ECO 304K Exam 2 Fall 2024 Version AC PDF

ECO 304K Exam 2 Annotated Answer Key Version: AC I have provided explanations for most questions to help you identify what we were looking for in an answer. Multiple-Choice Answers: Short Answers: 1. __B____ 17. __B___...

ECO 304K Exam 2 Annotated Answer Key Version: AC I have provided explanations for most questions to help you identify what we were looking for in an answer. Multiple-Choice Answers: Short Answers: 1. __B____ 17. __B___ 33. shortage 16 units 2. __C____ 18. __D___ 34. 1 = _D___ 3. __B____ 19. __A___ 2 = _A___ 4. __D____ 20. __A___ 3 = _B___ 5. __C____ 21. __C___ 4 = _C___ 6. __A____ 22. __A___ 35. _Q = 3___ 7. __C____ 23. __C___ 36. _$40____ 8. __D____ 24. __D___ 37. YES or NO 9. __C____ 25. __B___ 38. Circle one choice: 10. _D____ 26. __C___ rises 11. _B____ 27. __B___ falls 12. _B____ 28. __C___ remains constant 13. _D____ 29. __A___ rises at first then falls 14. _A____ 30. __C___ 39. $200_______ 15. _D____ 31. __B___ 40. $25.01-$29.99_ 16. _A____ 32. __C___ 1 MULTIPLE CHOICE 1. (InQuizitive) Price controls generally serve a positive economic function, as they compensate for the market’s inability to regulate wages in certain sectors of the economy. A) True. B) False. 2. (InQuizitive) Which of the following would need to be true for Internet access to qualify as a club good? A) There is no monthly fee or sign-up fee. B) Only a limited number of users can have access at any given time. C) Connection speed does not depend on number of current users. D) The internet subscription fee increases as more people sign up to keep the network from being congested. 3. (InQuizitive) In the long run, firms generally experience diseconomies of scale, first because the large initial costs are spread over a small amount of output. Eventually, economies of scale decrease the long-run average total costs (LRATC) as output increases. A) True. B) False. 4. (InQuizitive) In a perfectly competitive market, the long-run market supply curve tends to be horizontal or nearly so (very price sensitive). What is another way to state this fact? A) In the long run, average total cost is maximized. B) Market supply is much less elastic in the long run than in the short run. C) In the long run, price equals marginal cost. D) In the long run, the market will supply any amount of the good at the price where P = min ATC. 2 5. (InQuizitive) Calculate the amount of consumer surplus transferred to the monopolist in the monopoly situation shown. A) $600 B) $60 C) $300 D) $120 6. Which of these is an unintended consequence of a price ceiling? A) Quality declines. B) The price cannot rise. C) The demand for substitutes will fall. D) A surplus will occur. 7. Why don’t you ever hear politicians advocating for a minimum wage of $50/hour? A) They don't want “regular” citizens to earn more than they do. B) If everyone earned $50/hour it would create hyperinflation. C) Most workers aren’t worth enough to be hired at that wage. D) A minimum wage of $50/hour would lead to surpluses of most goods. 8. The equilibrium price and quantity are $2 and 50. A price floor of $1 is put in place. The equilibrium output: A) will be less than 50. B) will be greater than 50. C) cannot be determined. D) will equal 50. The price floor is non-binding. 3 9. If a price floor of $7 is established, the resulting ______ will be ______ units. A) shortage; 4 B) surplus; 6 C) surplus; 4 D) The result is non-binding. There is neither a shortage nor a surplus. At P = $7, Qd = 3; Qs = 7. Surplus of 4. 10. Which of the following groups is helped by a price floor on carrots? A) The government. B) Rabbits. C) Consumers. D) Carrot farmers. Carrot farmers receive a higher income: price is > equilibrium price. 11. Lila shares a house with two other people. She is a concert pianist and often practices at home. One roommate enjoys listening to her practice, but the other does not. For the roommate who enjoys listening to Lila play, this is an example of ________; for the other roommate, it is an example of ________. A) the tragedy of the commons; the third-party problem B) a positive externality; a negative externality C) a positive externality; the free-rider problem D) the free-rider problem; the tragedy of the commons 4 12. Richard owns a tea company. He buys raw tea leaves, sorts and grades them, before selling them to stores. He recently moved into a larger factory, so that he can sell tea to more stores. How would Richard know if he is experiencing diseconomies of scale from increasing the size of his factory? A) His long-run average cost per pound of producing tea decreases. B) His long-run average cost per pound of producing tea increases. C) His long-run total cost of producing tea increases. D) His marginal cost of producing tea increases. Diseconomies of scale occurs when ATC rises as Q rises. The TC & MC can be increasing while the ATC is not rising if MC < ATC. 13. Holding all else constant, a decrease in the market demand for a product in a competitive market would cause: A) the average total cost (ATC) curve of the firms to decrease. B) an increase in the price a firm could charge for the product. C) the marginal cost (MC) curve of the firms to decrease. D) the marginal revenue (MR) curve of the firms to shift downward. P = MR. When demand falls, price falls, so MR must also fall. 14. Diminishing marginal product begins with the _____ worker. # of Total Product workers 0 0 1 5 2 9 3 12 4 14 A) 2nd 5 11 B) 3rd C) 4th D) 5th DMP occurs when MP falls. Worker 1 adds 5 to MP; worker 2 adds 4 to MP. 5 15. The market for pens is perfectly competitive and is currently in equilibrium. What will happen if pens become more popular among university students? A) In the short run, firms will experience economic profits, but in the long run, firms will leave the market, bringing economic profits back down to zero. B) In the short run, firms will experience economic profits, but in the long run, firms will enter the market, bringing economic profits back up to zero. C) In the short run, firms will incur economic losses, but in the long run, firms will leave the market, bringing economic profits back down to zero. D) None of these answers are correct. In the short run, firms will experience economic profits, but in the long run, firms will enter the market, bringing economic profits back down to zero. 16. The output effect for a monopolist refers to the: A) increase in sales due to the price reduction. B) loss in revenue due to the price reduction. C) increase in revenue because of an increase in sales. D) decrease in revenue because of an increase in sales. Output effect refers to more units sold (gain for the firm). 17. Which of the following is the best example of rent seeking? A) You find an apartment with a low rent. B) Politicians competing to win an election. C) A bicyclist wins an endurance race. D) Playing hide and seek. 18. You are thinking of moving to Oregon, where the state minimum wage is $14.20/hour. The federal minimum wage is $7.25/hour & the market equilibrium wage is $19/hour. What wage will you be paid? A) $7.25 B) Between $7.25 and $14.20 C) $15 D) $19 The minimum wages are below the market equilibrium wage, so are non-binding. 6 19. The market works efficiently in the absence of externalities if the good is: A) rival and excludable. B) non-rival and non-excludable. C) rival and non-excludable. D) non-rival and excludable. A standard market is rival and excludable (private goods). If a market is non-excludable, a firm can’t charge a price (make money); therefore output will be less than socially optimal. 20. John earns $40,000 a year. He quits and invests $100,000 of his own money (which could have earned 10% in annual interest) to start a business. His opportunity cost is: A) $50,000. B) $140,000. C) $150,000. D) $110,000. The opportunity cost is the income from the job ($40,000) + the interest on the $100,000 ($10,000) = $50,000. 21. For some cafes, operating from 3PM to 4PM isn’t the most profitable hour—and if every hour was like that, the coffee shop wouldn’t make a profit because they couldn’t pay the rent. But staying open is about __________. A) MR < MC B) MR = MC C) MR ≥ MC D) MR being maximized MR has to be equal to, or greater than MC to make staying open worthwhile. 22. The Pedernales Electric Coop estimated the demand and marginal revenue for electricity services to be P = 16 - 2Q and MR = 16 - 4Q. The MC of electricity is $4. What is the profit-maximizing price? A) $10 B) $8 C) between $12 and $16 D) $16 Set MR = MC. 16 – 4Q = 4. 4Q = 12, Q = 3. Insert Q = 3 into P = 16 – 2Q. 16 – (2 x 3) = $10. 7 23. Which type of congestion charge will be the most effective at managing traffic flow? A) A single congestion price. B) A gasoline tax for all car drivers. C) A dynamic congestion price. D) Raising vehicle registration fees. 24. In the following table find the value of A: Output Total Total Total Average Average Average Marginal variable fixed cost variable fixed total cost cost cost cost cost cost 0 $ $ $80 - - - - 1 $8 $ $ $ $ $ $ 2 $ $ $100 $ $ $ $ 3 $ $ A $12 $ $ $ 4 $ $ $ $ $ $35 $ A) $88 B) $102 C) $110 D) $116 FC = $80 (TC when Q = 0). TVC at Q = 3 ($12 x 3 = $36). TC = $116 8 25. Identify the profit maximizing OUTPUT level in the table. Q MC MR 1 10 8 2 9 8 3 8 8 4 7 8 5 6 8 6 7 8 7 9 8 8 10 8 A) 3 B) 6 C) 7 D) 5 MC = MR at Q = 3, then after Q = 6, MC > MR, so stop at Q = 6. You earn more revenue at Q = 6 than Q = 3. 26. Which of the following statements about a monopoly is false? A) Rent seeking by monopolies imposes additional costs on society above the deadweight loss. B) A monopolist sells a good with no good substitutes. C) A monopolist sets a price along the inelastic region of the demand curve. D) A monopolist does not always make a profit. Options A, B and D are clearly true. A monopolist sets price along the elastic region of the demand curve (see below). 9 27. It is best to reduce the level of pollution: A) until all negative externalities are internalized. B) as long as the benefit exceeds the cost of doing so. C) to zero. D) until all external costs have been eliminated. Think at the margin: MR = MC. Pollution abatement will stop when MC > MR. 28. When offering online food ordering, many restaurants outsource the food production to ghost kitchens to expand their delivery capacity. This practice A) creates diminishing marginal product. B) lowers their explicit costs. C) creates economies of scale. D) earns higher accounting profits. The ghost kitchens help restaurants increase output while reducing the cost of making food (lowering ATC). The question refers to expanding their delivery capacity which makes the answer involving scale the correct one. 29. Due to freedom of entry and exit, long-run economic profits of perfectly competitive firms are A) zero. B) equal to the accounting profits. C) greater than the accounting profits. D) sometimes greater and sometimes lesser than the accounting profits. Profits must be zero; otherwise, there would be an incentive for firms to continue to enter the industry. 30. Compared to a perfect competitor, monopolies charge ______ and produce a _____ output. 10 A) less; smaller B) less; larger C) more; smaller D) more; larger 11 31. A profit-maximizing monopolist will set its price and output where demand is unit elastic. A) True. B) False. A monopolist sets price along the elastic region of the demand curve. See answer to Q26. 32. The deadweight loss associated with this monopoly is equal to: A) $50 B) $200 C) $100 D) $150 The monopolist produces Q = 15; P = $60. DWL = 1/2 x b x h = 1/2 x 20 x 10 = $100 Enter your answers for the short answer section on the Answer (front) page. 33. Consider a market with the following equations: Demand: Qd = 42 – 2P Supply: Qs = 2 + 6P Assume the market price is $3. Is there a surplus or shortage of the good at this price and, if so, how much is it? Demand: Qd = 42 – 2P (= 36) Supply: Qs = 2 + 6P (= 20) Shortage of 16 units 12 34. Connect each description on the left with the appropriate term on the right. 1. Streaming services A. Public good 2. Street lights B. Private good 3. An ERAS tour t-shirt C. Common Resource good 4. Fish stocks in the ocean D. Club good 1-D 2-A 3-B 4-C 35. A village has 6 residents, each of whom has an accumulated savings of $100. Each villager can use this money either to buy a government bond that pays 9% interest per year or buy a 1-year-old goat, send it onto the commons to graze, and sell it after a year. The price the villager gets for the 2-year-goat depends on how much it grows while grazing on the commons, which in turn, depends on the number of goats sent into the commons, as shown in the following table: Number of Price per 2- Income per Total Marginal goats on the year old goat steer income income commons 1 118 18 18 18 2 115 15 30 12 3 113 13 39 9 4 111 11 44 5 5 108 8 40 -4 6 105 5 30 -10 What is the socially optimal number of goats for this village? At 3 goats, the marginal income is the same as interest on the bond. 13 36. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when the firm hires 2 workers, the total cost of production is $100. When the firm hires 3 workers, the total cost of production is $130. In addition, assume that the variable cost per unit of labor is the same regardless of the number of units of labor that are hired. What is the firm’s fixed cost? 2 workers (VC) + FC = $100 3 workers (VC) + FC = $130 VC is $30. 2 x $30 + FC = $100 FC = $40 37. Suppose that you are an owner of a firm that sells headphones. You are currently producing 7 headphones. If a new customer calls and offers to pay $30 but this requires you to produce one more headphone, should you take the $30? YES or NO (circle answer on the front page) Number of Average Cost per headphones headphone 5 $23 6 $24 7 $25 8 $26 7 x $25 = $175 8 x $26 = $208 The MC of producing the 8th unit is $33. Since the MR is $30, NO DEAL. 38. What happens to the average fixed cost as we increase output? Circle the correct answer on the front page. TFC is constant. As Q rises, TFC is divided into a larger number, so AFC must fall. 14 39. For a monopolist, the firm’s profit in the graph below is $______. P = $25. At Q = 40, ATC = $20. Profit is (P – ATC) x output. ($25 - $20) x 40 = $200 40. What amount could you pay your roommate to stop playing loud music, so that you both benefit? The dollar amounts in the table refer to how much each individual values each outcome. There is a range of possible answers. You need to write a $ amount on the front page which would be acceptable to both parties. No Loud Music Loud Music Roommate $60/month $85/month You $50/month $20/month No loud music: roommate is $25 worse off; you are $30 better off. Any value from $25.01 to $29.99 would see both parties benefit. 15