Exam
Name___________________________________

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question. 

1) 

Microeconomics is the branch of economics that deals with which of the following topics?  

1) 

_______ 

A) 

The behavior of individual consumers  

B) 

Unemployment and interest rates  

C) 

The behavior of individual firms and investors  

D) 

B and C 

E) 

A and C 

2) 

A Rolling Stones song goes  "You can't always get what you want."  This echoes an important theme from microeconomics.  Which of the following statements is the best example of this theme?  

2) 

_______ 

A) 

Firms in market economies have limited financial resources.  

B) 

Workers in planned economies, such as North Korea, do not have much choice over jobs.  

C) 

Consumers must make the best purchasing decisions they can, given their limited incomes.    

D) 

Workers do not have as much leisure as they would like, given their wages and working conditions.  

3) 

Economics is about the allocation of scarce resources.  Which of the following is NOT an example of economic scarcity?  

3) 

_______ 

A) 

If Borders Books increases the number of titles it carries, it will have to reallocate shelf space to accommodate the new titles.  

B) 

If General Motors increases its production of SUV's this year, it will have to spend more on advertising.  

C) 

If Steve goes to see the movie Master and Commander on Saturday, he will not be able to afford buying ice cream.  

D) 

If Jenny studies for her economics quiz this evening, she will not have time to walk her dog.  

4) 

A valid and useful theory of gold prices  

4) 

_______ 

A) 

Need not exactly predict every change in gold prices.  

B) 

May be founded on simplifying assumptions.  

C) 

Helps to predict the movements of gold prices over time.  

D) 

all of the above.  

E) 

none of the above.  

5) 

Use the following two statements to answer this question 
	I. 	Economic theories are developed to explain observed phenomena by
 		deducing from a set of basic rules and assumptions. 
	II.	Economic theories use value judgments to determine which people ought to pay more taxes.  

5) 

_______ 

A) 

I is false, and II is true.  

B) 

Both I and II are true.  

C) 

Both I and II are false.  

D) 

I is true, and II is false.  

6) 

Which of the following is a positive statement?  

6) 

_______ 

A) 

The President of the United States ought to be elected by a direct vote of the American people rather than the Electoral College.  

B) 

Because many adults cannot afford to go to college, tax credits for tuition should be introduced.  

C) 

A fundamental assumption of the economic theory of consumer behavior is that consumers always prefer having more of any good to having less of it.  

D) 

all of the above.  

E) 

none of the above.  

7) 

Which of the following is a normative statement?  

7) 

_______ 

A) 

Presidential candidates should not be given funds from the federal government to run campaigns.  

B) 

State governments ought not subsidize corporations by training welfare recipients.  

C) 

The taxes paid by the poor should be reduced in order to improve the income distribution in the U.S.  

D) 

The sea otter should not be allowed to spread into Southern California coastal waters, because it will reduce the value of fisheries.  

E) 

all of the above.  

8) 

Which of the following is a positive statement?  

8) 

_______ 

A) 

The minimum wage should not be increased, because to do so would increase unemployment.  

B) 

Intermediate microeconomics should be required of all economics majors in order to build a solid foundation in economic theory.  

C) 

Smoking should be restricted on all airline flights.  

D) 

All automobile passengers should be required to wear seatbelts in order to protect them against injury.  

E) 

none of the above.  

9) 

Which of the following is a positive statement?  

9) 

_______ 

A) 

When the Federal government sells bonds, interest rates rise and private investment is reduced.  

B) 

When the price of a good goes up, consumers buy less of it.  

C) 

When the price of a good goes up, firms produce more of it.  

D) 

all of the above.  

E) 

none of the above.  

10) 

Which of the following statements is false?  An economic analysis of carbon taxes can  

10) 

______ 

A) 

Predict the effect on unemployment in West Virginia coal mining communities.  

B) 

Calculate the increase in costs faced by coal-using industries.  

C) 

Conclude that such taxes should be imposed to benefit future generations.  

D) 

Present a trade-off of the costs and benefits of different levels of carbon taxes.  

E) 

Compare the likely reductions in medical expenditures on diseases caused by smog.  

11) 

Use the following two statements to answer this question 
	I.	In order to answer normative questions, it is necessary to make value judgments. 
	II.	In order to conduct positive economic analysis, it is always necessary
		to use empirical evidence in addition to economic theories.  

11) 

______ 

A) 

I is correct, II is incorrect.  

B) 

I and II are incorrect.  

C) 

I is incorrect, II is correct.  

D) 

Both I and II are correct.  

12) 

________ questions have to do with explanation and prediction, ________ questions have to do with what ought to be.  

12) 

______ 

A) 

Affirmative; positive.  

B) 

Positive; negative.  

C) 

Econometric; theoretical.  

D) 

Positive; normative.  

E) 

Negative; normative.  

13) 

Which of the following markets has the most restrictive geographic boundary?  

13) 

______ 

A) 

The market for retail gasoline.  

B) 

The market for beef.  

C) 

The market for housing.  

D) 

The market for gold.  

14) 

An investor can acquire shares of stock in Acme Corporation either by purchasing shares on the stock market or by purchasing a bond that is convertible into shares of Acme stock.  After careful study, the investor discovers that she can profit by purchasing the bond, converting it to shares of stock, and selling the stock.  This practice is called  

14) 

______ 

A) 

Profiteering.  

B) 

Arbitrage.  

C) 

Selling short.  

D) 

Dumping.  

E) 

none of the above.  

15) 

Use the following two statements to answer this question 
	I.	A market is a collection of buyers and sellers that, through actual or potential interactions, 
		determine the price for a product or set of products. 
	II.	An industry is a collection of markets for similar or closely related products.  

15) 

______ 

A) 

I is false, and II is true.  

B) 

Both I and II are true.  

C) 

I is true, and II is false.  

D) 

Both I and II are false.  

16) 

In a perfectly competitive market  

16) 

______ 

A) 

There is a cartel.  

B) 

No single buyer or seller can significantly affect the market price.  

C) 

There is a single seller.  

D) 

There are a few buyers.  

17) 

Boeing Corporation and Airbus Industries are the only two producers of long-range commercial aircraft.  This market is not perfectly competitive because  

17) 

______ 

A) 

Each company can significantly affect prices.  

B) 

Airbus cannot sell aircraft to the United States government.  

C) 

Each company has annual sales over $10 billion.  

D) 

Airbus receives subsidies from the European Union.  

E) 

all of the above.  

18) 

Which of the following are examples of perfectly competitive markets?  

18) 

______ 

A) 

The stock market  

B) 

Gold  

C) 

Textiles  

D) 

Wheat  

E) 

all of the above.  

19) 

Although the U. S. airline industry has only a relatively small number of sellers, the market is nevertheless highly competitive.  The reason is that  

19) 

______ 

A) 

The number of buyers is very large.  

B) 

Most airline routes are served by relatively many sellers.  

C) 

Due to fierce competition, no firm has significant control over prices.  

D) 

Due to fierce competition, no firm has significant control over the quantity supplied.  

20) 

Washington D.C.'s metro train system is being extended further into the neighboring states of Maryland and Virginia, thereby reducing the cost of commuting into the United States' capital.  Other things being held constant, this can be expected to  

20) 

______ 

A) 

Have no effect on the extent of the market for housing around Washington D.C. as the range of houses available has not changed.  

B) 

Increase the extent of the market for housing around Washington D.C.  

C) 

Have no effect on the extent of the market for housing around Washington D.C. as property taxes have not changed.  

D) 

Decrease the extent of the market for housing around Washington D.C.  

E) 

Have no effect on the extent of the market for housing around Washington D.C. as the actual geography remains unchanged.  

21) 

Why is market definition important for economic decision making?  

21) 

______ 

A) 

A firm is interested in knowing its actual and potential competitors.  

B) 

A firm will define its market in order to maximize revenue  

C) 

Government regulators are interested in knowing the effect of mergers and acquisitions on competition and prices in a particular market.  

D) 

Both A and C 

E) 

Both A and B  

22) 

Which of the following features are relevant for determining the extent of a market?  

22) 

______ 

A) 

Its geographical boundaries.  

B) 

Technological innovations that would reduce the cost of production.   

C) 

The range of products to be included in it.  

D) 

Both A and B  

E) 

Both A and C 

23) 

Which of the following statements about markets and industries is TRUE?  

23) 

______ 

A) 

A market includes sellers but not buyers.  

B) 

An industry includes sellers but not buyers.  

C) 

A market includes buyers but not sellers.  

D) 

An industry includes buyers but not sellers.  

24) 

Although there are many reasons why a market can be non-competitive, the principal economic difference between a competitive and a non-competitive market is  

24) 

______ 

A) 

The annual sales made by the largest firms in the market.  

B) 

The size of the firms in the market.  

C) 

The number of firms in the market.  

D) 

The presence of government intervention.  

E) 

The extent to which any firm can influence the price of the product.  

25) 

Which of the following could not possibly be included in the same market as Coke?  

25) 

______ 

A) 

Gatorade.  

B) 

Pepsi.  

C) 

Milk.  

D) 

Bread.  

26) 

Use the following statements to answer this question. 
	I.	Political candidates need to know the geographical extent of the market
		for TV commercials in determining how to reach the target number of
		eligible voters with the smallest possible expenditure. 
	II.	The geographical extent of the market for gasoline in Texas will
		determine whether an oil company drills for oil there.  

26) 

______ 

A) 

I and II are true.  

B) 

I is false, and II is true.  

C) 

I is true, and II is false.  

D) 

I and II are false.  

27) 

Which of the following assertions, if proven true in a court of law, would help Archer-Daniels-Midland, a maker of corn syrup, in its attempt to acquire another corn syrup producer, the Clinton Corn Processing Company?  

27) 

______ 

A) 

Archer-Daniels-Midland produces many other different agricultural products, in addition to corn syrup.  

B) 

Archer-Daniels-Midland and the Clinton Corn Processing Company together hold only a small share of the market for sweeteners including corn syrup and sugar.  

C) 

There are no good substitutes for corn syrup for any of its major uses.  

D) 

Archer-Daniels-Midland is a dominant producer of corn syrup.  

28) 

Use the following statements to answer this question. 
	 I.	If the extent of a market is broader, it is less likely that firms in the
		market can influence the market price. 
	II.	In determining whether two different products belong to the same
		market, it is necessary to know whether the two products can be 
		used as substitutes for each other.  

28) 

______ 

A) 

I is false, and II is true.  

B) 

I is true, and II is false.  

C) 

I and II are both true.  

D) 

I and II are both false.  

29) 

The "constant dollar" price is  

29) 

______ 

A) 

The real price of a good. 

B) 

The "current dollar" price adjusted for inflation.  

C) 

The nominal price of a good adjusted for inflation.  

D) 

all of the above.           

E) 

none of the above.  

30) 

What does it mean when the CPI is higher this year than last?  

30) 

______ 

A) 

The rate of inflation has increased.  

B) 

Real prices have decreased.  

C) 

There has been inflation since last year.  

D) 

Real prices have increased.  

31) 

The price of a taco was $0.29 in 1970 and $0.99 in 1993.  The CPI was 38.8 in 1970 and 144.0 in 1993.  The 1993 price of a taco in 1970 dollars is  

31) 

______ 

A) 

$0.27.  

B) 

$0.34.  

C) 

$0.08.  

D) 

$3.67.  

32) 

Since last year, the price of gold has risen from $120 to $420.  What annual inflation rate would leave the real price of gold unchanged over the last twelve months?  

32) 

______ 

A) 

Approximately 71%.  

B) 

40%.  

C) 

Approximately 29%.  

D) 

250%.  

E) 

none of the above.  

33) 

Over the past year price inflation has been 10%, but the price of a used Ford Escort has fallen from $6,000 to $5,000.  The real price of a Ford Escort has fallen by  

33) 

______ 

A) 

12%.  

B) 

17%  

C) 

24%  

D) 

20%.  

E) 

32%.  

34) 

Which of the following is NOT an example of ways in which microeconomic analysis can help Ford Motor Company its in corporate decision making?  

34) 

______ 

A) 

Predicting how competitors will react to the firm's pricing strategy  

B) 

Forecasting the effect of an oil price increase on demand for SUVs  

C) 

Determining how many automobiles to produce in order to maximize profits  

D) 

Forecasting the effect of Ford's hiring patterns on unemployment  

E) 

Forecasting demand for new automobiles  

35) 

Which of the following is NOT an examples of ways in which microeconomic analysis can help in designing environmental policy?  

35) 

______ 

A) 

Lobbying consumers and firms to reduce consumption of energy  

B) 

Determining the optimal level of vehicle tailpipe emissions standards  

C) 

Examining the tradeoffs between ecological benefits of environmental legislation and its impacts on consumers' standard of living  

D) 

Designing laws to provide incentives for firms to implement clean technologies in new vehicles  

ESSAY.  Write your answer in the space provided or on a separate sheet of paper. 

36) 

Suppose the Social Security Administration would like to guarantee the purchasing power of social security payments to the elderly does not diminish.  That is, the real value of the payments does not decrease.  The CPI in 1990 was 130.7 and the CPI in 1998 was 163.0.  How much does the Social Security Administration need to increase payments from 1990 to 1998 to accomplish this objective?  

37) 

Suppose the minimum wage was $0.25 per hour in 1938 and the CPI in that year was 11.5.  If the CPI in 1990 was 130.7, what is the real value of the 1938 minimum wage in terms of 1990 dollars?  The real value of the 1990 minimum wage in terms of 1990 dollars is $4.25.  How much has the real value of the minimum wage declined since 1938?  

38) 

The reward for the capture of Jesse James was $500.00 in 1881.  Suppose the CPI in 1881 was 0.25.  What is the real value of the reward in 1990 dollars if the CPI was 130.7 in 1990?  

39) 

The CPI in 1970 was 38.8 and in 1998 the CPI was 163.0.  If the real value of a 1970 gallon of milk in terms of 1998 dollars is $0.70, what was the nominal price of milk in 1970?  

40) 

The nominal price of milk was $2.25 in 1998 while the CPI was 163.0 that year.  Also, the CPI in 1970 was 38.8.  What was the real value of 1998 milk in terms of 1970 dollars?  

41) 

The nominal price of a 1990 laptop was $3,500 and the CPI that year was 130.7.  The nominal price of a laptop in 1998 was $1,600 and the CPI that year was 163.0.  What is the real price of a 1998 laptop in terms of 1990 dollars?  By what percent has the real price of laptops changed?  

42) 

The price to attend a NBA basketball game in Chicago is $55 while the CPI in Chicago is 153.  The CPI in Charlotte is 108 while the price to attend a NBA basketball game is $52.  Which city offers a smaller real cost of attending a NBA basketball game?  

43) 

The first column of the following table describes the price movement of AOL corporation stock over the last 5 years.  The second column gives the period's consumer price index.  Calculate the real value of the stock for each time period using year 5 as the base year.  If you purchased $1,000 worth of AOL Corporation in year 1, what has happened to the purchasing power of your original $1,000 investment when you sell the stock in year 5? 

Year	AOL	CPI	
1996	$4.00	147.8	
1997	$3.84	155.3	
1998	$7.00	163.0	
1999	$37.00	165.4	
2000	$70.00	172.1	

 

44) 

The following is a list of prices for housing in five different countries along with their CPI.  For which country is the real cost of housing declining?  Use year 2 as the base year in your answer. 

 

45) 

For each city across the U.S., economists construct a price index for a similar basket of goods.  In Los Angeles the index is 127.3 and in Dallas the index is 94.8.   If you have been offered $137,000 for a job in Los Angeles and $117,000 for a similar job in Dallas, which job affords you the highest purchasing power of the bundle of goods in the price index?  Use the Los Angeles value as the base.  

 

1) 

E 

2) 

C 

3) 

B 

4) 

D 

5) 

D 

6) 

C 

7) 

E 

8) 

E 

9) 

D 

10) 

C 

11) 

A 

12) 

D 

13) 

C 

14) 

B 

15) 

C 

16) 

B 

17) 

A 

18) 

E 

19) 

C 

20) 

B 

21) 

D 

22) 

E 

23) 

B 

24) 

E 

25) 

D 

26) 

C 

27) 

B 

28) 

C 

29) 

D 

30) 

C 

31) 

A 

32) 

D 

33) 

C 

34) 

D 

35) 

A 

36) 

The change in the general price level is   Thus, the level of payments in 1998 need to be  

37) 

W(1938) = 130.7($0.25)/11.5 = $2.84  

38) 

130.7($500)/0.25 = 130.7($2,000) = $261,400.  

39) 

38.8($0.70)/163 = $0.17.  

40) 

38.8($2.25)/163 = $0.54.  

41) 

130.7($1,600)/163 = $1,283.  Percent decline in the real value of laptops  

42) 

Chicago real value  The real value of a game in Charlotte exceeds the real value of a game in Chicago.  Chicago offers a smaller real cost of attending a game.  

43) 

Year	Real AOL Stock Price in 2000 Dollars	
1996	$4.66	
1997	$4.26	
1998	$7.39	
1999	$38.50	
2000	$70.00	

The real value of a year 1996 dollar in 2000 is   I would have bought 250 shares of AOL at 1996 prices (ignoring transaction costs) with the $1,000.  The value of the stock in the year 2000 is   The change in my purchasing power is  That is, my purchasing power from investing in the stock rises by 1,409%.  

44) 

The real cost of housing in Spain has decreased.  The real cost of year 1 housing in year 2 is   This exceeds the real cost of year 2 housing in year 2, $57.00.  Thus, housing costs have declined in Spain.   

45) 

Real value[Dallas] = 127.3($117,000)/94.8 = $157,111.  This exceeds the real $137,000 salary for the job in Los Angeles.  The Dallas job entails higher purchasing power.