University of Maryland Economics Exam PDF

University of Maryland, College Park Department of Economics Name:. On your scantron sheet, you must place your last name, first name, and your ID number. Do not begin or open the pages of the exam until you are instructed to do so. You must turn i...

University of Maryland, College Park Department of Economics Name:. On your scantron sheet, you must place your last name, first name, and your ID number. Do not begin or open the pages of the exam until you are instructed to do so. You must turn in the scantron and exam sheets at the end of the exam. The exam has two parts: Part 1: Multiple choice questions. Please read the questions carefully and choose the BEST response to the questions and record your answers on the scantron sheet provided. Only answers marked on the scantron sheet will be counted. Part 2: Problems. Please read the questions carefully and provide answers to the questions asked. Providing more information than what is asked for will not add anything to your score. Policies: You may use a four-function or scientific calculator. BUT NOT A GRAPHING calculator. Having a cell phone or any electronic device except a calculator visible during the exam is considered cheating, whether you use it or not. Looking at someone else’s paper during the exam, whether you copy or not, is considered cheating. Having books or notes on the floor or a seat near you will be considered cheating regardless of whether you look at them. Conversation with and assistance from others is strictly prohibited during the exam. You may not ask questions to verify whether your work is correct. ************************************************************************************************************************************************** Part 1: Multiple choice questions. (50 questions, one point each, total: 50 points) 1. The extra benefit associated with producing or consuming the next unit is called the: A. revenue product. B. spillover. C. marginal benefit. D. economic benefit. 2. When a producer has a comparative advantage at producing a good, it means the producer: A. can produce more of that good than others with the same number of workers. B. has the ability to produce a good or service at a lower opportunity cost than others. C. has no reason to trade with others. D. is efficient. 3. The concepts of comparative advantage, specialization, and trade form a compelling argument in favor of: A. free trade. B. protectionism. C. self-sufficiency. D. only exporting, never importing goods. 4. The law of demand can be stated as: A. all else equal, quantity demanded rises as income rises. B. all else equal, quantity demanded rises as price falls. C. all else equal, quantity demanded rises as price rises. D. all else equal, quantity demanded rises as income falls. 5. Some nonprice determinants of demand are: A. consumer preferences, expectations of future prices, and the number of buyers in the market. B. consumer preferences, the price of the good, and incomes. C. incomes, expectations of future prices, and the number of sellers in the market. D. prices of related goods, knowledge of past prices, and the number of buyers in the market. 6. Whether a cross-price elasticity of demand is positive or negative: A. tells us whether the goods are substitutes or complements. B. tells us whether the elasticity is reported in absolute value. C. tells us whether the good is elastic or inelastic. D. None of these is true. 7. A determinant of the price elasticity of supply that is also a determinant of the price elasticity of demand is: A. availability of inputs. B. flexibility of the production process. C. adjustment time. D. availability of outputs. 8. An effective price floor: A. must be set above the equilibrium price, and will likely cause a shortage. B. must be set below the equilibrium price, and will likely cause a shortage. C. must be set above the equilibrium price, and will likely cause a surplus. D. must be set below the equilibrium price, and will likely cause a surplus. 9. Tax incidence: A. depends on whether the tax revenue is greater than the deadweight loss caused by the tax. B. depends on whether it is a buyers tax or sellers tax that is being imposed. C. depends on the amount of tax revenue generated once administrative burdens are taken into account. D. depends on the relative elasticity of the supply and demand curves in a market 10. Utility measurements are: A. a relative ranking of the values a person places on alternative combinations of things. B. a relative ranking of how much people enjoy a particular good. C. used to compare one person's preference for a good to another person's preference. D. None of these is true. 11. In general, the substitution effect of an increase in the price of a normal good: A. will cause the individual to buy more of that good because they have relatively more income. B. will cause the individual to buy less of that good because they have relatively less income. C. will cause the individual to buy more of that good and less of others because it is relatively less expensive. D. will cause the individual to buy less of that good and more of others because it is relatively more expensive. 12. In an effort to lose weight, Sam posts flyers all over town that offer a reward of $50 to anyone who catches him eating unhealthy food. Sam's flyers are an example of: A. the law of supply. B. price-optimization theory. C. a commitment device. D. a way to deal with inconsistent costs. 13. Game theory is: A. the study of how people behave strategically under different circumstances. B. used to predict the winners of only certain types of strategic games. C. used to evaluate the microeconomic choices that involve probabilities of different behaviors. D. the study of how people behave when playing a game involving odds, like horse racing. 14. Reaching a Nash equilibrium means that: A. the players have reached a stable outcome where neither of you would wish to change your strategy once you find out what the other player is doing. B. the outcome will be positive-positive. C. a cooperative equilibrium has been reached. D. the players have failed to reach a stable outcome because one player will always wish to change his strategy once he finds out what the other player is doing. 15. The tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions is called: A. collective bargaining. B. adverse selection. C. counter information. D. moral hazard. 16. Screening is when someone takes action to: A. find out the opportunity cost of acquiring more information B. reveal one's own private information. C. reveal private information about someone else. D. None of these statements is true. 17. Returns that occur in the long run when average total cost does not depend on the quantity of output are called: A. economies of scale. B. diseconomies of scale. C. constant returns to scale. D. minimum average total cost. 18. In the long run, firms in a perfectly competitive market: A. produce a quantity that maximizes profits. B. earn a zero economic profit. C. choose the level of output that minimizes average total costs. D. All of these are true. 19. In reality, the long-run supply curve for a perfectly competitive market is upward sloping because: A. of changing costs of production that firms may face. B. not all firms have identical cost structures. C. experienced firms will have different information and costs than new firms. D. All of these are true. 20. The monopolist's outcome happens at a: A. lower price than the perfectly competitive one. B. higher price than the perfectly competitive one. C. higher quantity than the perfectly competitive one. D. None of these statements is true. 21. Oligopoly describes a market with: A. only a few sellers. B. many sellers. C. one seller. D. few or many sellers, but only one buyer. 22. In the short run, monopolistically competitive firms behave like ________________, but in the long run, the outcome is similar to that of the ________________. A. monopoly; oligopoly B. perfectly competitive firm; monopoly C. monopolies; perfectly competitive firm D. oligopoly; perfectly competitive firm 23. The demand curve facing the monopolistically competitive firm is: A. steeper than that of their competition. B. flatter than that of a monopolist. C. steeper than that of a monopolist. D. flatter than that of a perfectly competitive firm. 24. If a monopolistically competitive firm's demand curve is shifting left, it will stop shifting when: A. the price is equal to the firm's marginal cost. B. the price is equal to the firm's average total cost. C. the price is the same as what a perfectly competitive firm's price would be. D. there is no deadweight loss. 25. In the long run, a profit-maximizing monopolistically competitive firm sells at a price that is: A. equal to average total cost, but higher than marginal cost. B. equal to marginal cost and marginal revenue. C. equal to average total cost, but lower than marginal cost. D. equal to demand, but higher than average total cost and marginal cost. 26. Collusion is: A. the act of firms working together to make decisions about price and quantity. B. buyers acting in unison against a company in efforts to change its practices. C. the act of firms undercutting one another in competition until zero profits are earned. D. None of these statements is true. 27. In the graph of supply and demand in the market for labor: A. individuals make up the demand curve. B. the equilibrium price of labor is generally denoted as L*. C. firms provide the demand. D. None of these statements is true. 28. The competitive firm's profit-maximizing quantity of labor is the quantity where: A. the value of the marginal product of labor is equal to the market wage. B. the quantity of the marginal product of labor is equal to the market wage. C. the quantity of the marginal product of labor is equal to zero. D. the value of the marginal product of labor is equal to the profit. 29. The labor-supply curve will be downward sloping if: A. the price effect outweighs the income effect. B. the income effect outweighs the price effect. C. the substitution effect outweighs the income effect. D. The labor-supply curve is never downward sloping. 30. In a competitive labor market, if the demand for labor decreases, labor demand will shift: A. to the right and wages will increase. B. to the left and wages will increase. C. to the right and wages will decrease. D. to the left and wages will decrease. 31. The quantity of labor supplied is determined by the: A. number of firms. B. opportunity cost of providing the labor. C. marginal product of labor. D. All of these statements are true. 32. Human capital is defined as: A. the set of skills, knowledge, experience, and talent that determine the productivity of workers. B. the amount of capital that is operated by workers in a firm. C. the amount of capital that is operated by workers in an industry. D. the amount of workers a firm employs. 33. In the market for labor, the monopsonist: A. is the sole buyer and can keep wages up, above the competitive wage. B. is the sole seller and can push wages down, below the competitive wage. C. is the sole buyer and can push wages down, below the competitive wage. D. is the sole seller and can keep wages up, above the competitive wage. 34. A country that would be a net-importer of wine if it moved from autarky to free trade would cause what reaction? A. Domestic wine producers would be opposed. B. Foreign wine producers would be opposed. C. Domestic wine consumers would be opposed. D. All of these are true. 35. Laws limiting trade are often referred to as: A. trade liberalization. B. trade protection.. C. trade enhancement. D. international policy. 36. A benefit that accrues without compensation to someone other than the person who caused it is called: A. an external benefit. B. a network benefit. C. a social benefit. D. a private benefit. 37. When negative externalities are present, it means that: A. individuals don't take into account all the costs associated with their market choice. B. society bears part of the cost borne of private transactions. C. production and consumption is above the socially optimal level. D. All of these statements are true. 38. Knowing that the presence of externalities reduces surplus, it implies that: A. government needs to find them and correct the market. B. there are mutually beneficial trades waiting to be exploited so private parties have an incentive to solve the externality problem themselves. C. there are mutually beneficial trades waiting to be exploited, so government has an incentive to force those parties to solve the problem themselves. D. None of these statements is true. 39. When a good ends up undersupplied, we can assume it is: A. a common resource. B. a private good. C. a public good. D. None of these goods can be undersupplied. 40. Which of the following goods is most likely to be overconsumed? A. Fish in the ocean B. Chickens on a farm C. Horses on a ranch D. None of these is likely to be overconsumed. 41. Excludability matters because it: A. allows consumers to control the price of a good B. allows owners to set an enforceable price on a good. C. creates a perceived scarcity that allows the seller to keep the price artificially high. D. creates a perceived scarcity that causes buyers to have an inelastic demand for the good. 42. A common resource is: A. rival in consumption and excludable. B. not rival in consumption, but excludable. C. rival in consumption, but not excludable. D. not rival in consumption and not excludable. 43. Free riders enjoy: A. positive externalities from others' choices to pay for a good. B. negative externalities from others' choices to pay for a good. C. positive externalities transferred from consumers who receive subsidies. D. positive externalities from a good they choose to buy themselves. 44. In a market where the tragedy of the commons arises, the equilibrium quantity is both individually ____________ and collectively __________. A. irrational; inefficient B. inefficient; rational C. rational; inefficient D. efficient; irrational 45. Bans are applied to: A. common-resource problems. B. reduce the inefficiency created by overuse. C. situations where the optimal quantity of consumption is zero. D. All of these statements are true. 46. One of the primary aims of taxation is: A. to increase government revenues. B. to reduce the equilibrium quantity. C. to alter the incentives of market participants. D. All of these are primary goals of taxation. 47. How much deadweight loss a tax causes depends on: A. how responsive buyers and sellers are to a price change. B. how much tax revenue the government generates. C. whether the tax is imposed on the buyer or seller. D. It can depend on all of these. 48. The logistical costs associated with implementing a tax are called the: A. deadweight loss. B. administrative burden. C. total surplus. D. tax revenue. 49. A public expenditure that has to be approved each year is called: A. discretionary spending. B. nondiscretionary spending. C. entitlement spending. D. earmarked spending. 50. An example of entitlement spending is: A. national defense. B. Social Security. C. police protection. D. garbage collection. Part 2: Problems (3 questions. Points are specified for each section. Total: 50 points) 1. Choice of optimal hours of work is a choice between the utility generated by money (wage) if she works and the utility of not working (called leisure). The graph below shows a budget line faced by an individual. The optimal point (A) is also shown (the indifference curve that generates this point is not shown.) 1.1. What happens to budget line if wage increases? Show it in graph above. (2 points) 1.2. Explain the income effect and price effect of increase in wage. (4 points) 1.3. Choose a point in your new budget line that represents a case in which price effect of increase in wage dominates its income effect. Explain your answer and explain the type of labor supply curve for this case. (4 points) 1.4. Now choose a point in your new budget line that represents a case in which income effect of increase in wage dominates its price effect. Explain your answer and explain the type of labor supply curve for this case. (4 points) 2. Production of flowers has positive externality. The neighbors benefit from the pleasant smells of flowers. Technically, the social cost of producing flowers is less than the private cost. The graph below shows the supply and demand for flowers in private market. 2.1. Draw the social supply curve assuming there is $3 external benefit per unit for flowers produced. Explain. (4 points) 2.2. Find privately optimal quantity and socially optimal quantity. Which one is higher? Explain why this makes sense for production of goods with positive externality. (2 points) 2.3. Show, using numbers, that if we internalize the externality we improve the welfare of the society. Show on graph the area that represents gain from internalizing externality. (6 points) 2.4. Carefully explain how we can use Pigou’s idea to correct externality of producing flowers. (2 points) 2.5. Carefully explain Coase’s idea to correct externality of producing flowers. Do you think it is practically feasible? Why or why not? (2 points) 3. Chickenland represents a small part of the world poultry market. The graph shows supply and demand of poultry in this country. 3.1. Calculate producer and consumer surplus in autarky. (2 points) 3.2. Assume that the world price of poultry is $0.3/lb. If Chickenland opens to trade, what is the domestic quantity consumed and produces? What is the quantity of imports? (3 points) 3.3. Calculate post-trade consumer and producer surplus. Who is better off after trade (producer or consumer)? Explain. (3 points) 3.4. Now suppose a tariff of $0.1/lb is imposes on poultry import. What is the price in Chickenland, and quantities consumed, produced, and imported? Explain how do you find them and show them in graph. (4 points) 3.5. Find the social surplus (consisting of consumers, producers, and government) after tariff. How much surplus does the society of Chickenland lose due to tariff? Calculate the values and show the area on graph. (4 points) 3.6. Government of Chickenland decides to reduce the import to the same level as in (3.4) by quota instead of tariff. Explain how it can do it and explain which policy (tariff or quota) is better and why (4 points).