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PART I Multiple Choice Questions

1. Why is democracy associated with capitalism? Consider the impact of the capitalistic
free market on the following:
-The mobility of Capital and Labor
-The affect of less government regulation which is characteristic of capitalism
-The impact of the free market on the level of government ownership of firms.
-The affect of government regulation on non-capitalistic nations.

2. In contrast to a socialist economic organization, how would a capitalist system differ?

Consider who owns the capital (means of production) in the two models.

3. When do assumptions made in conjunction with economic theorizing have to be

realistic? Can unrealistic assumptions provide useful outcomes?

4. What basic principles does the production possibilities (or transformation) curve
illustrate? Consider whether an increase in the production of one good requires
an increase or decrease in the production of other goods when K and L are held
constant.

5. When does the concept of opportunity cost indicate? Consider how the production of
one good affects the possible production level of other goods.

6. Will a change in the price of good x the demand for X, a normal good, to change?

7. What entity establishes a price ceiling and does it require government sanction for
violators? Will it result in a surplus or a shortage?

8. If a producer overproduces and sets the price of his product too high to allow him to
sell all of his production, does this cause a surplus or an excess supply condition?

9. What entity establishes a price floor and does it require government sanction for
violators? Will it result in a surplus or a shortage?

10. An increase in the supply of a good is expected to have what effect on its price?
What will be the effect on the demand for substitutes?

11. If the own-price elasticity of demand for gasoline is -.2 and there is a 10% increase
(+.10) in the price of gasoline, what will be the percentage change to the equilibrium
demand for gasoline?

12. Define a black market in terms of a Price Ceiling.

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13. A regulated transportation monopoly is losing money. The Monopoly goes to its
government regulators with a request to raise their rates (price). An economist on the
regulatory commission says that raising rates will bring in less revenue as customers
change to substitute forms of transportation. The Monopoly and the economist have
different views of the elasticity of demand for the monopoly’s transportation services.
Which one thinks the demand is inelastic and which one thinks it is elastic?

14. In the graph to the right, which portion

of the demand curve is relatively elastic
(P1 to P2) or (P3 to P4)? Which range is P
relatively inelastic?

P4

P
3

P
2

P
1
D
0
Q Q Q QD Q
16. Define utility. A B C

17. Define equilibrium in terms of the following:

-The plans of suppliers and demanders
-The budget line and the indifference curve.

18. Does the marginal rate of substitution increase or decrease as a point moves
downward and to the right along a given indifference curve?

19. Recognize the supply and demand graph for a price floor and (separately) a price
ceiling.

20. Be able to recognize a graph which depicts excess supply in the graph. Given
quantity demanded and quantity supplied are labeled at the excess supply level, state the
quantity of the excess supply. [The equilibrium quantity demanded and quantity supplied
will also be labeled.

PART II: QUANTITATIVE PROBLEMS

PROBLEM 1. Own Price elasticity or cross-price elasticity. Given a table of the price(s)
and quantities before the price rises, compute the POINT (or ARC) elasticity of demand of
a good as its price rises.
SHOW FORMULA AND WORK (No credit for magic numbers).
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This will be one problem. The possible forms of this problem will be:
-Own-Price elasticity by point method
-Own-Price elasticity by arc method
-Cross-Price elasticity by point method
-Cross-Price elasticity by arc method

For own-price elasticity, state whether the demand for this good is elastic or inelastic.
For cross-price elasticity, state whether the goods are substitutes or complements.

PROBLEM 2. A table like the one below is given, plus a wage and a cost of capital. The
problem is to fill in the BLANKS. Put formulas in the cells above the variable names. Do
not enter formulas in cells with "///" in them.

Formulas None Given

/// /// ///
L TVC Q MPL APL AVC TFC TC ATC MC

0 0
1 3
2 6
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PART III: GRAPHICAL PROBLEMS

PROBLEM 3.
a. Determine whether the typical firms depicted below are earning profits or losses then
show graphically how economic forces will cause the industry to move to a zero
economic profit for the typical firm. Be sure your graph indicates whether firms will
enter or leave the industry and shows how the equilibrium industry price and
quantity are changed.

Note that there are two possible versions of the graph below, one of which will appear
on the exam. In the graph below, the typical firms “A” and “B” are earning a profit. In
the other graph, they will suffer losses.

$ NEW FIRMS “C” $ FIRMS “B” $ FIRMS “A” $ INDUSTRY

q q q Q
MC MC
S1

ATC ATC

P1 P1 P1 P1
AVC AVC

0 q 0 q 0 q 0 Q1 Q

In parts b through e below, answer in writing what you answered graphically above.
Answers that address two or more possibilities will receive half credit if both
answers are correct.

b) In the above graph, do new firms enter the industry or do existing firms leave the
industry? What causes them to do so?

c) As the number of firms in the industry changes what happens to the industry supply
curve? Why? [More or less firms or because each firm produces more or less at the
new equilibrium price]

d) As the industry supply curve shifts, does price go up or down?

e) As the price changes, what happens to the profit or loss situation in the industry?
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PROBLEM 4. Complete the graphs below:

a) Draw the line representing the profit-maximizing level of output, q*.

b) Label ATC at output level q*.

c) Draw and shade in, the profit or loss rectangle.

d) Label rectangles "profit" or "loss" or "Zero Economic Profit."

$ MC $ $
q q MC q

ATC MC

ATC
AVC
ATC
AVC
P1 P1 P1
AVC

0 q 0 q 0 q

On the test, these graphs will be the same but they may be in a different order or
position right to left.