Principlesof Microeconomics J Ragan Name Exam 3 November18 2004 by rzx15370


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									                               Principlesof Microeconomics

J. Ragan                                           Name:
Exam 3
November18, 2004                                           #:

DIRECTIONS: Readeachquestioncarefullyand thoroughlybeforeselectingthe bestanswer.
Chooseonly one answerper question. If you find somethingunclear,ask aboutit beforeturning
                                        in             columnsof the computercard.
in your exam. Finally, mark your answers the appropriate

1. Why might a companypay a wagehigherthanthe competitivemarketwage?
a.   collectivebargaining
b.    efficiencywagetheory
c.   mInImumwages
d.   all of the above

2. Which statement  most accurately          the
                                     describes Social SecuritySystem?
a.                                                      of
      Bill Gatesis not eligible to receivebenefitsbecause his high income.
b.              into
      Revenues the Social Securitysystem(taxes)areprojectedto exceedoutlays(benefits
      and administrativecosts)for at leastthe next40 years.
c.    Overthe past30 years,Social Securitybenefitshavefailed to keeppacewith inflation.
d.    President Bushfavorsprivatization, which would allow youngworkersto investpart of
      their Social Securitytaxesin the stockmarket.

                                                      coal workers?
3. Which theorybestexplainsthe high wagesof underground
a.    economicrent
b.    humancapital
c.    compensating wagedifferentials
d.    signaling

4. Whena monopolisticallycompetitivefirm raisesprice,it:
a.   losesall its customers.
b.   losessomebut not all customers.
c.   losesno customers.
d.   gainscustomers.

5. In choosingthe numberof workersto employ,a profit-maximizing company        the
value of marginal productof labor(VMP). The company's goal is to:
a.     makeVMP-Wageashigh aspossible.
b.     makeVMP- Wageas low aspossible(but not negative).
c.     maximizeVMP.
d.     minimize VMP.
Answer the next four questions based on the following diagram.

~hS --

     o1,p     ~- -

                                             I                  OULp(';{~

6. If this fiml is free to set any price it chooses, which price will it set in order to maximize
a.      $65
b.      $33
c.      $25
d.      $20

7. If a regulatory commission sets a price that limits the company to a "fair return" through
average-costpricing, what price will the company receive?
a.      $65
b.      $33
c.      $25
d.      $20

8. If the regulatory commission chooses marginal-cost pricing in an effort to achieve efficient
allocation of resources, what price will be set?
a.      $65
b.      $33
c.      $25
d.      $20

9. If the regulatory commission guaranteesthat the company will earn zero economic profit,
economists worry that this guaranteewill:
a.      increase the fiml'S average cost curve.
b.      decreasethe fiml'S average cost curve.
c.      increase the fiml's demand curve.
10. The principle thatpeoplewith similar ability to payshouldpaysimilar amountsof taxesis
a.    progressivity.
b.    regressivity.
c.    efficiency.
d.    vertical equity.
e.    horizontalequity.

11. An increase capitalincreases  wageinequalityif:
a.                                             capitalandskilled labor arecomplements.
      capital andunskilled labor aresubstitutes,
b.    capital andunskilled labor arecomplements, capitaland skilled labor are substitutes.
c.                                                  for
      both skilled andunskilled laboraresubstitutes capital.
d.    both skilled andunskilled laborarecomplementary   inputs with capital.

12. Overthe past30 years,wageshaveincreasedfasterthan averagefor:
a.    women.
b.    high-schooldropouts.
c.    womenandhigh-schooldropouts(a and b areboth correct).
d.    neitherwomennor high-schooldropouts(a-c areincorrect).

Answerthe next two questions                                                taxesowed by
                              basedon the following table, which showsaverage
families at two differentincomelevels.
       Income         ~
       $40,000       $6,000
       $60,000       $8,000

                     from $40,000to $60,000,whatis the marginal tax rate?
13. As incomeincreases
a.     10%
b.     13.3%
c.    20%
d.    25%

14. Basedon the informationprovided,the tax is:
a.    proportional.
b.    progressive.
c.    regressive.
d.    a payroll tax.

15. Which of the following taxesraisesthe mostrevenuefor the federalgovernment?
a.    propertytaxes
b.   payroll taxes,including Social Securitytaxes
c.   individual incometaxes
d.   corporateincometaxes
16. The initial povertyline or budget,which detennineswhetheror not a family is considered
poor, was based  on:
a.     the costof food.
b.     the costof housing.
c.     the minimum wage.
d.     medianhouseholdincome.

17. Somepartiesarguedthat Microsoft madethe purchase one productconditional on
purchase a second    product. Sucha practiceis knownas:
a.    predatory pricing.
b.    tying.
c.    horizontalequity.
d.    a merger.
e.    privatization.

                                                                               capacity. As
18. One criticism of monopolisticcompetitionis that its finns tend to haveexcess
measured economists,     excesscapacitymeans that:
a.    price is not equalto marginalcost.
b.    marginal costis not minimized.
c.    average   costis not minimized.
d.    finns are not producingas muchas physicallypossible.

                                             to                 of
19. Whenis it most appropriatefor government subsidizeconsumption a good?
a.    Socialbenefitsexceed private benefits.
b.   Privatecostsarehigh.
c.   Externalbenefitsarezero.
d.    Socialcostsexceed private costs.
e.   Privatebenefitsexceedsocialbenefits.

20. Which of the following examplesbestillustratesan externalcost?
a.    Your neighborthrowswild partiesat all hoursof the night (anddoesnot invite you).
b.    Beer consumption   addsto yourwaistline.
c.    Your neighborre-sodshis lawn andaddsa numberof beautiful trees.
d.    Your smokingis injurious to your health.

21. An industryis comprisedof eightfinns. The largest  threefinns eachsell 50 units of output
per day. Daily salesof eachof the remainingfinns is 10 units. What is the marketconcentration
a.     10%
b.     50%
c.     75%
d.     80%
e.     100%
22. If incomewere distributedequallyacross     families,the Lorenzcurvewould be:
a.      horizontal.
b.      vertical.
c.      diagonalandupwardsloping.
d.      diagonalanddownwardsloping.
e.      initially horizontal and thenvertical.

23. Why might free marketsfail to producesociallyoptimal outcomes?
a.   public goods
b.   externalities
c.    monopoly
d.   all of the above

                                     data,progressin reducingpovertyhasbeengreatest
24. According to historical government                                            for:
a.    the young.
b.    the elderly.
c.                   the
      thosebetween agesof 18-64.

25. In the absence government   intervention,externalcosts(negativeexternalities) are
a.                 of                   the
        consumers the good that causes externalcost.
b.                of                   the
        producers the good that causes externalcost.
c.                                            the
        workersproducingthe good that causes externalcost.
d.                                                                               or
        otherparties-those who are not directly involved in eitherthe consumption the
        productionof the good.

26. Long-run equilibrium for a monopolisticallycompetitiveindustryis characterized
a.    price equalaverage  cost.
b.    price greater thanmarginalcost.
c.    marginalrevenueequalmarginalcost.
d.    all of the above.

27. Immigration:
a.    reduces wagesof domesticworkers.
b.    increaseswagesof domesticworkers.
c.    reduces wagesof somedomesticworkerswhile increasingwagesof others.
d.    hasno effect on the wagesof domesticworkers.

28. Internalizinga negativeproductionexternalitywill cause industry'ssupplycurveto:
a.     shift downward(to the right).
b.     shift upward(to the left).
c.     be eliminated.
d.     remainunchanged.
Answer the next three questions on the basis of the following information. The Wildcat Widget
Company is a perfectly competitive firm that receives $10 for each unit sold. It must pay the
market wage of $20 for each worker it decides to hire. The following schedule depicts the
relationship between number of workers and units of output.

Workers          Total Product
     0                   0
     1                   4
     2                 10
     3                 15
     4                 19
     5                 22
     6                 22

29. When is diminishing marginal product first evident?
a.    when the company hires one worker
b.    when the company hires three workers
c.    when the company hires five workers
d.    when the company hires six workers

30. What is the value of marginal product of the third worker? (What is VMP when the
company hires three workers instead of two)?
a.    $40
b.       $50
c.       $80
d.       $100

31. How many workers should Wildcat Widget hire to maximize profit?
a.       2
b.       3
c.       5
d.       6

32. In what senseis monopolistic competition similar to monopoly?
a.     barriers to entry
b.     differentiated products among the industry's producers
c.     product demand curves that are downward sloping
d.     potential for long-run profit

33. Predatorypricing:
a.     lowers prices initially but results in higher prices eventually.
b.     raises prices initially but results in lower prices eventually.
c.     lowers prices now and in the future.
d.     raises prices now and in the future.
34. Which statement about public goods best describesthefree-rider problem?
a.    Becausepublic goods are excludable, private markets tend to produce more than the
      socially optimal amount of a good.
b.    Becausepublic goods are excludable, private markets tend to produce less than the
      socially optimal amount of a good.
c.    Becausepublic goods are not excludable, private markets tend to produce more than the
      socially optimal amount of a good.
d.    Becausepublic goods are not excludable, private markets tend to produce less than the
      socially optimal amount of a good.

35. According to the theory of occupational crowding, if women are crowded into a small
number of occupations the result is:
a.     lower wages for women employed in these occupations.
b.     lower wages for men employed in these occupations.
c.     higher wages in male-dominated occupations.
d.    all of the above.

36. Social Security:
a.    is considered welfare.
b.    constitutes an in-kind trans~erpayment.
c.    is a proportional tax.
d.    is funded by taxes on cuuent workers and their employers.

37. Advertising:
a.    is designed to make demand for the firm's product more elastic.
b.    has resulted in lower prices for certain goods (e.g., eye glasses).
c.    is always socially wasteful becauseit usesresources but yields no benefit to society.
d.    is adopted only in industries that are perfectly competitive.

38. When production is associatedwith negative externalities:
a.    the market price is lower than socially optimal.
b.    the market price is higher than socially optimal.
c.    firms produce less than society wants in order to increaseprofit.
d.    firms produce less than society wants, which reducesprofit.

39. Which of the following statementsbest illustrates the economic concept of derived demand?
a.    An increased demand for medical care increasesthe demand for doctors and nurses.
b.    An increase in the number of nurses allows hospitals to substitute nurses for doctors.
c.    An increase in nurses' pay reduces employment of nurses.
d.    An increase in the pay of nurses increasesthe number of persons who enter the nursing

40. The view that formal education does little to increase a worker's productive abilities but does
help identify certain desirable characteristics of the worker (such as motivation) is the concept
a.      the signaling effect.

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