Reference no: EM13200502

1 The Houston Chronicle reported that in Houston the average price of new homes has decreased, while at the same time the number of new homes sold has increased. This situation could be explained by which one of the following: (draw curves before answering)

a. An Increase in demand
b. An Increase in supply
c. A Decrease in demand
d. A Decrease in supply

2. In another market, the average price of new homes fell, while at the same time the number of new homes sold decreased. The situation would best be explained by: (Draw the curves before answering)
a. An Increase in Demand
b. An Increase in Supply
c. A Decrease in demand
d. A Decrease in supply

3. A consumer is said to have achieved maximum total utility when
a. Purchases of Good A give the same satisfaction as purchases of Good B
b. Purchases of the last dollar spent on Good A give the same satisfaction as purchases of the last dollar spent on Good B
c. The average purchases per dollar of Good A give the same satisfaction as the average purchases per dollar of Good B
d. The total utility derived from Good A is the same as the marginal utility derived from Good B

4. You are given the following information about a firm's present output position: MPP (Marginal Physical Product) of Land = 12; MPP of Labor = 16; Price of Land = $2; Price of Labor = $4. With no additional money to spend, this firm should:
a. Increase expenditures for Land and Reduce expenditures for Labor
b. Decrease expenditures for Land and Increase expenditures for Labor
c. Remain in the current position, since it has maximized its position
d. Close down

5. A firm achieves its Least-Cost position in production by substituting factors of production until
a. Their factor prices are equal
b. The Marginal Revenue Product of each factor is equal
c. The Marginal Revenue Product (MRP) of a factor divided by the Price (P) of that that factor is equal to the MRP/P of each of the other factors
d. The Marginal Physical Product of each factor is equal

6. Suppose there are 10 firms in an industry and each of them has an equal share of the total market. Now consider that mergers occur leaving only 5 firms with equal market shares. Expressing this in terms of the Herfindahl index, economists would say
a. The Herfindahl index was cut in half: from _______ to ________
b. The Herfindahl index doubled: from ________ to ________
c. The Herfindahl index remained the same: at ___________
d. The Herfindahl index quadrupled: from ______ to ________

7. The economy is currently on its production-possibility curve (frontier). A politician says if he is elected it is possible to get more of everything - more infrastructure, more schools, more national defense, more spending on social programs, and so on. The politician could be right or wrong. The politician is:
a. Right if he is assuming a rightward-shifting P-P curve
b. Wrong if he is assuming a rightward P-P curve
C. Wrong if he is assuming a P-P curve that does not change
D. a and c

8. Assume your swimsuit business is at its maximum profit position and one new change occurs: consumer incomes decrease. If swimsuits are normal goods, the equilibrium price of swimsuits will __________, and the CONSUMER surplus will ________. (Drawing the curves will help.)
a. Decrease, decrease
b. Increase, increase
c. Decrease, Increase
d. Increase, decrease

9. Firms that shut down in the short run are still must pay:
a. Variable Costs
b. Marginal Costs
c. Fixed costs
d. They must pay all these costs

10. Your rich uncle just left you a bond in his will. The bond will mature in three years and pay you $50,000 upon maturity. Over this period the interest rate is 6%. If you could sell the bond today, what is the Present value of this Bond? ________________ (Show your work for full credit.)

11. The term externality refers to:
a. Black-market economic activity
b. The impact of imported goods on a market
c. The costs and benefits of a market activity borne by a third party
d. The inequitable distribution of income

12. Suzy and Sally have lemonade stands across the street from each other. Last week they each decided to drop their prices by 20%. As a result, Suzy's revenue increased, while Sally's revenue fell. What might account for this?
a. Suzy had an elastic demand; Sally had an inelastic demand
b. Sally had an elastic demand; Suzy had an inelastic demand
c. Both have elastic demands
d. Both have inelastic demands

13. You are the Vice President for sales in your company, and your commission salary is based on total sales. Select the action that would bring you the most income if the product you sell has a price-elasticity coefficient of 3.
a. Cut price by .10% (i.e. point 1)
b. Cut price by 20%
c. Maintain price at the same level
d. Raise price by 20%

14. True or False. If full external COSTS are not "internalized," firms will tend to allocate more of society's scarce resources to production than is societally warranted, and if full external BENEFITS are not "internalized," firms will allocate less of society's resources to production than is societally justified.

15. Joe was very careful about smoking in his home until he bought a fire insurance policy. After buying the policy he became careless. His attitude is: "I'm insured. What do I care if this place burns down; I'll just collect the money." Joe's attitude is an example of:
a. A moral hazard
b. Adverse selection
c. A Buyers curse
d. A Coase Theorem

16. Megatrust Bank had historically scrutinized loans very carefully and extended them only to persons whom they considered very creditworthy. They made relatively few loans. However, after the government provided guarantees to sub-prime loans, Megatrust relaxed its standards and increased its loan volume. (And its default rate as well.) This is an example of:
a. Collusion
b. Adverse Selection
c. Moral Hazard
d. Tragedy of the Commons

17. In the short run, if a firm finds itself producing at a loss, it will
a. Shut down
b. Raise the price and lower the quantity of output
c. Lower the cost and raise the quantity of output
d. Not necessarily do any of the above

18. If income today is more equally distributed than it was in 1960, a Lorenz Curve depicting today's distribution would be
a. More bowed and to the right of the 1960 curve
b. Less bowed and to the left of the 1960 curve
c. More bowed and to the left of the 1960 curve
d. Less bowed and to the right of the 1960 curve

19. Which one of the following statements is true? When output increases
a. The Average fixed cost must rise
b. The Marginal Cost must rise
c. The Average Variable Cost must rise
d. The Total Variable Cost must rise

20. A firm in any of the market structures we have studied will maximize its profit (or minimizes its loss) when its
a. Average costs are at a minimum
b. Total revenue is at a maximum
c. Marginal Revenue exceeds its Marginal Cost by the widest margin
d. Marginal Cost equals its Marginal Revenue

21. Industries in which there are only a few sellers of closely identical products
a. Are usually perfectly competitive in their price policies since each firm knows that by cutting its price a little, it can capture a significantly larger market share.
b. Operate in perfect competition since they are fierce commercial rivals
c. Often follow a pattern of explicit or implicit price arrangements broken occasionally by price wars when one firm tries to change the status quo
d. Often have uniform pricing policies, which mean that they are in effect operating in perfect competition.

22. If the demand for a good increases when the price of another good increases, these goods are
a. Complementary goods
b. Substitute goods
c. Inferior Goods
d. Capital goods

23. Which of the following pairs of products would be complementary?
a. Beer and Ale
b. Hamburgers and Hot Dogs
c. Rented videos and subscriptions to cable T.V.
d. Tennis rackets and tennis balls

24. The amount of a good that is given up to produce another good is:
a. Its dollar cost
b. Its opportunity cost
c. Its marginal revenue cost
d. Its marginal physical product

25. One very important characteristic of the equilibrium price is that it
a. Increases the quantity demanded
b. Decreases the quantity demanded
c. Guarantees that all buyers who desire the product will have it
d. Eliminates both surpluses and shortages, since at that price, quantity supplied equals quantity demanded

26. Rank the following market structures based on the number of participating firms: From fewest number of firms to most number of firms:
a. Monopolistic competition, Oligopoly, perfect competition, Monopoly
b. Oligopoly, monopolistic competition, monopoly, perfect competition
c. Perfect competition, monopoly, oligopoly, monopolistic competition
d. Monopoly, Oligopoly, monopolistic competition, perfect competition

27. If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios should they expect their future to hold as the market adjusts to its new equilibrium?
a. They should expect an increase in their demand curves
b. They should expect a decrease in their demand curves
c. They should expect a decrease in their marginal costs
d. They should expect no change in their costs or their revenue

28. If a government sets a rent controlled price below the market Equilibrium point, which one of the following can be expected
a. Excess quantity demanded and surplus
b. Excess quantity supplied and surplus
c. A shortage of rental properties
d. Competitive bidding among sellers

29. If labor in Mexico is less productive than labor in the U.S. in all goods and services,
a. Neither nation can benefit from trade
b. Mexico can benefit from trade but the U.S. can not
c. Mexico can not have a comparative advantage in any good
d. Both nations can still benefit from trade if the ratios of the opportunity cost between two products differs in Mexico and the U.S.

30. Which one of the following is FALSE:
a. International trade is based on Comparative Advantage NOT Absolute Advantage
b. Since the 1980's, the U.S. has imported more goods and services than it has exported, thus contributing to a negative Current Account condition.
c. The World Trade Organization (WTO) is the successor organization to the General Agreement on Tariffs and Trade (GATT) and is the organization to which member countries take trade disputes for settlement.
d. Trade is a "zero sum game" i.e. What one country gains from trade, the other nation loses.