Exam 2. (Questions 1-3) Figure 1 shows the market demand, marginal revenue, marginal cost, and average total cost for a monopolist.

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1 ECONOMICS Dr. John Stewart April 6, 2000 Exam 2 Instructions: Mark the letter for the best answer for each question on the computer readable answer sheet. Please note that some questions have four choices, others have five choices. On the answer sheet make sure that you have written your name and coded in your student ID number and the number of the recitation section you attend (A list of recitations shown on the screen will help you identify your section number). All questions are weighted equally. There are two bonus questions on the exam. Percentage scores will be calculated based on 35 points; there are 37 points on the exam (Questions 1-3) Figure 1 shows the market demand, marginal revenue, marginal cost, and average total cost for a monopolist. 1) In Figure 1, a profit maximizing monopolist charges a price of: a) $5 b) $7 c) $8 d) $10 2) The monopoly firm depicted in Figure 1 would earn a) losses of $90 b) profits of $0 c) profits of $10 d) profits of $110 e) not enough information to tell $/unit $10 $8 $7 $5 $4.50 MC AC 3) Again using Figure 1, the most efficient quantity of the good to produce from a social welfare perspective is a) 18 b) 20 c) 30 d) 35 Figure MR D Quantity 4) Which of the following characteristics of perfect competition does not apply in monopolistic competition? a) free entry and exit b) homogeneous products c) numerous participants d) perfect information 5) In the long run the prices charged by a firm in monopolistic competition will be a) high enough to provide profits to the firm. b) so low that many firms will drop out of the industry. c) equal to marginal cost. d) equal to average cost, including the opportunity cost of capital. Econ Exam 2a -- Page 1 of 6

2 Questions 6-9 involve the following scenario for Pedro s House of Fajitas. Pedro is currently planning on opening his restaurant soon, but needs to decide how many servers to hire before he can bring customers in. Pedro has the following estimates on the production and the price he would have to charge to sell each quantity of output he could produce by hiring different numbers of servers. Assume that servers are the only variable input. # of Servers Fajitas Sold Price of Fajitas Total Revenue MRPL 1 20 $ $ $ $ $ $ 7 6) Hiring a fourth server will provide Pedro with extra revenue? a) $16 b) $80 c) $144 d) $720 7) What is the minimum number of servers Pedro has to hire in order to make at least $700 in revenue? a) 3 b) 4 c) 5 d) 6 e) both (b) and (c) 8) Suppose that Pedro has to pay each server $7 per day. How many servers would Pedro want to hire? a) 3 b) 4 c) 5 d) 6 9) Now suppose that a new minimum wage law is enacted that says servers must be paid at least $20 per day. If Pedro has fixed costs of $600 and he hires the appropriate number of servers, his profits are: a) $20 b) $40 c) $80 d) $160 10) If a minimum wage law is enacted that causes unemployment, economists would say that the minimum wage a) created an excess supply in the labor market. b) created excess demand in the labor market. c) created equilibrium in the labor market. d) minimum wage laws didn t affect the labor market 11) In any competitive factor market, the marginal revenue product of the last unit of the factor purchased will equal: a) the price of the factor b) the average cost of the product c) average product of the factor 12) If the substitution effect dominates in your labor supply decision, you a) increase your hours worked as your wage rate rises b) decrease your hours worked as your wage rate rises c) increase your hours worked no matter what d) change jobs whenever you find a new one d) the price of the product Econ Exam 2a -- Page 2 of 6

3 13) A negative externality creates problems for the private market because: a) consumers have no incentive to pay for the products produced with a negative externality b) firms produce too little because they are concerned for the well-being of society c) consumers provide buy too little of the product to punish the firm for the negative externality d) firms ignore the external costs and produce more than is optimal for society. 14) A public good is a good a) that can only be produced by government. b) that once it is produced, all consumers can consume equal quantities whether they have paid or not. c) that will be over produced by a free market. d) both b) and c) 15) From the standpoint of economy efficiency, private individuals and firms will a) allocate too many resources into producing goods that generate external benefits b) allocate too few resources into producing goods that generate external benefits c) allocate too many resources into producing goods that generate external costs d) both b) and c) The table below shows the price of Beer, Pretzels, and Sausages (that s a Bavarian Breakfast) in 1997 and 1998 and the quantity of those goods that are purchased by a representative Bavarian in You may assume that these are the only goods consumed in Bavaria. Use the information from this table to answer questions 16 to 19. Prices 1997 Prices 1998 Quantity 1997 Beer Sausages Pretzels ) If we use 1997 as the base year, the Bavarian Consumer price index for 1998 is a) 100 b) 110 c) 120 d) ) Between 1997 and 1998 Bavaria experienced a) an inflation of 10% b) an inflation of 20% c) and inflation of 25% d) a deflation of 20% 18) A typical Bavarian who had a nominal income of 4000 in 1997 and a nominal income of 4800 in 1998 experienced a) a gain in real income of 800. b) a loss in real income of 800. c) a gain in real income of 400. d) a gain in real income of 200 e) no change in real income. 19) By 1999 the nominal income of our typical Bavarian had increased to 5000 and the Bavarian CPI was 130 (base year 1997). We can conclude a) our typical Bavarian is better off in 1999 than he was in b) our typical Bavarian is worse off in 1999 than he was in c) our typical Bavarian is just as well off in 1999 than he was in d) nothing. There is not enough information to draw a conclusion. Econ Exam 2a -- Page 3 of 6

4 20) If in an economy 8 million people are employed and 1 million are unemployed and looking for jobs and another million is unemployed, but has no intention to work, the unemployment rate is a) 10% b) 11.1% c) 12.5% d) 20.0% 21) Structural unemployment a) is unemployment that is due to normal turnover in the labor market. b) refers to unemployed workers whose skills don't match the jobs available. c) is the part of unemployment that is attributable to a decline in the economy's total production. d) is all of the above. 22) The difference between potential and actual GDP is a) the inflationary gap. b) the recessionary gap. c) the current unemployment rate. d) either a) or b) depending on whether actual GDP is larger or smaller than potential GDP. 23) Real GDP is a better measure for changes in total production than nominal GDP because a) only real goods count. b) nominal GDP includes the trade balance. c) economists got used to doing it this way. d) real GDP adjusts price changes. 24) The GDP as a measure of economic well being is not perfect because a) leisure time is not included. b) good' as well as bad' goods are counted. c) ecological costs of production are not deducted. d) all of the above. 25) Disposable income is the sum of all individual income, adjusted for a) Transfer payments. b) Taxes. c) Both a and b d) Neither a nor b Information for questions Consider a simple macro economy with no foreign trade (you can ignore exports and imports, so total expenditure = C + I + G ). You may also assume that the price level is fixed. The consumption function can be described by the equation C = (Y-T), where Y is income and T is the amount of tax payments the government collects from consumers. Assume initially that government taxes (T) total $ 100 million and that taxes are autonomous "lump sum" taxes), government spending is autonomous (G) and is equal to $ 130 million and autonomous investment (I) is $ 170 million. You may use the blank table below to help answer the questions that follow. GDP Gross Domestic Product = National Income DI Disposable Income C Consumption Expenditure I Investment Expenditure G Government Expenditure TE Total Expenditure all numbers are in millions of dollars per year. Econ Exam 2a -- Page 4 of 6

5 26) In the economy described above, the marginal propensity to consume is a).75 b).8 c).9 d) can t be determined 27) Given the numbers above, the equilibrium GDP for this economy will be. a) 800 b) 1200 c) 1600 d) 2000 e) ) Given the numbers above, the government expenditure multiplier is a).8 b) 1.0 c) 4.0 d) 5.0 e) ) If the potential GDP for this economy is 1800 and assuming taxes and investment do not change, the government could achieve full employment by a) increasing government spending by 200 b) increasing government spending by 100 c) increasing government spending by 40 d) decreasing government spending by 50 e) there is no level of government spending that will achieve full employment. 30) A one dollar increase in government spending will a) have the same effect on equilibrium GDP as would a one dollar tax cut b) have a larger effect on equilibrium GDP than would a one dollar tax cut c) have a smaller effect on equilibrium GDP than would a one dollar tax cut d) have a smaller effect on equilibrium GDP than would a one dollar increase in investment spending, 31) (BONUS QUESTION) If the government replaces the lump sum tax with a 10% tax on income (T =.1Y) a) equilibrium income will increase and the government expenditure multiplier will rise. b) equilibrium income will increase and the government expenditure multiplier will fall. c) equilibrium income will fall and the government expenditure multiplier will rise. d) equilibrium income will fall and the government expenditure multiplier will fall. e) equilibrium income will stay the same and the government expenditure multiplier will fall. 32) (BONUS QUESTION) If the government replace the lump sum tax with a 10% income tax as described in question 31, the government expenditure multiplier will be a) 4.0 b) 5.0 c) 4.5 d) approximately 3.6 e) approximately ) A change in which of the following would not lead to a shift in the aggregate supply curve? a) output prices b) the wage rate c) technology and productivity d) available supplies of labor and capital 34) The aggregate demand curve shifts upward when a) There is an decrease in government expenditure b) There is an increase in the tax rate c) There is an increase in autonomous investment spending d) There is an increase in income e) both c) and d) Econ Exam 2a -- Page 5 of 6

6 Questions Consider the economy shown in Figure 2. For simplicity you may ignore the foreign sector. The economy is currently in full employment equilibrium at Real GDP = Y 0 and price level P 0. 35) OPEC has recently cut crude oil production which has resulted in a substantial increase in the price of oil. How would this change be reflected in Figure 3? a) the total expenditure curve will shift up and the aggregate demand curve will shift out to the right. b) the total expenditure curve will not shift but the aggregate demand curve will shift in to the right. c) the aggregate supply curve will shift out to the right. d) the aggregate supply curve will back to the left. 36) What is the most likely effect on the economy of the oil price increase? a) the economy will experience more inflation and higher unemployment b) the economy will experience higher inflation but lower unemployment. c) inflation and unemployment will both fall d) there will be no effect on prices and output. 37) What must happen for the economy to return to full employment and stable prices? a) the government must cut taxes b) the government must cut spending c) the government must find ways to decrease investment spending. d) the government must wait for wages to fall. Figure 2 You have just completed FORM A of the exam. Make sure you print "Form A" in the upper corner of your scan sheet and put your exam in the FORM A pile for your recitation section. Econ Exam 2a -- Page 6 of 6