Final Exam - Practice Questions - AK

1 ECO201 Practice Final Exam Questions (These questions do NOT cover all topics that are included on your final exam. Limiting your study to this practice exam would not be a good strategy for final exam preparation.) True/False: _____1) A hard freeze in Florida that destroys 50% of the orange crop would cause the orange juice supply curve to shift to the right. _____2) The demand for Hershey's chocolate bars will be more elastic than the demand for chocolate candy. _____3) Bob would have to be paid $100 to be willing to shave his head. Ann would have to be paid $1,000 to be willing to shave her head. George would have to be paid $200 to be willing to shave his head. If I pay $200 to any of the three students willing to shave their heads, the total amount of producer surplus that will result is $100. _____4) The firm depicted below operates in a monopolistic market structure. This firm is earning a positive economic profit. P MC ATC D MR Q _____5) Suppose that asymmetric information exists in a market and the product in this market has the potential for harmful side effects for consumers. From Society's viewpoint, the market output level is lower than the socially optimal output level. _____6) Labor services provided by the firm's owner without reimbursement to the owner are a good example of an implicit cost of business for a firm. _____7) If Coke and Pepsi are substitutes in consumption , then when the price of Coke rises, the demand curve for Pepsi will shift to the right. _____8) Aziz decides to enroll in an organic chemistry course. By the end of the semester he ends up failing the course. Despite this negative outcome, an economist would still say that Aziz was “rational” when making his decision to enroll in the course. _____9) Ricardo’s PPF for the production of birdhouses (B) and dog houses (D) is represented by the equation B = 8 - 2D. This equation implies that, for Ricardo, the opportunity cost of making one dog house is two birdhouses. _____10) The minimum wage is binding when placed below the true market equilibrium wage rate. _____12) The practice of scalping generally moves the price in a market away from the true market equilibrium price. _____14) The current, federally mandated minimum wage is $7.25 per hour. _____16) You currently manage a company that produces soccer balls and you market your product globally. You plan to expand production and export to one additional country over the next few months. You are considering country A and country B. These countries are of similar size and you expect the size of the demand for your product to be about the same in each country. However, you have been informed that the government of country A will impose a tariff on your soccer balls and the government of country B will impose a quota on the number of soccer balls you export to their country. You estimate that while both policies will reduce the number of soccer balls you sell in those countries, you will sell the same number of balls in each country. If you must select one country in which you think your company will make the biggest profit, you would be more likely to chose country A than country B. 2 Multiple Choice: 17) The difference between production possibilities curves that are bowed out and those that are straight lines is that A. bowed-out production possibilities curves apply to economies that face tradeoffs, whereas straight-line production possibilities curves apply to economies that do not face tradeoffs. B. bowed-out production possibilities curves apply to economies in which resources are not specialized, whereas straight-line production possibilities curves apply to economies in which resources are specialized. C. bowed-out production possibilities curves illustrate increasing opportunity cost, whereas straight-line production possibilities curves illustrate constant opportunity cost. D. straight-line production possibilities curves illustrate real-world conditions, whereas bowed-out production possibilities curves illustrate more simplistic assumptions. 18) You manage a company that has recently opened a production facility in a southern Chinese province. Suppose a new virus has appeared in China, that when caught, leaves an individual sick for several weeks. A new vaccine has been developed that will protect people in China from the virus. Assuming China’s health care system and vaccine allocation is command-oriented rather than market-oriented, you can expect that… A. Price will allocate this vaccine in such a way that everyone will get the vaccine that needs it. B. A central planner will allocate the vaccine in such a way that everyone who is willing and able to pay for the vaccine will get it. C. A central planner will attempt to allocate the vaccine in such a way that everyone will get the vaccine who needs it. D. Price will allocate this vaccine in such a way that everyone who is willing and able to pay for the vaccine will get it. 19) Suppose that you manage a distillery that produces a high end “designer” beer and a low end “discount” beer. You find that the consumer demand for your “designer” beer is relatively more inelastic to changes in price than the consumer demand for your low end beer. In fact │ E D │ = .4 for the designer beer and │ E D │ = 1.2 for the discount beer. If your goal is to increase total revenue from beer sales, which of the following would be your best strategy? A. Increase the price of your high end beer and decrease the price of your low end beer. B. Increase the price of your high end beer and increase the price of your low end beer. C. Decrease the price of your high end beer and increase the price of your low end beer. D. Decrease the price of your high end beer and decrease the price of your low end beer. $ LRATC A C B Output or plant size 20) You serve on the board for a corporation that meets annually to make long-range planning decisions. The graph above represents the long run average total cost curve your firm faces. If the firm is currently operating at point ___ and you wish to cut per unit costs your best strategy would be to decrease plant size (downsize). A. A B. B C. C D. There is no point on the graph above that corresponds to decreasing our plant size. ● ● ●

3 In answering the next three questions, consider the cost curves for a firm you manage that operatives in a perfectly competitive market. P MC ATC AVC $10 $8 $6 $2 5 12 18 24 30 32 34 46 52 Q 21) If the market equilibrium price for this product is $8, then the profit maximizing output level you select for the firm would be A. 24 units of output B . 30 units of output C. 32 units of output D. 34 units of output 22) If the market equilibrium price for this product is $8, what is the dollar amount of your profit if you operate at the profit-maximizing output level? A . $68 B . $136 C. $192 D . $204 E . $272 23) You will temporarily shut the firm down if the market price temporarily falls below A. $2 B . $4 C . $6 D. $8 24) The marginal cost of consuming each cup of coffee is $1.50, while the marginal benefit derived is $4 for the first cup, and decreases by $1 for each cup consumed thereafter. A rational decision maker will consume: A. 1 cup of coffee B. 2 cups of coffee C. 3 cups of coffee D. 4 cups of coffee 25) Suppose that the government imposes a $100 excise tax on motorcycles. In response to this tax the market price of motorcycles rises by $75. Based on this information, we can conclude that consumers bear _____% of the economic burden of the tax and that the demand curve is relatively more _______than the supply curve. A . 75%, elastic B. 75%, inelastic C . 25%, elastic D. 25%, inelastic 26) At a firm's current output level of 200 units per week, it has 10 employees at a weekly wage of $500 each. Raw materials, which are ordered and delivered daily, cost $1,000 per week. The weekly cost of the firm's capital (building and equipment) is $1,250. Which of the following statements is correct? A. total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250 B. total variable cost is $6,000; total fixed cost is $1,250; total cost is $7,250 C. total variable cost is $1,250; total fixed cost is $6,000; total cost is $7,250 D. total variable cost is $2,250; total fixed cost is $500; total cost is $2,750 E. total variable cost is $1,500; total fixed cost is $1,250; total cost is $2,750 $4 4 27) You need to register for one more class for next spring. Your 3 options are Economics 202, Accounting 201, and Economics 391. If you decide to take Economics 202 then your opportunity cost is: A. Economics 391 B. Accounting 201 C. both Economics 391 and Accounting 201 D. Economics 391 or Accounting 201, whichever class was your second best option. 28) Ben lives in Bergovia, where everyone is guaranteed the same amount of food regardless of how much they work. Jerry lives in Krogestan, where no one is guaranteed a minimum level of food. What you earn is what you eat. Which property would you expect to see when observing these countries? A . Bergovia is defined by private property rights. B . Bergovia is a capitalist society. C . In Krogestan the government decides what to produce. D . The invisible hand is the allocating mechanism in Krogestan. 29) All possible combinations of two goods that could be produced with a fixed amount of resources can be depicted best by: A. a supply curve B . an average total cost curve C. the production possibility frontier D. the cross-price elasticity of supply 30) Given the following Production Schedule of Basketballs and Jelly Beans for two countries, the U.S and the Netherlands. The U.S. The Netherlands Jelly Beans Basketballs Jelly Beans Basketballs 0 10 0 5 4 8 5 4 8 6 10 3 12 4 15 2 16 2 20 1 20 0 25 0 Which country has the Comparative Advantage in the production of Jelly Beans? A. The U.S. B . The Netherlands C. Neither the U.S. nor the Netherlands D. Both the U.S. and the Netherlands 31) Consider the following PPFs for Madison, Wisconsin and Milwaukee, Wisconsin. Milk Beer If Madison and Milwaukee each face the PPFs shown on the graph above, which of the following statements is true? A. Milwaukee should specialize in the production of beer because it has the absolute advantage in beer production. B. Madison should specialize in milk production because it has the comparative advantage in milk production. C. Madison should specialize in the production of milk because it has the absolute advantage in milk production. D. Milwaukee should specialize in the production of milk because it has the comparative advantage in milk production. PPF Milwaukee PPF Madison

7 48) You go to the Farmer’s Market on Saturdays because you want tomatoes that are fresher than those you get at Meijer. Farmers sell their vegetables at the Market because they have surplus they would like to get rid of to make some extra money. You act in your own self interest, the farmers act in their self interest, yet you’re both made better off by going to the Farmer’s Market. In economic terms, what best describes this situation? A. coordination by the invisible foot. B. coordination through city government rationing. C. coordination by the invisible handshake. D. coordination by the invisible hand. 49) Consider the four production possibility frontiers depicted below. Y b) Y c) Y d) Y PPF D PPF A PPF B PPF C X X X X Which one exhibits constant opportunity costs? A. A B. B C. C D. D 50) Which of the following is a positive economic statement? A . Congress should increase the legal minimum wage to decrease excessive profits. B. An increase in the legal minimum wage is a good idea. C. An increase in the legal minimum wage would cause the level of unemployment to decline. D. The minimum wage should be increased so that the poor will have a better life. 51) The U.S. economy is an example of A. a pure market economy B. a pure command economy C. a mixed economy D. none of the above 52) If a firm is making zero economic profit, it A. will be forced to shut down and leave the market. B . will also generally be making zero accounting profit. C . is doing as well as typical firms in other markets. D. will not survive in the long run. 53) When economic efficiency occurs in a market, it implies that A. P = MC at the last unit exchanged. B. the willingness of consumers to pay is equal to the producer's opportunity cost for the last unit exchanged. C. all activities that generate more benefits than costs were undertaken in that market. D. All of the above. 55) A binding rent control policy results in all of the following EXCEPT: A. improvements in the quality of rental housing B. a black market for rental housing C. a reduction in the future production of rental housing D . higher search costs for those looking for rental housing 56) The profit-maximizing rule states that a producer should select their output level where: A. marginal revenue is equal to average total cost B. marginal cost is equal to total revenue C. marginal revenue is equal to total cost D. marginal revenue is equal to marginal cost 8 57) Given the following information about the market for compact discs: Price Quantity Demanded Quantity Supplied $5 100 0 10 80 30 15 60 60 20 40 90 25 20 120 30 0 150 What is the price elasticity of demand when the price increases from $15 to $20? A. -5/7 B. -7/5 C. -2/7 D . -7/2 58) The supply of product X is elastic if the price of X rises by: A. 5% and quantity supplied rises by 7%. B. 8% and the quantity supplied rises by 8%. C. 10% and the quantity supplied remains the same. D. 7% and the quantity supplied rises by 5%. 59) The deadweight loss that results from the imposition of a tax represents: A . consumer surplus that is transferred away from consumers and to the government in the form of tax revenue. B . producer surplus that is transferred away from producers and to the government in the form of tax revenue. C. a loss in consumer and producer surplus since no one receives the surplus and it is not transferred to government. D . a loss in government revenue. 62) A perfectly competitive firm faces a ________ demand curve while a monopolist faces a _______ demand curve. A. perfectly inelastic; downward sloping B. downward sloping; perfectly elastic C. downward sloping; perfectly inelastic D. perfectly elastic; downward sloping $ LRATC A C B Output or plant size 63) The above graph shows the planning curve for our classes’ firm. If we are currently at point A, we are experiencing: A . decreasing marginal returns, (diminishing marginal product) B. decreasing returns to scale, (diseconomies of scale) C. increasing marginal returns, (increasing marginal product) D. increasing returns to scale, (economies of scale) ● ● ●

9 Cozumel’s, a Mexican restaurant, makes burritos. Their financial department is not very organized. They have misplaced many of the company’s records. Complete the following table: Q: Quantity of Burritos Total Fixed Cost Total Variable Cost Total Cost Marginal Cost 0 10 -------- 1 10 2 4 3 27 3 4 5 64) What are the average total costs of producing 4 Burritos-As-Big-As-Your-Head? A. 2 B. 4 C. 8 D. 10 E. 31 65) What are the total variable costs of producing 2 Burritos-As-Big-As-Your-Head? A . 1 B. 4 C. 10 D. 14 E. 22 66) Suppose that the market for soybeans is perfectly competitive. A study is published that concludes that consumption of soybeans actually contributes to certain types of cancers. This, of course, leads to: A. a permanent increase in demand—the short run profits of a soybean farmer will increase and the soybean farmer will increase soybean production in the short run and, in the long run, market output will be higher. B. a permanent decrease in demand—the short run profits of a soybean farmer will decrease and the soybean farmer will decrease soybean production in the short run and, in the long run, market output will be lower. C. a permanent increase in demand—the short run profits of a soybean farmer will decrease and the soybean farmer will increase soybean production in the short run and, in the long run, market output will be higher. D. a permanent decrease in demand—the short run profits of a soybean farmer will increase and the soybean farmer will decrease soybean production in the short run and, in the long run, market output will be lower. P 0 MC P 1 P 2 P 3 D Q 1 Q 2 Q 3 Q 4 Q 5 Q MR 67) If the above graph represents a monopoly market, then the profit-maximizing quantity will be _____ and the profit-maximizing price will be _____. A. Q 1 and P 1 B. Q 2 and P 3 C. Q 2 and P 1 D. Q 4 and P 2 10 68) If Q = 10, AFC=$5. If Q=20, AVC=$20. The total cost of producing twenty units of output is: A. $400 B . $250 C. $450 D. $300 SRATC 1 (plant size 1) Cost ($) SRATC 2 (plant size 2) SRATC 3 (plant size 3) q* Output 69) You have been hired as a consultant to determine the appropriate plant size for this firm. The firm provides you with the graph above and the fact that they want to produce at the q* level of output. Based on the graph above, which plant size would you recommend? A. Plant size 1 B . Plant size 2 C . Plant size 3 D . Cannot make a recommendation on plant size based on this information. Use the following information to answer the next three questions. Bob decides to take his life savings of $10,000 to buy a small retail shop space on Euclid. He plans to make and sell UK Calendars. He hires a professional printer for $6.00 an hour who makes 50 calendars per hour. The following are needed to produce the calendars: ink, costing 20 cents per calendar, special paper costing $1 per calendar and a printing machine for $10,000. 70) The following represent fixed inputs in the short run for Bob: A . Professional printer and printing machine. B . Professional printer and ink. C. Retail shop and printing machine. D . Retail shop and special calendar paper. 71) The total cost to produce 100 calendars is: A. $132 B . $10,132 C. $20,000 D. $20,132 72) What is the average fixed cost of producing 100 calendars? A. $1.32 B. $100 C. $200 D . $201.32 73) Firms form for all of the following reasons except: A. to realize economies of scale. B . to prevent shirking. C. to allow specialization and team production. D. to minimize transaction costs.

13 84) A neighborhood group initiates a “neighborhood watch” program. Ella doesn’t take part in the program, but she enjoys the greater security the program provides. Ella is a: a. smart consumer. b. free rider. c. busy person. d. poor citizen. 85) Which of the following is a public good? a. house. b. traffic sign. c. both of the above. d. none of the above 14 ECO201 Practice Final Exam, Spring 2014 - KEY 1) False: A hard freeze in Florida that destroys 50% of the orange crop would cause the orange juice supply curve to shift to the right. This natural disaster will cause a reduction in supply which shifts the supply curve to the LEFT. 2) True: The demand for Hershey's chocolate bars will be more elastic than the demand for chocolate candy. The more narrow the product classification, the greater the elasticity because the more narrowly defined product will have a broader range of possible substitutes. If you don’t buy a Hershey bar you might buy a Snickers Bar, Kit Kat, etc.. But if you don’t buy chocolate, your substitutes might be candy made of things other than chocolate – but you range of possible substitutes is diminished. 3) True: Bob would have to be paid $100 to be willing to shave his head. Ann would have to be paid $1,000 to be willing to shave her head. George would have to be paid $200 to be willing to shave his head. If I pay $200 to any of the three students willing to shave their heads, the total amount of producer surplus that will result is $100. Producer surplus is the difference between what someone is actually paid to provide a product and what they had to be paid to be willing to provide something. Ann’s will not provide the product because she must be paid $1,000 to be willing and the market only offers $200. Bob will provide the product and his surplus is ($200- $100) or $100. George is indifferent as his threshold is identical to the market price. If he provides the product his surplus will be 0. So the total surplus that results is $100. 4) False: The firm depicted below operates in a monopolistic market structure. This firm is earning a positive economic profit. This firm is actually suffering a loss because the ATC (average cost per unit) of making the product exceed the price for which the product is sold. P ATC* MC ATC P* D MR Q 5) False: Suppose that asymmetric information exists in a market and the product in this market has the potential for harmful side effects for consumers. From Society's viewpoint, the market output level is lower than higher than the socially optimal output level. 6) True: Labor services provided by the firm's owner without reimbursement to the owner are a good example of an implicit cost of business for a firm. 7) True: If Coke and Pepsi are substitutes in consumption , then when the price of Coke rises, the demand curve for Pepsi will shift to the right. As Coke becomes more expensive some consumers will substitute toward Pepsi. 8) True: Aziz decides to enroll in an organic chemistry course. By the end of the semester he ends up failing the course. Despite this negative outcome, an economist would still say that Aziz was “rational” when making his decision to enroll in the course. As long as he “decided” – made a decision weighing costs and benefits we would say he made a rational choice. 9) True: Ricardo’s PPF for the production of birdhouses (B) and dog houses (D) is represented by the equation B = 8 - 2D. This equation implies that, for Ricardo, the opportunity cost of making one dog house is two birdhouses. The slope of the equation tells us that when dog house production increases by 1, bird house production falls by 2. 10) False: The minimum wage is binding when placed below ABOVE the true market equilibrium wage rate. 12) False: The practice of scalping generally moves the price in a market away from TOWARD the true market equilibrium price. Scalping is most likely to occur when a market is experiencing a shortage (implying that the actual market price is below the true market equilibrium price.) If scalping leads to an overall increase in selling prices, this moves the market closer to the true equilibrium price and helps to alleviate the shortage. 14) True: The current, federally mandated minimum wage is $7.25 per hour. 16) False: As a foreign producer, you would prefer the country that uses a quota to a tariff in that with a tariff, you sell fewer unit at a higher price but must give some revenue to the government. With a quota you sell fewer units at a higher price, but get to keep all of the revenue you earn. 17) C: The difference between production possibilities curves that are bowed out and those that are straight lines is that PPFs curved out from the origin exhibit increasing opportunity costs while linear PPFs exhibit constant opportunity costs so - bowed-out production possibilities curves illustrate increasing opportunity cost, whereas straight-line production possibilities curves illustrate constant opportunity cost. 18) C: You manage a company that has recently opened a production facility in a southern Chinese province. Suppose a new virus has appeared in China, that when caught, leaves an individual sick for several weeks. A new vaccine has been developed that will protect people in China from the virus. Assuming China’s health care system and vaccine allocation is command-oriented rather than market- oriented, you can expect that a central planner will attempt to allocate the vaccine in such a way that everyone will get the vaccine who needs it. 19) A: Suppose that you manage a distillery that produces a high end “designer” beer and a low end “discount” beer. You find that the consumer demand for your “designer” beer is relatively more inelastic to changes in price than the consumer demand for your low end beer. In fact │ E D │ = .4 for the designer beer and │ E D │ = 1.2 for the discount beer. If your goal is to increase total revenue from beer sales, which of the following would be your best strategy? Increase the price of your high end beer (for which consumers respond inelasticity) and decrease the price of your low end beer (for which consumers respond elastically.)

15 20) C: You serve on the board for a corporation that meets annually to make long-range planning decisions. The graph above represents the long run average total cost curve your firm faces. If the firm is currently operating at point C and you wish to cut per unit costs your best strategy would be to decrease plant size (downsize). At point C the company is experiencing “diseconomies of scale” meaning LRATC increases as factory size or scale of operation gets bigger. Downsizing moves the company back to the right and lowers LRATC. P MC ATC AVC $10 $8 d=MR=P E $6 $2 5 12 18 24 30 32 34 46 52 Q If the market price is at $8 since this is a “price taker” firm the firm’s demand curve will be a horizontal line at $8. 21) D: If the market equilibrium price for this product is $8, then the profit maximizing output level you select for the firm would be 34 units of output. This output is determined using the profit-maximizing rule and selecting the output level where marginal revenue and marginal costs are equal. 22) A: If the market equilibrium price for this product is $8, what is the dollar amount of your profit if you operate at the profit-maximizing output level? Profit = total revenue – total costs. Total revenue = $8X34 and total costs = 34X$6 or QXATC. Profit = $272-204 = $68. 23) B: You will temporarily shut the firm down if the market price temporarily falls below $4. At $4 the firm is suffering a loss but still making enough to cover variable costs of the production (the shut down rule.) Shut down rule – a firm will shut down when P falls below AVC. 24) C: You will continue to consume coffee as long as the marginal benefit exceeds the marginal costs. For the first cup ($4>1.5), for the second cup ($3>$1.50), for the third cup ($2>1.5). However for the fourth cup ($1 < 1.5) so the fourth cup will not be consumed since the marginal benefit of the fourth cup is less than the marginal cost of the fourth cup. 25) B: Suppose that the government imposes a $100 excise tax on motorcycles. In response to this tax the market price of motorcycles rises by $75. Based on this information, we can conclude that consumers bear 75% of the economic burden of the tax and that the demand curve is relatively more inelastic than the supply curve. The amount of the tax the consumers pay is reflected in the amount of the increase in the market price so consumers pay $75 of the $100 tax (75%) and producers must bear the burden of the remaining $25 or 25% of the tax burden. If consumers bear a larger share of the tax than producers than consumers must be relatively more inelastic than producers. 26) B: At a firm's current output level of 200 units per week, it has 10 employees at a weekly wage of $500 each. Raw materials, which are ordered and delivered daily, cost $1,000 per week. The weekly cost of the firm's capital (building and equipment) is $1,250. Which of the following statements is correct? Total Variable Costs = labor costs + raw material costs or 10 workersX$500 + $1,000 = $6,000, Total Fixes Costs = building and equipment or $1,250 Total Costs = Total Variable Costs + Total Fixed Costs = $6,000+$1,250 = $7.250 27) D: You need to register for one more class for next spring. Your 3 options are Economics 202, Accounting 201, and Economics 391. If you decide to take Economics 202 then your opportunity cost is Economics 391 or Accounting 201, whichever class was your second best option. Individuals have unique preferences sets so it would be whatever you view as your next best alternative. 28) D: Ben lives in Bergovia, where everyone is guaranteed the same amount of food regardless of how much they work. (so this would be a command-oriented economy) Jerry lives in Krogestan, where no one is guaranteed a minimum level of food. (This would be more of a market-based economy.) What you earn is what you eat. Which property would you expect to see when observing these countries? The invisible hand is the allocating mechanism in Krogestan since allocations seem to be market-based and not command based. 29) C: All possible combinations of two goods that could be produced with a fixed amount of resources can be depicted best by the production possibility frontier. 30) B: For the U.S. every time jelly bean(J) production is increased by 4, basketball (B) production falls be 2 so 4J=2B or J=2/4B=1/2B. So the opportunity cost of one unit of jelly beans = ½ a basketball. For the Netherlands every time jelly bean production increases by 5 units basketball production falls by 1 or 5J=1B or J = 1/5B. So the opportunity cost of one unit of jelly beans = 1/5 of a basketball for the Netherlands. The country with comparative advantage at jelly beans is the country with the lowest opportunity cost and that is the Netherlands. 31) B: The city with the flattest slope with respect to the beer axis has the lowest opportunity cost and hence the comparative advantage at beer production – that would be Milwaukee. The city with the flattest slope with respect to the milk axis has the lowest opportunity cost and hence the comparative advantage for milk production and that would be Madison. 32) D: Which would most likely result in a decrease in the demand for paint? Why answer A is incorrect: An increase in the price of paint (This will not shift the demand curve for paint. It will only cause a change in quantity demand – a movement along a demand curve.) Why answer B is incorrect:. Increased home construction (This will INCREASE the demand for paint.) Why answer C is incorrect: An increase in the population (This two might increase the demand for paint.) D. A reduction in the price of wallpaper, a substitute for paint (If wallpaper is a substitute and it becomes cheaper, the demand for paint will fall as people substitute toward the use of wallpaper.) 33) C: What happens to the equilibrium price and quantity of pottery pots, if i.) the price of clay (an input in pot production) rises at the same time ii) that people’s income increases. Assume that pottery pots are a normal good. $4 16 i) if an input becomes more expensive supple will decrease (shift to the left) this raises equilibrium price and lowers equilibrium quantity. ii) if incomes increase and pots are normal, demand will increase (shift to the right) This will lead to an increase in equilibrium price and an increase in equilibrium quantity. If i) and ii) occur simultaneously the P E will definitely increase because both the supply-side and demand-side changes are pushing it upward, however, the overall impact on equilibrium quantity is uncertain because the two effects push it in the opposite direction. C. The equilibrium price increases and the equilibrium quantity is indeterminate 34) B: If the quantity demanded is greater than the quantity supplied, the pricing system (through the invisible hand) will respond by raising the product price, therefore decreasing the quantity demanded. 35) B: A pure market economy is unlikely to provide a sufficient amount of a public good like national defense because it is generally impossible to withhold national defense from a nonpaying customer so some people will be free riders. 36) D: When a negative externality is present, then from society's point of view, the private market provides too much of the product. The socially optimal output level would be lower. 37) D: If the supply of coffee falls due to bad weather conditions in coffee-exporting countries, then the equilibrium price will rise and equilibrium quantity will fall because the supply curve has shifted back to the left in the supply and demand model. This raises the equilibrium price and reduces the equilibrium quantity. 38) D: Which does NOT help to determine the elasticity of demand? The first three answers all are considered determinants of the price elasticity of demand, E D , but answer D affects the price elasticity of supply, E S , for the producers of the product. 39) B: Economist have been studying the impact of the recession by looking at how a drop in average income levels has affected the demand for various products. When calculating the income elasticity of demand (Y D ) for delivered pizza they find that Y D = -.32. This implies that consumers treat delivered pizza as an inferior good since income elasticity is a negative number. When income levels go down, people demand more delivered pizza. 41) C: Short run production decisions are constrained because some inputs are fixed while others are variable. 42) C: The law of diminishing marginal returns (also called the law of diminishing marginal productivity) states that in the short-run the additional output produced from adding additional inputs must eventually decrease. 43) C: Which of the following is NOT a possible reason that Economies of Scale might occur? Organizational complexity, coordination problems, and bureaucratic inefficiencies can actually lead to diseconomies of scale. 44) B: A firm that must select its profit-maximizing output based on a market-determined price is called a price-taker firm. 45) C: In perfect competition, no individual producer can significantly affect the market price because each producer provides a very small portion of the total market supply. 46) D: Which of the following is NOT an assumption of the perfectly competitive (price taker) market structure model? large economic profits 47) B: If a monopoly were to emerge in an industry due to the consolidation of several smaller firms, what would be the most likely result? prices would increase and output would fall because market supply would likely shift to the left. 48) D: You go to the Farmer’s Market on Saturdays because you want tomatoes that are fresher than those you get at Meijer. Farmers sell their vegetables at the Market because they have surplus they would like to get rid of to make some extra money. You act in your own self interest, the farmers act in their self interest, yet you’re both made better off by going to the Farmer’s Market. In economic terms, what best describes this situation? coordination by the invisible hand as this scenario describes resource allocation resulting for market forces. 49) B: Graph B is linear and downward sloping and hence represents a PPF with constant opportunity sots. Graph A depicts increasing opportunity costs. 50) C: Which of the following is a positive economic statement? An increase in the legal minimum wage would cause the level of unemployment to decline. The other three statements are all statements of opinion. 51) C: The U.S. economy is an example of a mixed economy. Even though it is very market-oriented there is still some government intervention in the answering of the three big economic questions. 52) C: If a firm is making zero economic profit, it is doing as well as typical firms in other markets. 53) D: When economic efficiency occurs in a market, it implies that P = MC at the last unit exchanged, the willingness of consumers to pay is equal to the producer's opportunity cost for the last unit exchanged, and all activities that generate more benefits than costs were undertaken in that market. 55) A: A binding rent control policy results in all of the following EXCEPT improvements in the quality of rental housing 56) D: The profit-maximizing rule states that a producer should select their output level where marginal revenue is equal to marginal cost. 57) B: 58) A: The supply of product X is elastic if the price of X rises by a smaller percent than the quantity change in X since E s = % change in quantity supplied/% change in price 5% and quantity supplied rises by 7%. So if E s = 7%/5%>1 is elastic. 59) C: The deadweight loss that results from the imposition of a tax a loss in consumer and producer surplus since no one receives the surplus and it is not transferred to government. D. a loss in government revenue. 62) D: A perfectly competitive firm faces a perfectly elastic demand curve while a monopolist faces a downward sloping demand curve. 63) D: The above graph shows the planning curve for our classes’ firm. If we are currently at point A, we are experiencing increasing returns to scale, (economies of scale) Use the following information to answer the next two questions. Cozumels, a Mexican restaurant, makes wonderful Burritos-As-Big-As-Your-Heads. However, their financial department is not very organized. They have misplaced many of the company’s records. Use the information you have below to answer the following TWO questions: Q: Quantity of Burritos Total Fixed Cost Total Variable Cost Total Cost Marginal Cost 0 10 0 10 -------- 1 10 10 20 10 2 10 14 24 4 3 10 17 (TC-TFC) 27 3 4 10 22 32 5 64) C: What are the average total costs of producing 4 Burritos-As-Big-As-Your-Head? ATC = TC/Q or $32/4=$8. 5 / 7 ) 1 7 ( 5 1 7 1 5 1 35 5 100 20 20 15 15 20 40 60 60 40 − = − = − = − = + − + − = E D ) P + P ( P - P ) Q + Q ( Q - Q = ) P + P ( P ) Q + Q ( Q = P % Q % = E 1 o o 1 1 o o 1 1 o 1 o d Δ Δ Δ Δ