happen to equilibrium price and quantity of thneeds.

B) Price in input increases, supply decreases

Price of sweaters decrease, its a substitute
of thneeds, so demand of thneeds will decrease
assuming its a normal good

P*

C) Equilibrium quantity will definitely decrease

Equilibrium price is unknown
D
Q
Q*


4. Suppose Jerry Jordan runs a small company that makes strawberry jelly. In the short-run, some of Jerry
Jordans inputs are fixed (for example, he cannot easily change the size of his kitchen), but he is easily
able to vary the number of hours his employees work and the amount of strawberries he purchases
(labor and strawberries are variable in the short run). The table below shows Jerry Jordans daily
production costs (which include both explicit costs and implicit costs). Assume the market for
strawberry jelly is perfectly competitive.

Total
Average
Jars Per
Average
Marginal
Total Cost
Variable
Variable
Day
Total Cost
Cost
Cost
Cost
---
0
140
---
---
---
160-140=20
20/1=20
1
160 160/1=160




160-140=20
178-160=18
2
178 178/2=89




38/2=19
178-140=38
3
198
66

19.3

198-178=20
198-140=58
4
220
55
80
20

220-198=22
5
245
49
105
21
25
6
275
45.8
135
22.5
30

a. (2 points) Fill out the blank cells in the table above (you do not need to fill out the ones with ---).
b. (2 points) If p*=18, how many jars of jelly per day should Jerry Jordan make in the short run, and
what will be his economic profit? Show your work.
c. (2 points) If p*=$22, how many jars of jelly per day should Jerry Jordan make in the short run, and
what will be his economic profit? Show your work.
d. (2 points) Why might Jerry produce jelly in the short run even when his economic profit is
negative?
e. (2 points) If the price of a jar of jelly is $22, what will Jerry do in the long run? Briefly explain.
f. (2 points) In general, how will Jerrys short-run production of jelly change if his fixed costs increase
to $200 per day? Briefly explain.
g. (2 points) In general, how will Jerrys short-run production of jelly change if the price of
strawberries falls? Briefly explain.

B) P=MC
F) Fixed costs do not affect
At P=18,
He will produce 2

short-run production, so Jerry

Revenue = 36 < Total Variable cost 38

He will produce nothing, 0 jars
Profit = $-140
C) P=MC
At P=22, he will produce 4 jars
Revenue = 22*4 = $88
88 > Total variable cost
Profit = 88 - total cost
Profit = 88 - 220 = $-132
D) If revenue is > TVC he can use
that money to pay off fixed costs

E) At P = 22, Jerry will shutdown

and leave the market because he is
not making an economic profit

will continue to make Jelly

G) If the price of strawberries fall,
producing jelly becomes cheaper and he
will supply more jelly