Part I Multiple Choice (30 Questions, 60 Points)

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1 Economics 101 Final Exam Fall 2014 Version A Please read the exam carefully. The exam is worth 150 points with 30 multiple choice questions (2 points each) and 2 questions that requires a graph (30 points). Please use the back of your PARSCORE form to do questions 31 and 32. You will start with 60 points. All multiple choice questions are of equal value. All points will be awarded according to the correct answer. There is no deduction for incorrect answers. Mark your answers so that they can be properly read. Markings that are not read properly by the grading machine may not be given credit, even if they are correct answers. Please be sure to: -- Mark the bubbles for your last name as you enter it on the class web page. NOTE: If you put your first name, please put a space between your last name and your first name. You do not need to put your middle initial. Write your last name on the back. -- Mark the bubbles for your ID number -- Mark the bubble for the test version that you are using -- Mark the bubbles for the Test number (written number) in the space for subjective score There will not be any tolerance for cheating and other inappropriate behavior. You may not have anything on your desk except this exam, a writing utensil, and a calculator (no phones, ipods). If there is anything else on your desk, your exam will be removed and you will receive a zero for this exam. You must have a different colored exam than anybody working next to you. Part I Multiple Choice (30 Questions, 60 Points) Unless otherwise specified, consider that the economy is in autarky, that the demand curve and supply curve are typical-looking. Price Singing Elsa and Anna Doll Set Market 100 MC MR Demand Figure quantity 240

2 1. In Figure 1, a monopoly (one supplier) would produce a quantity of and charge a price of. a. 100; $20 b. 100; $60 c. 180; $40 d. 180; $60 e. 240; $20 For Questions 2 to 4, consider that the marginal cost curve is the market supply curve in a competitive market. 2. In Figure 1, perfect competition (many suppliers) would produce a quantity of and charge a price of. a. 100; $20 b. 100; $60 c. 180; $40 d. 180; $60 e. 240; $20 3. In Figure 1, perfection competition would increase the consumer surplus (CS) from under a monopoly to under perfect competition. a. $2000; $4000 b. $2000; $5400 c. $2000; $9600 d. $4000; $8000 e. $4000; $ In Figure 1, perfection competition would increase total revenue (TR) from under a monopoly to under perfect competition. a. $100; $180 b. $2400; $3600 c. $3000; $3600 d. $4800; $7200 e. $6000; $ In Figure 1, perfection competition among suppliers would generate an excess profit of in the long run. a. $0 b. $40 c. $100 d. $180 e. $240

3 For Questions 6 to 8, consider a market with identical firms that each have the following cost function. Quantity Produced Total Cost What is the marginal cost of the 7 th unit produced? a) $ 35 b) $ 50 c) $ 245 d) $ 1, If the equilibrium price in this market in the short-run is $50, what are the profits of each firm? a) zero b) $105 c) $120 c) $ If this firm is in a competitive market in which all firms are identical to this firm, what is the long-run equilibrium price in this market? a) $10 b) $ 15 c) $ 20 d) $ Which of the following best describes the effects of a subsidy compared to the situation with no government involvement (in a situation of autarky)? a) Consumer surplus increases, producers surplus increases, government budget worsens, society better off b) Consumer surplus decreases, producers surplus increases, government budget improves, society worse off c) Consumer surplus increases, producers surplus increases, government budget improves, society better off d) Consumer surplus decreases, producers surplus decreases, government budget improves, society worse off e) Consumer surplus increases, producers surplus increases, government budget worsens, society worse off 10. Which of the following is the best government response to a negative externality when the amount of damage and the victim of the damage can be identified? a) Force each consumer to pay his/her willingness to pay b) Subsidize consumption of the good by the victims of the externality c) Impose a Pigovian tax d) Issue tradable permits to the victims of the externality e) Eliminate common ownership by granting private property rights

4 11. Consider a market for shirts in which the elasticity of demand is -0.5 and the elasticity of supply is 2.0. The initial equilibrium in the market has a price of 20 and a quantity of 100. After an improvement in technology, the new equilibrium quantity is 120. What is the new equilibrium price? [Note: you should use the point-to-point method for the elasticity] a) 12 b) 16 c) 18 d) Which of the following best describes a compensating differential in the labor market? a) A subsidy by the government to promote employment b) A difference in wages between workers in jobs that have different characteristics c) The difference in wages between males and females d) A payment made by one worker to another worker e) The cost of a tradable permit 13. A normal good is best described as: a) A good for which an increase in the price, holding income fixed, leads to a decrease in quantity demanded b) A good for which an increase in income, holding prices fixed, leads to an increase in the quantity demanded c) A good for which an increase in income, holding prices fixed, leads to a decrease in quantity demanded d) A good that is not preferred by the consumer, all else equal e) A good for which the income effect is larger than all other effects 14. An inferior good is best described as: a) A good for which an increase in the price, holding income fixed, leads to a decrease in quantity demanded b) A good for which an increase in income, holding prices fixed, leads to an increase in the quantity demanded c) A good for which an increase in income, holding prices fixed, leads to a decrease in quantity demanded d) A good that is not preferred by the consumer, all else equal e) A good for which the income effect is larger than all other effects 15. A budget constraint is best described as a curve that shows: a) A firm s profit margin b) The combinations of goods that a consumer can afford c) The limits on income of the consumer d) The line that connects quantities for the consumer e) Demand in the market 16. Which of the following best describes the shape of the labor supply curve? a) Upward sloping b) Downward sloping c) Horizontal, then upward sloping d) Upward sloping, then backward-bending e) Downward sloping, then horizontal

5 17. Which of the following best describes the change in the quantity demanded of Good X and Good Y when the preferences of the consumer shift in favor of Good Y? a) Quantity demanded of Good X increases; Quantity demanded of Good Y increases b) Quantity demanded of Good X increases; Quantity demanded of Good Y decreases c) Quantity demanded of Good X decreases; Quantity demanded of Good Y uncertain d) Quantity demanded of Good X decreases; Quantity demanded of Good Y increases e) Quantity demanded of Good X decreases; Quantity demanded of Good Y decreases 18. An indifference curve is best described as a curve that shows: a) The consumption bundles that a consumer does not like b) The bundles of goods that a consumer has c) The bundles of goods that a consumer can afford d) The attitude of an unenthusiastic consumer e) The combinations of goods that give a consumer the same level of satisfaction 19. Which of the following best describes the effect of an increase in immigration on the labor market? a) Economic welfare of employers increases, economic welfare of pre-immigration workers increases, economic welfare increases b) Economic welfare of employers increases, economic welfare of pre-immigration workers decreases, economic welfare increases c) Economic welfare of employers decreases, economic welfare of pre-immigration workers increases, economic welfare decreases d) Economic welfare of employers increases, economic welfare of pre-immigration workers decreases, economic welfare decreases e) Economic welfare of employers decreases, economic welfare of pre-immigration workers increases, economic welfare increases 20. Which of the following is NOT part of the current debate on Immigration Reform? a) Strengthening penalties for employing illegal immigrants b) Deporting students who are the children of illegal immigrants c) Continuing to Strengthen Border Security d) Earned citizenship e) None of the above 21. Which of the following best explains why there was not immigration reform during ? a) The Senate did not pass a bill on immigration reform b) The House of Representatives did not pass a bill on immigration reform c) President Obama vetoed the Immigration Reform Bill d) The National Referendum on Immigration Reform (NRIR) did not pass e) All of the above

6 22. Which of the following best describes the objective of President Obama s executive order on immigration described in his speech on November 20, 2014: a) Allow about 5 million illegal immigrants to avoid deportation b) Give amnesty to illegal immigrants c) Deport any illegal immigrant detained by local law enforcement d) Increase the number of illegal immigrants in industries with worker shortages e) Double the number of border enforcement agents above the current level For Question 23, consider a society with five households who have income indicated below: HHI = $10,000, HH2 = $14,000, HH3 = $15,000 HH4 = $20,000, HH5 = $25,000 The basic basket of goods used to calculate the poverty line includes two goods: 100 units of Good X which has price of $70, and 100 units of Good Y which has price $ What is the poverty rate? a) 20 percent b) 40 percent c) 50 percent d) 60 percent e) 80 percent For Questions 24 to 30, consider a household that consume only two goods food and other goods that are each normal goods The income of the household is $120, the price of food is $10 and the price of other goods is $20. The household always consumes 50 percent of its income (or income plus value of coupon) on food and 50 percent on other things. The government is considering three policies designed to raise food consumption. -- A transfer of $40 in cash to the household -- A coupon that can be used only to consume 4 units of food (and costs government $40) -- A subsidy of $4/unit on food 24. How much food and other goods does the household consume in the initial situation? a) 60 food, 60 other goods b) 10 food, 20 other goods c) 10 food, 5 other goods d) 6 food, 3 other goods 25. If the government gives a transfer of $40 in cash to the household, how much food and other goods does the household consume? a) 80 food, 80 other goods b) 14 food, 20 other goods c) 14 food 5 other goods d) 8 food, 4 other goods

7 26. If the government gives a coupon for 4 units of food to the household, how much food and other goods does the household consume? a) 80 food, 80 other goods b) 14 food, 20 other goods c) 14 food 5 other goods d) 10 food, 3 other goods 27. Between the $40 transfer and the coupon for 4 units of food, under which policy does the household consume more food? a) Transfer b) Coupon c) Neither, consumption of food is the same d) Cannot be determined [Note: No answer e] 28. If the government gives a subsidy of $4/unit on food (and there is no other transfer i.e. income is $120) how many units of food does the household purchase? a) 6 units b) 10 units c) 12 units d) 20 units 29. Under which policy does the government spend the least amount of money towards the food consumption of this household? [Note: The initial situation is not included in the comparison] a) Transfer of $40 b) Coupon worth $40 of food c) Subsidy of $4/unit d) None they all cost the same e) Cannot be determined 30. If the government wants the best combination of spending as little money as possible and raising the food consumption of the household as much as possible, which policy should it adopt? a) Transfer of $40 in cash b) Coupon worth 4 units of food c) Subsidy of $4/unit d) Doesn t matter, they are all the same [Note: no answer e]

8 Part II Short Answer (30 points) Please use the back of your Parscore form to do questions 31 and 32. You must label your graph, identify key points and quantities to receive full credit. 31. (10 points) In 2013, the poverty rate in the United States was 14.5 percent. Please show how this number can be seen on a histogram of income. 32. (20 points) Consider an individual with income of $100 that consumes only gasoline (Good X) and other goods (Good Y). Both goods are normal goods. The price of other goods is $1/unit. a) (10 points) Please use an indifference curve and budget constraint diagram to show how a decrease in the price of gasoline from $4 to $3 affects the consumer s quantity demanded of gasoline and quantity demanded of other goods. b) (10 points) Please show the changes you document in part a) can be seen on a diagram for the individual s demand curve for gasoline.