Sample Exams for Microeconomic Principles and Problems A Pluralist Introduction 2nd Edition By Geoff

Exam #1, Version #1, SCHNEIDER, Microeconomic Principles ANSWERS 1.

a.

World PPC

90A

(1) What is the opportunity cost of moving from point D to point A?

80

B 

F

60

C 

D

1500 units of Food. b.

(1) Show what will happen to the graph if climate change reduces the productivity land used to grow food.

c.

(1) Circle the letter associated with each point on the graph that cannot be reached given existing resources and technology. a. b. c. d. e. f. g.

d.

Machinery

The graph to the right displays a production possibilities curve for the World, which must choose between allocating resources towards Machinery (M) or Food (F).

A B C D E F G

G

1000

0

1500

E 

2000

Food

(2) Circle all of the following statements that are true. a. Point A will result in the most economic growth. b. Point E is inefficient. c. One possible reason for the economy to be at Point E would be if the economy is in a recession. d. The opportunity cost of 1 unit of Food increases as the economy moves from Point A to Point E.

2. (2) List the major economics systems that have existed in human history, in the order in which they appeared.

Primitive communism (traditional) Slave-based empires Feudalism Mercantilism Laissez-Faire Capitalism Mixed-Market Capitalism 3.

On each of the graphs, show how the supply and demand curves for Apple Laptop Computers will be affected by specific events, and show what happens to equilibrium price and quantity. No explanation is necessary.

a. (3) A shortage of computer chips used in Apple Laptop Computers develops due to pandemic disruptions.

P

a. Apple Laptop Computers

S

$1,500

D 9

Q (millions)

2 b. (3) Intel undertakes a massive advertising campaign to convince people to buy laptops not made by Apple. The campaign is so bad that it actually increases Apple’s brand-name identification.

b. Apple Laptop Computers

P

S

$1,500

D Q (millions)

9 c. (3) Apple starts to make more money selling iPhones than it does selling laptop computers.

P

c. Apple Laptop Computers

S

$1,500

D Q (millions)

9 d. (3) Wages of workers all around the world rise due to the end of the global COVID-19 pandemic.

d. Apple Laptop Computers

P

S

$1,500

D Suppose that the Pennsylvania State Legislature legalizes recreational marijuana, creating the market depicted in the 200 graph to the right with an equilibrium price of $100 per unit P($)190 and an equilibrium quantity of 500 units.

180 170 a. (1) On the graph to the right, a $60 per unit excise tax on 160 marijuana would result in a new equilibrium price of $_____________. Show on the graph. b. (1) The total tax revenue from the $60 excise tax received by the government would be $________________. (show your work)

Market for Legalized Marijuana

S

150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

Q

D

1000

900

800

700

600

500

400

300

200

100

0

c. (1) Producers’ total revenue after the excise tax is imposed would be $________________. (show your work)

Q (millions)

9

4.

3 5.

(1) In the COVID-19 recession of 2020, incomes decreased by 5% and the quantity of Pabst Blue Ribbon Beer demanded increased by 2%. This tells us that Pabst Blue Ribbon Beer a. Has an elastic demand curve. b. Has an inelastic demand curve. c. Is a normal good. d. Is an inferior good. e. Is a superior good.

6.

(1) According to the Political Economy model of the work day, the wage rate paid to workers is a. Somewhere between the subsistence wage and the level where firms earn a normal profit. b. Affected primarily by the relative power of workers and employers. c. Lower when firms are able to move operations abroad. d. All of the above. e. None of the above.

7.

(1) In 2021 the price of beef increased by 20%. As a result, the quantity of buns demanded decreased by 5% and the quantity of chicken demanded increased by 10%. This means (circle all of the following that are TRUE): a. Beef has an inelastic demand curve. b. Beef is a normal good. c. Buns are a substitute good for beef. d. Buns are complementary good for beef. e. Chicken is a substitute good for beef. f. Chicken is a complementary good for beef.

8.

The government of the state of Pennsylvania wants to help out farmers who supply milk. Currently, the equilibrium price of a gallon of milk in Pennsylvania is $3, and the equilibrium quantity of milk produced is 10 billion gallons. The price elasticity of the demand for Pennsylvania Milk is extremely elastic (𝑒 3 , and the price elasticity of the supply of Pennsylvania Milk is inelastic (𝑒 0.3 . The government is considering (a) a price floor of $4, and (b) a subsidy to Pennsylvania Milk Farmers of $2 per gallon. a. (6) Draw a graph of the market for Pennsylvania Milk. Show as accurately P S as possible how it will be affected by a price floor of $4 per gallon.

Determine the cost to the government of buying the surplus (if any), and the total revenue that Pennsylvania Milk Farmers get after that price floor is installed.

𝑒

3

%∆

; %∆𝑃 33.33% %∆𝑄 3 ∗ 33.33% 100% Cost to government is surplus of 11b.* $4=$44 billion. TR for firms is $4*11b.=$44 billion %∆𝑄 𝑒 0.3 ; %∆𝑄 10% 33.33% %∆

$4 $3 D

b. (6) Draw another graph of the market for Pennsylvania Milk in equilibrium.

Show how it will be affected by a per-unit subsidy of $2 per gallon. Be as accurate as possible. Determine the cost of the subsidy to the government, and the total revenue that Pennsylvania Milk Farmers will receive after the subsidy is established.

P

The supply curve Q (billions) shifts down by 10 11 exactly $2, resulting in a new equilibrium of about $2.70. Once you pick the new equilibrium price, you compute the new quantity demanded using the price elasticity of demand. %∆ . %∆ 3 ; %∆𝑃 10%. 3 ; 𝑒

S S-2

$4

%∆

%

%∆𝑄 30%. Q2 is 30% higher than 10; Q2=1.3*10=13. Cost of subsidy to government is $2 * 13 billion = $26 billion. Total revenue to firms is ($2.70+$2)*13 b. =$4.70*13b.= $61.1 billion

$3

$2.70

D $1

c. (4) Given that the goal is to help out Pennsylvania Milk Farmers at the least cost to government, while also keeping prices low for consumers if possible, which policy is most effective, and why?

The subsidy is the clear best choice. Farmers get more revenue, it costs the government less, and consumers pay lower prices

10 13

Q (billions)

4 9.

On each of the graphs, show how the supply and demand curves for unskilled labor will be affected by specific events, and show what happens to (a) the wage rate, (b) the number of 9a W (wage) workers employed, and (c) the surplus of laborers. Assume S that each problem starts with a minimum wage of WMin in place. No explanation is necessary. a.

(3) Due to another COVID outbreak, a lot of workers decide to quit their jobs and live off of their savings.

WMin WE

DL b.

(3) (i) The government decreases the minimum wage to a level below WMin but above WE. (ii) This causes a decrease in workers’ productivity.

QD1 QS1 QE

QLabor

9b.

W (wage)

S

WMin

WE

c.

DL

(3) The government decides to hire all unemployed workers to do useful work in their communities.

QLabor

QS1

QD1 QE

9c W (wage)

S

WMin 10. Essay (50)

WE

DL

QD1 QS1 QE

QLabor

Exam #1, Version #2 ANSWERS

Consumer Goods 1.

a.

The graph to the right displays a production possibilities curve for the US, which must choose between allocating resources towards Consumer Goods (C) or Public Health (P).

(1) What is the opportunity cost of moving from point E to point C? 40 C (40 units of consumer goods).

b.

US PPC

80E

G D  A 

6 4

F C

(1) If the economy is currently at point C, what will happen on the graph if the government decides to reduce spending on public health so that they can give people tax cuts so they can purchase more consumer goods?

This would mean moving along the PPC from point C toward point D or point E.

100

0

c.

(1) Which point on the graph will result in the most economic growth?

2.

(2) Which of the following statements about the PPC above are true (select one or more)? a. Resources are not specialized on this PPC.

B 

130 150

Public Health

Point B

b. The opportunity cost of one unit of public health increases as the economy moves toward point B. c. d.

The US economy has enough resources to reach all points on the graph except point G. Point E represents an inefficient use of resources.

(2) List the major economics systems that utilized markets as their primary means for obtaining essential goods and services.

Mercantilism, Laissez-Faire Capitalism, Mixed Market Capitalism. No other systems used markets for essential goods like food.

3.

4.

On each of the graphs, show how the supply and demand curves for Google Pixel SmartPhones will be affected by specific events, and show what happens to equilibrium price and quantity. No explanation is necessary.

a. (3) Apple lowers the price of its new model of the iPhone.

P

a. Google Pixel SmartPhone

S

$900

D Q (millions)

9

b. (3) Google undertakes a massive advertising campaign to increase its market share above its current level of 2%. The campaign targets diverse communities usually ignored by advertisers, and is very successful in creating brand name identity.

P

b. Google Pixel SmartPhone

S

$900

D 9

Q (millions)

2 c. (3) Google’s profits on its YouTube TV operations (Google owns YouTube) decline rapidly due to increased competition from other TV streaming services such as Disney+.

P

c. Google Pixel SmartPhone

S

$900

D Q (millions)

9 d. (3) The recent dramatic increases in interest rates by the Fed result in steep declines in the availability of consumer credit.

d. Google Pixel SmartPhone

P

S

$900

D Suppose that the US government establishes a price floor on corn of $18 per unit and buys any surplus.

20 a. (1) The price floor will cost the government P($) 19 (Qs-Qd)*Pfloor=(9000-1000)*$18=$144,000 b. (1) The price elasticity of demand for corn (using the new price floor) is:

𝑒

=-1

b. (1) The total revenue corn farmers will receive after the $18 price floor is established will be Qs*Pfloor=$18*9000=$162,000 c. (2) If instead of the price floor the government establishes an $8 per-unit subsidy, this will cost the government Q2*subsidy=7000*$8=$56,000

S

Q

D

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

6.

Market for Corn

18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 0

d. (2) Producers’ total revenue after the per-unit subsidy is established would be (P+subsidy)*Q2=(6+8)*7000=$98,000

Q (millions)

9

5.

(1) In the COVID-19 recession of 2020, incomes decreased by 5% and the quantity of vacations demanded decreased by 15%. This tells us that vacations (circle one) a. Have an elastic demand curve. b. Have an inelastic demand curve. c. Are a normal good. d. Are an inferior good. e. Are a superior good.

3 7.

(2) In 2022 the price of natural gas in Europe increased by 700%. As a result, the quantity of solar panels demanded increased by 100% and the quantity of stoves demanded decreased by 200%. This means (circle all of the following that are TRUE): a. Natural gas has an inelastic demand curve. b. Natural gas is a normal good. c. Solar panels are a substitute good for natural gas. d. Solar panels are complementary good for natural gas. e. Stoves are a substitute good for natural gas. f. Stoves are a complementary good for natural gas.

8.

(1) The most important factors that led to major shifts in economic systems (from one type of system to another) were (circle one or more) a. Conflicts between different social classes. b. Changes in key technologies. c. Changes in religious or cultural views. d. Changes in the allocation of surplus. e. Changes in property rights.

9.

Determine which economic thinker is most closely associated with the following ideas. a. (1) Surplus Value.

Karl Marx b. (1) Sticky Wages.

John Maynard Keynes c. (1) Moral Sentiments.

Adam Smith d. (1) Pecuniary Emulation.

Thorstein Veblen

10. (1) Modern, Market-dominated economies (circle one or more) a. Are predominant in English-speaking countries. b. Tend to have a much higher growth rate than social market economies. c. Tend to have a lower poverty rate than social market economies. d. Use little or no government intervention. e. Have much higher inequality than social market economics.

11. The government of the state of Pennsylvania wants to discourage hard liquor (vodka, whiskey, etc.) consumption, which has increased significantly in recent years. Currently, the equilibrium price of a 0.75 liter bottle of hard liquor in Pennsylvania is $20, and the equilibrium quantity of hard liquor sold is 100 thousand bottles per month. The price 0.1 , and the price elasticity of the supply of elasticity of the demand for hard liquor is extremely inelastic (𝑒 4 . The government is considering (a) a price floor of $30 (where they will not Pennsylvania hard liquor is elastic (𝑒 buy any surplus created), and (b) a per-unit excise tax of $10 per bottle. a. (6) Draw a graph of the market for hard liquor in Pennsylvania. Show as accurately as possible how it will be affected by a price floor of $30 per bottle. Determine the total revenue that Pennsylvania hard liquor sellers get after that price floor is installed.

4 b. (6) Draw another graph of the market for hard liquor in Pennsylvania in equilibrium. Show how it will be affected by a per-unit excise tax of $10 per bottle. Be as accurate as possible. Determine government’s revenue from the tax, and the total revenue that Pennsylvania sellers of hard liquor will receive after the excise tax is established.

c. (4) Given that the goal is to discourage hard liquor consumption in the most cost effective way for the government, which policy is most effective, and why?

Quantity is slightly less with the price floor of $30 (95 thousand vs. 96 thousand) so the price floor discourages consumption the most. The price floor costs nothing but also does not bring in revenue. The excise tax brings in $960,000 for the government making the excise tax better from a government budgetary perspective.

12. On each of the graphs, show how the supply and demand curves for unskilled labor will be affected by specific events, and show what happens to (a) the wage rate, (b) the number of workers employed, and (c) the surplus of laborers. Assume that each problem starts with a minimum wage of WMin in place. No explanation is necessary. a.

(3) The U.S. economy enters a recession due to the Fed’s recent increases in interest rates.

W (wage)

9a

S

WMin WE

b.

(3) (i) The government increases the minimum wage to a level above WMIN. (ii) This causes an increase in workers’ productivity.

W

9b.

DL QD1 QS1 QE

S

QLabor

c. (3) The government decides to provide free child care for all families, as many social democracies do.

WMin

W

9c

S

W WMin DL QD1 QE

QS1

WE QLabo DL

QD1 QS1 QE

QLabor

Price ($ per bag of avocados)

Exam #2, version #1, Schneider, Chapters 12-23, ANSWERS Figure 1. A Typical Farmer in the Perfectly Competitive market for Avocados

25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

MC ATC AVC

Total Fixed Costs

0

100

200

300

400

500

600 700 800 900 1000 1100 1200 1300 1400 Quantity (bags) Currently, there is a price floor of $24 per bag of avocados, with the government buying any surplus. The equilibrium price of a bag of avocados is $12.

1.

(1) Given the price floor on a bag of avocados is $24, the farmer in Figure 1 should produce 1100 bags of avocados.

2.

(2) With the price floor on a bag of avocados is $24, the farmer in Figure 1 will make a total economic profit of $(24‐17)*11=$7700.

3.

(2) On the graph above, shade in the amount of Total Fixed Costs that will occur when the price for on a bag of avocados is $24 on the graph. (see above)

4.

(1) Firms in the avocado market will shut down in the short run if the price falls below $9.

5.

(2) If the government eliminates the price floor and the market returns to equilibrium at P=$12, the farm in Figure 1 will produce 800 bags of avocados and earn an economic profit per unit of $12‐16.50=$‐4.5.

6.

(2) If the price of a bag of avocados is $12 per bag then, assuming the firm in Figure 1 is typical of other avocado producers and that the cost curves are long run cost curves, in the long run we would expect which of the following things to happen (select one or more): a. Firms will enter the market. b. The market supply will decrease. c. The market price will decrease to the minimum AVC. d. Firms will earn an economic loss. e. The market price will increase to $16.

7.

(2) As more of one input is used, holding other inputs constant, (select one or more) a. Marginal costs will decrease at first due to specialization. b. Output will eventually decrease due to diminishing returns. c. Productivity of the variable input will eventually decrease due to diminishing returns. d. Total Fixed Costs will eventually decrease due to diminishing returns.

Daily cost & revenue information for Merck, a monopoly providing the anti‐ Covid‐19 pill Molnupiravir Long Run Long Run Long Run Total Marginal Quantity Marginal Average Price Total Cost Revenue Revenue Cost Total Cost Q TC MC ATC P TR MR 0 $0 $‐‐‐‐‐‐ $ ‐‐‐‐‐‐‐‐ $1,400 $0 $‐‐‐‐‐‐ 10 9,000 900 $900 $1,300 $13,000 1300 20 17,000 800 $850 $1,200 $24,000 1100 30 24,000 700 $800 $1,100 $33,000 900 40 30,000 600 $750 $1,000 $40,000 700 50 500 500 35,000 $700 $900 $45,000 60 70 80 90 100 110 120 130

39,000 42,000 44,000 45,000 46,000 47,500 49,500 52,500

400 300 200 100 100 150 200 300

$650 $600 $550 $500 $460 $432 $413 $404

$800 $700 $600 $500 $400 $300 $200 $100

$48,000 $49,000 $48,000 $45,000 $40,000 $33,000 $24,000 $13,000

300 100 ‐100 ‐300 ‐500 ‐700 ‐900 ‐1100

8. (1) Based on the data, if Merck wishes to maximize profits, how many units per day should they produce?

50

9. (2) Merck’s maximum (total) economic profits per day are $45000‐35000=$10,000

10. (2) If the government decided to institute average total cost pricing, then Merck would produce a quantity of 90 units, and would earn an economic profit of $45000‐45000=$0.

11. (2) If the government decided to institute marginal cost pricing, then Merck would produce a quantity of 120 units, and would earn an economic profit of $24000‐49500= $‐25,500

12. (2) Is Merck a Natural Monopoly when it comes to the market for Molnupiravir (select one)? a. Yes. b. No. c. Impossible to verify from the information given. d. True up to a quantity of 90. e. True up to a quantity of 70.

13. (4) If the U.S. government wants to regulate Molnupiravir, what would the most appropriate option be? Explain.

Marginal Cost Pricing is the best option due to the external benefits (better health, more productivity, more profitable businesses, more economic growth) that stem from this drug. Antitrust is not appropriate in the case of a natural monopoly, nor is a profits tax that would discourage consumption. Average Cost Pricing would lower the prices some, but not as much as MCP so it is not as effective.

Monopolistically Competitive Firm

MC

16

ATC

15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 ‐1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

D

15

16

17

18

‐2 ‐3

MR

14. (1) The profit maximizing quantity for Bechtel’s ice cream parlor above is ___5_______.

15. (2) Bechtel’s ice cream parlor will make a total economic profit of $_________. (show your work)

16. (8) What can we expect to happen to Bechtel’s Ice Cream Parlor in the long run? Explain carefully, and show your answer on the graph.

Losses cause firms to exit. There are then fewer substitutes, so demand increases and gets steeper until firms earn a normal profit at P2 and Q2.

17. (1) What is the main difference between oligopoly and monopolistic competition? (Select one) a. Oligopoly has a large number of small firms while monopolistic competition does not. b. In oligopoly, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods. c. Oligopoly firms do not tend to advertise, while monopolistic competition firms do. d. Oligopoly has barriers to entry while monopolistic competition does not.

18. (2) In the kinked demand curve model (select one) a. An increase in price by one firm is always followed by others. b. A decrease in price by one firm is never followed by others. c. Firm collude to fix prices. d. The demand curve is elastic for price decreases. e. The demand curve is inelastic for price increases. f. All of the above. g. None of the above 19. (2) According to the payoff matrix below, which of the following statements accurately describes Pepsi’s best strategy (select one): a. Pepsi has a dominant strategy: choosing to increase prices. b. Pepsi has a dominant strategy: choosing to reduce prices. c. Pepsi will always match whatever Coca‐Cola does. d. Pepsi will never match whatever Coca‐Cola does. e. None of the above.

Coca‐Cola’s Pricing Strategies

Pepsi’s Pricing Strategies

Increase Prices Reduce Prices

Increase Prices Coca‐Cola earns $100 million Pepsi earns $50 million Coca‐Cola earns $50 million Pepsi earns $70 million

Reduce Prices Coca‐Cola earns $80 million Pepsi earns $25 million Coca‐Cola earns $40 million Pepsi earns $20 million

20. (2) In the payoff matrix above, where is the Nash equilibrium? Select one of the options below. a. In the top left box, with both firms choosing to increase prices. b. In the bottom right box, with both firms choosing to reduce prices. c. In the top right box, with Pepsi choosing to increase prices and Coca‐Cola choosing to reduce prices. d. In the bottom left box, with Pepsi choosing to reduce prices and Coca‐Cola choosing to increase prices. e. There is no Nash equilibrium in this payoff matrix.

21. (1) Automobile manufacturing is an example of which of the following market structures? a. Perfect Competition b. Monopoly c. Monopolistic Competition d. Oligopoly e. In between Monopoly and Oligopoly.

22. (1) Which of the following statements about Public Goods is true (select one)? a. Markets are able to provide most public goods effectively. b. People cannot use a public good unless they pay for it. c. Public goods can be used simultaneously by more than one person. d. All of the above.

23. (1) With a negative externality, the unregulated market equilibrium is associated with a (select one) a. Lower price and a higher quantity compared with the efficient equilibrium. b. Higher price and a lower quantity compared with the efficient equilibrium. c. Lower price and a lower quantity compared with the efficient equilibrium. d. Higher price and a higher quantity compared with the efficient equilibrium.

24. In the perfectly competitive wheat market, there is a high price of wheat due to the war between Russian and Ukraine. The equilibrium price of wheat is $10 per bushel, and the equilibrium quantity of wheat is 4 billion bushels. Jen, a typical wheat farmer, currently produces 8 thousand bushels of wheat per year, while incurring average total costs of $9 and average variable costs of $7. a) (14) Draw a graph of the wheat market, and next to it draw a graph of Jen’s wheat farm. Show how both graphs will be affected if the war ends and the equilibrium price of wheat falls to $7 due to an increase in the supply of wheat.

b) (7) What do you expect to happen in the long run to Jen and to the Wheat Market in the long run (assuming that the war is permanently over)? Explain very carefully, and refer to the graphs in your answer.

Losses cause firms to exit. The market supply decreases, and the market price increases until firms can earn a normal profit. A normal profit would occur at a price just below $9 (perhaps $8.80) 25. (2) To internalize a positive externality generated by a product, economists suggest (select one or more) a. Subsidizing the product. b. Having the government provide the product. c. Taxing the product. d. Eliminating government regulations related to the product.

26. (1) According to the Piketty thesis, (select one or more) a. Inequality tends to increase when growth rates are slow. b. Inequality tends to increase when growth rates are fast. c. Inequality tends to increase when government policies favor unions. d. Inequality tends to increase when governments engage in supply‐side policies.

27. (1) Which of the following are major reasons economists have identified for why U.S. inequality is worse than that of other developed countries. (Select one) a. Lower taxes on the wealthy. b. A less generous safety net. c. An unequal educational system. d. Less support for unions. e. All of the above.

28. (30) Essay. One of the following 2 essay questions will be randomly selected at the exam for you to write about.

ECON101, Exam #2, Fall 2022, Professor Schneider ANSWERS 22

Don, a perfectly competitive soybean farmer

21

MC

20 19 18 17 16 15

ATC

14 13

AVC

Price ($)

12 11 10 9 8 7

D

6 5 4 3 2 1 0 0

1

2

3

4

5

6

7 Quantity

8

9

10

11

12

13

14

1.

(2) If the price of soybeans is $6, then farmer Don should produce 8 units of soybeans.

2.

(2) If the price of soybeans is $6, farmer Don will make a total economic profit (or loss) of $(6-13)*8= $-56.

3.

(2) At the profit maximizing level of output, Don will incur average fixed costs of (ATC-AVC)= $13 – 5 = 8 .

4.

(2) If the price of soybeans is $6 per bag then, assuming Don is typical of other soybean farmers and that the cost curves are long run cost curves, in the long run we would expect which of the following things to happen (select one or more): a. Firms will enter the market. b. The market supply will decrease. c. The market price will decrease to the minimum AVC. d. Firms will earn an economic loss. e. The market price will increase to $12. Normal profit f. The market price will decrease to $5.

5.

(2) In the graph above of Don’s Soybean farm, (select one or more) a. Specialization occurs up until a quantity of 11. b. Diminishing returns set in after a quantity of 5. (min. MC) c. Average fixed costs continually decrease. (always true) d. The firm should shut down in the short run if the price falls below $1. $5 is the short run shut down point.

Below is cost and revenue data for Xfinity, which has a Monopoly on Cable TV and High Speed Internet in the Philadelphia Area TC

MC

ATC

P

TR

MR

0

$0

$------

$ --------

$140

$0

$------

100

10,000

100

$100.00

$130

$13,000

130

200

19,000

90

$95.00

$120

$24,000

110

300

27,000

80

$90.00

$110

$33,000

90

400

34,000

70

$85.00

$100

$40,000

70

500

40,000

60

$80.00

$90

$45,000

50

600

45,000

50

$75.00

$80

$48,000

30

700

49,000

40

$70.00

$70

$49,000

10

800

52,000

30

$65.00

$60

$48,000

-10

900

54,000

20

$60.00

$50

$45,000

-30

1000

55,000

10

$55.00

$40

$40,000

-50

1100

56,500

15

$51.36

$30

$33,000

-70

1200

58,500

20

$48.75

$20

$24,000

-90

1300

61,500

30

$47.31

$10

$13,000

-110

6.

(2) Based on the data, if Xfinity wishes to maximize profits, how many units per day should they produce?

MR=MC at a Quantity of 400.

7. (2) Xfinity’s maximum (total) economic profits per day are $TR-TC= $40,000-34,000=$6000.

8. (2) If the government decided to institute average total cost pricing, then Xfinity would produce a quantity of 700 units (P=ATC), and would earn an economic profit of $TR-TC= 49,000-49,000=$0 (normal profit).

9. (2) If the government decided to institute marginal cost pricing, then Xfinity would produce a quantity of 1200 units (P=MC), and would earn an economic profit (or loss) of TR-TC=24,000-58,500=$-34,500.

10. (3) If the U.S. government wants to regulate the supply of Cable TV and/or internet services, (select one or more) a. Using anti-trust laws to break up Xfinity would be an appropriate policy. b. Marginal cost pricing would be appropriate if Cable TV is viewed as harmful to children. c. Average cost pricing would be appropriate if high speed internet is viewed as harmful to children. d. A profits tax would be appropriate if high speed internet is viewed as essential to schoolchildren. e. It might be more effective for the government to provide internet services. f. None of the above.

11. (15) Matty’s Sportsbar and Grill operates in the monopolistically competitive restaurant market. At Matty’s the price of a typical meal is $30 and it incurs an Average Total Cost of $25 per meal. Matty’s sells 250 meals per day. Draw a graph showing Matty’s current situation. Include D, MR, ATC, MC and show any profit or loss on your graph. Use the numbers provided. On the same graph, show what we can expect to happen in the long run to Matty’s, assuming that Matty’s is typical of local restaurants. Explain your answer briefly.

Matty’s initially has an economic profit of $5 per meal with a price of $30 and an ATC of $25. In the long run, since Matty’s is a typical restaurant and they are earning an economic profit, more restaurants will enter the market, increasing the number of substitutes, which will cause Matty’s Demand Curve to decrease and get flatter until it is tangent to the ATC curve (D2).

Matty now earns a normal profit at P2 and produces quantity Q2.

12. (2) Using the kinked demand curve model for Ford, which operates in the Oligopolistic automobile market, if Ford increases its prices then we can expect (select one or more) a. No other firms will match their prices. b. All other firms will match their prices. c. A large increase in the quantity demanded for Ford cars. d. A large decrease in the quantity demanded for Ford cars. e. No change in the quantity demanded for Ford cars.

13. (2) Which market structure best characterizes physicians services (doctors)? a. Perfect competition. b. Monopolistic competition. c. Oligopoly. d. Monopoly. e. Monopolistic oligopoly.

14. (2) According to the payoff matrix below, which of the following statements accurately describes Pepsi’s best strategy (select one): a. Pepsi has a dominant strategy: choosing large ad expenditures. b. Pepsi has a dominant strategy: choosing small ad expenditures. c. Pepsi will always match whatever Coca-Cola does. d. Pepsi will never match whatever Coca-Cola does. e. None of the above.

Coca-Cola’s Advertising Strategies

Pepsi’s Advertising Strategies

Large Ad Expenditures Small Ad Expenditures

Large Ad Expenditures Coca-Cola earns $70 million Pepsi earns $50 million

Small Ad Expenditures Coca-Cola earns $80 million Pepsi earns $40 million

Coca-Cola earns $90 million Pepsi earns $60 million

Coca-Cola earns $100 million Pepsi earns $30 million

15. (2) In the payoff matrix above, where is the Nash equilibrium? Select one of the options below. a. In the top left box, with both firms choosing large ad expenditures. b. In the bottom right box, with both firms choosing small ad expenditures. c. In the top right box, with Pepsi choosing large ad expenditures and Coca-Cola choosing small ad expenditures. d. In the bottom left box, with Pepsi choosing small ad expenditures and Coca-Cola choosing large ad expenditures. e. There is no Nash equilibrium in this payoff matrix.

16. (2) In a cap-and-trade market for carbon permits, (select one) a. Companies are taxed for each unit of carbon dioxide they produce. b. Companies can sell permits if they pollute above the number of permits they receive from the government. c. Companies do not attempt to manipulate the permitting process. d. Companies must buy permits if they pollute above the number of permits they receive from the government. e. Companies must buy permits for each unit of carbon dioxide they produce.

17. (2) Which of the following statements about Public Goods is true (select one)? a. Markets are able to provide most public goods effectively. b. People cannot use a public good unless they pay for it. c. When one person uses a public good, others cannot use it. d. People are generally willing to pay for public goods voluntarily. e. None of the above.

18. (2) With a negative externality, the unregulated market equilibrium is associated with a (select one) a. Lower price and a higher quantity compared with the efficient equilibrium. b. Higher price and a lower quantity compared with the efficient equilibrium. c. Lower price and a lower quantity compared with the efficient equilibrium. d. Higher price and a higher quantity compared with the efficient equilibrium.

19. (2) According to the Piketty thesis, (select one or more) a. Inequality tends to increase when growth rates are slow. b. Inequality tends to increase when growth rates are fast. c. Inequality tends to increase when government policies favor unions. d. Inequality tends to increase when governments engage in supply-side policies.

20. (2) Which of the following are major reasons economists have identified for why U.S. inequality is worse than that of other developed countries. (Select one) a. Lower taxes on the wealthy. b. A less generous safety net. c. An unequal educational system. d. Less support for unions. e. All of the above.

21. In the perfectly competitive apple market, there is a price floor of $50 per bushel. At that price, consumers buy 20 million bushels and the government buys 5 million bushels. The equilibrium price of apples is $40. Schlegel’s, a local apple producer, currently experiences Average Total Costs of $40 and Average Variable Costs of $30 while producing 2000 bushels per year. a) (18) Draw a graph of Schlegel’s apple farm. Include, D, MC, AVC, ATC and show any profit or loss. Also draw a graph of the apple market. Show how both graphs will be affected if the price floor is eliminated. Show any profit or loss at the new price on your graph of Schlegel’s farm.

b) (8) What do you expect to happen in the long run to Schlegel’s and to the Apple Market in the long run? Explain very carefully, and refer to the graphs in your answer. Assume that Schlegel’s is typical of other apple producers and that short run and long run costs curves are the same.

Schlegel’s is still earning a tiny economic profit at a price of $40. This will encourage new firms to enter, causing the market supply to increase and the market price to decrease until all firms are earning a normal profit. This will occur at a price of just less than $40, and just less than ATC2 and quantity Q2. The new quantity will also be just less than Q2.

22. (10) One of the following 2 policy questions will be randomly selected at the exam for you to write about. Write a few paragraphs in response to the question that is selected. In your response, construct an argument and support that argument with specific examples from course materials and current events articles.

Policy topic 1: The Benefits and (Market) Failures of Large Corporations. Critically analyze the arguments for and against large corporations. How should the government approach regulating corporations? Support your answer with specific examples.

Policy topic 2: Market failure vs. government failure. Does the U.S. strike the right balance of government and markets? Should the government intervene more strongly in markets? Or do you think markets are efficient enough and government intervention inefficient enough that we should have less government intervention? Support your argument with specific examples.

23. (10) One of the following 3 policy questions will be randomly selected at the exam for you to write about. Write a few paragraphs in response to the question that is selected. In your response, construct an argument and support that argument with specific examples from course materials and current events articles.

Policy topic 3: Climate change and the environment. Given the global problems presented by climate change, design your own solution to the problems. Refer to conservative, liberal or political economy perspectives in your answer.

Policy topic 4: Inequality in the U.S. Given the information on inequality and the different perspectives of economists on inequality, what if anything do you think the U.S. government should do about inequality? Explain and support your answer.

Policy topic 5: Social Balance of public goods vs. private goods (Galbraith v. Rothbard). Given the arguments by Galbraith and Rothbard on this topic, construct your own argument regarding whether or not you think the U.S. strikes the right balance of public and private goods. Support your answer with examples.

Exam Questions, Schneider, Chapter 24, International Microeconomics ANSWERS 1. (3) The U.S. Fed just raised interest rates. Show on a graph of P£ (in $) the market for British Pounds to the right what effect higher interest rates in the US will have on the value of the British Pound (₤) and the quantity of pounds exchanged for dollars.

Market for British Pounds (£)

S£

Q of £ exchanged for $ will _______________________.

P£ (in $) will __________________________.



1.7

D£ Q of £ exchanged for $

Q1 2.

(3) In 2008, incomes decreased rapidly in both Europe and in the US due to the recession. Using the graph of the market for Euros below, show how decreasing European and US incomes will affect the value of the Euro (€) and the quantity of Euros exchanged for Dollars.

P€ (in $)

Market for Euros (€)

S€

Q of € exchanged for $ will __________________.

P€ (in $) will ________________________.



1.2

D€ Q of € exchanged for $

Q1 3.

(3) If the prices of Japanese goods decline, what will happen to the value of the Japanese Yen (¥) relative to the Euro (€) and the amount of Yen exchanged for Euros? Show on the graph of the market for Yen below.

P¥ (in €) Market for Yen (¥)

Q of ¥ exchanged for € will __________________.

S¥

P¥ (in €) will ________________________.



.01 Electronics

Electronics

Germany

China

D¥ 4.

The graphs to the right show production possibilities curves (PPCs) for Germany and China using an identical amount of resources for one month.

Q of ¥ exchanged for €

Q1

120 60

60

Cars

40

Cars

2 a. (1) The opportunity cost of 1 unit of Electronics in China is:

_______________________________ b. (1) Which of the answers below is correct, given the graphs? (Circle the correct answer) a. b. c. d. e.

Germany has a comparative advantage in both goods.

Germany has a comparative advantage in Cars, and China has a comparative advantage in Electronics.

China has a comparative advantage in both goods.

Germany has a comparative advantage in Electronics, and China has a comparative advantage in Cars.

China has an absolute advantage in both goods.

c. (1) Draw consumption possibilities curves on the graphs above. Assume that the international terms of trade are 1 car for 2 units of electronics.