Introduction to Economics - DOC

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					                            Introduction to Economics
                            Seoul National University
                           Mid term exam 2009-07-09

Students name: ____________________________      Students number: ____________________


Department: _______________________________


Instructions: You score +1 for correct answer, -1 for wrong answer and 0 for no
attempt. There are 42 questions and 2 1/2 hours (3.5 minutes per question.) GOOD
LUCK!


1. Sue drinks three sodas during a particular day. The marginal benefit she enjoys from
    drinking the third soda
    a. can be thought of as the total benefit Sue enjoys by drinking three sodas minus
        the total benefit she would have enjoyed by drinking just two sodas.
    b. determines Sue’s willingness to pay for the third soda.
    c. is likely to be different from the marginal benefit provided to Sue by the
        second soda.
    d. All of the above are correct.


2. Production possibilities frontiers are usually bowed outward. This is because
    a. the more resources a society uses to produce one good, the fewer resources it
        has available to produce another good.
    b. it reflects the fact that the opportunity cost of producing a good decreases as
        more and more of that good is produced.
    c. of the effects of technological change.
    d. resources are specialized; that is, some are better at producing particular
        goods rather than other goods.


3. Suppose that a worker in Caninia can produce either 2 blankets or 8 meals per day,
and a worker in Felinia can produce either 5 blankets or 1 meal per day.       Each nation
has 10 workers.      For many years, the two countries traded, each completely
specializing according to their respective comparative advantages.        Now war has
broken out between them and all trade has stopped.      Without trade, Caninia produces
and consumes 10 blankets and 40 meals per day and Felinia produces and consumes 25



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blankets and 5 meals per day.      The war has caused the combined daily output of the
two countries to decline by
      a. 15 blankets and 35 meals.
      b. 25 blankets and 40 meals.
      c. 35 blankets and 45 meals.
      d. 50 blankets and 80 meals.


4. Assume that Japan and Korea can switch between producing cars and producing
airplanes at a constant rate.


            Hours Needed
                to Make 1
            Car      Airplane
Japan       30         150
Korea       50         150


Assume that Japan and Korea each has 2400 hours available.       Originally, each country
      divided its time equally between the production of cars and airplanes.   Now, each
      country spends all its time producing the good in which it has a comparative
      advantage.     How much does the total output of cars increased by? 16


5. The demand schedule below pertains to sandwiches demanded per week.


Price    Charlie’s     Maxine’s     Quinn’s
         Quantity       Quantity    Quantity
        Demanded       Demanded    Demanded
 $3         3                4         3
 $5         1                2         x




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Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches.      Also
    suppose the following:
       • x=2
       • the current price of a sandwich is $3.00
       • the market quantity supplied of sandwiches is 5
       • the slope of the supply curve is 1
Then
    a. there is currently a shortage of 5 sandwiches and the equilibrium price of a
           sandwich is between $3.00 and $5.00.
    b. there is currently a shortage of 5 sandwiches and the equilibrium price of a
           sandwich is $5.00.
    c. there is currently a surplus of 5 sandwiches and the equilibrium price of a
           sandwich is between $3.00 and $5.00.
    d. there is currently a surplus of 5 sandwiches and the equilibrium price of a
           sandwich is $5.00.


6. The diagram below pertains to the demand for pork in Korea.
        price




                      y



                            x




                                   D
                                    A

                           DB
                                 quantity




All else equal, the destruction of thousands of pigs would cause a move
    a. from DA to DB.
    b. from DB to DA.
    c. from x to y.
    d. from y to x.




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7. What will happen to the equilibrium price and quantity of new cars if the price of
     gasoline rises, the price of steel rises, public transportation becomes cheaper and
     more comfortable, and auto-workers negotiate higher wages?
     a. Price will fall and the effect on quantity is ambiguous.
     b. Price will rise and the effect on quantity is ambiguous.
     c. Quantity will fall and the effect on price is ambiguous.
     d. Quantity will rise and the effect on price is ambiguous.


8.
          Price




     P2
              A
                       C
     P1



              B        D


                                   Demand

                  Q2       Q1           Quantity



Refer to Figure above. If rectangle D is larger than rectangle A, then
     a. demand is elastic between prices P1 and P2.
     b. a decrease in price from P2 to P1 will cause an increase in total revenue.
     c. the magnitude of the percent change in price between P1 and P2 is smaller than
           the magnitude of the corresponding percent change in quantity demanded.
     d. All of the above are correct.


9. Assume the price elasticity of demand for tuna is 0.7, and a 1.5% increase in the
price of tuna occurs. What percentage does quantity demanded of tuna fall by and what
happens to total revenue (increase or decrease)? Quantity demand falls by 1.05%, and
tuna sellers' total revenue will increase as a result.




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10. Suppose a producer is able to separate customers into two groups, one having an
     inelastic demand and the other having an elastic demand. If the producer's
     objective is to increase total revenue, she should
     a. increase the price charged to customers with the elastic demand and decrease
         the price charged to customers with the inelastic demand.
     b. decrease the price charged to customers with the elastic demand and increase
         the price charged to customers with the inelastic demand.
     c. decrease the price to both groups of customers.
     d. increase the price for both groups of customers.


11. Barb's Bakery earned $200 in total revenue last month when it sold 100 loaves of
     bread. This month it earned $300 in total revenue when it sold 60 loaves of bread.
     Can you calculate the price elasticity of demand for Barb's bread? 0.58


12. When her income increased from $10,000 to $20,000, Heather's consumption of
     macaroni decreased from 10 pounds to 5 pounds and her consumption of soy-
     burgers increased from 2 pounds to 4 pounds. We can conclude that for Heather,
     a. macaroni and soy-burgers are both normal goods with income elasticities equal
         to 1.
     b. macaroni is an inferior good and soy-burgers are normal goods; both have
         income elasticities of 1.
     c. macaroni is an inferior good with an income elasticity of -1 and soy-burgers
         are normal goods with an income elasticity of 1.
     d. macaroni and soy-burgers are both inferior goods with income elasticities
         equal to -1.


13. Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of
good Y. This month sellers of good Y raised their price and took in $120 in total
revenue on sales of 40 units of good Y. At the same time, the price of good X stayed the
same, but sales of good X increased from 20 units to 40 units. Are X and substitutes or
compliments, and what is the cross-price elasticity? Substitutes, and have a cross-price
elasticity of 1.67.


14. A decrease in supply will cause the smallest increase in price when




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     a. both supply and demand are inelastic.
     b. demand is elastic and supply is inelastic.
     c. both supply and demand are elastic.
     d. demand is inelastic and supply is elastic.


15. A binding price floor will reduce a firm's total revenue
     a. always.
     b. when demand is elastic.
     c. when demand is inelastic.
     d. never.


16. Suppose sellers of liquor are required to send $1.00 to the government for every
     bottle of liquor they sell.   Further, suppose this tax causes the price paid by
     buyers of liquor to rise by $0.80 per bottle.   Which of the following statements is
     correct?
     a. This tax causes the supply curve for liquor to shift upward by $1.00 at each
        quantity of liquor.
     b. The effective price received by sellers is $0.20 per bottle less than it was
        before the tax.
     c. Eighty percent of the burden of the tax falls on buyers.
     d. All of the above are correct.


17. The price received by sellers in a market will decrease if the government
     a. increases a binding price floor in that market.
     b. increases a binding price ceiling in that market.
     c. decreases a tax on the good sold in that market.
     d. None of the above is correct.




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18. The demand for salt is inelastic and the supply of salt is elastic.           The demand for
        caviar is elastic and the supply of caviar is inelastic.      Suppose that a tax of $1 per
        pound is levied on the sellers of salt and a tax of $1 per pound is levied on the
        buyers of caviar.          We would expect that most of the burden of these taxes will fall
        on
        a. sellers of salt and the buyers of caviar.
        b. sellers of salt and the sellers of caviar.
        c. buyers of salt and the sellers of caviar.
        d. buyers of salt and the buyers of caviar.


19. In the market for bananas, the supply curve is the typical upward-sloping straight
        line, and the demand curve is the typical downward-sloping straight line.              The
        equilibrium quantity in the market for bananas is 200 boxes per month when there
        is no tax. Then a tax of $5 per box is imposed. As a result, the government is able
        to raise $750 per month in tax revenue. By how much has the equilibrium quantity
        of widgets fallen by? 50 boxes per month


20. The vertical distance between points A and B represents a tax in the market.

         Price

   22

   20

   18
                       A                                Supply
   16

   14

   12

   10

    8

    6
                       B
    4
                                              Demand
    2


             100 200 300 400 500 600 700 800 900 1000    Quantity




When a tax is imposed, producer surplus goes up/down by $1,800 and consumer
        surplus goes up/down by $2,700.


21. For the same problem above, total surplus goes up/down by $1,500.




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22. Suppose a tax of $4 per unit is imposed on a good, and the tax causes the
          equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The
          tax decreases consumer surplus by $3,000 and decreases producer surplus by
          $4,400. What is the deadweight loss? $600.


23. In which of the following cases is it most likely that an increase in the size of a tax
          will decrease tax revenue?
          a. The price elasticity of demand is small, and the price elasticity of supply is
             large.
          b. The price elasticity of demand is large, and the price elasticity of supply is
             small.
          c. The price elasticity of demand and the price elasticity of supply are both small.
          d. The price elasticity of demand and the price elasticity of supply are both large.


24. The figure illustrates the market for flash memory sticks in Korea.
           Price
  75
  70

  65
                                                                                                     Domestic supply
  60                       A
  55                                                                                                     World
                                                                                                         price
  50                               B                                    G
                                                            D
  45                                                                             H
  40                                                        F

  35                               C
                                                                                               Domestic demand
  30
  25
  20
  15
  10
      5


             1     2   3       4       5   6   7   8   9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26   Quantity


In the absence of trade, what is the total surplus? 412.5
And, what is the total surplus with trade? 467.5


25.



                                                                    8
Refer to Figure above. The tariff
     a. decreases producer surplus by the area C, decreases consumer surplus by the
        area C + D + E,    and decreases total surplus by the area D + F.
     b. increases producer surplus by the area C, decreases consumer surplus by the
        area C + D + E + F, and decreases total surplus by the area D + F..
     c. creates government revenue represented by the area B + E and decreases
        total surplus by the area D + E + F.
     d. increases producer surplus by the area C + G and creates government revenue
        represented by the area D + E + F.


26. Dolores used to work as a high school teacher for $40,000 per year but quit in
     order to start her own catering business. To invest in her factory, she withdrew
     $20,000 from her savings, which paid 3 percent interest, and borrowed $30,000
     from her uncle, whom she pays 3 percent interest per year. Last year she paid
     $25,000 for ingredients and had revenue of $60,000. She asked Louis the
     accountant and Greg the economist to calculate her profit for her.
     a. Louis says her costs are $25,900, and Greg says her costs are $66,500.
     b. Louis says her costs are $25,000, and Greg says her costs are $65,000.
     c. Louis says her profit is $66,500, and Greg says her costs are $66,500.
     d. Louis says her profit is $75,000, and Greg says her costs are $41,500.




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27. Suppose that for a particular firm the only variable input into the production process
      is labor and that output equals zero when no workers are hired. In addition,
      suppose that when the firm hires 4 workers, the firm produces 50 units of output.
      If the fixed cost of production is $4, the variable cost per unit of labor is $20, and
      the marginal product of labor for the fifth unit of labor is 2, what is the average
      total cost of production when the firm hires 5 workers? $2.00


28. Assume the following about John’s Vineyard in a competitive market.
 Quantity        Total       Quantity
Produced         Cost       Demanded       Price
      0            $0            0          $80
      1           $50            1          $80
      2          $102            2          $80
      3          $157            3          $80
      4          $217            4          $80
      5          $285            5          $80
      6          $365            6          $80
      7          $462            7          $80
      8          $582            8          $80


At what quantity does John’s Vineyard maximize profits, and what is John’s Vineyard's
economic profit/loss? Q = 6 and profit = $115 [Q = 5 is also acceptable]


29.   A profit-maximizing firm in a competitive market is currently producing 200 units
of output. It has average revenue of $9 and average total cost of $7. It follows that the
firm's

      a. average total cost curve intersects the marginal cost curve at an output level of
          less than 200 units.
      b. average variable cost curve intersects the marginal cost curve at an output
          level of less than 200 units.
      c. profit is $400.
      d. All of the above are correct.


30. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10,
produces an output level of 100 units, and charges a price of $50.            The socially




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efficient level of output is 200 units.                  Assume that the demand curve and marginal
revenue curve are the typical downward-sloping straight lines. Can you calculate the
Monopolist’s dead weight loss? $2,000.


31. A monopolist faces the following demand curve:


           Price                   Quantity
            $51                         1
            $47                         2
            $42                         3
            $36                         4
            $29                         5
            $21                         6
            $12                         7


The monopolist has total fixed costs of $60 and has a constant marginal cost of $15.
What is the profit-maximizing price? $36


32.
            Price
      50

      45

      40

      35

      30

      25

      20

      15                                             M C=ATC
      10

       5
                                MR                   Demand

             50 100 150 200 250 300 350 400 450 500 550 600 Quantity



Refer to Figure above. If the monopoly firm is not allowed to price discriminate, what
           would be the deadweight loss? $1,000.




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33. Refer to same Figure above. If there are no fixed costs of production, monopoly
          profit without price discrimination equals $2,000, while monopoly profit with
          perfect price discrimination equals $4,000.


34. A monopolistically competitive firm has the following cost structure:


 Output                       1             2        3         4          5    6      7
 Total Cost($)                30        32           36        42     50       63     77


The firm also faces the following demand curve:


 Price ($)               20         18               15        12         9    7      4
 Quantity                1              2            3         4          5    6      7


How much should it produce to maximize profit (or minimize losses)? 3 units.


35. The figure is drawn for a monopolistically competitive firm.

           P
  32

  24
                                                               MC
   18
  16
   12                                                                 Demand
      8
                                                           MR

                4        8         12           16        20    24        28   32 Q


Refer to Figure above.                  If the average variable cost is $12 at the profit-maximizing
          quantity, and if the firm’s fixed costs amount to $30, what is the firm’s maximum
          profit? $42.


36. Consider a firm operating in a competitive market. The firm is producing 40 units of
          output, has an average total cost of production equal to $5, and is earning $240
          economic profit in the short run. What is the current market price? $11


37.



                                                                     12
Refer to Figure above. Which of the graphs depicts a short-run equilibrium that will
    encourage the entry of other firms into a monopolistically competitive industry? C




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38. Assume that demand for a product that is produced at zero marginal cost is
     reflected in the table below.


    Quantity                Price
           0                $36
       200                  $33
       400                  $30
       600                  $27
       800                  $24
      1000                  $21
      1200                  $18
      1400                  $15
      1600                  $12
      1800                  $9
      2000                  $6
      2200                  $3
      2400                  $0


What is the profit-maximizing level of production for a group of oligopolistic firms that
operate as a cartel (that is, like monopolists)? Q = 1200


39. Following up from above, assume that this market is characterized by a duopoly in
which collusive agreements are illegal. What market price and quantity will be
associated with a Nash equilibrium? Q = 1600, P = 12


40. Two bottled beverage manufacturers (Firm A and Firm B) determine that they could
lower their costs, and thus increase their profits, if they reduced their advertising
budgets.       But in order for the plan to work, each firm must agree to refrain from
advertising.     Each firm believes that advertising works by increasing the demand for
the firm’s product, but each firm also believes that if neither firm advertises, the costs
savings will outweigh the lost sales.   Listed in the table below are the individual profits
for each firm.


                                                            Firm A
                                           Breaks the          Maintains the agreement




                                            14
                                        agreement and         and does not advertise
                                          advertises
                                        Firm A profit =
           Breaks the agreement             $9,000            Firm A profit = $8,000
              and advertises            Firm B profit =       Firm B profit = $6,000
                                            $4,000
Firm B
                                        Firm A profit =
               Maintains the
                                           $11,000            Firm A profit = $10,000
            agreement and does
                                        Firm B profit =       Firm B profit = $5,000
               not advertise
                                            $3,500



Indicate the Nash equilibrium in the table above.


41. Suppose that a competitive firm hires labor up to the point at which the value of the
     marginal product equals the wage.    If the firm pays a wage of $700 per week and
     the marginal product of labor equals 20 units per week, then what is the marginal
     cost of producing an additional unit of output? $35




                                           15
42. The figure shows a particular firm’s value-of-marginal-product (VMP) curve.          On
the horizontal axis, L represents the number of workers.    The time frame is daily.

             400 VMP
             360
             320
             280
             240
             200
             160
             120
              80
                                                                   VMP
              40

                         1      2       3           4   5      6         7    L

Refer to Figure above.   Assume the following:
   • Two points on the firm’s production function are (L = 2, Q = 180)       and (L = 3, Q =
228),
         where L = number of workers and Q = quantity of output.
   • The firm pays its workers $120 per day.
   • The firm’s non-labor costs are fixed and they amount to $250 per day.


We can conclude that
    a. the firm sells its output for $12 per unit.
    b. if the firm is currently employing 2 workers per day, then profit could be
        increased by $48 per day if a third worker is hired.
    c. the marginal cost per unit of output is $2.50 when output is increased from 180
        units per day to 228 units per day.
    d. the firm’s maximum profit occurs when it hires 3 workers per day.




                                            <end>




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