bAM223 final exam 2018

BAM 223

Principles of Economics

Text: Essentials of Economics

Final Examination

Multiple Choice Questions (Enter your answers on the enclosed answer sheet)

1. An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue.

a. variable

b. market

c. model

d. trade-off

Scenario 1-2

Suppose a hat manufacturer currently sells 2,000 hats per week and makes a profit of

$5,000 per week. The plant owner observes, “Although the last 300 hats we produced and sold increased our revenue by $1,000 and our costs by $1,100, we are still making an overall profit of $5,000 per week so I think we’re on the right track. We are producing the optimal number of hats.”

2. Refer to Scenario 1-2. Had the firm not produced and sold the last 300 hats, would its profit be higher or lower, and if so by how much?

a. Its profit will be $1,100 higher.

b. Its profit will be $1,000 lower.

c. Its profit will be $100 lower.

d. Its profit will be $100 higher.

3. The term market in economics refers to:

a. a place where money changes hands.

b. a legal institution where exchange can take place.

c. a group of buyers and sellers of a product and the arrangement by which they come together to trade.

d. an organization which sells goods and services.

Scenario 1-3

Suppose a t-shirt manufacturer currently sells 5,000 t-shirts per week and makes a profit of $10,000 per week. A manager at the plant observes, “Although the last 400 t-shirts we produced and sold increased our revenue by $4,000 and our costs by $4,800, we are still making an overall profit of $10,000 per week so I think we’re on the right track. We are producing the optimal number of t-shirts.”

4. Refer to Scenario 1-3. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 400 t-shirts?

a. marginal cost

b. explicit cost

c. operating cost

d. Any of the above terms are correct.

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BAM 223 Principles of Economics

Final Examination

5. Suppose the U.S. government encouraged new teachers to take jobs in underperforming schools by paying the new teachers a $20,000 bonus. These teachers would be exemplifying the economic idea that:

a. people respond to economic incentives

b. people are rational

c. optimal decisions are made at the margin

d. equity is more important than efficiency

6. Dr. Goldfinger decides to invest in companies which he believes can “improve the productivity and efficiency” of health care services. How can Dr. Goldfinger strive to achieve this productive efficiency?

a. by investing in companies that produce goods and services at the lowest possible cost

b. by investing in companies that produce up to the point where the marginal benefit of the last unit produced is equal to the marginal cost of producing it.

c. by investing in companies that fairly distribute their products and services

d. by investing in companies that produce goods and services based on consumer preferences

7. How are the fundamental economic decisions determined in Canada?

a. The United Nations decides because Canada is a developing economy.

b. The government decides because Canada is a centrally planned economy.

c. Individuals, firms, and the government interact in a market to make these economic decisions.

d. These decisions are made by the country’s elders who have had much experience in answering these questions.

8. Which of the following is a macroeconomics question?

a. How is the production quantity of snowboards determined?

b. What factors determine the price of electronic cigarettes?

c. What determines the growth rate of gross domestic product?

d. What determines the salaries of Wall Street executives?

9. Scarcity:

a. stems from the incompatibility between limited resources and unlimited wants

b. can be overcome by discovering new resources

c. can be eliminated by rationing products

d. is a bigger problem in market economies than in socialist economies

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BAM 223 Principles of Economics

Final Examination

10. The principle of opportunity cost is that:

a. in a market economy, taking advantage of profitable opportunities involves some money cost

b. the economic cost of using a factor of production is the alternative use of that factor that is given up

c. taking advantage of investment opportunities involves costs

d. the cost of production varies depending on the opportunity for technological application

11. A production possibilities frontier with a bowed outward shape indicates:

a. the possibility of inefficient production

b. constant opportunity costs as more and more of one good is produced

c. increasing opportunity costs as more and more of one good is produced

d. decreasing opportunity costs as more and more of one good is produced

Figure 2-4

Figure 2-4 shows various points on three different production possibilities frontiers for a nation.

12. Refer to Figure 2-4. Consider the following events:

(a) an increase in the unemployment rate

(b) general technological advancement

(c) decrease in consumer wealth

Which of the events listed above could cause a movement from X to V?

a. a only

b. a and b only

c. b and c only

d. a, b, and c

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BAM 223 Principles of Economics

Final Examination

13. You have an absolute advantage whenever you:

a. are better educated than someone else

b. can produce something at a lower opportunity cost than others

c. prefer to do one particular activity

d. can produce more of something than others with the same resources

Table 2-5

Production choices for Nadia’s Neckware

Choice Quantity of Ascots Quantity of Bowties

Produced Produced

A 32 0

B 24 6

C 16 12

D 8 18

E 0 24

14. Refer to Table 2-5. Assume Nadia’s Neckware only produces ascots and bowties. A combination of 16 ascots and 6 bowties would appear:

a. along Nadia’s production possibilities frontier

b. inside Nadia’s production possibilities frontier

c. outside Nadia’s production possibilities frontier

d. at the horizontal intercept of Nadia’s production possibilities frontier

15. If the best surgeon in town is also the best at cleaning swimming pools, then according to economic reasoning, this person should:

a. specialize in being a surgeon because its opportunity cost is lower

b. specialize in cleaning swimming pools because it is more labor-intensive

c. split his time evenly between being a surgeon and cleaning swimming pools

d. should pursue the activity he enjoys more

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BAM 223 Principles of Economics

Final Examination

Figure 2-12

Figure 2-12 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two goods, cotton and cashews.

16. Refer to Figure 2-12. Which country has a comparative advantage in the production of cotton?

a. Pakistan

b. They have equal production abilities.

c. Indonesia

d. neither country

17. Refer to Figure 2-12. Which country has a comparative advantage in the production of cashews?

a. They have equal production abilities.

b. Pakistan

c. Indonesia

d. neither country

18. If a commercial dairy farm wants to raise funds to purchase feeding troughs, it does so in the

a. output market.

b. product market.

c. factor market.

d. dairy products market.

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BAM 223 Principles of Economics

Final Examination

Figure 2-19

19. Refer to Figure 2-19. Which two arrows in the diagram depict the following transaction: LaDonna sells 20 pairs of sunglasses at the Oakley store.

a. J and G

b. K and G

c. K and M

d. J and M

20. All of the following countries come close to the free market benchmark except:

a. Singapore

b. Canada

c. North Korea

d. Germany

Figure 3-1

21. Refer to Figure 3-1. An increase in the price of a substitute would be represented by a movement from

a. A to B.

b. B to A.

c. D1 to D2.

d. D2 to D1.

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BAM 223 Principles of Economics

Final Examination

22. In June, buyers of titanium expect that the price of titanium will fall in July. What happens in the titanium market in June, holding everything else constant?

a. The quantity demanded decreases.

b. The demand curve shifts to the left.

c. The demand curve shifts to the right.

d. The quantity demanded increases.

23. Suppose that when the price of strawberries decreases, Simone increases her purchase of whipped cream. To Simone:

a. strawberries and whipped cream are substitutes

b. strawberries and whipped cream are normal goods

c. strawberries are a normal good and whipped cream is an inferior good

d. strawberries and whipped cream are complements

24. What is the difference between an increase in supply and an increase in quantity supplied?

a. There is no difference between the two terms; they both refer to a shift of the supply curve.

b. An increase in supply means the supply curve has shifted to the right while an increase in quantity supplied refers to a movement along a given supply curve in response to an increase in price.

c. An increase in supply means the supply curve has shifted to the right while an increase in quantity supplied means at any given price supply has increased.

d. There is no difference between the two terms; they both refer to a movement along a given supply curve.

25. Which of the following is the correct way to describe equilibrium in a market?

a. At equilibrium, quantity demanded equals quantity supplied.

b. At equilibrium, market forces no longer apply.

c. At equilibrium, scarcity is eliminated.

d. At equilibrium, demand equals supply.

26. Assume that the price for swimming pool maintenance services has risen and sales of these services have fallen. One can conclude that:

a. the law of supply has been violated

b. the demand for swimming pool maintenance services has increased

c. the supply of swimming pool maintenance services has decreased

d. swimming pool maintenance services are becoming more technologically advanced

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BAM 223 Principles of Economics

Final Examination

27. Suppose a drought resulted in a major reduction in the California lettuce crop. In the market for lettuce, the:

a. supply curve shifted to the left resulting in an increase in the equilibrium price

b. supply curve shifted to the left resulting in a decrease in the equilibrium price

c. demand curve shifted to the right resulting in an increase in the equilibrium price

d. demand curve shifted to the left resulting in a decrease in the equilibrium price

Figure 3-5

28. Refer to Figure 3-5. At a price of $20, the quantity sold:

a. is 0 units

b. is 4 units

c. is 8 units

d. cannot be determined

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BAM 223 Principles of Economics

Final Examination

Figure 3-8

29. Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D2 and S2 (point E). Which of the following changes would cause the equilibrium to change to point A?

a. A positive change in the technology used to produce apples and a decrease in the price of oranges (a substitute for apples)

b. An increase in the wages of apple workers and a decrease in the price of oranges (a substitute for apples)

c. An increase in the number of apple producers and a decrease in the number of apple trees as a result of disease

d. A decrease in the wages of apple workers and an increase in the price of oranges (a substitute for apples)

30. In New York City, about 1 million apartments are subject to rent control by the local government. Rent control:

a. is a government policy which limits apartment rental to those people whose incomes are less than $50,000 per year

b. only applies to those apartments which are owned and rented out by the local government

c. is a price floor which sets a minimum rent for apartments

d. puts a legal limit on the rent that landlords can charge for an apartment

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BAM 223 Principles of Economics

Final Examination

Table 4-1

Consumer Willingness to Pay

Tom $40

Dick 30

Harriet 25

31. Refer to Table 4-1. The table above lists the highest prices three consumers, Tom, Dick and Harriet, are willing to pay for a short-sleeved polo shirt. If the price of the shirts falls from $28 to $20:

a. Tom will buy two shirts while Dick and Harriet will each buy one shirt.

b. consumer surplus increases from $14 to $35.

c. consumer surplus will increase from $70 to $95.

d. Harriet will receive more consumer surplus than Tom or Dick.

Figure 4-1

Figure 4-1 shows Arnold’s demand curve for burritos.

32. Refer to Figure 4-1. What is the total amount that Arnold is willing to pay for 2 burritos?

a. $2.00

b. $4.50

c. $7.50

d. $10.00

33. Refer to Figure 4-1. If the market price is $3.00, what is the maximum number of burritos that Arnold will buy?

a. 0

b. 2

c. 3

d. 4

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BAM 223 Principles of Economics

Final Examination

Table 4-6

Marko's Polos Marginal Cost

(dollars)

1st shirt $7

2nd shirt 10

3rd shirt 15

4th shirt 20

34. Refer to Table 4-6. The table above lists the marginal cost of polo shirts by Marko’s, a firm that specializes in producing men’s clothing. What will happen if the price of polo shirts decreases from $15 to $10?

a. there will be a shortage of polo shirts

b. the marginal cost of producing the third polo shirt will increase to $25

c. consumers will buy no polo shirts

d. producer surplus will fall from $13 to $3

Figure 4-6

Figure 4-6 shows the market for granola. The market is initially in equilibrium at a price of P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2 in order to raise the price to P2.

35. Refer to Figure 4-6. What area represents consumer surplus at the equilibrium price of P1?

a. A + B + C + D + E

b. D + E

c. A + B + C

d. A

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BAM 223 Principles of Economics

Final Examination

36. The sum of consumer surplus and producer surplus is equal to:

a. total profit

b. the economic surplus

c. zero

d. the deadweight loss

Figure 4-10

Figure 4-10 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0.

37. Refer to Figure 4-10. Suppose that instead of a price ceiling, the government imposed a price floor of R1. What is the area representing producer surplus after the imposition of the price floor?

a. B + D + F

b. C + E

c. A

d. B + C + D + E + F

38. Assume that production from an electric utility caused acid rain and that the government imposed a tax on the utility equal to the cost of the acid rain. This is an example of:

a. the Coase Theorem

b. a Pigovian subsidy

c. a transaction cost

d. a Pigovian tax

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BAM 223 Principles of Economics

Final Examination

39. A contract under which a buyer agrees to make payments in exchange for the provider agreeing to pay some or all of the buyer’s medical bills is referred to as:

a. a fee-for-service plan

b. health insurance

c. the Affordable Care Act

d. a deductible

40. In the United States in 2012, of those companies employing more than 200 workers that offer health care to those workers, about ________ percent of employees accept the coverage.

a. 10

b. 36

c. 62

d. 98

41. Typically, the higher the level of income per person in a country, the higher the level of spending per person on health care. This relationship between income and spending indicates that health care is a:

a. necessity

b. inferior good

c. normal good

d. luxury

42. In the United States, health care spending per person based on income per person is

________ the average for most other countries.

a. significantly lower than

b. slightly lower than

c. comparable to

d. significantly higher than

43. Of the following high-income countries, which has the highest number of CT scanners per 1 million population?

a. Canada

b. Japan

c. the United Kingdom

d. the United States

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BAM 223 Principles of Economics

Final Examination

44. Consumers usually pay less than the total cost of medical treatment because:

a. the federal government pays for most medical procedures

b. competition forces doctors and hospitals to charge prices that do not cover their costs

c. a third party, usually an employer, often pays most of the bill

d. a third party, usually an insurance company, often pays most of the bill

45. Because consumers who have insurance provided by their employers usually only pay a deductible for a visit to the doctor’s office:

a. they demand a larger quantity of health care services than they would if they paid a price that better represented the true cost of providing the service

b. the insurance companies provide a larger quantity of health care services than they would if the consumer paid a price that better represented the true cost of providing the service

c. they demand a smaller quantity of health care services than they would if they paid a price that better represented the true cost of providing the service

d. the doctors supply a smaller quantity of health care services than they would if the consumer paid a price that better represented the true cost of providing the service

46. Basic supply and demand analysis indicates that having firms rather than the government provide health insurance to workers:

a. changes neither the composition of the compensation that firms pay nor its level

b. does not change the composition of the compensation that firms pay, but does change its level

c. changes both the composition of the compensation that firms pay and its level

d. changes the composition of the compensation that firms pay, but does not change its level

47. Which type of businesses earns the majority of profits in the United States?

a. sole proprietorships

b. partnerships

c. corporations

d. None of the above.

48. Economists refer to the conflict between the interests of shareholders and the interests of top management as:

a. a liability problem

b. a stock-equity problem

c. a principal-agent problem

d. a financial intermediary problem

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BAM 223 Principles of Economics

Final Examination

49. What takes place in the indirect finance market?

a. Part ownership of corporations is sold in the form of stocks.

b. Corporate and government bonds are sold to savers.

c. Government purchases of buildings and equipment are sold to the highest bidder.

d. Deposits of savers are accepted and loans made to borrowers.

50. Southwest Airlines wants to raise $20 million to finance the renovation of their corporate offices, and the company wishes to raise the funds through direct finance. Which of the following methods could it use?

a. It could issue $20 million in stocks.

b. It could sell $20 million in bonds.

c. It could borrow $20 million from a bank.

d. It could choose either A or B.

51. Donnie’s Donuts incurs $450,000 per year in explicit costs and $200,000 in implicit costs. The bakery earns $800,000 in revenues and has $2 million in net worth. Based on this information, what is the accounting profit for Donnie’s Donuts?

a. $350,000

b. $150,000

c. $600,000

d. $1.2 million

52. Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, the explicit costs of his business are $10,000, and the opportunity costs of his business are $18,000 per year. What are the implicit costs of his business?

a. $8,000

b. $18,000

c. $24,000

d. $32,000

53. When someone takes out a mortgage loan to buy a house, the mortgage lender can take possession of the house and sell it if the borrower defaults by failing to make payments on the loan because the house is being pledged as ________ for the loan.

a. insurance

b. collateral

c. a liability

d. goodwill

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BAM 223 Principles of Economics

Final Examination

54. Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car. Why?

a. The marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars.

b. Car buyers are irrational.

c. Luxury cars cost a lot more than non-luxury cars.

d. The total utility of less expensive cars is greater than that of luxury cars.

Table 7-2

Quantity of Soup Total Utility Quantity of Total Utility

(cups) Sandwiches

1 40 1 45

2 60 2 75

3 72 3 102

4 82 4 120

5 88 5 135

6 90 6 145

Table 7-2 above shows Keira’s utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods.

55. Refer to Table 7-2. What is Keira’s marginal utility per dollar spent on the third cup of soup?

a. 72 units of utility

b. 36 units of utility

c. 12 units of utility

d. 6 units of utility

56. Suppose the marginal utilities for the first three cans of soda are 100, 80 and 60, respectively. What is the total utility received from consuming 2 cans of soda?

a. 20

b. 80

c. 90

d. 180

89. Refer to Table 13-16. Looking at the table above, real wages ________ from 2011 to 2012, and real wages ________ from 2012 to 2013.

a. rose; fell

b. fell; rose

c. fell; fell

d. rose; rose

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BAM 223 Principles of Economics

Final Examination

90. You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is 5%. As a result, you will receive ________ at the end of the year, but that money has a purchasing power of ________.

a. $5,050; $5,025

b. $5,100; $5,050

c. $6,000; $5,500

d. $5,500; $5,250

91. If inflation is completely anticipated, ___________.

a. lenders lose in the economy

b. firms lose because they incur menu costs

c. borrowers lose in the economy

d. no one loses in the economy

Article Summary

According to the Office for National Statistics in the United Kingdom, productivity in the UK in 2012 was well below the average of the G7 countries, only faring better than Japan. The G7 is a group of the seven most industrialized countries, and includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. Compared to the G7 average, the UK was 16% less productive per hour worked, and output was 19% worse when measured on a per worker basis. The productivity gap was the largest for the UK since 1994. Worker productivity has increased in all of the G7 nations except for the UK since 2007, where it has fallen by two percentage points. The most productive workers were in the United States, where workers were 29 percentage points more productive per hour worked than in the UK.

Source: “UK workers much less productive than others in the G7,” Guardian, September 18, 2013.

92. Refer to the Article Summary. Unlike in the UK, labor productivity in the other G7 nations has increased since 2007. An increase in labor productivity:

a. allows the average consumer to increase consumption

b. will create short-run, but not long-run, economic growth

c. will increase output and decrease wages in the long run

d. will increase the labor force participation rate

93. Actual real GDP will be above potential GDP if:

a. firms are producing below capacity

b. inflation is rising

c. firms are producing at capacity

d. firms are producing above capacity

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BAM 223 Principles of Economics

Final Examination

94. Labor productivity will increase if the quantity of ________ increases and ________.

a. capital per hour worked; technology improves

b. labor per unit of capital; immigration increases while capital is fixed

c. capital per hour worked; immigration increases while capital is fixed

d. labor per unit of capital; technology improves

95. An increase in government purchases, ceteris paribus, will:

a. increase the supply of loanable funds

b. increase public saving

c. reduce real GDP

d. reduce investment

96. Purchases of which of the following goods would be dramatically reduced during a recession?

a. gasoline

b. ink pens

c. tomatoes

d. refrigerators

97. Changes in the price level:

a. decrease the level of aggregate supply in the long run

b. increase the level of aggregate supply in the long run only at very high levels of output

c. do not affect the level of aggregate supply in the long run

d. increase the level of aggregate supply in the long run

98. Workers and firms both expect that prices will be 3% higher next year than they are this year. As a result, ___________.

a. workers will be willing to take lower wages next year

b. the short-run aggregate supply curve will shift to the left as wages increase

c. the purchasing power of wages will rise if wages increase by 3%

d. aggregate demand will increase by 3%

99. Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

a. Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.

b. Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.

c. Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.

d. Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.

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BAM 223 Principles of Economics

Final Examination

100. When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred.

a. stagflation

b. an automatic destabilizer

c. a housing bubble

d. a supply shock

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