# Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space on the last page.

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Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space on the last page.

1. Pete receives a \$50 gift card from Best Buy as a birthday present. (A gift card cannot be converted into cash but can be used to buy \$50 worth of merchandise at the issuing store: Best Buy, in this case.) In deciding what to buy with the gift card, he narrows his options down to four choices: Option A, Option B, Option C, and Option D. Each option costs \$50. Finally he decides on Option B. The opportunity cost of this choice is

*. the value to Pete of the option he would have chosen had Option B not been available.

b. the value to Pete of Options A, C, and D combined.

c. the value to Pete of \$50 worth of merchandise at his favorite store, Borders.

d. the value to Pete of \$50 in cash.

2. An economy is using its resources efficiently to produce two goods: A and B. The production possibilities frontier describing the economy's opportunities is bowed outward. In which of the following cases would the opportunity cost of good A be the highest?

a. The economy is producing a little of good A and a lot of good B.

b. The economy is producing roughly equal amounts of goods A and B.

*. The economy is producing a lot of good A and a little of good B.

d. None of the above. (As long as the economy is using its resources efficiently, the opportunity cost of good A is constant.)

3. An Iowa farmer has 500 acres of crop land that can be planted in corn, in soybeans, or in any combination of the two. If he plants C acres in corn and S acres in soybeans, his harvest will be 170 x C bushels of corn and 50 x S bushels of soybeans. His opportunity cost of a bushel of corn is

a. 0.100 bushels of soybeans.

*. 0.294 bushels of soybeans.

c. 2.941 bushels of soybeans d. 3.400 bushels of soybeans.

4. A competitive market is a market in which a. an auctioneer helps set prices and arrange sales.

b. there are only a few sellers.

c. the forces of supply and demand do not apply.

*. no individual buyer or seller has any significant influence on price.

5. Which of the following could be responsible for a decrease in the supply of a good?

a. a decrease in the good's own price.

*. an increase in the price of a raw material used to produce the good.

c. a decrease in the demand for the good.

d. an increase in the price of a substitute good.

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Questions 6, 7, and 8 are based on the following information. Two small countries, Osceola and Ringgold, use their labor resources to produce goods of two types:

manufactured goods and agricultural goods. The table below gives the number of hours of labor needed to produce one unit of each type of good in each country.

Hours needed to produce one unit of manufactured goods agricultural goods

Osceola 5 3

Ringgold 6 6

6. The opportunity cost of one unit of agricultural goods in Ringgold is a. 6 hours.

b. 6 units of manufactured goods.

c. 1 hour.

*. 1 unit of manufactured goods.

7. Which of the following is true?

a. Osceola has the comparative advantage in the production of manufactured goods.

b. Ringgold has the comparative advantage in the production of agricultural goods.

*. Neither a nor b is true.

d. Both a and b are true.

8. Suppose there are international markets in manufactured and agricultural goods. In which of the following cases would Osceola and Ringgold be able to engage in a mutually beneficial trade with each other? The trade price of one unit of manufactured goods is

a. 3 units of agricultural goods.

b. 2 units of agricultural goods.

*. 1.5 units of agricultural goods.

d. 0.5 units of agricultural goods.

9. In a competitive market, if the demand for a good increases while supply remains stable, we would expect equilibrium price to

*. increase and equilibrium quantity to increase.

b. increase and equilibrium quantity to decrease.

c. decrease and equilibrium quantity to increase.

d. decrease and equilibrium quantity to decrease.

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10. What impact would we see in the competitive market for pasta if there were an increase in the price of flour (an input in the production of pasta) and a simultaneous decrease in the price of rice (a substitute for pasta)? The equilibrium price of pasta a. would increase and the equilibrium quantity of pasta could increase, decrease, or stay the same.

b. would decrease and the equilibrium quantity of pasta could increase, decrease, or stay the same.

c. could increase, decrease, or stay the same, and the equilibrium quantity of pasta would increase.

*. could increase, decrease, or stay the same, and the equilibrium quantity of pasta would decrease.

11. Which of the following would unambiguously cause an increase in equilibrium price in the competitive market for widgets?

a. Income increases (widgets are a normal good) and a technological breakthrough reduces the costs of producing widgets.

b. The price of aluminum goes down (widgets are made out of aluminum) and the price of gizmos goes down (gizmos are a substitute for widgets).

c. The wage paid to workers in the widget factories increases and widgets become less appealing to consumers because Oprah says on television that she doesn't own one.

*. None of the above.

12. Potatoes, an inferior good, are grown using agricultural chemicals to control weeds and insects. Which of the following events would cause the equilibrium price to increase and equilibrium quantity to decrease in the competitive market for potatoes?

a. an increase in consumer income.

b. a decrease in consumer income.

*. a tightening of government restrictions on the use of agricultural chemicals.

d. a relaxation of government restrictions on the use of agricultural chemicals.

13. The demand for a good is elastic. Which of the following is consistent with this fact?

Other things equal, a 10% increase in the price of the good, will lead to a a. 5% decrease in the quantity demanded.

b. 15% decrease in the quantity demanded.

c. 20% decrease in the quantity demanded.

*. either b or c.

14. In an effort to promote environmentally-friendly transportation, the government decides to subsidize the purchase of the "Ampere," a new model of electric automobile.

The subsidy reduces a buyer's net price from \$40,000 to \$30,000 per car, and has the effect of increasing sales from 2500 cars/month to 6000 cars/month. Over this range of prices, the elasticity of demand (calculated by the midpoint method) for Amperes is a. -0.238.

b. -0.347.

*. -2.882.

d. -4.200.

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15. Picture two parallel, downward-sloping, straight-line demand curves, one lying to right of the other. At any given price, which demand curve is more elastic?

*. the one to the left.

b. the one to the right.

c. neither (they will both have the same elasticity at a given price).

d. impossible to determine without more information (it depends on the price).

16. A legal maximum on the price at which a good can be sold is called a

*. price ceiling.

b. cutthroat price.

c. choke price.

d. none of the above.

17. A price floor is binding when it is set

a. above the equilibrium price, causing a shortage.

*. above the equilibrium price, causing a surplus.

c. below the equilibrium price, causing a shortage.

d. below the equilibrium price, causing a surplus.

18. When a city government repeals a binding rent control ordinance

*. rents will increase and, over time, the number of rented apartments will increase.

b. rents will increase and, over time, the number of rented apartments will decrease.

c. rents will decrease and, over time, the number of rented apartments will increase.

d. rends will decrease and, over time, the number of rented apartments will decrease.

19. If a \$1.00 per unit excise tax is imposed on a competitive market, under which of the following circumstances will it have the effect of increasing the price buyers pay

(inclusive of the tax) by the full \$1.00/unit. The elasticity of demand is a. -2.0 and the elasticity of supply is 0.5.

b. -0.5 and the elasticity of supply is 2.0.

c. -2.0 and the elasticity of supply is 2.0.

*. none of the above.

20. In a graph, consumer surplus is represented by the area to the left of the quantity consumed,

a. below the demand curve and above the supply curve.

b. below the price and above the demand curve.

*. above the price and below the demand curve.

d. above the supply curve and below the price.

21. For a given \$/unit size of an excise tax, under which of the following circumstances will the tax have the smallest impact on the quantity traded?

a. Demand is elastic and supply is elastic.

b. Demand is elastic and supply is inelastic.

c. Demand is inelastic and supply is elastic.

*. Demand is inelastic and supply is inelastic.

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22. The imposition of an excise tax on a competitive market has the following effects:

The price buyers pay (inclusive of the tax) increases by \$0.80/unit, and the sales of the good decrease from 1600 units/week to 1200 units/week. Assuming that the demand curve is a straight line, the tax reduces consumer surplus by

a. \$800/week.

b. \$960/week.

*. \$1120/week.

d. Not enough information given for an answer.

23. A doubling of the \$/unit size of an excise tax on a competitive market will have what effect on the tax' deadweight loss? The deadweight loss will

a. double.

*. more than double.

c. increase but by less than double.

d. decrease.

24. At Big Valley State University, the price of a student season ticket for the men's basketball games is \$150. Three students, Shane, Sharon, and Shelby, have willingness to pay for a season ticket given in the table below.

Student WTP for a season ticket

Shane \$120 Sharon \$140 Shelby \$160

If Big Valley State were to reduce the price of a season ticket from \$150 to \$130, which of these three students would NOT experience an increase in consumer surplus?

*. only Shane.

b. only Shelby.

c. only Shane and Sharon.

d. only Sharon and Shelby.

25. When a country lifts its prohibition of international trade and adopts a free trade policy, it becomes an exporter of silk. As a result of the repeal of the trade ban, the country's silk producers

a. gain and the country's silk consumers gain.

*. gain and the country's silk consumers lose.

c. lose and the country's silk consumers gain.

d. lose and the country's silk consumers lose.

(6)

26. When the country of Isoland imposes a tariff on steel imports, the gain in domestic steel producer surplus is \$725,000/day, the government's tariff revenue is

\$1,685,000/day, and the deadweight loss of the tariff is \$1,090,000/day. The tariff has the effect of reducing domestic steel consumer surplus by

a. \$960,000/day.

b. \$2,410,000/day.

c. \$2,775,000/day.

*. \$3,500,000/day.

27. The impact of one person's actions on the well-being of a bystander is called a. an economic dilemma.

c. a multi-lateral problem.

*. an externality.

Questions 28 and 29 refer to the following information. Three firms (A, B, and C) are each currently responsible for 4 units of pollution, for a total of 12. The following table shows the marginal abatement costs for each of the three firms. For example, it would cost Firm A \$25 to reduce its pollution by one unit, an additional \$37 to reduce its pollution by a second unit, an additional \$53 to reduce its pollution by a third unit, etc.

Firm Unit of pollution to be

eliminated

A B C

First unit 25 36 17

Second unit 37 42 25

Third unit 53 51 34

Fourth unit 79 63 45

28. Suppose the government imposes a pollution tax of \$50/unit. Firms would then have to pay a tax of \$50 for each unit of pollution they created. How many units of pollution would be eliminated by the three firms combined?

a. 6.

b. 7.

*. 8.

d. 9.

29. Suppose that the government issued to each firm two pollution permits, for a total of six, but allowed the firms to trade permits. Firms are only allowed to pollute up to their holdings of permits; one unit of pollution per permit. Which of the following trades might occur?

*. Firm B buys one permit from Firm C for a price between \$34 and \$42.

b. Firm C buys one permit from Firm B for a price between \$34 and \$42.

c. Firm B buys one permit from Firm A for a price between \$37 and \$51.

d. Firm C buys one permit from Firm A for a price between \$34 and \$37.

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30. Which of the following is not a common resource?

a. the Ogallala aquifer.

c. open grazing land.

*. national defense.

Questions 31 and 32 refer to Schedule Y-1 from the 2008 Instruction booklet for federal individual income tax form 1040. Dmitry and Ariana, a married couple, used the

"married, filing jointly" tax status to file their 2008 federal income tax returns. They calculate taxable income of \$112,435.

Schedule Y-1. Use if your filing status is married, filing jointly.

If your taxable income is over

but not over your tax is of the amount over

\$0 \$16,050 --- 10% \$0

16,050 65,100 \$1,605 + 15% 16,050

65,100 131,450 8,962.50 + 25% 65,100

131,450 200,300 25,550 + 28% 131,450

200,300 357,700 44,828 + 33% 200,300

357,700 --- 96,770 + 35% 357,700

31. Based on their calculated taxable income, Dmitry and Ariana's federal income tax for 2008 is

a. \$11,833.75.

*. \$20,796.25.

c. \$25,868.25.

d. \$28,108.75.

32. When checking their tax returns, Dmitry and Ariana realize that they made a mistake in their calculation of taxable income of \$112,435. They mistakenly claimed an itemized deduction to which they are not entitled. The deduction was in the amount of \$250.

When they correct this mistake, their re-calculated income tax will be __________ than the answer to Question 31.

a. \$250 higher.

b. \$250 lower.

*. \$62.50 higher.

d. \$62.50 lower.

33. A firm's implicit costs

*. do not require an outlay of money by the firm.

b. are not relevant to the calculation of economic profit.

c. are also known as variable costs.

d. include all of the firm's opportunity costs.

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34. A firm's fixed costs are \$1200/week. When it produces 200 units of output per week, its total costs are \$6000/week. At this output rate, the firm's average variable cost is a. \$6/unit.

*. \$24/unit.

c. \$30/unit.

d. \$36/unit.

35. A firm's average total cost increases from \$14.00/unit to \$14.05/unit when it increases output from 30 to 31 units/day. The firm's marginal cost of the 31st unit of output is a. \$0.05/unit.

b. \$5.05/unit.

c. \$14.05/unit.

*. \$15.55/unit.

36. A competitive firm faces a price of \$3.00/unit for its product. It is currently operating where marginal cost is \$3.00/unit and average total cost is \$4.00/unit. To maximize profit (or minimize loss) in the short-run, the firm should

a. maintain its current output.

b. decrease output, but not shut down.

c. shut down.

*. not enough information given for an answer.

37. When a single firm can supply a product to an entire market at a lower cost than could two or more firms, the industry is called

a. an exclusive proprietorship.

b. a resource monopoly.

c. a cost-inverting conglomerate.

*. a natural monopoly.

38. At its current output level, a monopolist's price, average total cost, marginal revenue, and marginal cost are \$5/unit, \$4/unit, \$3/unit, and \$2/unit, respectively. To maximize profit (or minimize loss) in the short-run, the monopolist should

*. increase output.

b. decrease output, but not shut down.

c. shut down.

d. not enough information given for an answer.

39. Because a monopolist must lower its price to sell another unit of output, a. average revenue is less than price.

b. price is less than average revenue.

*. marginal revenue is less than price.

d. price is less than marginal revenue.

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40. A monopolist faces two groups of potential customers. There are 150 potential customers with a willingness-to-pay (WTP) of \$4 for the first unit of the monopolist's product and \$0 for additional units. There are an additional 100 potential customers with a WTP of \$3 for the first unit and \$0 for additional units. The monopolist has zero fixed cost and a constant marginal cost of \$2/unit. If the monopolist is required to charge a uniform price, what is the maximum profit it could earn?

a. \$250.

*. \$300.

c. \$350.

d. \$400.

41. A distinguishing feature of an oligopolistic industry is a tension between a. profit maximization and cost minimization.

b. collusion and joint-profit-maximization.

c. short-run decisions and long-run decisions.

*. individual and collective interests.

Questions 42 and 43 refer to the following information. Ted and Amy are friends and music-lovers who like to go to concerts. The problem is that Ted's favorite is classical and Amy's favorite is rock. Tonight, there are classical and rock concerts available, but they are at the same time. So Ted and Amy each must independently decide which concert to attend. In other words, Ted and Amy each must choose between two strategies: "Attend the classical concert," and "Attend the rock concert." If they pick different strategies, they will both end up going to a concert alone, and that would be unfortunate because they also enjoy each other's company. Payoffs are in "utils," a measure of happiness. (More utils are better than fewer.) Based on the outcome of their strategy choices, the table below describes payoffs for each player.

Outcome My Payoff

Attend my favorite concert with friend 4 utils Attend my friend's favorite concert with friend 3 utils Attend my favorite concert alone 2 utils Attend my friend's favorite concert alone 1 util 42. Which of the following is true?

a. "Attend the classical concert" is a dominant strategy for Ted.

b. "Attend the rock concert" is a dominant strategy for Amy.

c. Both of the above are true.

*. None of the above is true.

43. Which of the following is true?

a. Ted choosing "classical" and Amy choosing "rock" is a Nash equilibrium.

b. Ted choosing "rock" and Amy choosing "classical" is a Nash equilibrium.

*. This game has more than one Nash equilibrium.

d. None of the above is true.

(10)

44. For a firm, the value of the marginal product of an input is equal to the marginal product of that input multiplied by

a. the price of that input.

b. the number of units of that input that the firm employs.

*. the market price of the firm's output.

d. none of the above.

45. The Child Labor Deterrence Act proposes to a. ban child labor in the U.S.

*. ban imports into the U.S. of goods made using child labor.

c. ban exports from the U.S. to countries that allow child labor.

d. ban sales of U.S.-made military equipment to countries that allow child labor.

46. Suppose that a competitive firm hires labor up to the point at which the value of the marginal product equals the wage. If the firm pays a wage of \$700 per week and the marginal product of labor equals 20 units per week, then the marginal cost of producing an additional unit of output is

a. \$20/unit.

*. \$35/unit.

c. \$70/unit.

d. \$700/unit.

47. If I deposit \$100 today in a savings account paying an annual interest rate of 3%, how much will I have in the account in 5 years?

a. \$115.00.

b. \$115.45.

*. \$115.93.

d. \$116.08.

48. How much would I have to deposit today in a savings account paying an annual interest rate of 2.5% in order to have \$500 in the account in 4 years?

a. \$450.00.

*. \$452.98.

c. \$454.55.

d. \$461.92.

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49. Today I have a \$1000 balance in a savings account that pays an annual interest rate of 5%. I would like to make a series of three equal withdrawals; the first in one year, the second in two years, and the third in three years. How much can I withdraw in each of these three equal installments and leave a \$0 balance in the account after the third withdrawal?

a. \$364.33.

b. \$366.16.

*. \$367.21.

d. \$368.45.

50. Suppose that you received a structured settlement as a result of a successful lawsuit.

The structured settlement will pay you \$5000 in one year and a second and final payment of \$5000 in two years. I offer to buy this structured settlement from you for \$8000 today.

What is the annual interest rate implicit in the factoring transaction I have proposed?

*. 16.26%

b. 20.00%

c. 22.38%

d. 25.00%

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