EC 201 FINAL EXAM (MSU)

Which of the following statements is associated with normative analysis, rather than positive analysis?

The tax system should be progressive.

Alan's opportunity cost of producing good A is lower than Bob's opportunity cost of producing good A. Bob's opportunity cost of producing good B is lower than Alan's opportunity cost of producing good B. This means that

Alan has comparative advantage in the production of good A.

Alan should specialize in the production of good A.

Which of the following is an example of a condition for an optimal decision by some kind of economic agent?

For the consumer: Marginal utility is equal to price.

Which of the following would push the production-possibilities frontier outward?

Technological improvements.

Increases in the size of the labor force.

Capital investments.

Which of the following is necessary for a firm to increase its profits by engaging in price discrimination?

- The firm must have some way of distinguishing among its customers, to tell which ones have demand that is more elastic and which ones have demand that is less elastic

- it must be difficult or impossible for customers to re-sell to other customers

The supply curve for tarfsnods is perfectly inelastic. The demand curve shifts to the right. What will happen as a result?

Equilibrium price will rise; equilibrium quantity will stay the same.

The income elasticity of demand for commodity J is 0.6. On the basis of this information, we would say that J is

normal

Which of the following would be expected to shift the supply curve

for tomatoes to the left?

An increase in the prices of inputs used in production of tomatoes

Flooding in tomato-growing regions, which leads to crop damage.

Which of the following is an example of the "Tragedy of the Commons"?

When there is free access to a fishing ground, the stock of fish will be depleted.

The elasticity of demand for thingamabobs is 1.0. The

quantity demanded goes up from 30 per day to 50 per day.

Assume that a change in price was the only reason for the change

in quantity demanded. What must have happened to the price, in

order to have caused quantity demanded to change in this way?

Price went down by 50%.

The payroll tax is a flat rate of labor earnings, but only up to a ceiling, above which the rate drops substantially. Also, the payroll tax does not apply to capital income. As a result,

the payroll tax is

about proportional over much of the income range,

but regressive at high incomes.

The firms in a monopolistically competitive industry are

earning positive economic profits. What would we expect to

happen as a result?

New firms will enter the industry until zero economic

profits are being earned.

Because of good growing conditions, there is an increase in the supply of asparagus. What will happen to the equilibrium price and quantity of asparagus?

Equilibrium price will fall; equilibrium quantity will rise

Which of the following is/are a reason why the earnings of college-educated workers tend to be higher than the earnings of workers with less than a college education?

College-educated workers have higher marginal revenue product, so that the demand curve for their services is farther to the right than it would otherwise be.

A college education is costly to acquire, so that the supply curve of college-educated workers is farther to the left than it would otherwise be.

When the price of champagne goes up, the demand curve for zabaglione shifts to the left. This means that

champagne and zabaglione are complements.

An import quota is instituted. As a result, consumers in the importing country are harmed, because they consume a smaller quantity, and they pay a higher price for the units they do consume. What is our best measure of the dollar value of the harm done to consumers by the import quota?

The change in consumer surplus.

Which of the following is a graph of the relationship between the cumulative proportion of the population and the cumulative proportion of income?

A Lorenz curve

Investment projects tend to have a large portion of their costs early in the life of the project, with the revenues coming later. Because of this, and because of the need to discount future costs and revenues, we would be more likely to approve a project if

the interest rate is lower.

the project can be completed quickly, so the revenues can

begin to be realized sooner rather than later.

The Gini coefficient for annual income is _____ than the Gini coefficient for wealth, and the Gini coefficient for annual income is ________ the Gini coefficient for lifetime income.

smaller than, larger than

annual income < wealth

annual income > lifetime income

If a natural monopoly were to charge a price equal to marginal cost, P = MC

the firm would suffer economic losses.

The price of a cotton handkerchief increases from $1.80 to $2.20. As a result, the quantity demanded decreases from 1100 per day to 900 per day. What is the own-price elasticity of demand?

1.0

e = (ΔQd/Qd) / (ΔP/P)

(1100 - 900) = 200

Avg: 1000

200/1000 = 0.2

$(2.20 - 1.80) = $0.40

Avg: $2.00

$0.40/$2.00 = 0.2

0.2 / 0.2 = 1.0

In the Empire of Lumpiness, every person pays $1000 per year of tax, regardless of his or her income. This tax system is

regressive

Which of the following is believed to be the most important force leading to the recent trend in income inequality in the United States?

Increases in the demand for skilled workers.

The supply curve for good X is given by Qs = P. The demand curve is given by

Qd = 20 - 3P. What is the equilibrium price of good X?

5

P = 20 - 3P

4P = 20

P = 5

What will be the effect of a price ceiling that is enforced above the equilibrium price?

there will be no effect

price ceiling > equilibrium price

In an attempt to raise its revenues, Emily's Bar & Grill increases the price of its onion soup. What does this imply about Emily's beliefs regarding the elasticity of demand for its onion soup?

demand is inelastic

%△Qd < %△P

Hezekiah is considering taking out a loan to make a new capital investment. The cost is $100. Exactly one year later, the project will generate revenue of $105, and the project will then self-destruct. The interest rate is 10%. Which of the following is true?

The project has negative net PDV; Hezekiah should not do it.

Assume that the elasticity of labor supply is smaller than the elasticity of labor demand. A payroll tax is levied at exactly the same rate on employers and workers. Who will bear the economic burden of the tax?

Workers will bear most of the burden

If there is a positive externality, a competitive private market will produce _____ the socially optimal quantity. If there is a negative externality, a competitive private market will produce _______ the socially optimal quantity.

less than, more than.

positive externality:

competitive private market will produce < the socially optimal quantity

negative externality:

competitive private market will produce > the socially optimal quantity

If the equilibrium interest rate is 10% and a usury ceiling is enforced at 5%,

a shortage of credit will occur

the quantity of credit demanded will be larger than it would have been

at the equilibrium.

Which of the following policy issues would be classified as having to do with macroeconomics, rather than microeconomics?

The effect of the Federal Reserve's monetary policy on the rate of inflation.

Which of the following is graphed as a horizontal line?

A total-fixed-cost curve.

For any firm for which price is greater than average variable cost, the profit-maximizing quantity of output will be the precise quantity at which

marginal revenue equals marginal cost.

MR = MC

P > AVC

A point that is below and to the left of the production-possibilities frontier is

associated with inefficient use of the available resources.

Huge Corporation is a monopolist. Its marginal costs decrease

(i.e., its entire marginal-cost curve shifts downward). How will

the firm change its price and quantity as a result?

Huge will reduce price and increase quantity of output

MC ↓ = P↓ Q↑

Which of the following is/are consistent with the Law of Demand?

The price of A goes up. As a result, and the quantity demanded of A goes down.

P↑, Qd↓

Two markets have exactly the same net-of-tax supply curve. They also have exactly the same equilibrium price and quantity when there is no tax. Then each of the markets is subjected to exactly the same tax. The only difference between the two markets is that the demand for good X is more elastic than the demand for good Y. On the basis of this information, what can we say?

The tax in market Y will generate more revenue.

The benefit to the firm from hiring an extra unit of an input is called the marginal revenue product. Marginal revenue product is equal to

marginal product multiplied by marginal revenue.

Marginal Revenue Product = (marginal product) x (marginal revenue)

Assume that the demand for low-skill labor is inelastic.

The minimum-wage law succeeds in pushing the wage rate

above its equilibrium level for a group of low-skill workers.

As a result, what will occur?

The number of these workers who are hired will decrease.

The total payments to the affected group of workers will increase

wage rate > equilibrium level

The evidence suggests that the elasticity of men's labor supply with respect to the net wage rate is ________, while the elasticity of women's labor supply with respect to the net wage rate is ________.

close to zero, positive

The deadweight loss from monopoly is represented graphically by the area of ____, and the excess burden of a tax is represented graphically by the area of _____.

a triangle, a triangle

All else equal, an increase in the demand for highly skilled labor will lead to _______ in the distribution of labor-market earnings, and an increase in the supply of highly skilled labor will lead to __________ in the distribution of labor-market earnings.

greater inequality, less inequality

In Miftez, there is no international trade, and the price of good R is $10 per kilogram. In the rest of the world, the price of good R is $20 per kilogram. This suggests that

Miftez would benefit by exporting good R to other countries.

Which of the following statements is/are true, regarding the effect on labor supply, caused by an increase in the wage rate?

When the wage rate increases, the opportunity cost of leisure increases.

WR↑, opportunity cost of leisure↑

The market supply curve for beef jerky shifts to the right. At the same time, the market demand curve for beef jerky shifts to the left. As a result of these two changes, what will happen to the equilibrium price and quantity of beef jerky?

Price will fall; the effect on quantity can't be determined without more information

In your textbook, the Prisoners' Dilemma is used to study

the interaction between firms in a duopoly

Rubeus Hagrid has received a promise that he will be paid $1000, exactly five years from now. There is no uncertainty: he is absolutely certain that he will receive the $1000. The interest rate is 10%. What is the present discounted value of the payment?

$1000 / (1.1)⁵

(Amount to be received) / (1+i)⁵

Consumer surplus is

the difference between the amount consumers are willing

to pay and the amount they actually have to pay.

graphically represented by the area under the demand curve but above the price line

used in calculating the deadweight loss of monopoly

Inequality between countries is

greater than the inequality within countries (that is, the

Gini index for the world as a whole is larger than the Gini

indexes for individual countries).

The short-run supply curve for a perfectly competitive firm is

the marginal-cost curve for prices equal to or greater

than average variable cost. If price is less than average

variable cost, the quantity supplied is zero.

P >= AVC

P < AVC: Qs = 0

Which of the following will occur as a result of a tariff?

The gross price paid by buyers in the importing country

will increase.

The net price received by sellers in the exporting country

will decrease.

The quantity of imports will be reduced.

The Lorenz Curve in country A is closer to the horizontal axis than the Lorenz Curve for country B. In other words, the Lorenz Curve for country A is always below the Lorenz Curve for country B. This means that

the Gini Ratio for country A is greater than the Gini Ratio for country B.

Gini Ratio for country A > Gini Ratio for country B

Which of the following is a characteristic of a pure public good?

Non-rival consumption

i.e., many people can enjoy the good at the same time.

Nonexcludability

i.e., it is difficult or impossible to exclude those who don't pay

Which of the following is widely considered to be a violation of horizontal equity?

The federal individual income tax is not neutral with respect to marital status

i.e., single persons sometimes experience a marriage penalty or marriage bonus.

Tariffs, quotas, and VERs are all used to restrict imports. Which of the following statements is true regarding these policies that interfere with international trade?

A tariff is a price mechanism, whereas a quota or a VER is an explicit restriction on the quantity of imports

In one day, Abner can fix 6 bicycles, or he can sharpen 6 axes. In one day, Zebediah can fix 12 bicycles, or he can sharpen 8 axes. Between these endpoints, each person has a straight-line production possibilities frontier. Which of the following statements is true?

Zebediah has absolute advantage in both activities.

There is an increase in the demand for billiard balls (i.e., the demand curve for billiard balls shifts to the right). As a result,

the equilibrium price will increase; the equilibrium quantity will increase.

Job A and Job B are identical in every way except one. The only difference between the two jobs is that the working conditions of Job A are pleasant, whereas the working conditions of Job B are unpleasant. As a result, the equilibrium wage rate for Job B will be higher than the equilibrium wage rate for Job A. Why does the wage difference occur?

The supply curve for A labor is to the right of the supply curve for B labor.

Which of the following is restricted by the antitrust laws?

price fixing

attempting to monopolize

interlocking directorates

tie-in sales

The income tax in Koblenzia has an exemption, such that those with low incomes pay no tax. It also has graduated marginal rates. For a taxpayer whose income is greater than the exemption level,

the marginal tax rate is greater than the average tax rate.

marginal tax rate is > average tax rate

A price ceiling is imposed in the market for licorice. The price ceiling is below the equilibrium price, and this leads to shortages. We say that a shortage is larger if the difference between quantity demanded and quantity supplied is larger. All else equal, which of the following statements is/are true, regarding the relationship between the size of the shortage and the own-price elasticity of demand?

The shortage will be larger if the elasticity is larger

If an individual receives non-labor income, he/she will work less. This means that

leisure is a normal good.

The payroll tax in the United States is a flat-rate tax on earnings in the labor market, up to a ceiling. Most Americans receive most of their income from labor-market earnings, and the ceiling is much higher than the average wage earner makes in a year. Thus the payroll tax is approximately proportional over most of the income range. However, above a certain amount (which was $106,800 in 2011), the marginal rate of payroll tax decreases dramatically. As a result, what can we say about the payroll tax for those who earn more than the ceiling?

It is regressive.

In the Republic of Fenwickia, every household has exactly the same income. The Gini Ratio for this country is

zero

A demand curve is

a graph of the relationship between quantity demanded and price, holding constant all other possible influences on buyers.

Downward sloping as we move from left to right, if it obeys the Law of Demand.

A graph of the information contained in a demand schedule.

Which of the following is a normative statement?

The United States should increase the degree of progressivity of its tax system.

There is an increase in the equilibrium price of gasoline, and an increase in the equilibrium quantity of gasoline. Which of the following would be consistent with these changes?

A rightward shift in the demand curve for gasoline.

Which of these is the best definition of economics?

The study of how society chooses to use its scarce resources to produce, consume, and exchange goods and services.

In the Duchy of Gutereise, the economy is on its production-possibilities frontier in 2011. Then, by one year later (in 2012), the economy produces more of every good than it had produced in 2011. How could this occur?

By adopting new technologies and increasing the size of the labor force.

For the exact same flight, American Airlines charges lower prices for passengers who stay over a Saturday night, and higher prices for passengers who do not stay over a Saturday night. This is an example of

price discrimination.

Assume that the elasticity of labor supply is smaller than the elasticity of labor demand. A payroll tax is levied on employers. Who will bear the largest share of the burden of the tax?

workers

graph with vertical slope

a perfectly inelastic demand curve

Assume that the elasticity of demand for green and white ball-point pens is 1.2. Due to a rightward shift in the supply curve for pompons, the price decreases by 50%. What will happen to the quantity of pompoms demanded?

Quantity demanded will increase by 60%.

Malfoy Corporation is a monopolist. Its marginal costs decrease

(i.e., its entire marginal-cost curve shifts downward). How will

the firm change its price and quantity as a result?

Malfoy will reduce price and increase quantity of output

If the social marginal cost of production of good Z is greater than the private marginal cost, we would say that good Z is characterized by

a negative externality

If a Pigouvian tax is designed in the socially optimal way, it will

lead to equality between social marginal costs and private marginal costs.

solve the problem caused by an externality.

Because of an improvement in agricultural technology, there is an increase in the supply of peaches. In other words, there is a rightward shift in the supply curve for peaches. What will happen to the equilibrium price and quantity of peaches?

Equilibrium price will fall, equilibrium quantity will rise

Marginal Utility

change in Total Utility

Q = 3, TU = $21

Q = 4, TU = $26

MU of 4 = $(26-21) = $5

Average total cost

ATC = TC / Q

TC = TFC + TVC

Marginal Revenue

change in total revenue

Marginal Revenue of the 5th unit?

Q = 4, P = 7

Q = 5, P = 6

TR = (P)(Q)

TR = (4)(7) = $28

TR = (5)(6) = $30

MR = $(30 - 28) = $2

Investment projects tend to have a large portion of their costs

early in the life of the project, with the revenues coming later. Because of this, and because of the need to discount future costs and revenues,we would be more likely to approve a project if

the interest rate is lower.

the project can be completed quickly, so the revenues can

begin to be realized

Which of the following is true regarding nonrival consumption?

Nonrival consumption is one of the characteristics of a public good.

Nonrival consumption means that one person can enjoy the good without diminishing anyone else's enjoyment of the good.

Nonrival consumption is the reason why we add individual willingness-to-pay curves vertically, in constructing the social willingness-to-pay curve

Different people have different wage rates, for a variety of reasons. One type of wage-rate differential is a compensatingwage-rate differential. Why do we observe compensating wage differentials for some occupations?

The work in those occupations is dangerous or unpleasant

Which of the following could lead to higher prices for the consumers in the importing country?

tariff

An import quota

A voluntary export restraint.

Which of the following is a reason why we might prefer Pigouvian remedies (such as emissions charges) to regulations, as a method of reducing pollution?

Pigouvian remedies take into account the differences among firms in the costs of pollution reduction

Pigouvian remedies raise revenue for the government, which can be used to reduce the reliance on other, more distortionary taxes

The price of good A increases. As a result, there is a decrease in the demand for good B. This means that

good A and good B are complements.

The price of geegaws falls from $18 to $14. As a result, the quantity demanded rises from 300 to 500. What is the elasticity of demand?

2.0

500 - 300 = 200

avg: 400

$(18 - 14) = $4

avg: $16

200/400 = 0.5

$4/$16 = 0.25

0.5 / 0.25 = 2.0

When the price of champagne goes up, the demand curve for zabaglione shifts to the right. This means that

champagne and zabaglione are substitutes.

the cross-price elasticity of demand for zabaglione with respect to the price of champagne is positive

If the net wage rate decreases, the income effect would move

the individual toward ____ work, and the substitution effect would

move the individual toward _____ work.

more, less

Which of the following would be expected to shift the supply curve

for tomatoes to the right?

A decrease in the prices of inputs used in production of tomatoes

Discovery of a new technology that makes it possible to

produce more tomatoes without using more inputs

The supply of rabmots is given by Qs = 3P. The demand for rabmots is given by Qd = 40 - P. What are the equilibrium price and quantity of rabmots?

P = $10, Q = 30

Which of the following policy issues could be studied with the tools of microeconomics?

The effects of tariffs on the price of belts.

The effects of the payroll tax on the net-of-tax wages

received by workers.

The effects of rent controls on the quantity of apartments.

The effects of unions on the wages of non-union workers

The demand for pedicures increases (i.e., the demand curve

for pedicures shifts to the right). As a result, what will happen

to the equilibrium price and quantity of pedicures

Equilibrium price will increase P↑

equilibrium quantity will increase Q↑

For any firm (regardless of market structure), if the price is greater than average variable cost, the profit-maximizing quantity of output will be the quantity at which

marginal revenue is equal to marginal cost

P > AVC → MR = MC

Perfect competition and monopolistic competition are similar in some ways, and different in other ways. Which of these is a way in which perfect competition and monopolistic competition are similar?

In each of these market structures, the tendency will be toward zero economic profit

the marginal revenue product of labor is

the marginal product of labor, multiple by the firms marginal revenue

marginal revenue product of labor = (marginal product of labor) x marginal revenue)

Assume that the individual consumer takes the market price as given. Then, the individual demand curve is

the marginal-utility curve

What will have happened if the Gini coefficient were to become smaller?

a decrease in inequality

In the last quarter of the 20th century, there was a large increase in the demand for highly skilled labor (i.e., the demand curve for highly skilled labor shifted to the right). What happened as a result?

There was an increase in the gap between the wages of highly skilled workers and the wages of less skilled workers

The income elasticity of demand for good Z is negative. This indicates that good Z is

an inferior good