EC101 DD/EE Final Exam December 16, 2014 Version 03

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EC101 DD/EE Final Exam F14

INSTRUCTIONS (***Read Carefully***):

ON YOUR QUESTION BOOKLET:Fill in your name, Student ID, Discussion Section Number (e.g. D5) and your signature.

ON YOUR SCANTRON:Enter the Course Number (EC101 DD or EE) and date on the lines at the top-left. In the boxes below that, enter your Student ID, your DISCUSSION SECTION number (D1 - D9, E0 - E9), your NAME and your EXAM VERSION into the Scantron computer sheet. Be sure that you bubble all entries.I will subtract up to 5 points as punishment for errors in these data!

DURING THE EXAM: Students who wish to leave the room for any reason must leave the Question Booklet and Scantron sheet with the instructor or teaching fellow. Students in EC101DD MUST turn in both the Question Booklet and the Scantron sheet at the end of the exam and exit from the front of the room. Students in EC101EE should keep their Question Booklet and turn in only their Scantrons. All students must show their BU Student IDs as they leave the exam room.

MULTIPLE-CHOICE QUESTIONS:Choose the BEST answer for each of the multiple-choice questions. (Only ONE answer is allowed, even when more than one of the answers is technically correct.) On the Question Booklet, CIRCLE the letter that you chose, and then BUBBLE it on the Scantron sheet.

Never cross out an answer on your Scantron. Use a pencil to bubble your answers, and keep a good eraser with you. If you bubble the wrong answer on the Scantron, erase your mark COMPLETELY, and then bubble the correct answer.

***YOU MAY NOT USE A CALCULATOR, CELL PHONE OR LAPTOP.

***However, INTERNATIONAL STUDENTS may use electronic translators or dictionaries.

You have 2 hours (120 minutes) to complete 60 questions. Good luck!

DO NOT OPEN THIS BOOKLET OR TURN IT OVER[until told to do so]

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1. You paid $10 to see a movie. After half an hour, you realize that the movie is very boring. If you are rational in the economic sense, you shoulda. wait another half hour because spending $10

for an hour is better than spending $10 for half an hour.

b. leave immediately and do something more enjoyable.

c. leave immediately only if you can get a partial refund of the ticket price.

d. stay until the end because you already paid for it.

2. Clean air is a public good, partly becausea. government regulations preserve it.b. people can enjoy it without paying for it.c. it promotes public health.d. only governments have the technology to keep

air clean.

3. Charging high prices for computer applications is inefficient becausea. the social cost of using applications is high.b. using applications has negative externalities.c. using applications has no social cost.d. applications increase productivity.

4. Jason works 10 hours per week at Star Market and earns $6.00 per hour. His boss decides to raise his wage to $12.00 per hour. Then, Jason says to himself, Great, now I will work more hours and make lots of money. This implies thata. he considers leisure to be a luxury good.b. the income effect on his demand for leisure is

stronger than the substitution effect.c. the substitution effect on his demand for leisure

is stronger than the income effect.d. his demand curve for leisure is not downward

sloping.

5. Kamwing buys 40 chocolate bars when their price is $1.00 per bar. His price elasticity of demand is 1/2.How many chocolate bars would he buy if the price changes to $1.20?a. 32b. 38c. 36d. 42

6. A firm can obtain market power bya. raising the price of its product.b. reducing the part of its fixed cost that is not

sunk.c. increasing its use of fuel and electricity.d. differentiating its product from those of other

producers.

Figure TXA. Suppose the government imposes a $10 per-unit tax on a good.

7. See Figure TXA. The tax causes consumer surplus to decrease by the areaa. A+B+C+D+F.b. A.c. B+C.d. A+B+C.

8. See Figure TXA. The government collects tax revenue that is the areaa. C+F.b. L.c. B+D.d. F+G+L.

9. See Figure TXA. The tax willa. create a deadweight loss of $180.b. reduce consumer surplus by $24.c. reduce producer surplus by $72.d. ALL of the above

10. See Figure TXA. The $10 tax willa. allocate goods to the consumers with the

highest willingness to pay.b. cause a $10 increase in consumer prices.c. result in nonprice rationing.d. create an excess demand of 20 units.

11. Suppose there is an early freeze in Florida that reduces the size of the orange crop. If the demand for oranges is downward sloping, what happens to consumer surplus in the market for oranges?a. It is not affected.b. It increases.c. It decreases.d. We would have to know the elasticity of

demand to make this determination.

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12. Suppose rent controls reduce prices in the market for apartments. Then, a. those willing to pay the most will get the

apartments.b. the consumer demand curve will shift out.c. some consumers will pay lower rents than they

would pay without controls.d. NONE of the above

Figure PPD. The graph below describes a profit-maximizing monopolist that can carry out perfect price discrimination.

[Hint: Do NOT forget perfect price discrimination.]

13. See Figure PPD. The line Z representsa. average price.b. marginal revenue.c. average variable cost.d. NONE of the above.

14. See Figure PPD. In order to maximize profits, the monopolist should produce _____ units.a. 5b. 6.25c. 10d. 3.33

15. See Figure PPD. The monopolist would earn total revenues ofa. $37.50.b. $25.c. $100.d. $50.

16. See Figure PPD. Consumer surplus would bea. $25.b. 0.c. $50.d. $12.50.

17. When all fixed costs are sunk,a. marginal cost is constant.b. output will be lower than normal.c. the firm will go out of business.d. the firm is operating in the short run.

18. A simultaneous increase in both the demand for radios and the supply of radios would imply thata. both the value of radios to consumers and the

cost of producing radios has increased.b. the value of radios to consumers has decreased

and the cost of producing radios has increased.c. the value of radios to consumers has increased

and the cost of producing radios has decreased.d. both the value of radios to consumers and the

cost of producing radios has decreased.

19. Suppose anyone is allowed to take wood from a public forest. The Tragedy of the Commons refers to the fact that people would be likely toa. assign a low value to anything that is free.b. earn profits by selling the wood that they have

taken.c. damage the forest by cutting down too many

trees.d. create pollution by burning the wood for

cooking and heating.

20. If the labor supply curve is extremely inelastic, a tax on labora. results in a large tax burden on the firms that

hire labor.b. has a large deadweight loss.c. raises a small amount of tax revenue.d. has little impact on the amount of work that

workers are willing to do.

21. When you calculate your (opportunity) costs of going to college, what portion of your room-and-board expenses should be included?a. your room-and-board expenses minus

room-and-board expenses you would have had if you werent in college

b. none of your room-and-board expensesc. your full room-and-board expensesd. your room-and-board expenses minus the

income you earn while attending college

22. An inward shift in the supply of lettuce could be caused bya. a decrease in the price of lettuce.b. an insect that eats lettuce.c. a report that lettuce causes cancer.d. a report that lettuce prevents heart disease.

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Figure PCM. The graph below describes supply and demand for a perfectly competitive market.

23. See Figure PCM. In equilibrium, social surplus is a. $216.b. $144.c. $288.d. $72.

24. See Figure PCM. The equilibrium allocation of resources isa. efficient because social surplus is maximized

when 12 units are produced and sold.b. inefficient because social surplus is maximized

when 20 units of output are produced and sold.c. efficient because consumers can buy as much

as they want to.d. inefficient because consumer surplus is smaller

than producer surplus.

25. See Figure PCM. The production and sale of unit 20 would reduce social surplus, becausea. the cost of producing unit 20 exceeds its value

to consumers.b. consumers place no value on unit 20.c. at unit 20, the elasticity of supply is infinite.d. at unit 20, MC > ATC.

26. If the government enacts a $4 excise tax per bottle of wine and requires the seller to collect the tax revenue and transfer it to the government, then the tax burdena. is divided equally between seller and buyer.b. falls entirely on the buyer.c. on the seller and the buyer depends on the

elasticities of demand and supply.d. falls entirely on the seller.

Figure EXT. The following graph represents the market for rubber.

27. See Figure EXT. If 6 units of rubber are produced and consumed, then a. there are unexploited social gains of trade.b. social surplus is maximized.c. rubber must have positive externalities.d. the market is in equilibrium.

28. See Figure EXT. If 8 units of rubber are produced and consumed, thena. social surplus is maximized.b. social cost is less than private cost.c. the market is in equilibrium.d. the demand curve will shift up.

29. See Figure EXT. In order to reach the social optimum, the government coulda. impose a tax of $3 per unit.b. impose a tax of $8 per unit.c. impose a tax of $2 per unit.d. apply a price ceiling of $8 per unit.

30. See Figure EXT. An efficient tax would raise ____ of revenue for the government.a. $48b. $30c. $18d. NONE of the above is efficient.

31. The distribution of cocaine is run by gangsters, mainly becausea. gangsters have a comparative advantage in

illegal markets.b. cocaine is addictive.c. honest business executives do not want to be

involved with a harmful substance.d. the cocaine business is highly profitable.

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32. As compared with barter, selling and buying...a. makes it easier to find trading partners.b. yields more useful information about market

value.c. requires the use of a widely accepted medium

of exchange.d. ALL of the above are true.

33. Which of the following is not a reason why voluntary exchange can lower a buyers welfare.a. deceptive marketingb. temptationc. high pricesd. poor information

34. Why does a firm in a perfectly competitive industry charge the market price?a. If a firm charges less than the market price, it

loses potential revenue.b. If a firm charges more than the market price, it

loses all its customers to other firms.c. The firm can sell as many units of output as it

wants to at the market price.d. ALL of the above are correct.

Scenario NRD. The table below shows the payoffs to the running of positive and negative political advertisements by two candidates, a Democrat and a Republican. The payoffs represent the increase or decrease in the percentage of voters willing to vote for the candidate. Payoffs are displayed in the chart as (Democrats payoff, Republicans payoff).

RepublicanPositive Negative

Demo-crat

Positive (+8, 8) (6, +6)Negative (10, +10) (+4, 4)

Note: Positive advertisements say good things about the candidate; negative advertisements say bad things about the candidates opponent.

35. See Scenario NRD. This game is an example ofa. a coordination game.b. a prisoners-dilemma game.c. a zero-sum game.d. NONE of the above

36. See Scenario NRD. How many pure-strategy Nash equilibria does this game have?a. 0b. 1c. 2d. 4

Scenario CDU. Two firms X and Y compete with each other by setting quantities. Each firm must choose to produce either 1, 2, 3 or 4 units, without knowing what the other firm has done. AC = MC = 0.Market demand is given by Q = 9 P.

37. See Scenario CDU. If X decided to produce 1 unit, then Ys best response is to produce ___ unit(s).a. 3b. 1c. 4d. 2

38. See Scenario CDU. Which of the following is a Nash equilibrium?a. NONE of the aboveb. X produces 2 and Y produces 3c. X produces 3 and Y produces 3d. X produces 1 and Y produces 4

39. If, at the current price, there is a shortage of a good,a. the market must be in equilibrium.b. the price is below the equilibrium price.c. sellers are producing more than buyers want to

buy.d. quantity demanded equals quantity supplied.

40. People accept paper money in return for valuable goods and services mainly becausea. money is legal tender.b. the law of most countries requires people to

accept money as payment for any goods or services they want to sell.

c. almost everyone else accepts money.d. money is backed by gold in most countries.

41. Shannon bakes cookies and Justin grows vegetables. In which of the following cases is it impossible for both Shannon and Justin to benefit from trade?a. Justin is better than Shannon at baking cookies

and at growing vegetables.b. Shannon does not like vegetables and Justin

does not like cookies.c. Shannon is better than Justin at baking cookies

and Justin is better than Shannon at growing vegetables.

d. ALL of the above are correct.

42. To find the total amount supplied in the market at a particular price, we musta. consider all determinants of demand.b. add up all of the amounts that firms are willing

and able to supply at that price.c. average the amounts that firms are willing and

able to supply at that price.d. consider the tastes and preferences of buyers.

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43. Suppose the data show that people who drink wine are more likely to get cancer than other people. Then it would be correct to conclude thata. chemicals in wine cause cancer.b. most cancer patients were wine drinkers.c. avoiding wine would reduce the chance of

getting cancer.d. NONE of the above

Figure QMC. Suppose each firm in a perfectly competitive market has the following cost curves:

44. See Figure QMC. Each firm will remain open in the short runa. only if the price is at least $6.b. at any price greater than zero.c. only if the MC is less than $6.d. only if the AVC is at least $6.

45. See Figure QMC. Each firm has a fixed cost of approximatelya. 0.b. $6.c. $9.d. MORE information is needed.

46. See Figure QMC. In long-run equilibrium, each firm willa. produce 3 units.b. set AVC equal to ATC.c. shut down.d. continue to expand.

47. Which of the following is not a determinant of demand?a. the price of an input used to produce the goodb. the price of a complementary goodc. the price of a substitute goodd. the expected price of the good next month

Figure MCP. This graph illustrates the condition of one firm in a market characterized by monopolistic competition.

48. See Figure MCP. Line Z on the graph representsa. average variable cost.b. demand.c. average fixed cost.d. NONE of the above.

49. See Figure MCP. For the short run, the monopolistic competitor will produce ____ units and charge ____.a. 9; $5.50b. 0; $10.00c. 5; $7.50d. 6.67; $6.67

50. See Figure MCP. The firms profits are approximatelya. $16.00.b. $4.50.c. $50.00.d. 0.

51. See Figure MCP. In the long run, this firm will a. shut down.b. produce at the same level as now.c. decrease its output.d. increase its output.

52. The price elasticity of demand for widgets is 2. At a price of $10, a store sells 200 widgets per month. The store owner decides that she wants to sell 260 widgets per month. What price should she set?a. $9.50b. $4.20c. $7.00d. $8.50

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53. Capital formation normally requiresa. the availability of advanced technologies.b. a sacrifice of consumption.c. the printing of stock certificates.d. an increase in the money supply.

54. In a perfectly competitive market, different people will not exchange the same good at different prices, becausea. individual consumers normally buy sufficiently

large quantities to obtain the lowest price.b. sellers offering low prices and buyers facing

high prices would refuse to complete the exchange.

c. arbitrageurs cannot earn profits unless all prices are the same.

d. the law requires everyone to sell at the official price set by the government.

55. Which of the following is an example of a positive externality?a. Mary couldnt catch the flu from Sue, because

Sue was vaccinated.b. Sue caught the flu, because Sue wasnt

vaccinated.c. Mary caught the flu from Sue, because Mary

wasnt vaccinated.d. Sue didnt catch the flu, because Sue was

vaccinated.

Table ACC. The data below represent the quantity of resources that Argentina and Brazil would need to manufacture one train or one plane.

Required ResourcesTrain Plane

Argentina 2 3Brazil 1 2

56. See Table ACC. The opportunity cost of a plane in Argentina is ___ train(s); the opportunity cost in Brazil is ___ train(s).a. 3/2; 1/2b. 1/2; 2/3 c. 2/3; 1/2d. 3/2; 2

57. See Table ACC. Which country has a comparative advantage in producing trains? planes?a. Argentina; Brazilb. Brazil; Argentinac. Brazil; Brazild. Argentina; Argentina

Scenario EFS. Claudia and Daniel each owns a jewelry store that sells precious emeralds. The two stores compete with each other. Each owner has to choose from two prices: a high price (H) or a low price (L). Claudia has promised to announce her price on Tuesday. Daniel will see what price Claudia announces, and then announce his own price the next morning. The following chart represents the actions of the two owners. Profits for each store are in parenthesis: (Claudias profits, Daniels profits).

58. See Scenario EFS. Claudia must choose a strategy from a set of ____ possible strategies; Daniel must choose a strategy from a set of ____ possible strategies.a. 4; 4b. 4; 2c. 2; 2d. 2; 4

59. See Scenario EFS. Which strategy will Daniel adopt in subgame-perfect Nash equilibrium?a. charge a high price when Claudia charges a low

price, and vice versa.b. always charge a high pricec. always charge a low priced. charge the same price as Claudia

60. See Scenario EFS. Which strategy will Claudia adopt in subgame-perfect Nash equilibrium?a. charge a high price when Daniel charges a low

price, and vice versab. charge the same price as Danielc. charge a low priced. charge a high price