Economics 2306 Name_____________________________

Principles of Economics I

Baylor in Great Britain

Final Exam

I. Multiple Choice. Circle the best answer.

1. An economic model
a. always has to have a mathematical foundation
b. can never be proven wrong
c. can be constructed for an individual economic unit but not for the economy as a whole
d. is a simplification of the real world
e. can be constructed for the economy as a whole but not for an individual economic unit

2. Opportunity cost is defined
a. only in terms of the money spent
b. as the value of all alternatives not chosen
c. as the value of the best alternative not chosen
d. as the difference between the benefits from your choice and the benefits from the next best alternative
e. as the difference between the benefits from your choice and the costs of that choice

3. The division of labor refers to
a. having each worker specialize in a particular task
b. discrimination in labor markets
c. separating ownership from management
d. letting each worker make a separate product from start to finish
e. separating management from workers

4. One of the most centrally planned economies is found in
a. the United States
b. Cuba
c. Austria
d. Australia
e. Mexico

5. Which of the following would be most likely to increase the level of demand for downtown parking in a large city?
a. Improved bus service to the downtown area
b. Lower downtown parking fees
c. More downtown parking lots
d. More freeways leading to the downtown area
e. A major employer moves to the suburbs

6. Studies show that the supply curve for oranges has shifted. Your boss suggests the following five explanations. Which of the following could not explain the shift in the supply curve?
a. Weather conditions have changed.
b. The price of fertilizer has changed.
c. The wage paid to orange pickers has changed.
d. The price of tangerines has changed.
e. The demand for grapefruit has changed.

7. A shortage of textbooks will cause
a. a decrease in the supply of textbooks.
b. a decrease in the demand for textbooks.
c. both an increase in the supply of textbooks and a decrease in the demand for textbooks.
d. an increase in the price of textbooks, caused by a shift in either the supply curve or the demand curve.
e. an increase in the price of textbooks.

8. If the price of Pepsi-Cola increases from 40 cents to 50 cents per bottle and the quantity demanded decreases from 100 bottles to 50 bottles, then according to the midpoint formula, the value of price elasticity of demand for Pepsi-Cola is
a. 0.5
b. 0.25
c. 1
d. 3
e. 2

9. Along a linear demand curve, as the price rises, demand becomes more
a. steep
b. elastic
c. inelastic
d. unit elastic
e. variable

10. For which of the following products is the consumer's demand curve most likely to be perfectly inelastic?
a. Lobster, for a seafood lover
b. Cars, for high school students
c. Insulin, for a diabetic
d. Compact disks, for a music lover
e. Beef, for a food lover

11. In order to prove that Dr. Pepper and 7-Up are substitutes, the FTC should test the _____ and get a _____.
a. price elasticity of demand; number less than 1
b. income elasticity; positive number
c. cross-price elasticity; negative number
d. price elasticity of demand; number greater than 1
e. cross-price elasticity; positive number

12. At which price and quantity is profit maximized for the firm represented in the above exhibit?
a. $10 and 80
b. $8 and 70
c. $4 and 10
d. $10 and 70
e. $8 and zero output

13. Peg's Kegs sells kegs in a perfectly competitive market. Because low demand forced price below average variable cost, Peg has made the short-run decision to shut down. her current losses are
a. zero.
b. greater than if she had kept operating.
c. the same as the losses she was incurring while operating
d. equal to total fixed cost
e. less than her total revenues

14. In the short run, if a firm shuts down, its total revenue is
a. $0
b. equal to its fixed costs
c. greater than its variable costs
d. greater than its fixed costs
e. less than its variable costs

15. In the above exhibit total revenue at the profit-maximizing output equals
a. $2,400
b. $4,000
c. $5,200
d. $5,600
e. $6,000

16. The demand curve facing a firm will be more elastic
a. the fewer the number of competing firms.
b. the more differentiated the product.
c. the more substitutes a good has.
d. the greater the firm's ability to control price.
e. the more profits the firm can make.

17. Which of the following is true of the relationship between P and MC under monopolistic competition?
a. P = MC at all levels of output.
b. P = MC only at the profit-maximizing quantity.
c. P > MC at the profit-maximizing quantity.
d. P < MC at the profit-maximizing quantity.
e. P < MC at the quantities below the profit-maximizing quantity.

18. If the marginal physical product of labor increases, it will likely cause
a. an increase in the price of output produced with labor.
b. an increase in labor demand
c. an increase in labor supply
d. a fall in the wage paid to labor
e. a fall in the number of workers employed

19. Firms that face downward-sloping demand curves for their output are called
a. perfectly competitive
b. price takers
c. price searchers
d. resource price takers
e. resource price searchers

20. The demand for labor is likely to increase when
a. the supply of the good it produces falls
b. the demand for the good it produces rises
c. the supply of the good it produces rises
d. the demand for the good it produces falls
e. the real wage rate rises

21. Suppose that the number of law school graduates continues to increase. Which of the following is true?
a. Lawyers' salaries must fall
b. Lawyers' salaries must rise
c. Lawyers' salaries will fall only if demand increases
d. Lawyers' salaries will fall only if demand increases more than supply increases
e. Lawyers' salaries will fall only if demand rises less than supply

22. Which of the following is not an example of derived demand?
a. As more high school graduates go on to college, more professors are hired.
b. As consumers buy more computers, they demand more software.
c. As kids let their hair grow longer, fewer people become barbers.
d. The rise in health insurance increases the demand for health care, and more foreign doctors come to the United States.
e. Increased demand for overnight delivery speeds up orders for new delivery trucks.

23. If Albert Belle earns $7 million playing baseball for the Indians but would be driving a truck otherwise for $30,000.
a. all of his present salary is economic rent
b. none of his present salary is economic rent because he has an alternative
c. $30,000 of his salary is rent.
d. all of his present salary is opportunity cost
e. all but $30,000 of his salary is economic rent

24. For a firm hiring resources in a perfectly competitive resource market, its demand curve for a resource is its
a. marginal physical product curve
b. marginal revenue product curve
c. marginal resource cost curve
d. marginal revenue curve
e. total revenue curve

25. The interest rate compensates
a. bankers for their time spent on paperwork
b. borrowers for their increased consumption today
c. savers for forgone consumption today
d. consumers for more consumption today
e. the Fed for its efforts to control the money supply

26. Which of the following affects the interest rate on a loan?
a. Riskiness of the loan
b. Duration of the loan
c. Tax treatment of the loan
d. Administrative cost of the loan
e. All of the above

27. The present value of receiving $200 one year from now when the prevailing rate of interest is 8 percent is approximately
a. $192
b. $185
c. $200
d. $208
e. $160

28. The government attempts to redistribute income through
a. taxes only.
b. taxes and transfers.
c. in-kind benefits only.
d. cash transfers only.
e. retirement programs only.

29. Over time, poverty in the United States, as measured by the number of poor, has become greater
a. among women because of discrimination.
b. among women because of an increasing divorce rate.
c. among households headed by women.
d. among the elderly because of cutbacks in the Social Security program.
e. for everyone because of inflation.

30. The losers when the United States institutes trade restrictions include
a. U.S. consumers of imported goods, U.S. producers who use imported intermediate goods, and U.S. exporters.
b. U.S. producers of goods that compete with imported goods only.
c. U.S. consumers of imported goods and U.S. producers of goods that compete with imported goods.
d. All U.S. producers of all goods and U.S. exporters
e. Only U.S. exporters

II. Answer true, false, or uncertain. Explain.

1. The elasticity of demand for nurses depends on the elasticity of demand for hospital care.

2. For a monopsonist, the resource supply curve and the marginal resource cost curve are identical.

3. Because present consumption is valued higher than future consumption, interest is paid.

4. When a tariff increases, everybody loses except the government imposing the tariff.

5. It is possible for one person to have a comparative advantage in all tasks.

III. Short Answer

1. Briefly discuss the major causes of income inequality. What can the government do to promote equality? What can you do?

2. What is the difference between a tariff and a quota? What are the benefits and costs of such protectionist policies?

IV. International Trade

The table below represents the production possibilities (in millions of bushels):

New Zealand

a. Which country has the absolute advantage in the production of apples? ___________
Plums? _____________

b. What is New Zealand's opportunity cost of producing one bushel of plums? ________
Spain's? __________

c. Which country has the comparative advantage in the production of
plums? _______________ Apples? ______________

d. Based on your analyses, what should the two countries do to increase overall production?