Economics 165 Final Exam
Fall 1996

1. "A compassionate welfare program should have a higher priority than strong defense." This statement is an example of
a. the ceteris paribus fallacy
* b. a normative economic statement
c. a positive economic statement
d. the fallacy of composition

2. In economics, capital is best defined as:
* a. produced goods which are used as productive resources
b. private property
c. money needed to run a business
d. the primary factor in productivity

3. Opportunity cost along a production possibilities frontier is
a. zero
b. the amount by which the production of guns increases when the production of butter increases
c. how much of each good is produced
* d. the sacrifice of one good required to produce one more unit of another good
e. all of the above

4. A production possibilities frontier will shift out when:
a. the production of investment goods decreases
* b. the quantity and/or productivity of resources (factors of production) increases
c. unemployment is decreased
d. the labor force decreases

5. Demand shows the relationship between
a. income and quantity needed per unit of time
b. price of a good and the available quantity of that good per unit of time
* c. the price of a good and the quantity consumers are willing and able to buy in a given time period
d. income and quantity demanded per unit of time

6. The statement that oatmeal is an inferior good, as economists use the term
a. means that as the price of oatmeal falls, the quantity demanded of oatmeal falls
b. means that there is no real income effect when the price of oatmeal changes
c. is an example of a normative statement
* d. means that as the average level of income falls, the demand for oatmeal rises
e. means that the supply of oatmeal is perfectly inelastic

7. The income effect of a price change arises because
* a. as price falls or rises there is an effect similar to an income increase or decrease
b. the effect of taxes on government revenues
c. higher or lower prices affect suppliers incomes
d. as the price of a good rises or falls buyers feel their incomes have fallen due to inability to recall the previous price and a suspicion regarding all price changes

8. An increase in demand accompanied by a simultaneous decrease in supply will result in
a. a change in equilibrium quantity
b. a decrease in equilibrium quantity
c. a decrease in equilibrium price
* d. an increase in equilibrium price
e. an increase in equilibrium quantity

9. A price ceiling will not cause a shortage if the government
a. enters the market and purchases the excess
b. always has perfect information
* c. does not enforce the ceiling price
d. sets the ceiling price below the equilibrium price

10. When the price of a certain good increases by 30%, quantity demanded decreases by 2%. What is the price elasticity of demand?
a. 15
b. 30
* c. 1/15
d. 2

11. If goods R and K have a cross elasticity of -5 and goods R and S have a cross elasticity of 5,
a. R and K are substitutes; R and S are complements
* b. R and K are complements; R and S are substitutes
c. K is price inelastic
d. S is price inelastic
e. R and K are normal goods; R and S are inferior goods

12. In the theory of utility, it is assumed that marginal utility
a. is zero as consumption of a product increases
* b. diminishes beyond some point as consumption of a product increases
c. increases as consumption of a product increases
d. increases as consumption of a product remains constant
e. remains constant as consumption of a product increases

13. If George gets 100 units of utility from watching the show "Family Ties" one time and 150 units of utility from watching the same show twice, his marginal utility from watching the second time is
a. 250
b. -50
* c. 50
d. 150

14. If the equilibrium dollar price of Dutch guilders is 40 cents, but for some reason the market opens at 30 cents, it is likely that
a. an excess supply of guilders will force a decline in the dollar price of guilders
b. the U.S. demand for Dutch guilders will increase
c. the Dutch demand for U.S. goods will increase, moving the dollar price of guilders toward equilibrium
* d. an excess demand for guilders will force a rise in the dollar price of guilders

15. Imposition of a U.S. tariff on imported shoes:
a. harms foreign consumers of shoes by decreasing the amount of shoes available for their consumption
b. harms U.S. shoe workers who now face a more hectic production schedule
c. benefits consumers in the United States by guaranteeing a high-quality product
* d. benefits domestic shoe producers by eliminating competitors

16. The short run is a period of time
a. during which all inputs are fixed
b. that is just long enough to permit entry and exit
c. that is always less than one year
* d. during which at least one input is fixed
e. during which all inputs can be varied

17. Which of the following is true concerning short-run total costs?
a. total costs are minimized when average total costs are minimized
b. total costs are at a maximum when the average physical product of labor is at its maximum value
c. at zero output, total costs equal zero
* d. total costs equal total variable costs plus total fixed costs

18. At its minimum point, the average total cost curve is intersected by the
a. total fixed cost curve
b. total variable cost curve
c. average fixed cost curve
d. average variable cost curve
* e. marginal cost curve

19. A. Rock operates the Telly Savalas Lolli-Pop Factory in Springfield, Mo. At the present level of output, he finds that his average fixed costs = $40, average variable costs = $60 and total costs = $9000. Given this information, what is the quantity being produced?
a. 225 units of output
* b. 90 units of output
c. insufficient information is given to determine the quantity being produced
d. 150 units of output
e. 450 units of output

20. If a firm's long-run average costs remain constant as production increases, then we say that the firm has
a. quasi-returns to scale
* b. constant returns to scale
c. economies of scale
d. diseconomies scale

21. Suppose a firm can sell as much or as little as it wants at a price of $5. This firm
a. can make infinitely large profits
* b. has constant marginal revenue
c. is likely to be a monopolist
d. is likely to be a oligopolist

22. The additional revenue a firm receives from selling an extra unit of output is
a. average revenue
b. marginal profit
c. total revenue
* d. marginal revenue
e. price

Use the graph below to answer question number 23

23. According to the graph above, at a price of OA this profit maximizing firm will realize:
a. an economic profit of ACFH
* b. an economic profit of ABGH
c. a loss equal to BCFG
d. a loss equal to ACFH
e. economic profits of zero

24. Assume that marginal revenue equals marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. The price of the product is $5 per unit . In the short run the firm should produce
* a. 100 units of output
b. more than 100 units of output
c. 0 units of output
d. less than 100 units of output

25. Which of the following is NOT true of perfectly competitive firms in the long run?
a. Price is equal to minimum ATC
* b. Firms can make profits or losses
c. Economic profits are zero
d. Price is equal to marginal cost

26. In a perfectly competitive, constant cost, industry
* a. the long-run market supply curve will be perfectly elastic
b. the long run market demand curve will be perfectly inelastic
c. the long-run market demand curve will be positively sloped
d. the long-run market demand curve will be perfectly elastic

27. For a non-discriminating monopolist who is maximizing profits, which of the following cannot be true?
a. marginal revenue equals average total cost
b. price equals average total cost
c. marginal revenue equals marginal cost
d. average total cost equals marginal cost
* e. price equals marginal revenue

28. If a monopolist lowers price and, as a result, its total revenue rises, then
a. its price must be less than its marginal revenue
b. there must be no close substitutes for the monopolist's product
c. the monopolist must be in the inelastic region of its demand curve
* d. its marginal revenue must be positive

29. If additional firms enter a monopolistically competitive industry
a. the price would most likely increase
* b. the demand facing an existing firm would decrease
c. the demand facing an existing firm would increase
d. the profits of an existing firm would increase

30. When a monopolistically competitive firm is in long-run equilibrium, it is:
a. making a zero economic profit
b. allocatively inefficient since it produces where its price exceeds its marginal cost
c. technologically (productively) inefficient since it produces an output smaller than the one which would minimize its average costs of production
* d. all of the above are true

31. "Mutual Interdependence" means a situation in which each firm
* a. considers the reactions of its rivals when it determines its price policy
b. faces a perfectly elastic demand for its product
c. produces a product similar but not identical to the products of its rivals
d. produces a product identical to the products produced by its rivals

Use the graph below to answer question number 32

32. The cost and revenue curves of a certain firm are shown in the graph above. When maximizing its profit, the firm will realize:
a. a loss of GH per unit
b. an economic profit of ACGJ
c. a loss equal to ABHJ
d. a loss of JH per unit
* e. an economic profit of ABHJ

33. According to the kinked demand curve model, which of the following is generally true with respect to firms in oligopolistic industries?
a. in recent decades they have tended to eliminate rivals through merger or predatory practices until a single monopoly firm remains in the industry
b. market conditions force the firms to be allocatively efficient
* c. they tend to be reluctant to change price but will use non-price competition to increase sales
d. they engage in vigorous price competition

Use the graph below to answer question number 34

34. Suppose that you own and operate a movie theater: the demand (and marginal revenue) for theater tickets is drawn in the graph above. The unique feature of this business is that all costs are fixed. (If you must pay $50 to rent a film that can be shown only once, your costs are $50 whether you have 1 or 100 customers).
Question: What are the number of tickets you should sell in order to maximize profits? What price should you charge? $ (Hint: draw the appropriate MC curve in the diagram below)
a. 150, $1
b. 200, $.50
c. 50, $3
* d. 100, $2

35. The marginal revenue product is the
a. change in revenue associated with a change in the product price
* b. extra revenue associated with hiring an additional unit of the input
c. change in revenue associated with a change in factor price
d. total revenue divided by the quantity hired of the resource
e. extra revenue associated with selling an additional unit of the good

36. The marginal revenue product of labor is expected to decrease as more labor is employed because:
* a. of the law of diminishing marginal productivity
b. of the law of diminishing marginal utility
c. the supply of labor is positively sloped
d. the supply of labor is backward bending
e. labor quality declines as the employment of labor increases

37. In a perfectly competitive output market, the marginal revenue product is equal to the
a. marginal physical product
* b. price of the product times the marginal product
c. price of the product
d. price of the input

38. If a firm hires an insignificant fraction of unskilled labor in its community, then the wage rate that it must offer in order to employ workers probably
* a. does not change as the firm hires more workers
b. is very high
c. rises as the firm hires more workers
d. falls as the firm hires more workers

Use the graph below to answer question number 39

39. According to the above graph, this monopsony firm will hire a quantity of labor equal to
a. 0-L4
b. 0-L3
* c. 0-L2
d. 0-L1

40. A profit-maximizing monopsonist will hire additional units of labor as long as its:
a. marginal revenue product exceeds labor supply
* b. marginal revenue product exceeds marginal factor cost
c. marginal factor cost curve is horizontal
d. marginal revenue product curve is declining
e. marginal factor cost exceeds the marginal revenue product

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