Microeconomics E201

Section 15943 (2:30)

EXAM 1-Form B
March 6, 2012
INSTRUCTIONS: There are 25 multiple-choice questions on this exam. Check to be sure you
have 25 different questions. Each question is worth 4 points. This exam counts 20 percent of
your course grade.
Use a pencil to write your name (last name <space> first name) and 10-digit ID number
accurately. Please understand: your "last name" is you family name or surname; your "first
name" is your given name. Be sure to bubble in the letter and number circles under your name
and ID number, respectively.
Check your identifying information for accuracy. If it is not correct, your score may be
reduced by one percentage point.
In the special codes field, please write 1 00 or 230 to correspond to the lecture you attend.
You do not need to specify the form of your exam, as exam forms are color-coded.
Select the best answer for each question. Be sure your answer is clearly marked on the answer
sheet; any stray marks should be completely erased. After 40 minutes of the exam period, if you
have a question about any item, please raise your hand and one of the proctors will, if
appropriate, answer your question.
At the end of the exam, hand in your answer sheet only. Please be prepared to show your ID
card.
Answers will be posted on the course web site as soon as possible, so indicate your selections
on the exam questions.
Please do not phone or email with questions about the exam.
Stay calm, focused, and do your best!
Right F4 BLUE
Seat Number
----
J
-
Price
24
22
20
Supply
16
14
12
10
8
6
4
2 r rS ;:__ D -f tc + :]
Demand
I 2 3 4 S 6 7 8 9 10 11 12 13 14 Quantity
CJ . .:::: ~ f ~ ~
I .J . ::::::-- A--+ ~ --t c_ t . o ~ ~
D 1. Refer to the graph above. After the government impos_es a $10 tax, producer surplus is the -t- "J
area
a. A
b. B+D+J
c. A+B+C
d. J
e.K
tj 2. Refer to the graph above. By imposing the $10 tax, the government collects revenue of area
a. A+B+D+J
c
b.B+D
c. C+F
d. F+G+L
e.L
3. Refer to the graph above. As a result of the $10 tax, deadweight loss is area
a.A+J
b.B+D
c.C+F
d.G+H
e.G+L
b 4. In the graph above, if demand and supply are both more inelastic than shown in the graph,
a. tax revenue would be bigger and deadweight loss would be bigger.
b. tax revenue would be bigger and deadweight loss would be smaller. v
c. tax revenue would be smaller and deadweight loss would be bigger.
d. tax revenue would be smaller and deadweight loss would be smaller.
t;/
Q 5. Suppose that salsa and tortilla chips are com1i'lements. How would an increase in the cost of
producing tortilla chips affect the market for salsa?
c
a. Increase in price of salsa, increase in quantity sold, and increase in producer surplus
b. Increase in price of salsa, increase in quantity sold, and decrease in producer surplus
c. Increase in price of salsa, decrease in quantity sold, and decrease in consumer surplus
d. Decrease in price of salsa, decrease in quantity sold, and decrease in producer surplus
e. Decrease in price of salsa, decrease in quantity sold, and increase in producer surplus
6. Which of the following is not an example of a price floor?
a. Aminimum wage law 1/
b. dairy price supports v
c. price controls on gasoline in the 1970s '
d. a legal price intended to maintain prices above the equilibrium price v
e. minimum allowable air fares set by the government in the 1970s v
7. Consider the following price elasticities of demand that have been estimated in for a country:
the price elasticity of demand is 0.19 for fresh potatoes and 2.84 for frozen potatoes. Which of
the following statements is correct?
a. Buyers of fresh potatoes are more responsive to price changes than are buyers of frozen
potatoes. '-- .
b. Buyers of frozen potatoes are more responsive to price changes than are buyers of fresh
potatoes. J
c. Buyers of fresh potatoes are more responsive to income changes than are buyers of frozen
potatoes.
d. Buyers of frozen potatoes are more responsive to income changes than are buyers of fresh
potatoes.
e. b andd
8. The price elasticity of demand for cigarettes has been estimated to be 0.4 over a 3-month
period of time. Suppose that, for public health reasons, government wants to reduce cigarette
consumption. How large of a price hike is required to achieve a 10% reduction in the quantity of
cigarettes bought?
a. 25%
b. 2.5%
c . .25%
d. 4%
e . .4%
' \
. J
r
Bags of Po:gcorn Total Utility
0 0
'0
1 8
~
2 20
l'2
3 30 tO
4 36 b
5 35
-\
C 9. According to the table above, marginal utility diminishes with consumption of
a. the first bag of popcorn
b. the second bag of popcorn
c. the third bag of popcorn
d. the fourth bag of popcorn
e. the fifth bag of popcorn
f\ 10. Suppose that h ~ price elasticity of demand for tuna is 0.7. A 1.5% increase in the price of
tuna will decrease quantity demanded of tuna by
a. 1.05%, and total revenue of tuna sellers will increase as a result.
b. 1.05%, and total revenue of tuna sellers will decrease as a result.
c. 2.14%, and total revenue of tuna sellers will increase as a result.
d. 2.14 %, and total revenue of tuna sellers will decrease as a result.
_}S__ = D--l
10,-o/o
X.::: \,oS
C 11. Suppose the price of a donut is reduced from $1.30 to $1.1 0, and as a result the quantity
demanded increases from 900 to 1100. Using the midpoint method, the price elasticity of
demand for donuts in the given price range is
a. 0.69
b. 0.83
c. 1.20
d. 1.44
e. 1.50
l l 00
~
tooo 6
-y-
c
Wage
V V = 8 ~ ~ ~ L
\Ne=$6
45 65 l 80 Labor hours
'2--0 :
12. Refer to the diagram of a labor market above. Compared to the market equilibrium, the
imPosition of an $8 minimum wage would cause
a. employment to fall by 20 and unemployment to rise by 15:
b. employment to fall by 35 and unemployment to rise by 35.
c. employment to fall by 20 and unemployment to rise by 35.
d. employment to rise by 15and unemployment to fall by 20.
e. employment to fall by 45 and unemployment to rise by 80.
13. Suppose that the market equilibrium price of child care is $20 per day per child and the
equilibrium quantity is 900. Suppose that, in order to m.ake child care more affordable, Congress
mandates a ceiling price of $15. At a price of $15,
a. the quantity demanded is less than 900, the quantity supplied is more than 900, and a surplus
exits. """
b. the quantity demanded is more than 900, the quantity supplied is less than 900, and a surplus
exits. "-
c. the quantity demanded is less than 900, the quantity supplied is more than 900, and a shortage
exits.
d. the quantity demanded is more than 900, the quantity supplied is less than 900, and a shortage
exits.
e. the quantity demanded is more than 900, the quantity supplied is more than 900, and a new
equilibrium exists.
s
D
F
C.. 14. Suppose that the price of a shirt is $20, and the marginal utility of a shirt is 50 utils; the price
of a sweater is $50, and the marginal utility is 100 utils; the price of socks is $10, and the
marginal utility is 20. Which good would a rational consumer purchase next?
a. either socks or sweater, but cannot tell which
b. depends on which she wants more--shirt, sweater, or socks
c. sweater
d. socks
e. shirt
too
C 15. Under which ofthe following conditions would the interdiction of illegal drugs result in a
decrease in the quantity of drugs sold and in an increase in expenditure on drugs by drug users?
a. The interdiction has the effect of shifting the demand curve for illegal drugs to the right.
b. The price elasticity of demand for illegal drugs is 1.3. '--
c. The price elasticity of demand for illegal drugs is 0.8 . .._/
d. As a result of the interdiction, the price of illegal drugs increases by 16% and the quantity of
illegal drugs sold decreases by 20%.
e. The interdiction has the effect of shifting the supply curve for illegal drugs to the right.
D 16. The cross-elasticity of demand coefficient between tennis balls and tennis racquets is
a. zero.
b. equal to one.
c. greater than one.
d. negative.
e. greater than zero but less than one.
C 17. Suppose that the market equilibrium of ice cream is 500 pints per week. If government
restricts the amount of ice cream produced to 400 pints,
a. consumer surplus will be higher than at any other quantity.
b. producer surplus will be higher than at any other quantity.
c. the 401st pint of ice cream would add more to society's benefit than to its cost.
d. the 401st pint of ice cream would add more to society's cost than to its benefit.
c
18. Both state and federal governments impose taxes on cigarettes that are collected from
sellers of cigarettes. If the same level of taxes were collected from buyers of cigarettes instead of
sellers, the tax burden borne by buyers would
a. rise for poorer taxpayers more than richer taxpayers.
b rise for richer taxpayers more than poorer taxpayers.
c. fall.
d. rise.
e. remain unchanged.
19. Suppose the price elasticity supply of cheese is 0.3 for a three-month period and 1.2 for a 12-
lliOii"th period. If an increase in the demand for cheese causes the market price to increase by
36%, then the market quantity of cheese will increase by
a. 0.8% in the shorter time period and 3.3% in the longer time period.
'b. 1.2% in the shorter time period and 0.3% in the longer time period.
c. 0.8% in the shorter time period and 43.2% in the longer time period.
<h 120% in the shorter time period and 30% in the longer time period.
::,6(c ~ \ '2-
y._-=- 4 ~ 2
20. Suppose that you inherit an antique doll from Aunt Sadie. The doll has a sentimental
value of$100 to you. Jane is a collector who is willing to pay $800 for your doll. If you sell the
doll to Jane for $600,
a. consumer surplus is $500 and producer surplus is $200.
b. consumer surplus is $200 and producer surplus is $500.
c. consumer surplus is $700 and producer surplus is $200.
d. consumer surplus is $500 and producer surplus is $700.
21. Last year Buffy bought 15 bottles of Tabor Hill wine when her income was
$40,000. This year her income is $50,000, and she purchased 10 bottles of Tabor Hill wine.
This information suggests that, for Buffy, Tabor Hill wine
a. is a normal good.
b. is an inferior good.
c. has a price elastic demand.
d. has a price inelastic demand.
C 22. For which of the following goods will demand be most price inelastic?
a. Dasani water
p
$4.10
$4.00
b Bottled water
c. Bottled drinks
d. The demand elasticities for all items above would be about the same, since all are drinks.
D
Q of burritos
\) 23. Refer to the diagram above showing the market for burritos.
a. The after-tax price paid is $4.00 and the after-tax price received is $4.10.
b. The after-tax price paid is $4.10 and the after-tax price received is $4.00.
c. The after-tax price paid is $4.40 and the after-tax price received is $4.00.
d. The after-tax price paid is $4.10 and the after-tax price received is $3. 70.
e. The after-tax price paid is $4.10 and the after-tax price received is indeterminate.
b 24. Refer to the diagram above. Based on the relative tax burdens,
a. demand is more elastic than supply, and buyers bear the greater burden of the a x ~
b. demand is more elastic than supply, and sellers bear the greater burden of the tax.
c. supply is more elastic than demand, and sellers bear the greater burden of the tax.
d. supply is more elastic than demand, and buyers bear the greater burden of the tax.
e. elasticities and tax burden cannot be determined without more information.
~ 5 Suppose the Bloomington City Council imposes a tax on gasoline sold inside the City limits,
C/ and the after-tax price paid rises by 10%. Monroe County has no gasoline tax. Which of the
following is/are likely to occur?
I. Purchases of gasoline within Bloomington would fall by more than 10%.
II. Total revenue of gas stations in Monroe County (outside the Bloomington City limits) would
nse.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Microeconomics E20 1
Section 15943 (2:30)
Apr 10,2012
EXAM 3- Form A
INSTRUCTIONS: There are 25 multiple-choice questions on this exam. Check to be sure you
have 25 different questions. Each question is worth 4 points. This exam counts 20 percent of
your course grade.
Use a pencil to write your name (last name <space> first name) and lOdigit ID number
accurately. Please understand: your "last name" is you family name or surname; your "first
name" is your given name. Be sure to bubble in the letter and number circles under your name
and ID number, respectively.
Check your identifying information for accuracy. If it is not correct, your score may be
reduced by one percentage point.
In the special codes field, please write 100 or 230 to correspond to the lecture you attend.
You do not need to specify the form of your exam, as exam forms are color-coded.
Select the best answer for each question. Be sure your answer is clearly marked on the answer
sheet; any stray marks should be completely erased. After 40 minutes of the exam period, if you
have a question about any item, please raise your hand and one of the proctors will, if
appropriate, answer your question.
At the end of the exam, hand in your answer sheet only. Please be prepared to show your ID
card.
Answers will be posted on the course web site as soon as possible, so indicate. your selections
on the exam questions.
Please do not phone or email with questions about 1
Stay calm, focused, and do your best!
Seat Number
----
~

c
c
1. An efficient pollution control system would ensure that
a. each polluter reduce its pollution an equal amount. ......._
b. those polluters with lowest cost of pollution abatement reduce their pollution most.
c. regulators decide how much each polluter must reduce its pollution.
d. the latest pollution abatement technology is used.
e. existing polluters are subject to less stringent standards than new entrants.
2. Kathy and Sydney are neighbors. Kathy's dog barks at night. Sydney values peace and quiet
at $100, and Kathy places a $150 value on her dog. If there is no property right to the noise
level in the neighborhood, which of the following would be an efficient solution to the dog's
barking?
a. Kathy sells her dog for $100 to Bruce, who lives on a farm outside of town. ........
b. Kathy pays Sydney up to $100 and keeps her dog. -...
c. Sydney pays Kathy up to $100, and Kathy gets rid of her dog. .._
d. Kathy pays Sydney between $100 and $150, and the dog continues to bark.
e. No solution is possible unless a property right to the noise level is established.
3. Inventors in developing nations are usually unable to capture the full benefit of their
innovations; therefore, they tend to devote an inefficiently low quantity of resources to research
and development. Government can address this problem by
a. establishing a patent system to provide inventors with the exclusive control over their
inventions for a period of time.
b. subsidizing the purchasing of technology from other countries.
c. both (a) and (b).
d. (a) nor (b).
_!_The height of the market demand curve of gasoline shows
private valuation of consumption of gasoline if there are externalities in consumption ........
social value of consumption of gasoline if there are no externalities in consumption.
c. both (a) and (b).
d. neither (a) nor (b).
(: . r
l :
---- '
5. According to the case for toll roads in your textbook, congestion pricing would
a. reduce the number of trips made on congested roads at peak times. ../
b. shift trips to less congested times and routes. J
c. both (a) and (b).
d. neither (a) nor (b).
6. Which of the following would be most likely to have a common-property resource problem
\} associated with it?
'0 a. A cable television broadcast
b. A public park on the Fourth of July
c. Bottled spring water
d. Electricity consumption by a household in April
e. A satellite radio broadcast
7. Which of the following is closest to a pure public good?
a. An interstate highway
b. A public library
c. A radio broadcast
d. A lighthouse with no port nearby
e. A recreation center at a state university
\;:}. 8. Which of the following is consistent with the logic of the Coase Theorem?
result a resource of value does not have an owner with the legal authority to
f). protect it.
1
\ b. Private solutions to externalities are possible when transaction costs are greater than the value
of the externality. \..
c. People imposing external costs are law-breakers and criminal penalties are necessary to reduce
an externality. "\..
d. Private solutions to externalities are possible if each affected party has equal power in
" negotiations.
e. The party most strongly affected by an externality must be assigned the property right in order
for a solution to emerge. '-
OV\1-o
b _LAccording to the case discussed in your textbook, When the United States added tariffs to
\:< Chinese tires, . A
a. it was viewed as a victory for all American workers. -..
b. the Chinese responded by imposing tariffs on auto parts.
c. both (a) and (b).
d. neither (a) nor (b).
.. -.....
c
c
Price
Quantity
10. The diagram above shows the market for outdoor concerts in a public park surrounded by a
residential neighborhood. Which of the following is a true statement about this example?
a. At (Q3, P2), the cost of traffic congestion in the neighborhood is included. ........._
b. Quantity QI is the optimal quantity of concerts, providing a tax of (Po-P2) is imposed. .....__
c. P
3
is the value of the positive externalities of the concert for Q4 concertgoers. '-.......
d. PI includes the positive externalities of the concert for Q2 concertgoers. '
e. Q
2
is the optimal quantity of concerts.
11. Which of the following would improve economic efficiency in the market in the
diagram above?
a. A subsidy equal to (PI- P3) '--
b. A tax equal to (Po - P 4)
c. A tax equal to (P1- P3) v
d. A subsidy equal to (Po- P4)
--e:--A subsidy equal to (PI - P3)
12. When marginal cost is above average total cost,
a. average total cost is rising.
b. total cost is falling.
c. average total cost is minimized.
d. average fixed cost is rising.
e. average variable cost is falling.
c
A
Alexander owns a small factory that makes fishing lures. He can make 1000 lures per year and
sell them for $100 each. Alexander pays $25,000 for raw materials to produce the 1000 lures.
He invested a total of$100,000 in the building and equipment: $50,000 ofhis own savings and
$50,000 borrowed at 10 percent; his own money was earning 10 percent interest too. Alexander
could work at a competing factory for $40,000.
13. According to the information above, Alexander's accounting profit is
a. $30,000. lOOtOO 0 I
b. $$35,000. _ '00'0
c. 70,000.
d. $75,000. I e> 1<0 0 0
e. $80,000.
14. According to the information above, Alexander's economic profit is
a. $25,000. r o '\::)U
b. $30,000. 5 '0 0 0
c. $35,000.
d. $70,000. t:> tO '-' 0
e. $75,000. --
-----N "' 19-.:>
Labor
0
1
2
3
Output
0
22 22.
36 \4
48 \ 2.
15. According to the table above, the marginal product of hiring the third worker is
a. 48.
b. 36.
c. 16.
d. 12.
e. 4.
16. Over the range of output indicated, the production process in the data above exhibits
__ marginal product of labor, and the marginal cost curve for this firm would be __ .
a. increasing; downward sloping.
b. increasing; upward sloping.
c. decreasing; downward sloping.
d. decreasing; upward sloping.
e. constant; downward sloping then upward sloping.

Ouantitt of Oumut Fixed Costs Variable Costs
0 $10 $0
\'0

1 10 8 t<t
2 10 18
lo
3.
10 30
+o \.:2
4 10 44 S"4
14-
5 10 80
?b
c
17. According to the table above, the average total cost of producing four units is
a. $3.50.
b. $11.00.
c. $13.50.
d. $25.00.
e. $27.50.
18. According to the table above, the marginal cost of producing the fifth unit is "'
a. $7.20.
b. $16.00.
c. $18.00.
d. $36.00.
e. $80.00.
19. Firm A and Firm B each currently emit 100 tons of chemicals into the air. The government
D has decided to reduce pollution. Each firm is now required to own a permit for each ton of
pollution emitted into the air: The government gives each firm 40 permits, which it can either
use or sell. It costs Firm A $100 to eliminate a ton of pollution, and it costs Firm B $200 to
eliminate a ton ofpollution. After the two firms buy or sell permits from each other, we would
expect
a. Firm A to own 80 permits and reduce its pollution by 80 tons.'-
b. Firm B to own 80 permits and reduce its pollution by 80 tons. '-
c. Firm A to own zero permits and reduce its pollution by 4P tons.
d. Firm B to own 80 permits and reduce its pollution by 20 tons. v
e. Firm A to oWn. zero permits and reduce its pollution by
:2.'1:::>
..
B
p
Domestic D
a
(tons of steel)
20. The steel market in the country above is small relative to the world market. If this country
were to trade with other countries,
a. exports of steel would increase, and consumer surplus would increase by A.
b. exports of steel would decrease, and producer surplus would decrease by C.
c. imports of steel would decrease, and consumer surplus would decrease by B. '
d. imports of steel would increase, and producer surplus would decrease by B +C. "-
e. imports of steel would increase, and consumer surplus would increase by B + C.
21. Juanita's car needs to be repaired. She has already paid $1800 to have the transmission
fixed, but it still doesn't work properly. Juanita can sell the car in its current condition
for $2000. Iftlie car were fixed, she could sell it for $2600. Based on this information,
Juanita would be willing to pay for her car to be fixed, with a guarantee, as long as the cost of
doing so is less than
a. $200.
b. $600.
c. $2000.
d. $2400.
e. $2600.
!
I
I
j
I
!:
1:
..
D
-----
22. Suppose that an MBA degree generates benefits for the student in the form of higher
earnings. Suppose also that all benefits from the degree are revealed by the market. Further
suppose that government subsidizes the production of MBA degrees by offering below-market
interest on loans. Which of the following statements is correct?
a. The market equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
b. The market equilibrium quantity ofMBAs will be greater than the socially optimal quantity of
MBAs.
c. The market equilibrium quantity of MBAs will be less the socially optimal quantity of MBAs.
d. Since there are no externalities, the socially optimal quantity of MBAs cannot be known.
p
$10
$8
Domestic Supply
$6 World P
DomesticD
20 30 35 40 50
a (millions of towels)
23. In the graph above, the equilibrium price and quantity after imposition of a $2 tariff would
be
a. more than $10, but less than $12; less than 35
b. $10; less than 35
c. $8; 40
d. $8; 30
e. $6; 20
24. In the graph above, the deadweight loss from a $2 tariff would be
a. A+B+C+D+E+F+G
b. D+E+F+G
c. A+B+E+F
d. D+G
e. E+F
\1 25. Suppose that economists at Purdue are paid $2000 more on average than economists at IU
V .. because the probability of a fatal injury from a faulty boiler is 0.0005 greater at Purdue. What is
statistical value of life implied by these data?
a. $250,000
b. $400,000
c. $2,500,000
d. $4,000,000
e. $10,000,000 '":).ODIJ T I : J , ~ ) ~
,.
F' ;x--
I
Microeconomics E201
Sections 15945 and 15943
FINAL EXAM- Form A
May2,2012
If you are starting,this exam firS(, STOP! Go back and do the Departme,taJ Exam first.
Instructions: There are 25 multiple-choice questions on this exam. Each question is worth four
points. This exam score will be posted in Slot 5 of the grade book.
Use a pencil to write your name (last name <space> first name) and 10-digit ID number
accurately. Be sure to bubble in the letter and number circles under your name and ID
number, respectively. In the special codes columns KLM, enter 100 or 230 to indicate yout
lecture section.
Select the best answer for each question. Be sure your answer is clearly marked on the answer
. sheet. Any stray marks should be completely erased.
At the end of the exam, hand in your answer sheet only. Answers will be posted at the course
web site, so you should indicate your choices OJJ the exam questions. Please do not phone or
email me with questions about the exam or your course grade during finals week.
Stay calm and do your best.
Good luck and have a good summer!
1. It costs a company $50,000 to produce 5000 beach towels. The company's cost will be
f\ $50,009 if it produces an beach If the company produces towels
then .
a. its average total cost is greater than its marginal cost. 5'0
00
0
b. its average total cost and its marginal cost are equal. so,coct 5()() \
c. its average total cost is less than its marginal cost.
d. average total cost is less than average variable cost.
2. Willie is restoring a car and has already spent $4000 on the restoration. He to be able
____ ... _A_ ___ to__sell car for $5800. He that he needs to do an additional o:fWbrk make
llie car worth $5800 to potential buyers. Wllbe coUld sel.Illie car now, Witholif C6mpletmg the
additional work, for $3800. As a rational decision maker, Willie would
a. sell the car now for $3800.
b. keep the car for himself, since it would not be rational to spend $6400 to restore a car and then
sell it for only $5800.
c. complete the additional work and sell the car for $580{).
d. be indifferent between completing the restoration and selling the car now.
-3@oo

c
/
3. Suppose that, the U.S .. produces bQthjewelry and clothing. Suppose also that a,n adyancement
in teclnlology enables the U.S. to produce more jewelry from its existing.resources. On a
production possibilities frontier relating jewelry and clothing, this change will
a. increase the amount of jewelry that can be produced but have no effect on the amount of
clothing that can be produced. "'- -
b. enable the U.S. to produce more jewelry, but only if some output of clothing is sacrificed.
c. enable the U.S. to produce more ofbothjewelry and clothing.
d. enable the U.S. to produce more clothing, but only if some output of jewelry is sacrificed.
4. Suppose that there is an increase in the price of peanuts. What will happen in the market for
rL peanutbutter?
'() a. Increase in equilibrium price and increase in equilibrium quantity r;
b. Increase in equilibrium price and decrease in equilibrium quantity \
c. Decrease in equilibrium price and increase in equilibrium quantity
d. in equilibrium price and decrease in equilibrium quantity 0
4-
5. New cars are normal goods. Suppose that auto insurance becomes more expensive.
V happen in the market for new cars?
What will
a. Increase in equilibrium price and increase in equilibrium quantity
b. Increase in equilibrium price and decrease in equilibrium quantity
c. Decrease in equilibrium price and increase in equilibrium quantity
d. Decrease in equilibrium price and decrease in equilibrium quantity

f) 6. For a particular good, aIo percent increase in price causes a 15 percent decrease in quantity
V demanded. Which of the following statements is most likely true?
a. There are no close substitutes for this good. """ \s-9'c -
1

b. The good occupies a small portion of the typical consumer's budget. l

"' ''
c. The market for the good is broadly defined. "
d. The change in quantity is measured over a long time horizon.
. $3.00 a day on coffee, regardless of the price of coffee. Pierre's demand
t::.. a. perfectly elastic.
b. perfectly inelastic.
c. inelastic, but not perfectly so.
d. elastic, but not perfectly so.
e. unit elastic.
c
R kelvin's Magnets earned $200 in total revenue last month ,'hen it sold 1 SO'\lvenit magnets.
month it earned $300 in total revenue when it sold 60 ;ouvenir magnets. The price elasticitY
of demand, using the midpoint method, for these magnets is
a. 0.27. }P-
h. 0.58. \00
c. 1.25.
d.1.71.

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If government removes a binding price floor from a market, the price paid by buyers will
a. increase, and the quantjty sold in the market will increase. .,.,....... ,
b. increase, and the quantity sold in the market will decrease.
c. decrease, and the quantity sold in the market will increase.

d. decrease, and the quantity sold in the market will decrease.
,
' t.D
10. Which of the following would. cause coldf r surplus in the market for beef?
a. An increase in the price of feed for cattle '"""
b. A technological innovation in processing bee - ....-;;
c. A technological innovation in the production of pork '
d. A decrease in the size of the cattle herd "'
e. Imposing a binding price floor on the market for beef
11. Which ofthe following magnitudes decrease in response to a tax on a good?
a. The equilibrium quantity, the after-tax price paid by buyers, and consumer surplus " ..
b. The equilibrium quantity, producer surplus, and the well-being of buyers J
c. The after-tax price received by sellers, the after-tax price paid by buyers, and consumer
surplus ........_
d. All of the above
e. None of the above is necessarily correct unless we kn wwhether the tax is levied on buyers or
on sellers.
l2. Suppose that a country begins to allow trade in steel across its borders. Which of the
o oWing ou WI
exporter of steel?
a. The welfare losses of the losers exceed the welfare gains of the gainers. '---
b. Domestic producers of steel receive a higher price for their output.
c. The quantity of steel demanded by domestic consumers increases. ""-
d. Total surplus in the domestic steel market increases. "--"'
c
13. The United States sometimes imposes taxe!l on imported goods that are deemed to be sold. in
the U.S. at prices below their cost of production. Such taxes
a. benefit the U.S. as a whole, because they generate tax revenue and do not harm domestic
consumers. "-._ .
b. benefit the U.S. as a whole, because they increase producer surplus more than they decrease
consumer surplus. "-._
c. harm the U.S. as a whole, because they decrease consumer surplus more than they increase
producer surplus.
d. harm the U.S. as a whole, because they decrease producer Ius more than they increase the
tax revenue for government. ........._
14. Suppose that the benefits of a law degree are completely internalized by the market in the
form of higher wages for a law graduate. If the government offers subsidized loans for law
students, then
a. the equilibrium quantity of law degrees will equal the socially optimal quantity of law degrees.
b. the equilibrium quantity of law degrees will be greater than the socially optimal quantity of
law degrees. -,}
c. the equilibrium quantity of law degrees will be less than the socially optimal quantity of law
degrees.
d. the social benefits of a law degree will exre he p 71 benefits of a law degree.
15. Firm A and Firm B currently dump 20 tons each of chemicals into a river. Government has
decided to require that a firm must hold a permit for each ton of pollutant dumped into the river.
Government gives each firm 10 pollution permits, which they can use or sell. It costs Firm A
$100 for each ton of pollution that it eliminates, and it costs Firm B $50 for each ton of pollution
that it eliminates. After the two firms buy or sell permits from each other, we would expect that
a. Firm A will no longer pollute, and Firm B will not reduce its pollution at all. --.
b. Firm B will no longer pollute, and Firm A will not reduce its pollution at all.
c. Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of
pollution into the river. '-'--
d. Firm B will reduce its pollution, and Firm A will increase its pollution.'-......
c
16. Suppose that a railroad company's rail cars pass through a farmer's com fields. The railroad
causes an externality to the farmer because the rail cars emit sparks that cause $1500 damage to
the farmer's crops. The railroad company could purchase special grease at a price of $1200 that
would eliminate sparks. Suppose that the railroad is notJ.illhle for any damage caused to crops.
Assuming that transaction costs are zero, an efficient solution would be for the
a. railroad to continue to operate and to pay the farmer $1500 in.damages.
b. railroad to purchase the grease for $1200 and pay the farmer nothing, since no damage will
Occur.
c. farmer to incur the $1500 damages, since there is no voluntary solution possible.
d. farmer to pay $1200 to the railroad to purchase grease so that no crop damage will occur.
17. The Ogallala aquifer is a large underground pool of fresh water beneath several western
states in the U.S. Any farmer who owns land above the aquifer can at present pump water out of
it.. These facts suggest that they Ogallala aquifer is
a. a public good, and over time the aquifer will likely be overused. \..
b. a common resource, and over time the aquifer will likely be overused.
c. a public good, but each farmer has sufficient incentive to conserve the water.
d. a common resource, but each farmer has sufficient incentive to conserve the water.
e. likely to be regulated efficiently by the state governments, since they have sufficient incentive
to conserve water for many generations.
Number of Workers
0
1
2
3
4
5
Total Output Marginal Product
0
30 ..
'tO 40
50
40
30
18. Refer to the table above. What is toial output when 2 workers are hired?
a. 10
b.40
c. 70
d. SO
e. 120
19. Refer to the table above. The marginal cost curve for this producer
a rises throughout the range of output shown.
b. falls throughout the range of output shown.
c. rises then falls.
d. falls then rises.
e. cannot be determined from the information given.
c
20. A ftrm has fixed costs of $700 in its first year of operation. When the ftnn produces 99 units
of output, its total costs are $4000. The marginal cost of producing the 1 OOth unit of output is
$200. What is the total cost of producing 100 units?
a.$42
b.$900
c.$4200
d.$4900
e. $11,200
Quantity
0
1
2
3
4
Total Revenue
$0
$15
$30
$45
$60
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l ~
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4a:>0
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21. Refer to the table above. For a firm operating in a competitive market, the price is
a.$45
b.$30
c.$15
d.$0
22. A competitive firm has been selling its output for $20 per unit and has been maximizing
profit, which is positive. Then the price rises to $25, and the firm makes the necessary
adjustments to maximize its profit at the new pric_,e. After the firm has adjusted, its
a. quantity of output is higher than it had been . .J
b. average total cost is higher than it had been. x/ (\'\.....
c. marginal cost is higher than it had been. 7 ~ . . t O
d. All of the above are correct.
e. None of the above is correct.
23. Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own
business. She spent $12,000 of her savings, which had been earning 10 percent interest
per year, on equipment for her business. She also borrowed $.12,000 from her bank at 10 percent
interest, and she spent these funds on equipment. For the past several months, she has spent
$1000 per month on ingredients and other variable costs. Also, for the past several months she
has earned $4500 in monthly revenue. Assuming that Susan operates in a perfectly competitive
setting, in the short run,
a. she should shut down the business, and in the long run she should exit the catering industry.,
b. she should continue to operate her business, and in the long run she should exit the catering
indusny.
c. she should continue to operate her business, and in the long run she will probably face
competition from newly entering fmns.
d. she should continue to operate her business, and she is in long run equilibrium.

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24. Consider the firm shown above. This firm would produce a quantity of
a. Q1 and charge a price ofP1.
b. Q2 and charge a price ofP2.
c. Q3 and charge a price ofPs.
d. Q3 and charge a price of P 4
e. Q2 and charge a price ofP
3
.
25. Which of the following is an example of price discrimination?
' a. An auto insurance company charges a higher premium for a 20-year old male than a 40-year
old male.
b. IU charges different tuition for in-state and out-of-state students.
c. Both (a) and (b)
d. Neither (a) nor (b)
-