PRINCIPLES OF MICRO
PRINCIPLES OF MICRO ECON 211
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This 10 page Class Notes was uploaded by Noah Pouros on Saturday September 26, 2015. The Class Notes belongs to ECON 211 at Clemson University taught by Staff in Fall. Since its upload, it has received 145 views. For similar materials see /class/214226/econ-211-clemson-university in Economcs at Clemson University.
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Date Created: 09/26/15
Econ 211 Final Exam Fall 2010 Directions There are 2 parts to this exam Part 1 is multiple choice and is worth 60 points 2 points each Part 2 is made up of ten short answer questions this part is worth 140 points Be sure to write your answers on the paper provided You will tum in 11 sheets of paper page 1 multiple choice answers page 2 short answer 1 page 3 short answer 2 etc Be sure to leave a margin at the top of each paper and to write your first and last name on each sheet Failure to follow directions will result in a 10 point penalty 1 According to the principle of diminishing marginal benefit A The value of the good declines the more common is the good B Maximum satisfaction is reached when marginal and total benefits are equal C Even though total benefits rise as more of a good is consumed marginal benefits decline D As the rate of consumption of a good rises marginal and total benefits will both fall E As consumption rises total benefits fall but marginal benefits rise generally up to some ideal maximum 2 When I say that you specialize in producing fish I mean that you A produce more fish than you consume B produce and consume only fish C produce more fish than anyone else D produce an amount of fish exactly equal to the amount of fish you consume E none of the above Questions 35 are based on the following information Each yearI drive across country in my Honda S2000 Whenl do so lmust choose the average speed at whichl drive the table below shows the marginal benefits and marginal costs of driving at various speeds All benefits and costs are measured in dollars for convenience but all of the relevant costs and benefits are taken into account Also for convenience in computing assume average speeds come only in lOmileperhour mph increments thus I can average 50 mph or 60 mph but not 57 mph 3 Given the information in the table above what are the total costs of my trip if I average 30 mph A 250 B 450 C 650 D 2400 E None of the above 4 Given the information in the table above at what average speed shouldl drive A 40 B 60 C 70 D 80 E 90 or more because benefits are still positive at 90 5 Given the information in the table above what must be true about the net benefits of averaging 100 mph compared to not taking the trip at all ie averaging 0 mph A Greater than 0 B Greater than 3150 C Less than 0 D Less than 3150 E None of the above 6 If a 20 fall in consumer income causes a 10 rise in the demand for grommets then A grommets are an inferior goo B although grommets are a normal good spending on them will fall as incomes rise because consumers are allocating more of their income to other goods C the income elasticity of demand for grommets is 20 D consumer spending on grommets will rise E both a and d are correct 7 Which of the following might cause a decrease in the supply of Y a A rise in the price of Y b A decrease in the demand for Y c A rise in the price of an input used to produce Y d An improvement in the technology used to produce Y e Both b and c are correct 8 1f nimrods and bloopers are complements a reduction in the supply of nimrods will cause the price of nimrods to rise and thus a cause the quantity of nimrods demanded and the demand for bloopers to both fall b cause the demand for nimrods to fall and the demand for bloopers to rise c cause the demand for bloopers to rise and the supply of bloopers to rise in response d both b and c are correct e none of the above 9 When taxes per pack on cigarettes are raised are New York Y a cigarette smuggling into NY will increase and thus the consumption of cigarettes in NY will rise compared to before the tax increase b the price of cigarettes will rise in NY causing i an increase in cigarette smuggling into NY and ii a decline in cigarette consumption in NY compared to before the tax increase c cigarette smuggling into NY will decline because it is now more costly to supply cigarettes to NY d the demand for cigarettes in NY will rise compared to before the tax increase e both b and d are correct 10 Other things equal when the price of a good rises the quantity demanded of the good falls and when the price falls the quantity demanded rises This relationship between price and quantity demanded applies to most goods in the economy b is represented by a downwardsloping demand curve c is referred to as the law of demand d All of the above are correct 11 If you know that i Bratislava can produce either widgets or kumquats and only these two things and ii it faces constant marginal costs when it expands its production of kumquats then you know t at Bratislava s production possibilities curve PPC is bowed outward convex7 Bratislava faces rising marginal costs of producing widgets when it expands widget production Bratislava s PPC is a straight line Both A and C None of the above WUOW 12 Suppose the market for widgets is in equilibrium Which of the following must be true a The quantity of widgets demanded equals the quantity of widgets supplied b The price and quantity of widgets will remain unchanged unless there is a change in the ceten39s pan39bus conditions in this market c The price of widgets is equal to the marginal cost of the last widget produced and sold in this market d All of the above e Only a and b are correct 13 Suppose Hurricane Zarathusa simultaneously caused a reduction in consumers incomes and also reduces the supply of gasoline 1f gasoline is a normal good how will the equilibrium price P and equilibrium quantity Q of gasoline respond to the hurricane a P up Q down b P down Q up c P uncertain Q down d P up Q uncertain e P up Q up 14 If there is a technological improvement in the production of mens suits at the same time that the price of the material used to make these suits rises then we may conclude that a the supply of suits will definitely rise b the marginal cost of producing suits will definitely fall c because these two changes have opposing effects on the marginal costs of suit production the net effect on the mens suit supply curve is uncertain d the supply of mens suits will definitely fall e both a and b 15 Price discrimination is defined as cost differences across customers B price differences across customers C price differences across customers that are not due to differences in cost differences across them D unjustifiable unfair differences in price across customers especially those that don t take into accountability to pay E difference in prices across customers that are based solely on differences in costs across customers 16 Assume computers are a normal good and software and computers are complements Suppose people consumed more computers in 2005 than in 2004 Which of the following could have been responsible for this A a fall in the price of software accompanied by a rise in consumers39 incomes B a fall in consumers39 incomes accompanied by no change in the price of software C a decline in consumers39 incomes accompanied by a rise in the price of software D a rise in the price of software accompanied by no change in consumers39 incomes E Either or c or d could have caused this observation 17 Suppose a firm operates in the short run at a price above its average total cost of production In the long run the firm should expect new firms to enter the market the market price to fall its profits to fall All of the above are correct 90 57x 18 Which one of the following statements is false A A price searcher monopolist can sell any quantity of output at any price it wants To sell more a price searcher must lower price A perfectly competitive price taker firm39s total revenues rise if it sells more output A price taker s behavior does not affect the market price If a price searcher raises price then it will not sell more output WUOW 19 Suppose the demand curve facing a monopolist is elastic 1f the firm is currently at the profitmaximizing rate of output what would happen to its i total revenue and ii profits respectively if it were to lower its rice uncertain decrease decrease uncertain increase decrease decrease increase both would fall to zero because sales would fall to zero mUowgt 20 If a 20 rise in consumer income causes a 10 rise in the demand for grommets then a grommets are an inferior good because demand failed to rise by as much as income rose b the income elasticity of demand for grommets is 20 c although grommets are a normal good spending on them will fall as incomes rise because consumers are allocating more of their income to other goods d consumer spending on grommets will rise e both b and d are correct 21 To maximize producer surplus a pricetaker will chose a rate of output at which B MRMC C MRTR D both a and b are correct E None of the above 22 Suppose that a perfectly competitive firm and a monopolist are selling their products at 5 per unit in their respective markets One can infer that A marginal revenue is 5 for the competitive firm and more than 5 for the monopolist B marginal revenue is less than 5 for both firms C marginal revenue is 5 for both firms D both rms are earning zero profits E marginal revenue is 5 for the competitive firm and less than 5 for the monopolist 23 1f the price elasticity of demand for pineapple is 075 a 4 increase in the price of pineapple will lead to a A 3 decrease in the quantity demanded of pineapple B 3 increase in the quantity demanded of pineapple C 4 decrease in the quantity demanded of pineapple D 3 16 increase in the quantity demanded of pineapple 24 less gets half as much marginal utility from an additional bagel than from an additional muffin 1f the price of muffin is 200each then less is maximizing utility if the price of a bagel is 0 B 150 c 200 D 400 N Lquot 0 Suppose that u shots create a positive externality equal to 12 per shot Further suppose that the government offers a 5 pershot subsidy to producers What is the relationship between the equilibrium quantity and the socially optimal quantity of u shots produced a They are equal b The equilibrium quantity is greater than the socially optimal quantity c The equilibrium quantity is less than the socially optimal quantity d There is not enough information to answer the question Without government intervention public goods tend to be overproduced and common resources tend to be overconsum ed b overproduced and common resources tend to be underconsumed c underproduced and comm on resources tend to be overconsum ed d underproduced and comm on resources tend to be underconsumed Continued on Next Page mugnal casLMC af amanapah mm a 30 Assume that because of high research and development costs the Famous Fizzbee would only be invented under the expectation of patent protection It costs 4 billion in research and development costs to invent and bring the F izzbee to market Once the Fizzbee is invented and available for sale from that point forward it generates producer surplus of 8 billion and consumer surplus of 3 billion Which of the following is true about patent protection for the Fizzbee a it creates a net loss to society of 4 billion b it creates a net loss to society of 3 7 4 1 billion c it creates net gains to society of 8 4 3 7 billion d it creates a net gain to society of 8 3 11 billion e it creates a net gain to society of 3 billion Short Answer 1 OffShoring and Out S0urcing10 points The media often confuses out sourcing with off shoring Out sourcing is when a company hires another company to perform a task for them for example Clemson hires Armack to provide food services for its student body Off shoring occurs when a domestic company relocates certain jobs overseas such as lLicrosoft whom houses its call support center in India 1 Using economic phenomenon plural explain why out sourcing occurs 2 People often become enraged and protest when a company attempts to off shore explain why we observe this if we know that trade increases our wealth Hint who wins and who loses from off shoring 2 Supply and Demand 15 points Consider the table below that displays the market for supply and demand of wheat per day in the US market and answer the questions that follow a What is the equilibrium price and quantity b Graph the supply and demand for wheat Be sure to label the axes of your graph correctly and label the equilibrium price and quantity c Why will 340 not be the equilibrium price in this market Why not 490 Surpluses drive prices up shortages drive them down Do you agree Explain d In November 2012 suppose President Obama establishes a price ceiling of 370 for wheat What might prompt him to establish this price ceiling Explain carefully the main effects equilibrium price and quantity and consumer and producer surplus Demonstrate your answer graphically and using prose 3 Opportunity Cost and PPF Construct a production possibilities frontier for a nation facing increasing opportunity costs for producing food and video games Show how the PPF changes given the following events Also describe in words what is occurring and use economic terms where appropriate 10 points a A new and better fertilizer is invented b Immigration occurs and the immigrants labor can be employed in both the agricultural sector and the video game sector c A heat wave and drought result in a 10 percent reduction in usable farmland 4 Comparative Advantage and Trade 15 points Suppose that two individuals Fred and Barney and each can spend their time mining bedrocks or hunting sabertooth tigers Fred can spend all of his mining and produce 50 rocks a day and no tigers or he can kill 8 tigers a day and no rocks or any linear combinations Barney can produce 48 rocks a day and no tigers or 6 tigers and no rocks a day or any linear combination a Who has a comparative advantage in producing rocks Who has a comparative advantage in producing tigers b If Fred and Barney each spent half their on rocks and half on tigers how many rocks and tigers could they produce Is this efficient Why or why not c Now suppose that they decide to specialize completely What good will each person produce What is the maximum price that Fred will trade at What is the maximum price that Barney will trade at 5 Government Policy 15 points In 2008 as Chicago faced a 217 million budget deficit and declining tax revenues city leaders turned to tax hikes including a new fivecent bottled water tax a series of tax increases on beer liquor and wine and a surcharge for 911 emergency services The bottled water tax alone was supposed to raise over 10 million in its first year and help balance the struggling city budget But the Windy City found out that sin taxes are not always the windfall they are projected to be Six months into the year the bottled water tax raisedjust 26 million of the projected 105 million And by the end of the year the tax brought in 76 million about threequarters of what the city had predicted Mayor Richard Daley confronted by the failure of this and other emergency tax measures had to make an additional 20 million in spending cuts by June 2008 Reason Foundation 102510 a Explain using a supply and demand graph and prose why the projected tax revenue was inaccurate Hint think in terms of the distortionary effect of taxes on the market b Label the new and old consumer surplus producer surplus and the dead weight loss that is created from the tax c Also comment on the elasticity of demand of bottled water ie is it elastic unit elastic or inelastic why do you believe this 6 Government Intervention 15 points Consider the diagram below which depicts the labor market in a city that has adopted a living wage law requiring employers to pay a minimum wage of 9 per hour assume there are no additional benefits to working Answer the questions that follow o 100 Quantity W 7 Supply iiiquot Demand a What is the initial equilibrium before the living wage law is imposed What condition exists in this city s labor market at the present minimum wage of 10 per hour How many people are unemployed at this wage What is the dead weight loss to society from this policy b A city councilwoman has proposed amending the living wage law She suggests reducing the minimum wage to 6 per hour Assuming that the labor demand and supply curves were to remain in their present positions how many people would be unemployed at a 6 minimum wage What is the dead weight loss to society from this policy 7 Perfect Comp LR SR problem 15 points The following table provides information on the cost structure of a firm in a perfectly competitive market that produces widgets Costs are measured in dollars and quantity is measure in widgets per our A If the market price is 8 per widget Explain the firm s profit maximizing decision in both the short run and long run B The firm has a technological breakthrough and has reduced its fixed costs to 10 per hour Explain the firm s profit maximizing decision Is this an equilibrium in the short run in the long run Explain C Suppose the government decides that the current number of firms in the industry is the socially optimal number Describe a tax scheme that eliminates the incentives for firms to enterexit the market How much will the tax have to be 8 Another Perfect Comp Problem 15 Points Assume that you are a sugar farmer and you employ 10 laborers For the purposes of this problem mortgage and loan payments of 10000 per month are your only fixed costs and salaries of 11000 per month are your only variable costs If your monthly revenues are 23000 are you better off remaining in business in the short run or discontinuing farm operations immediately Will entry or exit occur or is this a long run equilibrium Explain What happens to the market price and quantity in the long run 9 Conditions 10 Points a State the three parts of the firm s decision making rule b Also state the conditions necessary for entry exit and shutdown 10 Price Discrimination 20 points Discuss an example of price discrimination that we have not discussed in class nor discussed in your book Explain why the firm is price discriminating How does the firm separate consumer into groups How does the firm increase their profits How does this effect social welfare
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