Economics I Exam
Answer Key
Course Introduction
Economics I provides an introduction to the fundamental principles of microeconomics, focusing on how individuals, firms, and governments make decisions in a world with limited resources. Topics covered include supply and demand, market equilibrium, elasticity, consumer behavior, production and costs, and the various market structures such as perfect competition, monopoly, and oligopoly. Throughout the course, students learn to apply economic reasoning to real-life situations and develop critical thinking skills essential for analyzing economic issues and policies.
Recommended Textbook Microeconomics 1st Canadian Edition by B.
Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Q1) In their study of the effect of legalized abortion on crime rates,Steven Levitt and John Donohue applied
A) Positive economic analysis
B) Normative economic analysis
C) The principle of individual sovereignty
D) Value judgments
Answer: A
Q2) Questions that address what did,will or would actually happen are called ________ questions.
A) Normative
B) Positive
C) Efficiency
D) Equity
Answer: B
Q3) The real test of a good model is
A) Its degree of mathematical rigor
B) The degree to which it conforms to the "real world."
C) Its usefulness in predicting outcomes
D) How detailed it is
Answer: C
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Chapter 2: Supply and Demand3
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Q1) Refer to Figure 2.1.A movement from point a to point b is most likely caused by
A) A decrease in the price of the good
B) An increase in consumers' incomes, assuming the good is normal
C) An increase in the price of a complementary good
D) A decrease in consumers' incomes, assuming the good is normal
Answer: B
Q2) Consider the relationship given by Q<sub>Cars</sub> = 100 + 4xP<sub>Cars</sub>2xP<sub>Steel</sub> - 2xP<sub>Workers</sub>,where is the quantity of cars (in thousands),is the price of cars and P is the wage earned by autoworkers.If the price of steel is $10 per unit and the price of workers (the wage)is $20,what is the supply curve for cars?
A) Q<sub>Cars</sub> = 140 + 4xP<sub>Cars</sub>
B) Q<sub>Cars</sub> = 100 + 4xP<sub>Cars</sub> - 2xP<sub>Steel</sub> -.2xP<sub>Workers</sub>
C) Q<sub>Cars</sub> = 100 + 4xP<sub>Cars</sub>
D) Q<sub>Cars</sub> = 40 + 4xP<sub>Cars</sub> Answer: D
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Chapter 3: Balancing Benefits and Costs
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Q1) Suppose that the marginal benefit of an activity is less than the marginal cost,then
A) The net benefit would be increased by reducing the amount of the activity
B) The net benefit would be decreased by reducing the amount of the activity
C) The net benefit would be increased by increasing the amount of the activity
D) There can be no marginal improvement by changing the amount of the activity
Answer: A
Q2) Refer to Table 3.1.Suppose there is a monthly tax of $100 on the house that you rent.How does this affect the number of hours you spend mowing the lawn?
A) Less time would be spent mowing the lawn because the cost of mowing the lawn would increase
B) Less time would be spent mowing the lawn because the benefit of mowing the lawn would decreases
C) More time would be spent mowing the lawn because the net benefits of mowing the lawn would increase
D) There would be no change in the amount of time spent mowing the lawn
Answer: B
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Chapter 4: Principles and Preferences
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Q1) A marginal rate of substitution formula tells us
A) The rate at which the consumer is willing to exchange one good for another, given the level of utility
B) The rate at which the consumer is willing to exchange one good for another, given the amounts consumed
C) The rate at which the consumer is willing to exchange one good for another, given the consumer's income
D) The rate at which the consumer is willing to exchange one good for another, given the prices of the goods
Q2) Suppose that Frank is considering giving Mike eight paper back books in exchange for 2 CDs.Explain the conditions under which this trade would be mutually beneficial.Also explain the conditions under which Frank and Mike won't make the trade.
Q3) The rate at which a consumer will exchange one good for another is called
A) Marginal utility
B) The marginal rate of transformation
C) The rate of substitutability
D) The marginal rate of substitution
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Chapter 5: Constraints, Choices, and Demand
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Q1) An increase in a consumer's income will cause the budget line to
A) Shift outward
B) Shift inward
C) Become steeper
D) Become flatter
Q2) Suppose that soup is measured on the horizontal axis and bread is measured on the vertical axis.At an interior solution
A) MRS<sub>SB</sub> = P<sub>S</sub>/P<sub>B</sub>
B) MRS<sub>SB</sub> = - P<sub>S</sub>/P<sub>B</sub>
C) MRS<sub>SB</sub> = P<sub>B</sub>/P<sub>S</sub>
D) MRS<sub>SB</sub> = - P<sub>B</sub>/P<sub>S</sub>
Q3) An increase in the price of the good measured on the vertical axis will cause the budget line to
A) Shift outward
B) Become steeper
C) Become flatter
D) Shift inward
Q4) Using a carefully-labeled diagram,explain an Engel curve for a good that is initially a normal good,but eventually becomes an inferior good.
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Chapter 6: Rom Demand to Welfare
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Q1) Assume an individual has 14 hours per day for either work or leisure.Using an indifference curve graph,derive an individual's labour supply curve.In your answer,explain what might cause the individual's labour supply curve to eventually bend backwards.
Q2) Suppose the base year for a Laspeyres index is 2001.The value of the index is 1.3 in 2004 and 1.6 in 2006.By how much did the cost of the bundle increase between 2004 and 2006?
A).3%
B) 23%
C).23%
D) 60%
Q3) A consumer's ______ determines the location of their uncompensated demand curve,while the level of their ______ determines the location of their compensated demand curve.
A) Income; well-being
B) Well-being; income
C) Indifference curves; income
D) Preferences; well-being
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8
Chapter 7: Technology and Production
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Q1) Suppose a firm uses only capital and labour to produce output.When the firm doubles the amount of both inputs,output increases by less than double.This firm exhibits
A) Increasing returns to scale
B) Decreasing returns to scale
C) Constant returns to scale
D) Diminishing marginal returns
Q2) Suppose that the marginal product of a firm's labour is 10 units of output per hour.Also assume that the marginal product of the firm's capital is 30 units of output per hour.In this case,the marginal rate of technical substitution for labour with capital is A) 3
B) 300
C) 40
D) 1/3
Q3) Two inputs ______ when they must be combined in a fixed ratio.
A) Are perfect substitutes
B) Are perfect complements
C) Represent Cobb-Douglas technology
D) Are fixed inputs
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Page 9
Chapter 8: Cost
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Q1) Refer to Figure 8.1.Which graph best represents a variable cost function?
A) A
B) B
C) C
D) D
Q2) A ______ cost is ______ if the firm incurs the cost even if it produces no output.
A) Fixed; sunk
B) Fixed; explicit
C) Variable; sunk
D) Fixed; avoidable
Q3) Refer to Table 8.1.Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost.What is the variable cost of producing 45 units of output?
A) $30
B) $10
C) $450
D) $22.22
Q4) Using a graph,explain the relationship between average cost and marginal cost.
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Chapter 9: Rofit Maximization
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Q1) Which of the following is NOT true about marginal revenue?
A) It is a firm's marginal benefit
B) It is defined as the extra revenue generated by the production of one more unit
C) It can be expressed mathematically as MR = [R(Q - Q) - R(Q)]/ Q
D) It can be expressed mathematically as R/ Q
Q2) When a firm's profit maximizing sales level is positive,its marginal revenue is ______ its marginal cost at that quantity.
A) Greater than
B) Less than
C) Equal to
D) Less than or equal to
Q3) Suppose a competitive firm produces spaghetti dinners.The market price of a spaghetti dinner is $20.The cost of making the dinners is given by C(Q)= 10Q + (Q<sup>2</sup>/160).The marginal cost is given by MC = 10 + (Q/80).
a)How many spaghetti dinners should the firm make each day?
b)What if the firm has avoidable fixed costs of $1562.50?
c)What is the firm's supply function if there is no avoidable fixed cost?
d)What is the supply function if the firm has avoidable fixed costs of $1562.50?
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11
Chapter 10: Choices Involving Time
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Q1) Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.If the interest rate is 8% is this a good investment?
A) Yes, because you will earn a profit of $1,250 dollars in 5 years
B) Yes, because the internal rate of return is higher than the interest rate
C) No, because the internal rate of return is higher than the interest rate
D) No, because the net present value is negative
Q2) Suppose you are looking to add more capacity to your current manufacturing plant.The new project will cost $6 million up front and is projected to increase revenue $1.5 million a year for each of the next 5 years.If the interest rate is 8%,what is this project's NPV and is it a profitable investment?
A) -$10,934.94, Yes it is profitable
B) -$10,934.94, No it is not profitable
C) $944,444.44, Yes it is profitable
D) $944,444.44, No it is not profitable
Q3) Refer to Figure 10.1.Which line represents saving?
A) b
B) h
C) f + i
D) d
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Page 12
Chapter 11: Choices Involving Risk
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Q1) An insurance benefit is
A) The contract that reduces the financial loss associated with some risky event
B) The amount of money a policy holder pays for the insurance policy
C) The amount of money a policy holder receives if a specific loss occurs
D) The probability of loss from a specific event
Q2) Risk
A) Is inherent in every action or decision
B) Exists whenever the consequences of a decision are uncertain
C) Exists when outcomes are certain
D) Is a good that can be purchased
Q3) Suppose Alice is deciding whether or not to go to a New York Giants game.Alice's enjoyment and thus decision,depends upon two uncertain events that are out of her control: whether the Giants win and whether it snows.She will be happiest if the Giants win and it does not snow.The newspaper reports a 35% chance for snow and the Giants record suggests a 40% chance of winning.The probability that the Giants win and that it does not snow is
A) 75%
B) 5%
C) 26%
D) 35%
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Chapter 12: Choices Involving Strategy
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Q1) Refer to Figure d.What is the Nash equilibrium in problem 21?
A) Travis north, Darren east
B) Travis north, Darren west
C) Travis south, Darren east
D) Travis south, Darren west
Q2) A player is playing a pure strategy when
A) He chooses a rule to randomize over the choice of a strategy
B) He chooses a strategy without randomizing
C) There is uncertainty in his choice
D) It is not perfectly predictable
Q3) A game is
A) A situation in which each member of a group makes at least one decision and cares both about his own choice and about others' choices
B) Describes a situation in which strategy plays a role
C) Provides the foundation for understanding competition in industries with only a few producers
D) All of these
Q4) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
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Chapter 13: Behavioral Economics
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Q1) Lily wants to invest in the stock market.She notices that the share price for Widgets Inc.has been falling for weeks.She chooses to invest in Widgets Inc.because she assumes it is due for a rebound.Lily suffers from
A) The hot-hand fallacy
B) The gambler's fallacy
C) Irrational exuberance
D) The sunk cost fallacy
Q2) In the trust game
A) Game theory tells us that trustees will be untrustworthy and trustees will forego potentially profitable investments
B) Both players divides up the principle and earnings together
C) One player (the trustee) decides both how much money to invest and how the principle and earnings are divided between himself and the other players
D) Both players decide how much to invest together
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15
Chapter 14: Equilibrium and Efficiency
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Q1) Products are homogenous when
A) They are identical in the eyes of the purchasers
B) Some purchasers view the products as different
C) Suppliers can charge different prices for the same good
D) They are different in the eyes of the purchasers
Q2) Characteristics of a perfectly competitive market include
A) The presence of transaction costs
B) Differentiated products
C) Many sellers, each with a small market share
D) All of these
Q3) With free entry
A) The long run market supply curve is horizontal at the market price
B) The long run market supply curve is vertical at the market price
C) The short and long run market supply curves are the same
D) The short run market supply curve is horizontal at the market price
Q4) Aggregate surplus
A) Is minimized under perfect competition
B) Is the difference between consumer and producer surpluses
C) Is the sum of consumer and producer surpluses
D) A and B
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Chapter 15: Market Intervention
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Q1) A subsidy
A) Is a payment that decreases the amount that buyers pay for a good
B) Is a payment that increases the amount that buyers pay for a good
C) Is a payment that decreases the amount that sellers receive
D) Is a payment that decreases the amount that sellers sell for a good
Q2) A production quota program
A) Imposes limits on the price that individual firms can charge
B) Is a way to raise prices without causing the overproduction that occurs under a price support program
C) Places limitations on demand
D) Is a way to lower prices without causing the overproduction that occurs under a price support program
Q3) There is no deadweight loss from a tax when
A) Demand is perfectly inelastic
B) Supply is perfectly inelastic
C) Demand is perfectly elastic
D) A and B
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) Utilitarianism
A) Was favored by John Nash
B) Was favored by John Rawls
C) Is an process-oriented notion of equity
D) Is an outcome-oriented notion of equity
Q2) The social welfare function
A) Summarizes judgments about resource allocations
B) Assigns a number that indicates the overall level of social welfare
C) Was pioneered by Abram Bergson and Paul Samuelson
D) All of these
Q3) Outcome-oriented notions of equity
A) Focus on the procedures used to arrive at an allocation rather than on the allocation of resources
B) Focus on whether the process used to allocate resources yields fair results
C) Include those that focus on the distribution of products
D) Focus on the procedures used to arrive at an allocation of resources rather than on the allocation itself
Q4) Discuss the second welfare theorem.How can societies use competitive markets to achieve both efficiency and equity?
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Chapter 17: Monopoly
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Q1) A monophony market
A) Is a market with a single buyer
B) Is a market with a single seller
C) Is a market with a single input
D) Is a market with a single product
Q2) Significant market power exists in
A) All markets
B) Perfectly competitive markets
C) Unregulated markets
D) Monopoly markets and Oligopoly markets
Q3) A monopoly market is
A) A market with many sellers
B) A market with a single seller
C) A market with a few sellers
D) A market with a few buyers
Q4) A market is a natural monopoly when
A) A good is produced most economically by several firms
B) A good is produced most economically by one firm
C) The government grants a firm a patent on a good
D) The firm's average cost function is everywhere upward sloping
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Chapter 18: Pricing Policies
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Q1) A monopolist can perfectly price discriminate
A) When it can distinguish consumers with a high versus low willingness to pay
B) When it offers a menu of alternatives, designed so that different customers will make different choices based on their willingness to pay
C) If it knows perfectly the customer's willingness to pay for each unit its sells and can charge a different price for each unit
D) When it cannot distinguish consumers with a high versus low willingness to pay
Q2) With a two-part tariff
A) Consumers simply pay a fixed fee if they buy anything at all
B) Consumers pay a fixed fee if they buy anything at all, plus a separate per-unit price for each unit they buy
C) Consumers pay a fixed fee if they buy anything at all, plus an annual fee for the right to purchase anything
D) Consumers simply pay a fee for the right to buy anything
Q3) Explain bundling and mixed bundling and the benefits to a multi product monopolist of such packaging schemes.
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Chapter 19: Oligopoly
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Q1) Business stealing arises when
A) Some of a new entrant's sales are due to new buyers in the market
B) Some of a new entrant's sales are due to stolen ideas
C) Some a new entrant's sales come at the expense of existing firms, whose sales contract after the new firm enters the market
D) A and B
Q2) In the infinitely repeated Bertrand model
A) Firms play the Bertrand pricing game over and over, with no definite end
B) Firms play the Bertrand pricing game one time
C) Firms play the Bertrand pricing game several times, with a clearly defined endpoint
D) Firms play the Bertrand pricing game at least two times, but no more than four
Q3) As products become less differentiated
A) Consumers are less willing to switch in response to price changes
B) Consumers are more willing to switch in response to price changes
C) Competition becomes less intense
D) Consumers are not willing to switch in response to price changes
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Chapter 20: Externalities and Public Goods
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Q1) An action creates an externality if it
A) Does not affect someone with whom the decision-maker has not engaged in a related market transaction
B) Affects someone with whom the decision-maker has not engaged in a related market transaction
C) Affects only those individuals engaged in the market transaction
D) Affects only those individuals not in the market transaction
Q2) A common property resource is
A) A resource that only one person can use
B) A resource that anyone can use for a fixed fee
C) A resource that more than one person is free to use without payment
D) A resource that only one person can use free of charge
Q3) Pigouvian taxation
A) Involves the use of taxes or fees to remedy negative externalities
B) Involves the use of subsidies to remedy negative externalities
C) Is a legal principles requiring a party who takes an action that harms others to compensate the affected parties for some or all of their losses
D) Requires that victims of an externality pay a tax to the producers of the externality
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