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Second Examination Economics 101 November 11, 2015 Unless a question explicitly says otherwise, assume that all demand curves are linear and slope downward and all supply curves are linear and slope upward, and there are no tariffs

Second Examination

Economics 101

November 11, 2015

Unless a question explicitly says otherwise, assume that all demand curves are linear and slope

downward and all supply curves are linear and slope upward, and there are no tariffs.

For all questions, mark the best answer.

1) Ifthe world price of a good is less than the domestic price in a country that can engage in

international trade, that country would become an importer ofthat good.

a. True

b. False

2) It takes Yipei 4 hours to make a pie and 3 hours to make a shirt. It takes Max 5 hours to make

a pie and 2 hours to make a shirt. In order to maximize consumption, Yipei should specialize in

making shirts and Max should specialize in making pies, then they should trade.

a. True

b. False

3) In order to have a comparative advantage in the production of a good it is not necessary to

have an absolute advantage and having an absolute advantage in the production of a good does

not necessarily imply having a comparative advantage.

a. True

b. False

4) Ifimplicit costs are not zero, then a firm's economic profit will always be higher than it's

accounting profit.

a. True

b. False

5) For a firm, the production function explicitly represents the relationship between the quantity

of.output and total cost.

a. True

b. False

6) At Max's bookcase shop, the variable cost ofproducing twenty bookcases is \$300 and the

fixed cost is \$100. The marginal cost ofproducing the twenty-first bookcase is \$18. We can

conclude that the average total cost will rise when Max produces the 21st bookcase.

a. True

b. False

7) Suppose that a firm can hire a unit of labor for \$5 per hour and a unit of capital for \$10 per

hour regardless of how many units of labor or capital they hire. Initially, the firm is hiring 8 units

of labor and 8 units of capital each hour and is producing 60 units of output each hour. The firm

then decides-to cut all of its inputs in half. When they do so, they end up producing 40 units of

output per hour. Over this range of output, the firm is experiencing economies of scale.

a. True

b. False

8) Consider the following two-good (fish & bananas) two-person (Meera & Steve) economy.

Initially, in a given day, Meera can find’40 bananas and no fish, or30 fish and no bananas, or

some linear combination of the two. Steve, in a given day, can find 30 bananas and no fish, or 50

fish and no bananas, or some linear combination of the two. Suppose Meera discovers a new

fishing technique that doubles the quantity of fish she can catch each day. As a result of this:

innovation, which of following are true:

a. Meera had a comparative advantage in fish production prior to the innovation and has a

comparative advantage in banana production after the innovation.

b. Meera had an absolute advantage in fish production] prior to the innovation and has a

comparative advantage in banana production after the innovation.

c. Meera had an absolute advantage in banana oroductids prior to the innovation and has a

comparative advantage in fish production after the innovation.

d. Meera had a comparative advantage in banana production prior to the innovation and has

an absolute advantage in banana production after the innovation.

e. More than one of the above are true.

9) Suppose a firm produces 5,000 guitars per year. Its average total cost at that level of output is

\$90, and its fixed cost is \$250,000. What is the firm’s variable cost at that level of output?

a. \$250,000

b. \$450,000

c. \$25,000

d. \$56,000

e. \$200,000

10) Which of the following will cause a country’s production possibilities frontier to shift

outward?

a. The country specializes in the good for which it has a comparative advantage.

b. There is an increase in the level of technology.

c. The country engages in trade.

d. All of the above are correct

e. Both (a) and (b) are correct

11) Suppose there are two grades of quality for French wine: High quality and low quality. In

France, a high quality bottle of wine is \$100 and a low quality bottle of wine is \$25. It costs \$15

to ship a bottle of wine from France to the U.S. regardless of quality. Also, the U.S. congress, led

by newly elected protectionist Senator Jayanti, imposes a tariff of \$10 per bottle of wine

imported from France. For simplicity, assume all transportation costs and tariffs are passed on to

the consumer. The price of high quality French wine in the U.S. relative to low quality French

wine in the U.S. would be , and the average quality of French wine will be in

the U.S. than in France. .

a. 2.875:1; Lower

b. 2.875:1; Higher

c.  2.5:1; Lower

d. 2.5:1; Higher

e. 2:1; Lower

12) Which of the following best explains why marginal cost eventually increases as output

increases in the short-run?

a. Diseconomies of scale occur

b. Average cost increases

c. Total cost increases

d. Marginal product decreases

e. Both (a) and (d)

13) A firm is currently producing 250 units of output. The marginal cost for the last unit of

output is \$12. At that quantity, its marginal cost is between its average variable cost and its

average total cost. Which ofthe following is a possible combination ofits variable and fixed cost

at that quantity?

a. VC = \$2,600; FC = \$350

b. VC = \$2,800; FC = \$250

c. VC = \$3,500; FC = \$200

d. VC = \$3,600; FC = \$250

e. VC = \$4,000; FC = \$100

14) The accompanying table shows the U.S. domestic demand schedule and domestic supply

schedule for oranges. The corresponding domestic demand and supply curves are linear. Suppose

that the world price oforanges is \$0.40 per orange lower than the domestic market clearing price

Price of Quantity ofOranges Demanded Quantity of Oranges Supplied

Orange (thousands) (thousands)

\$1.00 2 . 11

0.90 4 10

0.80 6 9

{f.7~ 8 8

0.60 10 7

0.50 12 6

0.40 14 5

0.30 16 4

0.20 18 3

Ifthe U.S. opens up the orange market such that international trade exists, but imposes a tariff on

imported oranges equal to \$0.10 per orange. The size ofthe deadweight loss that exists with the

tariffrelative to the free trade scenario would be:

a. \$50

b. \$100

c. \$150

d. \$600

e. \$1,050

16) Which of the following are always true about production in the short-run:

a. Capital is fixed in the short-run.

b.  Diminishing marginal product will eventually occur, even if all units of the variable input

are identical.

c. The length of the short-run is defined as approximately one year.

d. All of the above are true.

e. Only (a) and (b) are true.

17) Suppose there are two people in the economy (John and Ron) and there are two goods that

can be produced (Pizza and Cola). In a given day John can produce 10 pizzas or 40 colas and

Ron can produce 6 pizzas or 12 colas. If John and Ron are allowed to trade with each other and

both want to consume 2 pizzas each, what is the maximum amount of colas that they could

collectively consume?

a. 32

b. 40

c.  44

d. 48

e. 52

18) Mark and Jeff operate a small company that produces souvenir footballs. Their fixed cost is

\$2,000 per month. They can hire workers for \$1,000 per worker per month. Their monthly

production function for footballs is as given in the accompanying table.

300

If this firm decided to hire 3 workers, the average variable cost at that level of output would

be and the average total cost at that level of output would be

a. \$0.83; \$2.50

\$2.50; \$2.50

c. \$2.50; \$4.17

d. \$333; \$2,333

e. \$1,000; \$3,000

19) Consider the following statements regarding the theory of comparative advantage and

identify which of them are true.

i. Specialization and trade that is based on comparative advantage can allow all individuals

to consume a bundle of goods each day that is not possible for them to produce on their

own during a day.

1. Gains from specialization and trade can be achieved by all parties involved even if

nobody fully specializes in the good for which they have a comparative advantage.

2. If all parties produce only one good and produce the exact same good, there are no gains

3. The gains from specialization and trade are limited by the extent of the market.

4.  Only one of the above statements is true.

Only (i) and (iv) are true.

Only (i) and (11) are true.

Only (i), Gi), and (iv) are true.

All of the above statements are true

20) Suppose we observe that a firm’s average total cost is falling over a given range of output. If

it is in the short-run, then it must be true that . If it is in the long-run, then it must

be true that

a. Average variable cost is falling; the firm is experiencing increasing returns to scale

b. Average variable cost is falling; the firm is experiencing decreasing returns to scale

c. The firm is not experiencing diminishing marginal returns to its variable input; the firm is

experiencing increasing returns to scale

d. The firm is experiencing diminishing marginal returns to its variable input; the firm is

experiencing increasing returns to scale.

e. None of the above combinations need be happening to the firm over this range.

22) On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2

workers. He is able to produce 4,600 bushels of wheat when he hires 3 workers. Which of the

following possibilities is consistent with the property of diminishing marginal product?

a. The farmer is able to produce 4,600 bushels of wheat when he hires 4 workers

b. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers

c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers

d. All of the above are correct

e. Only (b) and (c) are correct

23) Mutt and Jeff find themselves on a deserted island. The only two activities available are

fishing and hunting rabbits. In a full day, Mutt can catch 6 fish or 18 rabbits; in the same time,

Jeff can catch 8 fish or 4 rabbits. Activities can be divided with no loss of efficiency. When left

to their own devices, Mutt consumes 6 rabbits and Jeff consumes 2 rabbits. Each ofthem spends

the rest oftheir available time catching fish. IfMutt and Jeff are allowed to specialize and trade

with each other, and they each want to continue to consume the same number of fish as in the no-

trade situation, how many additional rabbits would they be able to collectively consume relative

a. 8

b. 10

c: 14

d. 18

e. 22

27) Suppose the world price for the good depicted in the graph above is \$10 per unit. Ifthe

country is allowing free trade and the domestic price moves to t]le world price, the inefficiency

associated with this market for the domestic country would be:

a. \$0

b. \$10

c. \$30

d.  \$40

e.  \$60

28) Aakash owns and operates a small busines.l that provides economic consulting services.

During a given year, he spends \$57,000 on travel for his business. Aakash owns a computer that

he uses for his business. Ifhe didn't use the computer, he could rent the computer to his friend,

Steve, for \$100 per year. Aakash's total revenue for the year is \$100,000. Also, instead of

working as a consultant, Aakash could teach economics at the University of Michigan and make . _

ayearlysalaryof\$50,000.Asaresult,Aakash's:

a. Economic profit would be -\$7,100 per year

b. Economic profit would be \$49,900 per year

c. Accounting profit would be -\$7,100 per year

d. Accounting profit would be \$42,900 per year

e. More than one ofthe above are correct

s1,000

29) Suppose that a worker in Oatland can grow either 40 bushels of corn or 10 bushels of oats

per year, and a worker in Cornland can grow either 5 bushels of corn or 50 bushels of oats per

year. There are 20 workers in Oatland and 20 workers in Comland. If the two countries

specialize in the production of the good for which they have a comparative advantage and then

trade at a rate of 1 bushel of oats for 5 bushels of corm, which of the following would be true

relative to a case where no trade occurs?

a. Both Oatland and Cornland will be made better off by this trade.

b. Both Oatland and Cornland will be indifferent towards this trade.

c. Oatland will be made better off but Cornland will be made worse off.

Cornland will be made better off but Oatland will be made worse off.

e. Both Oatland and Cornland will be made worse off by this trade.

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