EXAMINATION QUESTIONS

Third Microeconomics Exam

Instructor: James Sondgeroth

For the essay  part of the exam, students will be allowed to use two sheets of paper (8.5 X 11) with handwritten notes on both sides of each. These information sheets must be turned in with the exam. Answers to the essay questions must be written in a Blue Book. Three of the following questions will be randomly drawn on the day of the exam; you will have to answer those three questions for the exam.

These questions cover chapters 9, 13, 16, 15, 10, and 11 (in this order)

 

31. The Representative Firm's Supply Curve (Chapter 9)
    1. Sketch a graph of the
       1. Average Variable Cost curve,
       2. the Average Total Cost curve,
       3. and the Marginal Cost Curve.
    2. Label the shut down point and the break-even point.
    3. Explain why these are the firm's shut down and the break-even points.
    4. On the above graph illustrate the firm’s supply curve.
    5. Explain why a firm will continue producing if the price of the product or service it is selling is less than the average total cost of producing it but is greater than the average variable cost of producing it.


32. Market Supply Curve and Above Normal Profits (Chapter 9)
    1. Why does the industry supply curve shift to the right when positive economic profits appear?
    2. Illustrate by drawing the industry supply and demand curves and the representative firm's average cost, marginal cost, and marginal revenue curves starting with the situation where the representative firm is earning above normal profits.
    3. In what way does society benefit from having industries in long-run competitive equilibrium?


33. The Factor Market (Chapter 13)
    1. What is meant by "derived demand"?
    2. Why does the demand curve for labor slope down and to the right?
    3. Assuming the product sells for $100 per unit, complete the following table.

       Quantity of Labor	Total Product Per Week	Marginal Physical Product	Marginal Revenue Product
       0	0	Undefined	Undefined
       1	12	?	?
       2	19	?	?
       3	24	?	?
       4	28	?	?
       5	30	?	?

    4. How many workers would be hired if the going salary for this quality of labor is $400 per week?
    5. If the product’s price were to increase to $200 per unit, how many workers would be hired?
    
    
34. The Supply of Labor (Chapter 13)
    1. Why does the supply curve for labor slope upward and to the right?
    2. What can cause the supply curve to shift?
    
    
35. Why do wage rates differ? Explain both the demand side and supply side reasons. (Chapter 13)
    


36. Interest Rates (Chapter 16)
    1. What are ‘interest rates’?
    2. How are they determined?
    3. Define "nominal interest rate" and "real interest rate" and use an equation to show how they are related.
    4. Why does the return to capital and interest rates tend to equality?
    
    
37. Rent (Chapter 16)
    1. What is ‘economic rent’?
    2. What is ‘pure economic rent’?
    3. What is the difference between ‘artificial rent’ and ‘real rent’?
    
    
38. Profits (Chapter 16)
    1. What is the difference between ‘economic profits’ and ‘accounting profits’?
    2. How do profits play a role in allocating resources to where they are needed in a capitalist market economy?
    3. What are some of the different theories that have been advanced to answer the question of where profits come from?
    
    
39. Income Distribution I (Chapter 15)
    1. Explain what is meant by “the marginal productivity theory” of income distribution.
    2. What normative implications does this theory have?


40. Income Distribution II (Chapter 15) (Links to the following tables can be found at this site: http://www.census.gov/hhes/www/income/data/historical/inequality/index.html.)
    1. In 2010 (URL: http://www.census.gov/hhes/www/income/data/historical/household/2010/H02AR_2010.xls) what was the percentage of total income received  by the lowest, second, third, fourth, and highest fifth of household income groups in the economy?
    2. What money income did a household (URL: http://www.census.gov/hhes/www/income/data/historical/household/2010/H01AR_2010.xls) have to receive in order to be placed in each income group? (That is, what is the upper income level of the first four fifths and the lower limit of the top 5 percent?)
    3. Draw a Lorenz curve of the income distribution given in your answer above.
    
    
41. Inequality and Poverty (Chapter 15)(marriage status and working status http://blog.american.com/?p=22933 and http://www.census.gov/hhes/www/cpstables/032010/hhinc/new05_000.htm, consumption patterns of those in poverty: http://www.heritage.org/research/reports/2011/09/understanding-poverty-in-the-united-states-surprising-facts-about-americas-poor)
    1. Why does income inequality exist?
    2. What is poverty? (Poverty Income Thresholds)
    3. Who are the poor? (Percent Distribution of Households by Selected Characteristics 2009: http://www.census.gov/hhes/www/cpstables/032010/hhinc/new05_000.htm)
    
    
42. Normative Standards of Income Distribution (Chapter 15)
    • List and discuss three of the better known normative standards of income distribution.
    
    
43. "Up by Our Bootstraps" a paper handed out in class which can also be found at this address: http://www.dallasfed.org/assets/documents/fed/annual/1999/ar95.pdf.
    1. Using Exhibits 1 and 2, explain why some people might view the United States as a "Caste Society" (that is unfair to the poor and working classes).
    2. Using Exhibit 3, explain the reasons the authors argue that "Inequality is not inequity."
    3. Using Exhibits 4 and 5, explain why the United States can not be considered a caste society and why the authors would dispute the saying that "the rich get richer while the poor get poorer."
    4. Exhibit 11 shows that top income households out earned bottom ones by a factor of 13 to 1, but when you look at consumption per person the gap is only 2 to 1. Explain why this is so. (See http://www.austincc.edu/sondg/handouts/micro/HeritageIncomeDist.pdf.)
    
    
44. Monopoly (Chapter 10)
    1. Define what a monopoly is.
    2. List several different barriers to entry that can lead to the formation of a monopoly.
    3. Name some monopolies that you know of at the national or local level.
    
    
45. Monopoly vs. Perfect Competition (Chapter 10)
    1. Sketch a graph of the monopolist's demand curve, marginal revenue curve, and marginal cost curve.
    2. Show on the graph the output-price combination the monopolist will try to operate at.
    3. On the same graph show the output-price combination would prevail if the monopolist acted as if it were a perfectly competitive industry.
    
    
46. Economists vs. Monopolies (Chapter 10)
    1. List and explain the reasons why economists object to monopolies.
    2. Draw a graph of a single price monopoly with the appropriate cost and revenue curves included and indicate on this graph the region that represents the "deadweight loss" to society of a monopoly.
    
    
47. Monopolistic Competition (Chapter 11)
    1. List the characteristics of an industry that economists might label as Monopolistically Competitive.
    2. Name some examples of such industries.
    3. How is Monopolistic Competition like Perfect Competition? How is it different?
    4. How is Monopolistic Competition like Monopoly? How is it different?
    
    
48. Oligopoly (Chapter 11)
    1. List the characteristics of an industry that economists might label as Oligopolistic.
    2. Name some examples of such industries.
    3. What is a cartel? What are some of the problems of forming an effective cartel and keeping it going?
    
    
49. Market Failure: Externalities (Chapter 17)
    1. What is meant by "market failure"?
    2. Define "externality" and explain how an externality can lead to market failure.
    3. Define "negative externality" and "positive externality"; also give examples of each.
    4. Draw a diagram of a negative externality; show the region on that graph that represents market failure.
    5. Draw a diagram of a positive externality; show the region on that graph that represents market failure.
    
    
50. Market Failure: Public Goods (Chapter 17)
    1. Define "public good" and explain how the existence of a public good can lead to market failure.
    2. Explain the concepts:
       1. rivalrous in consumption
       2. nonrivalrous in consumption
       3. excludable
       4. nonexcludable
    3. Explain what is meant by a "free rider problem" in the provision of a good. Also explain why governments usually produce or pay for goods that have this problem.
    
    
51. Market Failure: Asymmetric Information (Chapter 17)
    1. Define "asymmetric information" and explain how the existence of asymmetric information can lead to market failure.
    2. Draw a diagram of a situation where the seller has information that the buyer does not have. On the same graph show the situation that would exist if the information between buyer and seller were symmetric.
    3. Draw a diagram of a situation where the buyer has information that the seller does not have. On the same graph show the situation that would exist if the information between buyer and seller were symmetric.
    4. Explain what "adverse selection" is, and why it is problem in markets.
    5. Explain what "moral hazard" is, and why it is problem in markets.