EC142 PRINCIPLES OF MICROECONOMICS
Final Exam (Weight 300 Points) NAME: __________________________
PART I Multiple Choice Questions (Weight 7 Points each) Choose best answer.
1. Democracy is associated with capitalism because:
a) The free market does not require that factors of production be mobile.
b) Capitalism takes many of the planning decisions from the market and gives them to the government to determine.
c) Public ownership of the means of production decreases governmental power.
d) Continuous government regulation of all aspects of the economy is essential to a market economy.
e) None of the above.
2. In contrast to a socialist economic organization, a capitalist system would:
a) Have elections for government officials.
b) Allow critics of the regime free speech.
c) Have labor unions to resolve work disputes and job grievances.
d) Encourage the private ownership of capital and the means of production.
3. Assumptions made in conjunction with economic theorizing:
a) Can be unrealistic, if when they are relaxed, the outcome is essentially unchanged.
b) Make the output of economic modeling useless.
c) Must be avoided to the extent possible.
d) Must be realistic and consistent with known real-world conditions if the predictions of the theory are to be useful for practical purposes.
4. The production possibilities (or transformation) curve illustrates the basic principle: a) An economy's capacity to produce increases in proportion to its population size
b) More of one good can be produced without a decrease in the production of the other good while holding inputs and technology constant.
c) The production of more and more of one good will require larger and larger cuts in the production of the other good.
d) An economy will automatically seek that level of output at which all of its resources are employed.
5. The concept of opportunity cost:
a) Is irrelevant if the production possibilities curve is shifting to the right.
B) is irrelevant in socialist economies because of central planning.
c) Suggests that the cost of resources for any particular product is the alternative outputs foregone because these resources are not available for alternative production.
d) Suggests that insatiable wants can be fulfilled only if the opportunity costs for fulfilling them approach zero or are negative while the society continues to pay the prevailing wage.
6. Which of the below will not cause the demand for X, a normal good, to increase?
a) A decrease in the price of X.
b) A change in consumer taste in favor of product X.
c) An increase in consumer incomes.
d) An increase in the price of a substitute good.
e) A decrease in the price of a good that is a complement to X.
7. A price ceiling:
a) Is established by individual firms.
b) Does not requires government sanction for violators
c) Will result in a shortage of the good concerned.
d) Will cause new firms to enter the market.
8. If a producer overproduces and sets the price of his product too high to allow him to sell all of his production:
a) This will cause a lasting surplus of the good.
b) This will create a lasting shortage of the good.
c) This will cause a temporary excess-demand condition.
d) This will cause a temporary excess-supply condition.
9. A price floor:
a) Raises consumer welfare.
b) Must be established by the government.
c) Will increase the demand of the good concerned.
d) None of the above.
10. An unusually bountiful crop of Florida oranges might be expected to:
a) Decrease the supply of oranges.
b) Reduce the price of orange juice.
c) Increase the demand for California oranges.
d) All of the above.
11. If the own-price elasticity of demand for gasoline is -.30 and there is a 10% decrease (-.10) in the price of gasoline, this will cause the quantity of gasoline demanded to:
a) Increase by .30 (30%).
b) Increase by .03 (3%).
c) Decrease by .03 (-3%).
d) Decrease by .30 (-30%).
12. A black market is:
a) Something that happens when producers sell goods for a greater price than the government mandated price ceiling.
b) A characteristic of a surplus or excess supply condition.
c) Legal but frowned upon by economists who feel it violates consumer sovereignty.
d) None of the above.
13. The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase argued that the railroad's revenues would fall because of the rate hike. It can be concluded that:
a) The railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt that it was inelastic.
b) The railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt that it was elastic.
c) Elasticity of demand was not at issue, that railroad felt they needed more revenue to continue operations.
d) Both groups felt that demand was inelastic but for different reasons.
e) None of the above.
14. In the P1 to P2 price-range, demand is:
a) Perfectly elastic.
b) Relatively elastic.
c) Perfectly inelastic.
d) Relatively inelastic.
15. In the P3 to P4 price-range, demand is:
a) Perfectly elastic.
b) Relatively elastic.
c) Perfectly inelastic.
d) Relatively inelastic.
16. Utility refers to the:
a) Usefulness of a product.
b) Relative scarcity of a product.
c) Price reasonableness of a product.
d) Affordability of a good or service to a consumer.
e) Satisfaction which a consumer derives from a good or service.
17. Equilibrium is the condition where:
a) The plans of suppliers and demanders coincide
b) The supply and demand curves are tangent.
c) The budget line crosses the indifference curve.
d) Only demanders are motivated to change their quantity demanded.
e) None of the above.
18. The marginal rate of substitution:
a) Is constant at all points on the budget line.
b) Increases in absolute value as one moves southeast along an indifference curve.
c) Decreases in absolute value as one moves southeast along an indifference curve.
d) May increase or decrease in absolute value as one moves southeast along an indifference curve, depending upon whether the substitution or income effect is dominant.
19. A price floor is illustrated in which graph above?
a) A
b) B
c) C
d) D
20. When price is $5, the quantity of excess
supply in the graph to the right is:
a) 25
b) 50
c) 175
d) 200
e) 225
PART II: QUANTITATIVE PROBLEMS
| Price | Quantity |
| 1.00 | 10 |
| 1.50 | 9 |
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PROBLEM 1. (Weight 30 points)
a. Own Price elasticity. Given the data to the right, compute the POINT elasticity of demand of a good as its price goes from $1.00 to $1.50.
SHOW FORMULA AND WORK (No credit for magic numbers).
b. Is the demand for this good in this range elastic or inelastic?
PROBLEM 2 (Weight 50 points). If the wage bill per unit of labor (L) is $30 and the cost of capital (K) is $200 in the short run, fill in the BLANKS in the table below. Put the formulas in the cells above the variable names. Do not enter formulas in cells with "///" in them.
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| L | TVC | Q | MPL | APL | AVC | TFC | TC | ATC | MC |
| 0 |
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| 1 |
| 4 |
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| 2 |
| 10 |
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