ECO211 Principles of Microeconomics Spring 2020 Final Exam (SAMPLE: Answer Key) Student Name _________________________________________________________ This is a closed book, closed notes exam. Time allowed is 70 minutes. The exam consists of two parts: • Part A (Multiple-choice): 40 questions (Note: Questions 1-22 were taken from the actual Midterm 2.) • Part B (Short-answer questions): 2 questions (Note: the actual test will be all multiple-choice questions. There will be 50 multiple-choice questions, and each question is worth 2 points. Still, there will be several questions from Part B (and the in-class exercises); They will be modified into multiple-choice questions.) The total points of the exam is 100. Calculators are allowed but no cell phone calculators or graphing calculators. ACADEMIC INTEGRITY: All students are bound by the University of Miami and School of Business Administration honor codes. Any cheating (looking at others’ answers, giving answers to others—verbally or by showing your paper—using notes, books or internet to search for answers) will be punished accordingly and as described in the course syllabus. of 1 14 Part A: Multiple Choice (80 points) This part consists of 40 multiple choice questions. Each question is worth 2 points. 1. A seller is willing to sell 5 units of a good at a minimum price of $1 per unit. The reservation value of the seller in this case is: A) $1 B) $5. C) $6. D) $10. 2. If a buyer enjoys a consumer surplus of $25 when he purchases a good for $50, his willingness to pay for the good is ________. A) $2 B) $25 C) $50 D) $75 3. The following table displays the reservation values of buyers and sellers in the market for notebooks, where each one either wants to buy or sell one notebook. If the market for notebooks is perfectly competitive, the equilibrium price is: A) $2. B) $3. C) $4. D) $5 Buyers Reservation Value of Buyers ($) Sellers Reservation Value of Sellers ($) 1 7 1 1 2 6 2 2 3 5 3 3 4 4 4 4 5 3 5 5 6 2 6 6 7 1 7 7 of 2 14 4. Refer to the table in Question 3. What is Seller 3’s producer surplus under the perfectly competitive equilibrium? A) $1 B) $2 C) $3 D) $4 5. Refer to the table in Question 3. If only the two highest-value buyers and the two least-cost sellers engage in trade, what is the social surplus? A) $6 B) $10 C) $12 D) $20 6. For social surplus to be maximized, the ________ buyers are actually making a purchase and the ________ sellers are selling the products. A) lowest-value; highest-cost B) highest-value; lowest-cost C) highest-value; highest-cost D) lowest-value; lowest-value 7. Which of the following statements is true of a perfectly competitive market? A) At equilibrium, it is possible to make someone better off without making someone else worse off. B) The equilibrium price in a competitive market efficiently allocates scarce resources to participants. C) The equilibrium price is determined by a few large firms in the market. D) The sum of consumer surplus and producer surplus is not maximized at the equilibrium. of 3 14 8. Which of the following statements is true? A) The total cost of production in a perfectly competitive market can be minimized only when the marginal costs across firms in the market are different. B) When a competitive market is allowed to operate efficiently, firms end up producing goods using the least amount of scarce resources. C) Under a perfectly competitive framework, a ruling authority is essentially required to dictate goals for the betterment of society. D) A firm interested in maximizing profits in a perfectly competitive market will produce output at a level where marginal revenue is equal to the price and greater than the marginal cost. 9. The invisible hand is mostly guided by: A) costs of production. B) quantity of goods and services sold. C) market prices. D) government intervention. 10. If prices are held below the equilibrium price: A) there exists a surplus in the market. B) there exists a shortage in the market. C) social surplus is maximized. D) all firms earn positive economic profits. 11. Which of the following best describes a command economy? A) An economy that is characterized by barter trade of goods and services B) An economy where strong controls are imposed by the ruling authority C) An economy in which resources are allocated through the price mechanism. D) An economy in which there are a few privately owned firms 12. Which of the following statements is true? A) Command economies do a better job at maximizing social welfare in comparison to market economies. B) The incentive problem and the coordination problem lead to lower efficiency in market economies. C) Central planners in command economies have to make decisions that prices would have automatically made in market economies. D) Bringing economic agents together to trade is easier in command economies in comparison to market economies. of 4 14 13. An externality occurs when ________. A) the quantity demanded of a good exceeds the quantity supplied B) the quantity supplied of a good exceeds the quantity demanded C) the government regulates production and consumption decisions D) an economic activity affects third parties not engaged in the activity 14. If the production of a good gives rise to negative externalities, ________. A) the fixed cost of production is zero B) the variable cost of production is zero C) the private cost of production exceeds the social cost of production D) the social cost of production exceeds the private cost of production [Questions 15-16] The figure below shows the demand, supply, and marginal social benefit curves for Good Y. 15. Refer to the figure above. Social welfare will be maximized if ________ units of Good Y are produced. A) 9 million B) 20 million C) 13 million D) 16 million of 5 14 16. Refer to the figure above. The triangular region ABC represents the ________. A) deadweight loss due to the presence of a pecuniary externality B) deadweight loss due to the presence of a negative externality C) economic loss of not recognizing a positive externality D) inefficiency created by not recognizing a negative externality 17. Which of the following gives rise to a positive externality? A) Sudden increase in the price of oil due to a supply shock B) Sudden increase in the demand for diamonds leading to an increase in their price C) Deforestation leading to the extinction of many species D) Consumption of a drug to cure a communicable disease 18. Which of the following occurs when an externality is internalized? A) Higher social well-being B) Higher private benefit C) Larger deadweight loss D) Higher returns to scale 19. The Coase Theorem states that ________. A) positive externalities lead to higher market prices B) negative externalities lead to lower equilibrium output C) transaction costs are higher in free markets D) negotiation between economic agents leads to an efficient allocation of resources 20. A government regulation that bans the use of a certain polluting technology in the production of a good is an example of a ________ to solve an externality. A) social enforcement mechanism B) command and control approach C) market-based approach D) Coasian approach of 6 14 21. The production of an industrial good in a plant emits harmful gases that cause breathing difficulty. Which of the following will happen if the government imposes a Pigouvian tax on the plant? A) Marginal external cost will increase. B) Marginal private cost will fall. C) The quantity supplied of the good will decrease. D) The demand for the good will increase. 22. Which of the following happens when a Pigouvian subsidy is provided? A) The marginal social cost curve shifts upward. B) The marginal private cost curve shifts downward. C) The marginal social benefit curve shifts downward. D) The marginal private benefit curve shifts upward. 23. Public goods are ________ in consumption. A) excludable but non-rival B) non-excludable and non-rival C) rival but non-excludable D) excludable and rival 24. Tom is willing to contribute $400 toward building a public park, Jack is willin
g to contribute $500, and Joe is willing to contribute $750. What is the total marginal value generated by the park if Tom, Jack, and Joe are the only residents in the neighborhood where the park is being built? A) $1,650 B) $1,050 C) $3,300 D) $2,350 25. A retired athlete built a gym near his house that could be used for free by all the residents in the neighborhood. However, the overuse of the facilities soon led to irreparable damages. This is an example of the ________. A) tragedy of the commons B) pecuniary externality C) paradox of thrift D) prisoners’ dilemma of 7 14 26. Paternalism is the view that ________. A) consumers do not always know what is best for them, and the government should encourage or induce them to change their actions B) producers do not always have the resources required for the production of a good, and the government should provide them with these resources C) the government should impose a tax on an economic activity only if it generates a negative externality D) the government has the supreme power to decide which goods are to be taxed and which are to be subsidized The figure below shows the market for Good X, where a price ceiling of PC is imposed: 27. Refer to the figure above. The region PC CAF shows the ________ after the imposition of the price ceiling. A) government revenue B) consumer surplus C) producer surplus D) deadweight loss of 8 14 28. The government of Putania spent $67,000,000 in a particular year, and the total tax receipts of the government in that year were $120,000. Calculate the budget deficit. A) $600,000 B) $680,000 C) $67,120,000 D) $66,880,000 29. The government redistributes funds via transfer payments in order to ________. A) reduce the number of private transactions B) increase competition among domestic producers C) finance the operation of its various departments D) reduce inequality among the citizens 30. In a ________ tax system, the average tax rate declines with income. A) progressive B) regressive C) proportional D) marginal 31. The burden of a tax falls entirely on buyers if ________. A) the price elasticity of demand is zero (perfectly inelastic) B) the price elasticity of demand is greater than 1 C) the income elasticity of demand is high D) the price elasticity of supply is unitary elastic 32. In Barylia, Greenaqua Corp. is the sole controller of a resource required for the production of bottled drinking water. Therefore, Greenaqua Corp. enjoys: A) legal market power. B) natural market power. C) regulated market power. D) restricted market power.
of 9 14 33. The quantity effect of a price reduction causes: A) a decrease in revenue because of a lower price. B) an increase in revenue because of increased sales. C) an increase in labor demand due to increased sales of the product. D) a decrease in labor demand because of a lower price of the final product.
34. Compared to a firm under perfect competition, a monopolist: A) charges less and produces less. B) charges less and produces more. C) charges more and produces less. D) charges more and produces more. 35. Patents are a source of: A) legal market power. B) natural market power. C) regulated market power. D) firm-biased market power. 36. A network externality refers to a situation when: A) the value of a product increases as more consumers start to use it. B) firms collude to sell products at a price higher than the equilibrium market price.
C) a firm that has control over key resources auctions the resources off to other firms.
D) the government interferes to prevent the concentration of market power in the hands of a few firms.
37. When a monopolist charges $5 for its product, it sells 250 units of the product. When it decreases the price of the product to $4, it sells 325 units of the product. What is the price effect of the price change? A) $50
B) $75 C) $100 D) $250
of 10 14 38. The pricing rule for a monopolist is: A) P = MR > MC. B) P > MR > MC. C) P = MR = MC. D) P > MR = MC. 39. A certain amusement park offers a 50 percent discount to kids between the age of 8 and 14 years. This is an example of: A) shadow pricing. B) first-degree price discrimination. C) second-degree price discrimination. D) third-degree price discrimination. 40. Which of the following statements correctly identifies a similarity between monopoly and perfect competition? A) Entry is restricted in both market structures. B) Price equals marginal cost in both market structures. C) Production is expanded until marginal revenue equals marginal cost in both the market structures. D) Firms face an upward sloping demand curve and a downward sloping marginal revenue curve in both the market structures. of 11 14 Part B: Short answer questions (20 points) 1. (10 points) The graph below shows the supply and demand curves in the market for cigarettes. Suppose that the government decides to impose a $4 tax on each pack of cigarette sold. A. (2 points) Draw a new supply curve representing the sellers’ behavior after this tax is imposed. (Note: The supply curve shifts up by $4.) B. (3 points) Does more of the tax incidence fall to the sellers or is it passed on to the consumers? Why? The tax burden falls more heavily on consumers, because demand is less elastic than supply. C. (3 points) Indicate the amount of government tax revenue on the graph. (Note: It is shown by the blue rectangle.) D. (2 points) Indicate the deadweight loss on the graph. (Note: It is shown by the red triangle. of 12 14 2. (10 points) Claritin, the allergy drug, is produced entirely by a single firm (Schering-Plough). The below graph shows the demand curve for Claritin, and the corresponding MR curve of the monopolist. A. (3 points) Suppose that Schering-Plough increases its quantity from 4 million to 6 million, causing the market price to decrease from $8 to $6. What is the amount of (positive) quantity effect? What is the amount of (negative) price effect? Quantity effect: since the monopolist sells 2 million more product at $6, the amount of quantity effect is 2 million x $6 = $12 million. Price effect: since the selling price for the initial demand of 4 million is lowered by $2, the amount of (negative) price effect is 4 million x $2 = $8 million. Assume that Schering-Plough incurs a constant marginal cost (MC) of $4 per unit. Also assume that Schering-Plough cannot conduct a price discrimination. B. (2 points) What is the monopolist’s optimal quantity? What is the equilibrium market price? Optimal quantity is 4 million (where MC=MR); tracing up the demand curve gives the equilibrium price of $8. of 13 14 Now, suppose that Schering-Plough is able to conduct first-degree (perfect) price discrimination. C. (2 points) What is the quantity of Claritins supplied? Under the first-degree PD, equilibrium quantity is equal to the socially efficient quantity; in this graph, such quantity is 8 million, where the demand curve meets the MC curve. D. (3 points) Calculate the amount of Consumer Surplus (CS). Under the first-degree PD, the monopolist takes the entire social surplus, and thus CS is zero. of 14 14
