econ 001 final spring 2014

7/25/2019 Econ 001 Final Spring 2014

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Economics 001

Principles of Microeconomics

Final --- Version A

May 9, 2014

Last Name: ______________________ First Name: ____________________________

Signature: __________________________________________

Instructions:

1.

Print your name clearly and sign your exam in the space provided above.

2. On your scantron: print and fill in the bubbles for your name, GU ID #, and test version.

3.

Unless the question indicates otherwise, assume no externalities and symmetric information.

4.

Multiple choice questions are worth 4 points for each correct answer. Unmarked or wrong multiple

choice answers will receive zero points --- there is no penalty for guessing!

5. When you are done: If there are fewer than 10 minutes left in the exam period, please wait patiently

and quietly until the exam period is over. If you have finished more than 10 minutes early, you mayquietly bring your coding sheet and this exam booklet to the nearest instructor.

6.

There are 30 questions on this 12 page test --- make sure your test is complete before you begin!



Jordan manages a monopoly with no fixed costs and a constant marginal cost of $7 per unit. The table gives

the demand for his product. Use this information to answer questions 1-2.

1.

How many units should Jordan sell to maximize his profit?

a. 1

b. 2

c. 3

d. 4

e. 5

2.

What price should he charge to maximize his profit?

a. $6

b.

$7

c.

$8

d. $9

e. $10

Use the monopoly diagram below to answer questions 3 and 4:

Price Quantity Sold

$10 1

$9 2

$8 3

$7 4$6 5

D

$/unit

Q

20

MR

50

MC

15

10

80

25

2



3. To maximize profits, the monopolist should sell ___ units and charge ____ per unit.

a. 25, $10

b. 25, $20

c.

50, $10

d.

50, $20

e. 80, $15

4.

What is the dead weight loss caused by this monopoly?

a. $300

b. $5

c. $10

d.

$30

e.

$150

Use the monopsony diagram below to answer questions 5 and 6:

5. The monopsonist should buy ___ units and pay ____ per unit.

a. 20, $20

b. 50, $20

c.

50, $40

d. 80, $30

e. 80, $65

MB

$/unit

Q

20

50

S

MCM

30

40

80

20

65



6. To induce the monopsonist to purchase the efficient number of units the government should set a ___ of

___ per unit.

a. Tax, $30

b.

Tax, $20

c.

Tax, $35

d. Subsidy, $20

e. Subsidy, $35

The graph below depicts a monopolistically competitive firm. Use this diagram to answer questions 7 and 8:

7. The firm should sell ___ units and earn a profit of ___.

a. 30, $300

b.

20, $200

c. 20, $100

d. 30, $150

e. 35, $300

8.

In the long run we expect this firm to ___ its output and earn ___ profit.

a. Increase, more

b. Decrease, more

c. Increase, less

d.

Decrease, less

DF

unit

q

MRF

30

50

MC

ATC

45

40

35

20



9. In long run monopolistically competitive equilibrium, which of the following is NOT true:

a. Firms earn zero (economic) profits

b. Each firm produces q such that MC = MR

c.

Each firm sets P > MR

d.

Each firm produces q such that average total cost is minimized

10.

When there is a negative externality in production (ex. pollution), a competitive market produces too ___

output relative to the efficient amount and a ___ can be used to restore efficiency.

a.

much; subsidy

b. much; tax

c. little; subsidy

d. little; tax

11. When there is a positive externality in consumption (ex. gardening), a competitive market produces too

___ output relative to the efficient amount and a ___ can be used to restore efficiency.

a.

much; subsidy

b. much; tax

c. little; subsidy

d. little; tax

Questions 12-14 are based on the following competitive market with an externality in production:

MCS

MBP

$/unit

Quantity

20

MCP

30

30

= MBS

44

42

52

20

40



12. The efficient quantity is ___, while a competitive market produces ___.

a. 20; 20

b. 20; 30

c.

30; 20

d.

30; 30

e. 30; 44

13.

The DWL in the competitive market is:

a.

$20

b. $22

c. $100

d. $110

e.

$154

14. A ___ of ___ per unit restores efficiency.

a. Subsidy; $20

b.

Subsidy; $22

c.

Tax; $20

d. Tax; $22

e. Tax; $24

Questions 15 and 16 are based on the following information: Firm 1 and firm 2 produce pollution as part of

their production processes. The fixed costs of pollution abatement are zero for each firm, while the marginal

costs of pollution abatement are MC1 = A1 and MC2 = 2 A2 when firm 1 reduces pollution by A1 units and firm 2

reduces pollution by A2 units.

15.

A ___ tax per unit of pollution efficiently allocates 30 units of pollution abatement between the two firms.

a. $10

b. $20

c. $30

d.

$40

e. $50

16. Given the efficient tax you solved for in the last question, firm 1 reduces pollution by ___ units, while firm

2 reduces pollution by ___ units.

a.

15, 15

b. 10, 20

c. 20, 10

d. 0, 30

e.

30, 0



17. The following graph depicts a public goods problem for a population with identical marginal costs and

marginal benefits from the public good.

If the public good is financed by voluntary contributions, what will the dead weight loss be?

a. $125

b.

$1250

c.

$50

d. $250

e. $1375

18.

Consider a public goods problem. Assume the economy has 10 people each with: MBP = 20 – Q, where Q is

equal to the quantity of the public good. Assume no externality in public good production: MCP = MCS = 40

What is the socially efficient Q?

a. 0

b.

16

c. 20

d. 160

e. 200

$/unit

Q

MBP

MBS

MCP

= MCS

50

100

10

5

60



19. Consider a public goods problem. Assume the economy has 10 people each with:

MBP = 20 – Q, where Q is equal to the quantity of the public good. Assume no externality in public good

production with MCP = MCS = 40. If everyone in the economy is asked to voluntarily donate to the

public good, how much Q will be donated in total?

a.

0

b. 16

c. 20

d.

160

e.

200

20. Three roommates are deciding whether they should buy a couch to share (a public good). They have

already agreed on a couch they all like and found it on sale for $300. Assume they have valuations for the

couch $300, $50, $50. If they vote on the purchase (majority rules, share the cost equally if they buy) then

they will ___ the couch. This voting outcome ___ total surplus.

a.

Purchase; maximizes

b.

Purchase; does not maximizec. Not purchase; maximizes

d. Not purchase, does not maximize

21. The following table lists Jordan’s marginal benefit from a public good.

Assuming everyone else contributes 2 units (in total) to the public good, what is Jordan’s marginal benefit

from the first unit he contributes?

a. 20

b. 15

c.

10

d. 8

e. 5

Q MBJ

0 0

1 20

2 15

3 10

4 8

5 5



22. Assume a used car market has 25 cars that are lemons (which are bad cars) and 75 cars that are plums (which are

good cars). The owner of a lemon is willing to sell his car for $100, while the owner of a plum values his car at $120.

Buyers value lemons at $160, and plums at $200. If buyers cannot observe the quality of the cars they are

purchasing, what is the maximum they would be willing to pay if all the cars were put on the market?

a. $115

b. $160

c.

$180

d.

$190 e. $200

23. Consider adverse selection in the car insurance market. Drivers are of two types: risky and safe. The

insurance companies cannot distinguish between the two types of drivers but they know the fraction of

risky drivers and safe drivers. Assume that insuring a risky driver costs $1,800, while insuring a safe driver

costs $600. The benefits for the car owners are twice the cost of insurance. If there are 100 safe drivers in

this market, what is the minimum number of risky drivers at which safe drivers will no longer purchase

insurance?a. 50

b. 100

c.

150

d.

200

e. 250

24. Consider a competitive market with adverse selection (informed sellers). Sellers are either high (H) or low

(L) quality. Many new low quality firms enter the market. Which of the following graphs best represents

the effects of this change?

P

Q

C.

D’

S’

D

Q

P D.

S’

D

D’

P

Q

A.

D’

S

D

S

Q

P B.

S

D

D’

S



25. Consider a competitive market with adverse selection (informed sellers). Sellers are either high (H) or low

(L) quality. A technological breakthrough raises the marginal cost of producing high quality goods, but does

not change the marginal cost of producing low quality goods. Which of the following graphs best

represents the effects of this change?

26. Consider a competitive health insurance market with adverse selection (informed buyers). Health

insurance buyers are either high (H) or low (L) cost. Assume the population of buyers becomes more

physically active and as a result the proportion of low cost types rises and insurance companies know this.

Which of the following graphs best represents the effects of this change?

P

Q

C.

D’

S

D

Q

P D.

S

D

D’

P

Q

A.

D

S

S’

Q

P B.

S’

D

S’

S’

S

P

Q

A

D’

S S’

D

P

Q

B

D’

S’ S

D

P

Q

C

D

S

S’

P

Q

D

.

D

S’

S



27. Consider a competitive health insurance market with adverse selection (informed buyers). Health

insurance buyers are either high (H) or low (L) cost. Assume the diet of the population of buyers becomes

less healthy and as a result the proportion of high cost types rises and insurance companies know this.

Which of the following graphs best represents the effects of this change?

Questions 28-30 are based on the following information: A firm hires a worker. The worker and firm agree to

split the revenue from the worker's effort down the middle: 25/75 with the lower share going to the worker.

Let e represent the worker's chosen level of effort (which the firm cannot observe). Assume that the marginal

benefit for the worker plus the firm is: MB = 240-4 e, and that the worker incurs a hassle cost of effort with

marginal cost MC = 2 e.

28. What is the efficient level of effort?

a.

10

b. 20

c. 30

d. 40

e. 60

29. What level of effort will the worker choose?

a. 10

b. 20

c.

30

d. 40

e. 60

P

Q

A

.

D

S

S’

D’

P

Q

B

.

D

S’

S

D’

P

Q

C

.

D

S S’

P

Q

D

.

D

S’ S


http://slidepdf.com/reader/full/econ-001-final-spring-2014 12/1212

30. What is the dead weight loss resulting from the worker’s choice of effort level?

a. $20

b.

$40

c.

$60

d. $600

e. $1,200

econ 001 final spring 2014

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