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Principles of Microeconomics
Final Exam A
Regulations:
1) There is zero tolerance for cheating; any student caught cheating will have their paper taken away, and will receive a grade of 0% on the exam. There will not be any opportunity to re-take the exam later. 2) All books, bags, notes, jackets, and any other belongings will be left at the front of the classroom. The only belongings you are allowed at your desk are your exam paper and pen/pencils.
3) Mobile phones and other electronic equipment will be turned off, and cannot be used for any purpose whatsoever during the exam. Students caught using such equipment for any reason during the exam will be assumed to be cheating, and have their papers seized.
4) Calculators that have been approved for use by the test authorities will be allowed.
5) You cannot communicate with any other person inside or outside the classroom, or look at any paper other than your own.
6) Once the exam starts, you cannot leave the examination room for any reason whatsoever until you are finished. If you leave the examination room early, you will also hand in your exam at that time, and will not be allowed to return to continue writing.
7) Be sure to write your name and student number clearly on every page of your exam.
8) When you finish the exam, you may walk quietly to the front of the room to hand it in, and then leave the examination room. You may not talk to anyone else until you’ve left the room.
9) When the time for the exam is finished, you must stop writing and hand in your exam at that time, regardless of whether or not you are finished. Continuing to write after the time is finished will be considered to constitute cheating, and can lead to seizure of your paper, and/or reduction in your grade.
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1. True/False (2 points per question) Example:
Economics is the study of how evenly goods and services are distributed within society. ANS: F 1.1、Efficiency means everyone in the economy should receive an equal share of the goods and services
produced. F 1.2、It is difficult for economists to make observations and develop theories, but it is easy for economists
to run experiments to generate data to test their theories. F
1.3、An economy can produce at any point on or inside its production possibilities frontier, but it cannot
produce at points outside its production possibilities frontier. T
1.4、In a competitive market, there are so few buyers and so few sellers that each has a significant impact
on the market price. F
1.5、The price elasticity of demand is defined as the percentage change in quantity demanded divided by
the percentage change in price. T 1.6、At the equilibrium price, the quantity that buyers want to buy exactly equals the quantity that sellers
want to sell. T 。
1.7、All else equal, a decrease in demand will cause an increase in producer surplus. F
1.8、When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare
of buyers and sellers caused by the tax. F
1.9、If the United Kingdom imports tea cups from other countries, then U.K. producers of tea cups are
better off, and U.K. consumers of tea cups are worse off, as a result of trade. F 1.10、When firms internalize a negative externality, the market supply curve shifts to the left. T
2. Choose the best answer.(2 points per question)
2.1 The law of demand states that, other things equal,( B ) A. an increase in price causes quantity demanded to increase. B. an increase in price causes quantity demanded to decrease.
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C. an increase in quantity demanded causes price to increase. D. an increase in quantity demanded causes price to decrease. 2.2 A good will have a more elastic demand, ( A ) A. the greater the availability of close substitutes. B. the more narrow the definition of the market. C. the shorter the period of time. D. the more it is regarded as a necessity.
2.3 When a tax is placed on the sellers of a product, ( B )
A. buyers pay more and sellers receive more than they did before the tax. B. buyers pay more and sellers receive less than they did before the tax. C. buyers pay less and sellers receive more than they did before the tax. D. buyers pay less and sellers receive less than they did before the tax. 2.4 Total surplus is ( B )
A. the total cost to sellers of providing the good minus the total value of the good to buyers. B. the total value of the good to buyers minus the cost to sellers of providing the good. C. the difference between consumer surplus and sellers’ cost. D. always smaller than producer surplus.
2.5 The size of a tax and the deadweight loss that results from the tax are ( A ) A. positively related. B. negatively related. C. independent of each other. D. equal to each other.
2.6 The before-trade price of fish in Germany is $8.00 per pound. The world price of fish is $6.00 per pound. Germany is a price-taker in the fish market. If Germany allows trade in fish, then Germany will become an ( A )
A. importer of fish and the price of fish in Germany will be $6.00. B. importer of fish and the price of fish in Germany will be $8.00.
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C. exporter of fish and the price of fish in Germany will be $6.00. D. exporter of fish and the price of fish in Germany will be $8.00. 2.7 Since air pollution creates a negative externality, ( A )
A. social welfare will be enhanced when some, but not all air pollution is eliminated. B. social welfare is optimal when all air pollution is eliminated.
C. governments should encourage private firms to consider only private costs. D. the free market result maximizes social welfare.
2.8 A Goods that are rival in consumption and excludable would be considered ( D ) A. natural monopolies. B. common resources. C. public goods. D. private goods.
2.9 As a nation gets richer, the government typically takes ( C ) A. a constant share of income in taxes. B. a smaller share of income in taxes. C. a larger share of income in taxes.
D. There is little evidence of a relationship between income and taxes for most countries. 2.10 The amount of money that a firm receives from the sale of its output is called ( C ) A. total gross profit. B. total net profit. C. total revenue. D. net revenue.
2.11 Because the goods offered for sale in a competitive market are largely the same, ( D ) A. there will be few sellers in the market. B. there will be few buyers in the market. C. only a few buyers will have market power.
D. sellers will have little reason to charge less than the going market price.
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2.12 A fundamental source of monopoly market power arises from ( C ) A. perfectly elastic demand. B. perfectly inelastic demand. C. barriers to entry.
D. availability of \2.13 An oligopoly is a market in which ( A )
A. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market. B. firms are price takers.
C. the actions of one seller in the market have no impact on the other sellers' profits.
D. there are many price-taking firms, each offering a product similar or identical to the products offered by other firms in the market.
2.14 As a group, oligopolists would always earn the highest profit if they would ( C ) A. produce the perfectly competitive quantity of output.
B. produce more than the perfectly competitive quantity of output.
C. charge the same price that a monopolist would charge if the market were a monopoly. D. operate according to their own individual self-interests. 2.15 The term \A. labor. B. capital. C. land.
D. All of the above are correct.
3. Short answer （25 points）
3.1、Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? (5 points) ANS:
Whatever must be given up to obtain some item is its opportunity cost. (1 point) Basically, this would
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be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time, as well as the additional costs the person incurs by making the choice to attend college. (2 points) For most students this would be the income the student gives up by not working plus the cost of tuition and books, and any other costs they incur by attending college that they would not incur if they chose not to attend college. (1 point)A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (1 point)
3.2、Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency? (5 points) ANS:
When a negative externality exists, the private cost (or supply curve) is less than the social cost. (1 point) The market equilibrium quantity of Q0 will be greater than the socially optimal quantity of Q1. (1 point) The government could help eliminate this inefficiency by taxing the product. In this example, the size of the per-unit tax would be P3 - P1 (or P2 - P0). (1 point)
（The graph has 2 points. If a student doesn’t give the graph, but the other sections are right, give him 4 points）
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3.3、Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market. (5 points) ANS:
The losses and revenues are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue (because profit/loss=TR-TC, so TC=TR+profit/loss). (1 point) The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. (1 point) If average variable cost is below P0 at output level Q0, the firm will remain in the market. If average variable cost is above P0 at output level Q0, the firm will shut down in the short run. (1 point)
（The graph has 2 points. If a student doesn’t give the graph, but the other sections are right, give him 3 points. If he uses other words and the meaning is right, give him the points.）
3.4、Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint. (5 points) Ans:
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Competitive firms do not face downward-sloping demand. (1 point) The graph shows the firm choosing a level of production in which the intersection of marginal revenue and marginal cost occurs
at an output level where average total cost is decreasing. (1 point) This profit-maximizing output level is less than the efficient scale (minimum of average total cost), and therefore the firm is said to be operating with excess capacity. (1 point)
（The graph has 1 point. If a student uses other words and the meaning is right, give him the points.）3.5、Assume that a person consumes two goods, Coke and Snickers. Use a graph to demonstrate how the consumer adjusts his/her optimal consumption bundle when the price of Coke decreases. What will happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good? (5 points)
Ans:
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If Coke is a normal good, the consumption of Coke will increase when the price decreases. (1 point) If Coke is an inferior good and the substitution effect dominates, the consumption of Coke will increase when the price decreases. (1 point) If Coke is an inferior good and the income effect dominates, the consumption of Coke will decrease when the price decreases. (1 point) If consumption decreases, the demand curve is upward sloping, and Coke would be a Giffen good. Giffen goods are very rare in the real world, and Coke is not likely to be one. (1 point) (The graph has 2 points)
4. Answer the following two questions（25 points）
4.1 Use the following graph shown to fill in the table that follows.（7 points）
P4PriceSupplyAP3BCP2DGP1FDemandQ2Q1Quantity
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WITHOUT TAX WITH TAX CHANGE Consumer surplus Producer surplus Tax revenue Total surplus
ANS: WITHOUT TAX WITH TAX CHANGE Consumer surplus A+B+C A –(B+C) Producer surplus D+F+G F –(D+G) Tax revenue None B+D (B+D) Total surplus A+B+C+D+F+G A+B+D+F –(C+G) (Each blank has 1 point.)
4.2 Answer questions （16 points）
a.
Given the table below, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity. (6 points)
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Price Quantity Demanded Per Month 6,000 Quantity Supplied Per Month 10,000 b. A surplus of 4,000 flashlights would be the problem in the market, (2 points) and we would expect the price to fall. (2 points) (The graph has 1 points)
c. A shortage of 8,000 flashlights would be the problem in the market, (2 points) and we would expect the price to rise. (2 points) (The graph has 1 point)
$5 $4 8,000 8,000 $3 10,000 6,000 $2 12,000 4,000 $1 14,000 2,000
b. Suppose the price is currently $5. What problem would exist in the market? What would you expect to happen to price? Show this on your graph. (5 points)
c. Suppose the price is currently $2. What problem would exist in the market? What would you expect to happen to price? Show this on your graph. (5 points) ANS:
a. The equilibrium price (Pe) is $4 and the equilibrium quantity (Qe) is 8,000.
(Equilibrium price and equilibrium quantity each has 2 points, and the graph has2 points)
priceSurplus of 4000S54.5Pe43.532.521.5Shortage of 8000D10.5100020003000400050006000700080009000100001100012000quantityQe
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