Temple University
Department of Economics

Economics 52
Principles of Microeconomics

Final Exam

Directions:  This is a closed book exam: you may not use books or notes of any kind.  You may neither give nor receive help on this exam.  You must do all questions within 2 hours.  Point values are shown.

Multiple Choice ( 60 points)

1.	An increase in the demand for coal with no concurrent change in the supply of coal will result in a ________ equilibrium price and a(n) ________ equilibrium quantity. 
	A)	higher; lower 
	B)	lower; lower 
	C)	higher; unchanged 
	D)	higher; higher 
	E)	lower; higher 

Use the following to answer questions 2-3:

2.	The marginal cost of increasing output from 135 units to 180 units is 
	A)	$1.55. 
	B)	93 cents. 
	C)	62 cents. 
	D)	34 cents. 
	E)	22 cents. 

3.	If the output price for this good is 50 cents, the firm should produce 
	A)	more than 225 units. 
	B)	more than 135 units but less than 180 units. 
	C)	between 90 and 45 units. 
	D)	more than 180 units but less than 225. 
	E)	between 0 and 45 units. 

4.	Without the aid of a graph, one can say definitively that if supply decreases while demand increases simultaneously, the new equilibrium price is ___________  and the new equilibrium quantity is _________________. 
	A)	lower; lower 
	B)	lower; indeterminate 
	C)	indeterminate; higher 
	D)	indeterminate; lower 
	E)	higher; indeterminate. 

Use the following to answer question 5:

5.	An output level of 25 units results in 
	A)	an economic loss of $8. 
	B)	accounting profits of -$8. 
	C)	normal profits. 
	D)	positive accounting profits. 
	E)	economic profits of zero. 

6.	A dominated strategy is one that 
	A)	leads to a higher payoff, regardless of the other player's choice. 
	B)	leads to a lower payoff, regardless of the other player's choice. 
	C)	is sometimes selected. 
	D)	contains the set of all possible strategies. 
	E)	is present in all games. 

Use the following to answer questions 7-8:

	7.	According to data, Jenny has an absolute advantage in 
	A)	the production of shoes. 
	B)	neither shoe nor pants production. 
	C)	the production of pants. 
	D)	both shoe and pants production. 
	E)	pants and possibly shoe production. 

	8.	Jenny's opportunity cost of producing an extra pair of pants is 
	A)	1 pair of shoes. 
	B)	1.5 pairs of shoes. 
	C)	2 pairs of shoes. 
	D)	2.5 pairs of shoes. 
	E)	3 pairs of shoes. 

	9.	The reason $100 today is equivalent to more than $100 next year is due to 
	A)	inflation. 
	B)	uncertainty. 
	C)	greed. 
	D)	the ability to invest the $100 today and earn interest. 
	E)	rising prices. 

	10.	If  factors of production are relatively immobile, then the price elasticity of supply will tend to be 
	A)	larger. 
	B)	perfectly elastic. 
	C)	smaller. 
	D)	elastic. 
	E)	unaffected. 

	11.	If the elasticity of demand for the latest Korn CD is -1.4, this means 
	A)	few substitutes exist. 
	B)	a 1% increase in the price leads to a 14% reduction in quantity demanded. 
	C)	a 10% decrease in the price leads to a 140% increase in quantity demanded. 
	D)	a 5% increase in the price leads to a 7% decrease in quantity demanded. 
	E)	a 5% increase in the price leads to a 7% increase in quantity demanded. 

	12.	If a nation has the lowest opportunity cost of producing a good, that nation has a(n) 
	A)	comparative advantage. 
	B)	absolute advantage. 
	C)	comparative and absolute advantage. 
	D)	absolute advantage and possible a comparative advantage. 
	E)	relative advantage. 
	13.	If the price of tea increases and the demand for sugar decreases, then 
	A)	tea and sugar are complements. 
	B)	tea is a normal good and sugar is inferior. 
	C)	tea and sugar are substitutes. 
	D)	tea is an inferior good and sugar is normal. 
	E)	tea and sugar are unrelated to each other. 

Use the following to answer question 14:

The three firms have five choices for pollution control: no controls or four different technologies, W, X, Y and Z.  The amount of pollution emitted and the cost of the technologies are shown in the table.

	14.	Suppose that the government imposes a tax of $1400 per ton of pollution above 3 tons, i.e., the first three tons are tax free.  As a result, Axxon picks __________, Immobil picks __________, and Cexaco picks __________. 
	A)	Y; Z; no controls 
	B)	Z; Z; Z 
	C)	X; Y; W 
	D)	W; X; X 
	E)	X; Y; Z 

	15.	Seka and Jill mover to LA at the same time and both wish to find apartments to rent.  Seka is staying with her Aunt while Jill is at the Best Western motel.  One can predict that 
	A)	Seka and Jill will spend the same amount of time searching. 
	B)	Jill will search more than Seka. 
	C)	Seka will search more than Jill. 
	D)	Jill will have better information. 
	E)	the magnitude of their search times is indeterminate. 

	16.	The sum of the economic surpluses accruing to buyers and sellers is 
	A)	producer surplus. 
	B)	deadweight loss. 
	C)	total economics surplus. 
	D)	conspicuous consumption. 
	E)	consumer surplus. 

Use the following to answer question 17:

Joe is the owner of the Texaco Mini Mart, Sam is the owner of the Exxon Mini Mart and together they are the only gas stations in town.  At the current price of $1 per gallon both receive total revenues of $1,000.  Joe is considering cutting his price to 90 cents, which would increase his total revenue to $1,350. If Sam's price remains $1 after Joe cuts his price, Sam will collect $500 in revenues.  If Sam cuts his price to 90 cents, his total revenues would also rise to $1,350 if Joe continues to charge $1. Joe will collect $500 in revenues if he keeps his price at $1 while Sam lowers his to 90 cents. Joe and Sam will receive $900 each in total revenue if they both lower their price to 90 cents. You may find it easier to answer the following questions if you fill in the payoff matrix below.

	17.	To both Joe and Sam, __________ is a(n) __________. 
	A)	cutting price to 90 cents; disequilibrium. 
	B)	leaving price at $1; Nash equilibrium. 
	C)	leaving price at $1; dominant strategy. 
	D)	cutting price to 90 cents; Nash equilibrium. 
	E)	cutting price to 90 cents; strategy that makes them both better off. 

	18.	The price of output to a firm is $9 and the marginal cost of the last unit produced is $8.50.  This means the 
	A)	extra benefit of the last unit produced is less than the extra cost. 
	B)	firm should lower its output to increase profits. 
	C)	firm is earning an average profit of $0.50. 
	D)	extra benefit of the last unit produced is greater than the extra cost. 
	E)	firm is earning profits. 

	19.	Sonya is employed at a stock brokerage firm where she earns $25 per hour. The office she works at is located downtown. To get to work each day, she must either ride a series of buses that takes one-and-a-half hours at a cost of $2, or take a cab that takes 30 minutes and costs $20. The opportunity cost: 
	A)	of riding the bus is $2, and taking the cab is $20. 
	B)	of riding the bus is $37.50, and taking the cab is $12.50. 
	C)	of riding the bus is $35.50, and taking the cab is -$5. 
	D)	of riding the bus is $39.50, and taking the cab is $32.50. 
	E)	of riding the bus is $27, and taking the cab is $20. 

Use the following to answer question 20:

Paul owns a home on the top of a hill and enjoys an unobstructed view of a large wooded area.  The view was a large factor in his decision to buy the house and Paul values his view at $5,000 per month. Sid purchases the undeveloped wooded area with plans to build a retail shopping center.  Sid expects to earn $10,000 a month from the shopping center, which is $3,000 more than his next best alternative. 

	20.	The least Sid would accept to cease construction of the shopping center is 
	A)	$10,000. 
	B)	$5,000. 
	C)	$3,001. 
	D)	$2,000. 
	E)	0. 

	21.	Suppose the local slaughterhouse gives off an unpleasant stench.  The price of meat would then be _______ because not all of the _________ are accounted for in the marketplace. 
	A)	too high; benefits 
	B)	too low; benefits 
	C)	too high; costs 
	D)	too low; costs 
	E)	an equilibrium; costs 

Use the following to answer question 22:

Sharon, a marketing major, has an economics test and a finance test to take tomorrow and she has four hours tonight to allocate to studying the two subjects.  The data below show her scores on the two tests based on the time spend studying. (Hint: Studying economics for 0 hours means studying finance for 4 hours.)

	22.	To efficiently allocate her time, Sharon should study economics for __________ hours and finance for __________ hours. 
	A)	2; 2 
	B)	1; 3 
	C)	3; 1 
	D)	0; 4 
	E)	4; 0 
	23.	Assume the marginal utility of the 3rd candy bar is 15, the marginal utility of the first tube of toothpaste is 12, the price of a candy bar is $1.50/bar and the price of toothpaste is $2.00/tube.  If  one buys three candy bars and a tube of toothpaste, is one applying the rational spending rule correctly? 
	A)	Yes, this is an optimal combination of candy and toothpaste. 
	B)	No, spend less on candy and more on toothpaste. 
	C)	No, spend more on candy and less on toothpaste. 
	D)	No, spend more on both candy and toothpaste. 
	E)	No, spend less on both candy and toothpaste. 

	24.	When part of the cost of an activity falls on people not pursuing the activity, it is call a(n) 
	A)	external benefit. 
	B)	prisoner's dilemma. 
	C)	negative externality. 
	D)	positive externality. 
	E)	efficient allocation. 

Use the following to answer question 25:

Figure 14.1

	25.	The socially efficient output is __________ with a price of __________. 
	A)	Q1; P1. 
	B)	Q2; P2. 
	C)	Q3; P3. 
	D)	Q1; P3. 
	E)	Q4; P1. 
Use the following to answer questions 26-27:

Figure 7.2

	26.	Based on demand curve D and supply curve S, the dollar value of the consumer surplus is 
	A)	$240. 
	B)	$200. 
	C)	$180. 
	D)	$160. 
	E)	$120. 

	27.	Based on demand curve D1 and supply curve S, the dollar value of the producer surplus is 
	A)	$135. 
	B)	$150.50. 
	C)	$200. 
	D)	$212.50. 
	E)	$250. 

	28.	A monopsonist finds that if he hires Zeke, he will pay Zeke a wage rate of $10 and see his labor costs rise by $15.  One can predict that Zeke will be hired if his 
	A)	value of marginal product is greater than $10. 
	B)	marginal product is greater than $15. 
	C)	value of marginal product is at least $10. 
	D)	marginal product is greater than $10. 
	E)	value of marginal product is greater than or equal to $15. 

Use the following to answer question 29:

	29.	The profit maximizing monopolist will produce where __________, which in this example means the price, quantity combination __________. 
	A)	P=MC; $8 & 3 units 
	B)	MR=MC; $6 & 5 units 
	C)	P=MR; $7 & 4 units 
	D)	MR=MC; $8 & 3 units 
	E)	P=MC; $6 & 5 units 

Use the following to answer question 30:

Figure 9.2

	30.	At the point of monopoly profit maximization, consumer surplus is represented by the area 
	A)	CJE. 
	B)	GJI. 
	C)	BJEK. 
	D)	BCEK. 
	E)	GCEI. 

Problem (20 points)

The following table shows all the marginal benefits for each voter in a small town whose town council is considering a new swimming pool with capacity for at least three citizens.  The cost of the pool would be $18 per week and would not depend on the number of people who actually use it.  The interest rate is 1% per week.  

Voter	Marginal Benefit ($/week)	
Abigail	12	
Bob	5	
Caitlin	2	

A.	If the pool must be financed by a weekly head tax levied on all voters, what would be the amount of the tax?

B.	If the pool and accompanying tax must be approved by referendum, will the pool be approved by a majority vote?

C.	Who would vote ‘NO’?

D.	Would the outcome of the referendum be socially efficient? Explain.

E.	The town council instead is considering auctioning a franchise off to a private monopolist to build and maintain the pool.  Your job is to help the council anticipate the outcome of the auction.  In any given week, what is the marginal cost of serving an additional visitor to the pool?

F.	Complete the following demand schedule for the proposed pool.

Price	Quantity	Total Revenue	Marginal Reveneu	
15				
12				
5				
2				

G.	Given your answers to E and F, what price would the monopolist charge for use of the pool?

H.	At the price in G., will the monopolist build the pool?

I.	 Suppose that the monopolist can practice perfect price discrimination.  In such a circumstance would be the monopolist’s total revenue?

J.	 Given you answer to I., what is the most that the monopolist would be willing to pay for the franchise? Remember that the monopolist gets the franchise in perpetuity if she wins the auction.

Essays (20 points)

A.	Suppose that the city of Slaterville makes fire insurance for homeowners mandatory.  What will be the likely impact of this on the local volunteer fire department?

B.	Ben Schopin has been searching for an affordable car.  After some days of shopping around he reports that, all other things equal, a used Civic costs the most at a new car dealership, is somewhat cheaper at a used car lot, and is cheapest when being sold by an individual.  How do you explain this?

Answer Key -- Spring 2002 Final

	1.	D	
	2.	C	
	3.	B	
	4.	E	
	5.	A	
	6.	B	
	7.	B	
	8.	B	
	9.	D	
	10.	C	
	11.	D	
	12.	A	
	13.	A	
	14.	A	
	15.	C	
	16.	C	
	17.	D	
	18.	D	
	19.	E	
	20.	C	
	21.	D	
	22.	A	
	23.	C	
	24.	C	
	25.	C	
	26.	C	
	27.	A	
	28.	E	
	29.	D	
	30.	A