Part I - Multiple Choice: Choose the best answer
1. In the short run, if a firm finds itself producing at a loss:
a. It will shut down
b. It will shut down only if it cannot cover its fixed cost
c. It will raise the price of its product
d. It will not necessarily do any of the above
2. An increase in supply will lower price unless:
a. Supply is perfectly elastic
b. Demand is perfectly elastic
c. Demand is highly inelastic
d. Both supply and demand are highly inelastic
3. A straight line demand curve has the following properties:
a. Constant elasticity with varying slope
b. Constant slope and constant elasticity
c. Constant slope and varying elasticity
d. Varying slope and varying elasticity
4. If the price of a good is $5 (in a competitive market), and at that price buyers wish to purchase 4,000 units weekly, and sellers wish to sell 5,000 units weekly:
a. Price will tend to rise above $5 and suppliers will tend to offer more than 5,000 units
b. Price will tend to fall below $5 and buyers will tend to buy less than 4,000 units
c. Price will tend to rise above $5 and suppliers will tend to offer less than 5,000 units
d. Price will tend to fall below $5 and suppliers will tend to offer less than 5,000 units
5. A firm is maximizing output for a given level of production costs when:
a. The marginal rate of technical substitution equals the ratio of the factor prices.
b. The ratio of the marginal-physical products equals the ratio of the factor prices.
c. Both a and b
d. Neither a nor b
6. If a monopoly is attempting to maximize profits, which of the following should it attempt to do?
a. Maximize revenues
b. Maximize profit per unit
c. Select that output at which average fixed cost is a minimum
d. None of the above
7. In perfect competition the marginal cost curve is:
a. The firm's supply curve
b. An inverse function of the output
c. Always a straight line
d. All of the above
8. Joe Zilch operates a gas station. His accounting profit is 510,000. Prior to that he earned $5,000 per year pumping gas. Assuming that his range of occupational choice is restricted to the two above-mentioned alternatives, his economic profit is:
a. 0
b. 5000
c. 15,000
d. Impossible to determine unless we know his direct expenses
9. The dominant firm model is a type of:
a. Perfect competition
b. Monopolistic competition
c. Price leadership
d. Monopoly
10. In the theory of production, the short run is:
a. A specified period of calendar time for all industries
b. Defined in calendar time only
c. A period of time in which no resource inputs are fixed
d. A period of time in which the firm operates with at least one fixed resource
11. A firm experiencing constant returns to scale increases its labor input from 50 to 75 units and its capital input from 20 to 30 units. Its output will increase from:
a. 200 to 500
b. 200 to 250
c. 200 to 300
d. Inadequate information to answer
12. In the kinked demand curve model:
a. A price increase by one firm is followed by all others, but no firms follow a price decrease
b. A price decrease by one firm is followed by all others, but no firms follow a price increase
c. Price increases and decreases by one firm will be followed by the other firms
d. Neither price increases nor decreases by one firm will be followed by the others
13. A decrease in the cost of materials needed to produce commodity X will affect the demand and/or supply curve for commodity X as follows:
a. The demand curve will move downward (or to the left)
b. The supply curve will move downward (or to the right)
c. Both the demand curve and the supply curve will move downward
d. The supply curve will move upward (to the left)
14. Which of the following is nearest to being a perfect competitor?
a. A chain of movie theaters whose demand has an elasticity coefficient equal to 1.00
b. A cigarette firm whose demand has an elasticity coefficient equal to .50
c. A penicillin producer whose demand has an elasticity coefficient equal to 0.001
d. A salt producer whose demand has an elasticity coefficient equal to 999
15. If industry demand shifts sharply to the left as industry supply moves to the right, we should expect:
a. The same price to prevail
b. The same quantity to prevail
c. Price and quantity to fall
d. Price to fall while quantity may or may not change
16. If the elasticity of demand for cigarettes is 1.2, raising the price of cigarettes will:
a. Raise total spending on cigarettes
b. Lower total spending on cigarettes
c. Not affect total spending on cigarettes
d. None of the above
17. Consumer equilibrium on an indifference map:
a. Is at that point where the slope of the budget line is exactly equal to the slope of the indifference curve
b. Is at the intersection of the budget line and the indifference curve
c. Is at any point on the highest indifference curve shown on the indifference map
d. Is at any point inside the budget line
18. The perfectly competitive firm will be in the long run equilibrium whenever price is:
a. Equal to minimum average cost
b. Equal to minimum average variable cost
c. Greater than minimum average cost
d. Greater than minimum average variable cost
19. A barber shop is an example of:
a. A perfectly competitive firm
b. A monopoly
c. A firm in a monopolistic competition
d. An oligopoly
20. If prices fall in a perfectly competitive industry, the firms in that industry in the shortrun will:
a. Not decrease in number
b. Try to reduce production
c. Keep output at the same level but minimize losses
d. Shut down
Part II -
Suppose you are given the following demand schedule for a commodity:
|
Price
|
Quantity Units
|
|
10
|
9
|
|
9
|
10
|
|
8
|
11
|
|
7
|
12
|
|
6
|
13
|
|
5
|
14
|
a. What is the arc elasticity coefficient of demand if the price changes from $7 to $6?
b. Over what regions of the schedule is demand elastic, of unitary elasticity, inelastic?
Part III -
Analyze the following situations by means of supply and demand diagrams. Explain fully.
1. Explain the Democratic Party position concerning the impact of the minimum wage on the employment market.
2. From 1346-1348 the plague eliminated one third of the population of Europe. What impact would you expect this to have on the wages of agricultural workers?
3. "A good harvest will generally lower the income of farmers." Illustrate this proposition using a supply and demand diagram. Explain the diagram.
Part IV -
Given the following information for the ABC Manufacturing Company:
|
Output
|
Total Revenue
|
Total Cost
|
|
0
|
0
|
2
|
|
1
|
11
|
4
|
|
2
|
20
|
7
|
|
3
|
27
|
11
|
|
4
|
32
|
16
|
|
5
|
35
|
22
|
|
6
|
36
|
29
|
|
7
|
35
|
37
|
|
8
|
32
|
46
|
|
9
|
27
|
56
|
|
10
|
20
|
67
|
1. Calculate the firm's marginal revenue and marginal cost at every level of output.
2. Is this firm operating in perfect competition? How do you know?
3. Find the firm's maximum profit output and maximum profit price.
4. What is the level of fixed costs for this firm?
Part V -
Suppose you were given the following information:
|
Percent of families
|
U.S. 1996
|
U.S. 1936
|
|
20
|
5
|
3
|
|
40
|
18
|
14
|
|
60
|
25
|
28
|
|
80
|
39
|
47
|
|
100
|
100
|
100
|
A. Draw the Lorenz curves for family income in 1936 and 1996. Put the curves on the same diagram.
B. During which period of time was income inequality the greatest?
Part VI -
Given the production function:
0 = AL.60K.70
A. What is the increase in output if the quantity of capital rises 30%? (Assume the quantity of labor and technological changes are constant.)
B. Is this industry exhibiting increasing, constant, or decreasing returns to scale? How do you know?
Part VII -
Suppose in a population of 1,000 there are 725 employed and 175 unemployed.
1. The employment rate is
2. The unemployment rate is
3. The Labor Force participation rate is
Part VIII -
A. A $10,000 perpetual bond is issued at 8%. What will be the price of the bond if interest rates rise to 11%? Show your work.
B. Explain how, using a relative income definition of poverty, the proportion of the population living in poverty can be reduced. Use diagrams.
C. Write an essay discussing alternative definitions of poverty. Include approaches used in both developed and developing countries (150-200 words).