Exam #1 - 2 October 1990



Sample Exam #2

Economics 103

Wayne Carroll Name: . Section (time): .

Part II - Multiple Choice (90 points total)

Select the best answer to each of the following questions. Use a pencil to mark your answer on the answer sheet. This part of the exam includes thirty-four questions worth a total of 90 points.

1. If the government raises the gasoline tax by 20 cents per gallon,

a. in the short run the market price of gasoline will probably rise, but by less than 20 cents per gallon.

b. the market price of gasoline will probably rise by more than 20 cents per gallon in the short run.

c. the quantity of gasoline sold will not change in the short run or the long run as a result of the tax increase.

d. society’s total surplus from sales of gasoline must stay the same, since the tax revenue would just be spent elsewhere in the economy.

2. When talking about production costs, economists define “the short run” to be

a. a period in which the firm doesn’t change the quantities of some of its inputs (such as its factory space).

b. the immediate future (the next week or month).

c. the length of time it takes the firm to buy the inputs it uses (such as labor or electricity).

d. the length of time that a typical worker stays with a firm.

3. Congested traffic on an urban highway at rush hour is an example of

a. a common resource.

b. a public good.

c. increasing returns.

d. private costs.

4. Buyers pay a bigger share of a tax than sellers do if

a. the demand curve for the good that’s taxed is less elastic than the supply curve.

b. the demand curve for the good that’s taxed is more elastic than the supply curve.

c. the tax is imposed directly on buyers (like a home property tax) rather than sellers (like a gasoline tax).

d. the tax is imposed directly on sellers (like a gasoline tax) rather than buyers (like a home property tax).

5. Suppose you buy a new car for $24,000. You would have been willing to pay $26,000 for the car if you had to. If it costs the car dealer $20,000 to supply the car, then

a. your consumer surplus is $3,000.

b. your consumer surplus is $4,000.

c. the producer surplus is $4,000.

d. the producer surplus is $6,000

e. your consumer surplus is $24,000.

The graph below shows the demand and supply curves for a good. As you can see in the graph, the initial market equilibrium price of this good is $30, and 12 units are sold at that price.

[pic]

6. At the initial market equilibrium the consumer surplus in this market is equal to

a. $30

b. $180

c. $360

d. $720

7. Now suppose the government pays a subsidy to producers of this good for each unit they sell. The government wants producers to increase the quantity sold to 14 units. How large must the subsidy be (per unit sold) in order to raise the quantity sold to 14 units?

a. $5.

b. $10.

c. $25.

d. $35.

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8. When there are positive externalities in a market, private market forces tend to lead to

a. too much production or consumption of the good.

b. an upward-sloping marginal cost curve.

c. a free-rider problem.

d. an insufficient supply of the good.

|output per day |marginal cost |total cost |

|9 |$80 |$720 |

|10 |$90 |$X |

9. In the table above, the value $X must be equal to

a. $730.

b. $800.

c. $810.

d. $900.

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10. Land is a fixed input for a farmer in the short run. If the cost of the farmer’s land rises, then in the short run

a. both the farmer’s average cost curve and the farmer’s marginal cost curve must shift up.

b. the farmer’s marginal cost curve must shift up, but not the farmer’s average cost curve.

c. the farmer’s average cost curve must shift up, but not the farmer’s marginal cost curve.

d. neither the farmer’s marginal cost curve nor the farmer’s average cost curve will shift.

11. Common resources are

a. rival and non-excludable.

b. rival and excludable.

c. non-rival and excludable.

d. non-rival and non-excludable.

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Toyota’s production of cars is subject to economies of scale.

12. Therefore we would expect that

a. if Toyota produces more cars than another car manufacturer, then Toyota’s average cost of producing a car is likely to be lower than the other manufacturer’s.

b. Toyota’s long-run average cost curve must slope upward.

c. Toyota’s short-run average cost curve must slope downward.

d. Toyota’s production cannot be subject to diminishing returns in the short run.

13. If the quantity of cars produced by Toyota increases significantly in the short run,

a. its marginal cost of production must increase.

b. its average cost must fall.

c. it could increase the scale of its production in the short run.

d. its production cost will not change.

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If someone lives in Eleva and works at UWEC, the fastest way to get home after work is to drive down Highway 93. If there are 200 drivers on the highway during rush hour, then the trip takes each driver 10 minutes. If one more driver is on the highway (for a total of 201), the trip takes each driver 11 minutes.

14. When the 201st driver enters the highway, the total external cost associated with his use of the highway is equal to

a. a 1-minute delay.

b. an 11-minute delay.

c. a 200-minute delay.

d. a 2000-minute delay.

15. If the next-best route between UWEC and Eleva takes 15 minutes, then from society’s perspective

a. it makes sense for the 201st driver to use Highway 93 (the faster route) as longer as his travel time is less than 15 minutes, as in this case.

b. it makes sense for the 201st driver to use Highway 93 (the faster route) as long as the increase in the average travel time (one minute per driver) is less than the difference in travel times between the two routes (four or five minutes), as in this case.

c. society is worse off if the 201st driver uses Highway 93 (the faster route).

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16. A good that is non-rival and non-excludable is a

a. public good.

b. common resource.

c. monopoly good.

d. private good.

17. Given its production facilities (buildings and machines), a firm’s average cost of production

a. is high when the firm’s output is small, and it keeps falling as the firm’s output gets larger.

b. tends to be small when the firm’s output is small, and it grows as the firm’s output gets larger.

c. tends to be high when the firm’s output is very small or very large, but is lower when the firm’s output is at an intermediate level.

d. tends to stay fixed in the short run as the firm’s output changes.

18. If we know that a good is a common resource, we expect that

a. the entire community will be able to share the good efficiently.

b. a tax on the good must make everyone worse off than they would be without the tax.

c. it is likely that there will be too many people sharing the good, and they will get in each others’ way.

d. the market for the good will be efficient.

The graph below shows a firm’s short-run cost curves. Use this graph to answer #19 and #20.

[pic]

19. When the firm produces the 15th unit of output (that is, when its output rises from 14 units to 15 units), its total production cost rises by about

a. $6.

b. $50.

c. $90.

d. $750.

20. Which of the following total cost tables is most consistent with the cost curves in the graph?

Answer a:

|output per |total cost |

|day | |

|0 |$25 |

|1 |$31 |

|2 |$43 |

|3 |$61 |

|4 |$85 |

|5 |$115 |

|6 |$151 |

|7 |$193 |

|8 |$241 |

|9 |$295 |

|10 |$355 |

Answer b:

|output per |total cost |

|day | |

|0 |$75 |

|1 |$81 |

|2 |$93 |

|3 |$111 |

|4 |$135 |

|5 |$165 |

|6 |$201 |

|7 |$243 |

|8 |$291 |

|9 |$345 |

|10 |$405 |

Answer c:

|output per |total cost |

|day | |

|0 |$75 |

|1 |$77 |

|2 |$81 |

|3 |$87 |

|4 |$95 |

|5 |$105 |

|6 |$117 |

|7 |$131 |

|8 |$147 |

|9 |$165 |

|10 |$185 |

Answer d:

|output per |total cost |

|day | |

|0 |$150 |

|1 |$156 |

|2 |$168 |

|3 |$186 |

|4 |$210 |

|5 |$240 |

|6 |$276 |

|7 |$318 |

|8 |$366 |

|9 |$420 |

|10 |$480 |

21. Adam Smith’s principle of the Invisible Hand suggests that

a. markets often lead to outcomes that are best for society.

b. the government can often improve upon market outcomes.

c. demand always equals supply in a market.

d. most externalities are positive, not negative.

22. A market outcome is said to be economically efficient if

a. it generates the largest possible total “surplus” for society.

b. the market reaches a market equilibrium point at which supply equals demand.

c. producers use the latest production technology.

d. producers earn the largest possible profits.

22. Economists recognize that pollution problems are due to

a. the fact that clean air and clean water are private goods.

b. a failure of producers to maximize their profits.

c. the fact that polluters don’t take into account their full impact on society.

d. the fact that production of any good generates wastes.

24. When a business firm's output is large, its average production cost tends to be high in the short run because

a. its fixed costs are spread over a large output.

b. its marginal cost is high.

c. it faces economies of scale.

d. its variable costs are low.

25. “Market failure” refers to a situation in which

a. the market equilibrium outcome is not the best possible outcome from society’s viewpoint.

b. the market fails to reach an equilibrium point.

c. producers fail to earn a profit.

d. the market price is at the wrong level, so the government must impose a price ceiling or price floor.

26. If a firm’s marginal cost is equal to its average cost at its current output, then its

a. marginal cost must be falling.

b. average cost is at a minimum.

c. total cost is at a minimum

27. “Driving while intoxicated” (or drunk driving) is a social problem rather than just a private matter because

a. it involves negative externalities.

b. alcohol is a public good.

c. roads are a public good.

d. it involves suppliers of alcoholic beverages as well as the consumer.

[pic]

28. In the graph above, the curves labeled “small scale” and “large scale” are

a. two of the firm’s short-run average cost curves.

b. two of the firm’s short-run marginal cost curves.

c. two of the firm’s long-run average cost curves.

d. two of the firm’s long-run marginal cost curves.

29. According to the graph above, the firm could produce 800 units of output per day at a lower cost

a. if it had a small-scale factory rather than a large-scale factory.

b. if it had a large-scale factory rather than a small-scale factory.

30. According to the graph above, in the long run the firm’s lowest possible total cost of producing 800 units of output per day would be

a. $20.

b. $800.

c. $16,000.

d. $32,000.

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31. In the short run

a. a firm’s marginal cost tends to fall if the firm increases its output.

b. a firm has no fixed costs.

c. a firm’s average cost curve must be U-shaped.

d. a firm’s production function must be downward-sloping.

32. Radio broadcasts and national defense are examples of

a. externalities.

b. private goods.

c. c. common resources.

d. public goods.

33. A deadweight loss is

a. a measure of the potential gains from trade that are lost when a market’s output is not efficient.

b. a measure of the amount of revenue the government earns when it imposes a tax.

c. equal to consumer surplus minus producer surplus.

d. a measure of the total opportunity cost of producing a certain quantity of a good.

34. If a firm’s production is subject to diminishing returns, then

a. its marginal cost curve must be upward-sloping.

b. its marginal product of labor curve must be upward-sloping.

c. its long-run average cost curve must be downward-sloping.

d. its total cost curve must be downward-sloping.

Sample Exam #2

Economics 103

Wayne Carroll Name: Section (time): ___________________

Part I – Short Answer Questions (10 points total)

(10 points) The graph below shows the supply and demand curves for a good and the initial market equilibrium point. Now suppose that a new tax of $4 per unit is imposed on sellers of this good.

[pic]

a. Use the graph to illustrate how the $4-per-unit tax would affect the market equilibrium price and quantity sold.

• What would be the new market price after the tax? ________________

• What would be the new quantity sold after the tax? ________________

b. Before the tax, sellers received $8 for each unit they sold. After the tax is imposed, how much do sellers receive for each unit after paying the tax? ______________

c. On the graph, shade in the area that represents the deadweight loss associated with the $4-per-unit tax, and mark this area clearly. Then calculate the deadweight loss. Show your work.

• Deadweight loss = _________________________

d. On the graph, shade in the area that represents the government’s total revenue from this tax, and mark this area clearly. Then calculate the total tax revenue. Show your work.

• Total tax revenue = _________________________

e. By how much would the tax reduce consumer surplus in this market? Calculate the reduction, and show your work.

• Reduction in consumer surplus = ___________________________

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