Eastern Mediterranean University Faculty of Business and Economics Department of Economics 2015‐16 Fall Semester ECON101 ‐ Introduction to Economics I Final Exam Type A 15 January 2016 Duration: 100 minutes Name: _________________________
Student ID: _____________________ Group No: ______________________ Part A: Multiple Choice Questions (2 points each, total 60 points) Please mark your answers on both the exam paper and the optic sheet. 1. If a price floor is not binding, then a. the equilibrium price is above the price floor. b. the equilibrium price is below the price floor. c. there will be a surplus in the market. d. there will be a shortage in the market. 2. Price controls are usually enacted a. as a means of raising revenue for public purposes. b. when policymakers believe that the market price of a good or service is unfair to buyers or sellers. c. when policymakers tax a good. d. All of the above are correct. 3. Price controls a. always produce a fair outcome.
b. can generate inequities of their own.
c. always produce an efficient outcome. d.​
A
​ll of the above are correct. 4. In a free, competitive market, what is the rationing mechanism? a. seller bias
b. buyer bias
c. government law
d. ​
price 5. To say that a price ceiling is binding is to say that the price ceiling a. results in a surplus. b. is set above the equilibrium price. c. causes quantity demanded to exceed quantity supplied. d. All of the above are correct. 6. A legal minimum on the price at which a good can be sold is called a a. price subsidy. b. ​
price floor.
c. tax.
d.​
p
​rice ceiling. Page 1​
of 8 7. Which of the following statements is correct? a. Assuming that explicit costs are positive, economic profit is greater than accounting profit. b. Assuming that implicit costs are positive, accounting profit is greater than economic profit. c. Assuming that explicit costs are positive, accounting profit is equal to economic profit. d. Assuming that implicit costs are positive, economic profit is positive. 8. Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom’s economic profit for his first year in business? a. $0
b. $20,000 c. $65,000 d. $85,000 Number of Workers Output Fixed Cost Variable Cost Total Cost TR MR MC MP 0 0 $50 $0 $50 1 90 $50 $20 $70 2 170 $50 $40 $90 3 230 $50 $60 $110 4 240 $50 $80 $130 9. Refer to the table above. ​
The marginal product of the second worker is a. 90 units.
b. 85 units.
c. ​
80 units​
.
d. 20 units. 10. Refer to the table above​
. The marginal product of the fourth worker is a. 10 units.
b. 60 units.
c. 230 units.
d. 240 units. 11. Refer to the table above​
. At which number of workers does diminishing marginal product begin? a. 1
b. 2
c.​
3
​
d. 4 12. Refer to the table above. ​
What is the marginal cost of the third worker? a. $30
b. $25
c. $20
d. $10 13. Deadweight loss a. measures monopoly inefficiency. b. exceeds monopoly profits. c. equals monopoly profits. d. equals monopoly revenues minus profits. Page 2​
of 8 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost MR MC 0 $0 $5 1 $8 $9 2 $16 $14 3 $24 $20 4 $32 $27 5 $40 $35 6 $48 $44 7 $56 $54 8 $64 $65 9 $72 $72 14. Refer to the table above​
. If the firm produces 3 units of output, a. marginal cost is $4. b. total revenue is greater than variable cost. c. marginal revenue is less than marginal cost. d. the firm is maximizing profit. 15. Refer to the table above​
. At which quantity of output is marginal revenue equal to marginal cost? a. 3 units
b. ​
5 units
c. 7 units
d. 9 units 16. Refer to the table above​
. In order to maximize profit, the firm will produce a level of output where marginal revenue is equal to a. $6.
b. $7.
c. $8.
d. $9. 17. Refer to the table above​
. In order to maximize profit, the firm will produce a level of output where marginal cost is equal to a. $6.
b. $7.
c. $8.
d. $9. 18. Refer to the table above​
. If the firm’s marginal cost is $11, it should a. increase production to maximize profit. b. increase the price of the product to maximize profit. c. advertise to attract additional buyers to maximize profit. d. reduce production to increase profit. 19. Refer to the table above​
. If the firm’s marginal cost is $5, it should a. reduce fixed costs by lowering production. b. increase production to maximize profit​
. c. decrease production to maximize profit. d. maintain its current level of production to maximize profit. Page 3​
of 8 20.
Refer to the figure above​
. If the market price is $10, what is the firm’s short­run economic profit? a. $9
b. $15
c. $30
d. 50 21. Refer to the figure above​
. If the market price is $6, what is the firm’s short­run economic profit? a. $0
b. $12
c. $15
d. $18 22. Refer to the figure above​
. If the market price is $10, what is the firm’s total revenue? a. $15
b.$30
c. $35
d. $​
50 23. Refer to the figure above​
. The firm will earn zero economic profit if the market price is a. $0
b. $6
c. $7
d. $10 24. Refer to the figure above​
. The firm will earn positive economic profit if the market price is a. positive.
c. $6. b. above $6.
d. There is no price at which the firm earns positive economic profits.. 25. Refer to the figure above. ​
A profit­maximizing monopolist would create a deadweight loss to society valued at a. $12.
b. $24
c. $42.
d. $84. Page 4​
of 8 26. The theory of consumer choice most closely examines which of the following ​
Ten Principles of Economics​
? a. People face trade­offs. b. Governments can sometimes improve market outcomes. c. Trade can make everyone better off. d. Markets are usually a good way to organize economic activity. The downward​
­sloping line on the figure represents a consumer’s budget constraint. 27. Refer to the figure above​
. If the consumer’s income is $140, then what is the price of a CD? a. $3
b. $5
c. ​
$7
d. $9 28. Refer to the figure above​
. A consumer who chooses to spend all of her income could be at which point(s) on the figure? a. A only
b. E only
c. ​
B, C, or D only
d. A, B, C, or D only 29.
Refer to the figure above​
. All of the points identified on the figure represent affordable consumption options with the exception of a. A. b. E. c. A and E. d. None of the above are correct. All of the points identified on the figure are affordable. 30.
to Refer to the figure above​
. If the price of a CD is $12, then the consumer’s income amounts a. $140. b. $180. c. $210. d. $240. Page 5​
of 8 Part B: Essay Questions (50 points) Question 1. ​
Answer the following questions given the indifference curves diagram below. (20 points) a. Which combination above gives the minimum level of satisfaction (A or D or C)? Briefly explain why? (1+2 points) Answer: ​
It is known that the further away the indifference curve from the origin, the higher the satisfaction combinations on it provide to the consumer. Therefore, combination A gives the minimum level of satisfaction relative to combinations D and C, which provide the same level of satisfaction as they are on the same indifference curve. b. Draw on the same diagram above the consumer’s budget line for income = $20, P (t­shirt) = $4 and P (shoes) = $4. (3 points) Answer: ​
See the diagram above. c.
What is the slope of the budget line? What is the marginal rate of substitution at point A? (4 points) Answer: ​
Slope of the budget line is calculated as P T −shirt /P shoes = 1 . Given that the budget line and the indifference curve (IC) are tangent to each other at point A, the marginal rate of substitution (slope of the IC) is also equal to 1. d. Show the best affordable combination (utility maximizing quantities) of T­shirt and Shoes on the same diagram above. What are the quantities of T­shirt and Shoes at that combination? (2+3 points) Answer: ​
The best affordable combination is the one shown as point A, where 3 units of shoes and 2 units of t­shirts are consumed. Page 6​
of 8 e. Suppose the T­shirt falls from $4 to $2, P (t­shirt) = $2, ceteris paribus. Illustrate the new budget line with the new optimum point on the diagram above. What are the new utility maximizing quantities of shoes and t­shirt? (2+3 points) Answer: ​
When the price of t­shirt falls to $2 (ceteris paribus), the budget line rotates outward. As we can see from the diagram above, point C gives us the new optimum point where the new utility maximizing quantities are 2 units of shoes and 6 units of t­shirt are consumed. Question 2. ​
Use the following figure to answer the questions below. (20 points) a. What is the price that a profit­maximizing monopoly will charge? Briefly explain how this price is obtained. (2+3 points) Answer: ​
The profit­maximizing price that a monopolist charges is found by equating the MR to the MC and finding the particular price corresponding to the profit­maximizing quantity. As we can see from the diagram, MR is equal to the MC at point B. That is to say that, the monopolist maximizes its profit by producing Q3 units each sold at the price of P2. b. What would be the price if the market had a perfectly competitive structure? Briefly explain how this price is obtained. (2+3 points) Answer: ​
If the market had a perfectly competitive structure, the price would be equal to P3. We find the price by equating the MC to the market demand curve. c. At which price the perfectly competitive firm shuts down in the long­run? Briefly explain why. (2+3 points) Answer: ​
The firm exists the market in the long­run when the price is below P6. When the price is below P6, the firm cannot cover its cost and makes economic loss. It means that the firm is better to exit the market and use its capital for its best alternative use. Because P = MR for a competitive firm, when the price is below P6, the profit­maximizing (loss­minimizing) quantity would be below Q1 where ATC is higher than the price. Please note​
the mistake in the question here. We should have said “exit the market” or “in the short­run”. Page 7​
of 8 d. What is the amount of a profit­maximizing monopoly's profit? Briefly explain. (2+3 points) Answer: ​
The amount of profit is equal to the area P2­A­C­P5.This is the area between the demand curve and the ATC: (P2­P5)*Q3 Bonus Question. ​
Compare the concepts of economic and accounting profits, and briefly explain what it means to have a zero economic profit (Your explanation should include the concepts of opportunity cost, implicit and explicit costs, total revenue, and total cost) (10 points) Answer: ​
Economic profit is calculated as the difference between the total revenue and total cost where the latter includes both the explicit and the implicit (opportunity) costs. Accounting profit, on the other hand, does not take into account the implicit costs. Having zero economic profit means that the accounting profit obtained from the business we are doing now is as much as the accounting profit we would obtain from the best alternative use of the capital. Alternatively, we can explain the concept of “zero economic profit” as the point of production where no firms have any incentive to either exit or enter the market in the long­run. Page 8​
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