FINAL EXAM/ Principles of Microeconomics/ Fall 2001/ Instructor-Sondgeroth

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Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

Scarcity is defined as the condition in which

a.	both wants and resources are limited.
b.	wants are finite and resources infinite.
c.	both wants and resources are infinite.
d.	wants are infinite and resources finite.

Competition for the available goods and services in a society

a.	is a cultural artifact of capitalism.
b.	is just another evil perpetuated by Westernized men.
c.	is the unavoidable consequence of scarcity.
d.	could be ended if people would just try to get along with one another.

Which of the following statements is true?

a.	Evidence can never prove a theory.
b.	Evidence cannot reject a theory.
c.	Economists prefer not to test theories.
d.	If the evidence supports a theory, the theory has been proved correct.

The physical and mental talents people bring to production processes comprise the resource called

a.	entrepreneurship.
b.	natural resources.
c.	capital.
d.	labor.

In economics, a free good is

a.	a prize that is won in a drawing.
b.	a gift given to you by your parents.
c.	one that you have stolen.
d.	one whose supply is greater than demand at zero price.

Exhibit 1

Refer to Exhibit 1. The economy is currently operating at point A. The opportunity cost of increasing fax machine production to 20,000 is

a.	65,000 television sets.
b.	50,000 television sets.
c.	30,000 television sets.
d.	10,000 television sets.
e.	5,000 television sets.

What is the reason for the law of increasing costs?

a.	There is no reason: it just is.
b.	People have varying abilities and those with lower opportunity costs of producing a good produce it before people with higher opportunity costs produce it.
c.	The price of a good rises as more of it is demanded.
d.	As more of a good is produced, the taxes applied to the production of the good rise.
e.	c and d

Which scenario below most accurately describes the process by which a technological change can affect employment patterns across industries?

a.	A technological advance makes it possible to produce more of good X with less labor. As a result, labor is released from producing good X. Some of this labor ends up producing goods Y and Z.
b.	A technological advance makes it possible to produce less of good X with less labor. As a result, labor is released from producing good X. Some of this labor ends up producing good Y.
c.	A technological advance makes it possible to produce more of good X with more labor. As a result, more labor is needed to produce good X. There is less labor available to produce goods Y and Z.
d.	A technological advance makes it possible to produce more of good X with less labor. As a result, labor becomes more important to the production of good X. More labor ends up producing good X.
e.	none of the above

Capitalist thinkers believe that prices

a.	are necessary to ensure that resources are allocated to their best use.
b.	provide no incentives to consumers if set above their maximum buying price.
c.	are not necessary for resource allocation, but are one of several possible allocation devices.
d.	provide information only to buyers, but not to sellers.

10.

In the "Circular Flow Model of Economic Activity," the question of to whom output will be distributed is answered

a.	by the government.
b.	by business firms.
c.	in the factor market.
d.	in the money market.
e.	in the final goods and services market.

11.

In an eight-hour day, Andy can produce either 24 loaves of bread or 8 pounds of butter. In an eight-hour day, John can produce either 8 loaves of bread or 8 pounds of butter. The opportunity cost of producing 1 pound of butter is

a.	1/3 hour for Andy and 1 hour for John.
b.	1 hour for Andy and 1 hour for John.
c.	3 loaves of bread for Andy and 1 loaf of bread for John.
d.	3 loaves of bread for Andy and 1/3 loaf of bread for John.
e.	none of the above

12.

Money

a.	facilitates exchange.
b.	can be anything that is widely accepted as a means of payment.
c.	forms prices which approximate the opportunity cost of goods and services.
d.	can take the form of balances in checking accounts.
e.	all of the above.

13.

The law of demand states (everything else unchanged)

a.	that goods will be supplied to just equal consumer demand.
b.	that consumer demand will determine the level of firm supply.
c.	that consumers will buy more of a good if its price rises.
d.	that consumers will buy more of a good if its price falls.

14.

An increase in the price of Ford cars will have what likely effect in the market for Honda cars?

a.	It will have no effect.
b.	The demand for Hondas will increase.
c.	The demand for Hondas will decrease.
d.	The supply of Hondas will increase.

15.

Which of the following statements best represents the law of supply?

a.	Price and quantity supplied are inversely related.
b.	Price and quantity supplied are directly related.
c.	Price and quantity supplied are inversely related, ceteris paribus.
d.	Price and quantity supplied are directly related, ceteris paribus.
e.	Price and supply are directly related, ceteris paribus.

16.

If there is an increase in the supply of a good,

a.	the demand for the good will increase.
b.	the price of the good will fall and the quantity purchased will decrease.
c.	the price of the good will fall and the quantity purchased will rise.
d.	the price of the good will rise and the quantity purchased will rise.

Exhibit 2

17.

Refer to Exhibit 2. Which of the graphs best represents the market for theater tickets on the day of the performance?

a.	(1)
b.	(2)
c.	(3)
d.	(4)

18.

If computers and software are complements, then

a.	a fall in the price of computers will increase the demand for software and, ceteris paribus, the price of software will rise.
b.	a rise in the price of computers will decrease the demand for software and, ceteris paribus, the price of software will rise.
c.	a fall in the price of computers will decrease the demand for software and, ceteris paribus, the price of software will fall.
d.	a rise in the price of software will increase the demand for computers and, ceteris paribus, the price of computers will rise.
e.	a fall in the price of software will decrease the demand for computers and, ceteris paribus, the price of computers will fall.

19.

Someone says, "Even though the equilibrium wage rate is $6 an hour in the unskilled labor market, if we impose a minimum wage of $10 an hour, no one currently working will lose his or her job." This person must believe that the

a.	demand curve for unskilled labor is vertical.
b.	demand curve for unskilled labor is downward-sloping.
c.	firms that hire unskilled laborers are earning high profits.
d.	firms that hire unskilled laborers have relatively low costs.
e.	none of the above

20.

If rent controls for apartments were established in Austin below the present going rental rates, we could expect

a.	a shortage in apartments to develop.
b.	a surplus in apartments to develop.
c.	equilibrium rents to fall below the rates set by rent control.
d.	a building boom in new apartments to start.

21.

Which of the following would result in a higher (more elastic) price elasticity of demand for a good?

a.	more substitutes for a good
b.	shorter periods of time considered
c.	lower costs of labor
d.	the good is a necessity.
e.	the cost of the good claims only a extremely small part of a consumer's budget.

22.

If the price of good X rises and the demand for good X is inelastic, then the percentage fall in quantity demanded is _________ the percentage rise in price, and total revenue _________.

a.	greater than; rises
b.	less than; rises
c.	equal to; remains constant
d.	greater than; falls
e.	none of the above

23.

If the price of good A decreases by 10 percent and the quantity demanded of good B decreases by 10 percent, this is evidence that A and B are

a.	substitute goods.
b.	complement goods.
c.	inferior goods.
d.	normal goods.
e.	not related.

24.

In economic theory, what motivates people?

a.	money
b.	fear
c.	altruism
d.	rational self-interest
e.	the desire to sacrifice themselves for the common good

25.

The law of diminishing marginal utility can be stated as follows:

a.	As the amount of a good consumed increases, the sum of satisfaction received tends to decrease.
b.	As the amount of a good consumed increases, the additional satisfaction gained from consuming additional units tends to decrease.
c.	As the amount of a good consumed decreases, the additional satisfaction gained from consuming additional units tends to increase.
d.	As the amount of a good consumed increases, the sum of satisfaction received tends to increase but at a diminishing rate.
e.	b and d

26.

Suppose the marginal utility (MU) of paperback books is 40 utils and each costs $4 while the MU of video movies is 50 utils and each rents for $4. If you consume one movie and one book per week, are you attaining consumer equilibrium?

a.	Yes, so there is no need to change.
b.	No. You need to buy more books and rent fewer videos.
c.	No. You need to rent more videos and buy fewer books.
d.	There is not enough information to answer the question.

27.

Suppose a consumer is purchasing Coke (c) and pretzels (p) in quantities such that he is achieving consumer equilibrium. Then the price of Coke increases. Before the consumer can react to this change, which of the following will be true?

a.	MU_C/P_C = MU_P/P_P
b.	MU_C/P_C > MU_P/P_P
c.	MU_C/P_C < MU_P/P_P
d.	We cannot say for certain what will happen to the MU_C/P_C relative to the MU_P/P_P.

28.

People are willing to pay more for diamonds than for water because

a.	markets do not always reflect value.
b.	they have fewer uses.
c.	they yield higher marginal utility.
d.	they yield higher total utility.
e.	their supply is smaller.

29.

According to economists Alchian and Demsetz, firms are formed when

a.	the sum of what individuals can produce as a team is greater than the sum of what individuals can produce working alone.
b.	the sum of what individuals can produce working alone is greater than the sum of what individuals can produce as a team.
c.	what each individual can produce as a member of a team is greater than what each individual can produce working alone.
d.	the sum of what individuals can produce as a team is equal to the sum of what individuals can produce working alone.
e.	none of the above

30.

A corporation

a.	is a legal entity.
b.	is owned by its stockholders and bondholders.
c.	faces double taxation of its profits.
d.	limits the liability faced by its owners.
e.	all of the above

31.

Economic profit is the difference between total revenue and

a.	explicit costs.
b.	implicit costs.
c.	sunk costs.
d.	the sum of explicit and implicit costs.

32.

If a firm earns normal profit, then it has generated revenues

a.	equal to total opportunity costs.
b.	greater than total opportunity costs.
c.	sufficient to cover explicit costs, but not implicit costs.
d.	sufficient to cover implicit costs, but not explicit costs.

33.

"As additional units of a variable input are added to a fixed input, eventually the marginal physical product of the variable input will decline." This is a statement of the

a.	law of supply.
b.	average-marginal rule.
c.	law of comparative advantage.
d.	law of diminishing marginal returns.

34.

Which of the following is not an assumption of the theory of perfect competition?

a.	There are many sellers and many buyers, none of which is large in relation to total sales or purchases.
b.	Each firm produces and sells a differentiated product.
c.	Buyers and sellers have all relevant information with respect to prices, product quality, and sources of supply.
d.	There is easy entry and exit.

Exhibit 3

35.

Refer to Exhibit 3. What quantity does the profit-maximizing or loss-minimizing firm produce?

a.	Q₁, where "what is coming in" on the last unit is greater than "what is going out."
b.	Q₂, where the difference between "what is coming in" on the last unit and "what is going out" is zero.
c.	Q₃, where marginal cost is greater than marginal revenue.
d.	Q₄, which maximizes the excess of marginal cost over marginal revenue.

Exhibit 4

36.

Refer to Exhibit 4. The curve labeled "I" represents the firm's __________ cost curve.

a.	total
b.	average variable
c.	average fixed
d.	marginal
e.	average total

Exhibit 5

37.

Refer to Exhibit 5. The perfectly competitive, profit-maximizing firm's supply curve is

a.	the AVC at 40 units and above.
b.	the MC at 40 units and above.
c.	the MC at 30 units and above.
d.	the MC at 50 units and above.
e.	the ATC at 50 units and above.

38.

As firms exit an industry, the industry supply curve shifts __________ and the equilibrium price __________ until long-run competitive equilibrium is established and the surviving firms are earning __________ economic profits.

a.	leftward; rises; zero
b.	leftward; falls; positive
c.	leftward; rises; positive
d.	rightward; falls; negative
e.	rightward; rises; positive

39.

A firm that is perfectly competitive will continue to hire workers as long as

a.	MRP < wage.
b.	MRP > wage.
c.	VMP < wage.
d.	MC > MR.

40.

Suppose there are two labor markets, A and B, and labor is homogeneous between markets. The wage rate in labor market A falls relative to the wage rate in labor market B. What happens in labor market B?

a.	The supply curve of labor shifts leftward.
b.	The supply curve of labor shifts rightward.
c.	The quantity supplied of labor rises.
d.	b and c
e.	none of the above

41.

Which of the following conditions is not necessary for wage rates to be identical in every labor market in both the short run and the long run?

a.	Demand for labor is identical in each market.
b.	Nonpecuniary factors in each job are the same.
c.	All labor is homogeneous.
d.	All labor has zero costs of mobility.
e.	All of the above are necessary conditions.

42.

If the price for loanable funds is less than the return on capital, then firms will

a.	borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises.
b.	borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls.
c.	not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall.
d.	not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise.

43.

"Pure economic rent" is a payment

a.	in excess of opportunity costs.
b.	in excess of opportunity costs when opportunity costs are zero.
c.	for the use of land.
d.	in excess of opportunity costs when opportunity costs are positive.
e.	to a pure monopolist for the monopolist's product.

44.

Profits may exist as the result of

a.	uncertainty.
b.	alertness to arbitrage opportunities.
c.	innovation.
d.	all of the above
e.	none of the above

45.

Marginal productivity theory implies that a worker will be paid an amount

a.	equal to his or her contribution to the productive process.
b.	less than his or her contribution to the productive process.
c.	greater than his or her contribution to the productive process.
d.	determined by his or her individual bargaining.

46.

The top 20 percent of households in the United States earn collectively about what percent of the total income of all households?

a.	20 percent
b.	30 percent
c.	40 percent
d.	50 percent
e.	60 percent

47.

Differences in income result from differences in

a.	innate abilities and attributes.
b.	education and other training.
c.	attitudes toward risk.
d.	differences in the value of the marginal revenue product different people are able to produce.
e.	all of the above.

48.

Rawls argues that a person who is behind the veil of ignorance

a.	is less likely to want a more equal distribution of income than if he or she were not behind the veil.
b.	is more likely to want a more equal distribution of income than if he or she were not behind the veil.
c.	wants the same distribution of income that she wants when he or she is not behind the veil.
d.	does not care about the distribution of income.

49.

If a perfectly competitive firm and a single-price monopolist face the same demand and cost curves, then

a.	the competitive firm will attain resource-allocative efficiency, but the monopolist will not.
b.	the competitive firm will attain resource-allocative efficiency, but the monopolist may or may not, depending upon the demand for its product.
c.	the competitive firm will not attain resource-allocative efficiency, but the monopolist will.
d.	both the competitive firm and the monopolist will attain resource-allocative efficiency.
e.	neither the competitive firm nor the monopolist will attain resource-allocative efficiency.

50.

At the quantity where a single-price monopolist maximizes profit, price will be

a.	equal to marginal cost, and there will be allocative efficiency.
b.	equal to marginal revenue, and there will be allocative efficiency.
c.	greater than marginal cost, and there will be allocative inefficiency.
d.	less than marginal cost, and there will be allocative inefficiency.
e.	less than marginal revenue, and there will be allocative inefficiency.