Economics 101-300

Winter 2006
Final Examination
April 24th, 2006
I am the person registered for this class and I am filling in my own scantron form and no
other.
I have not conversed, exchanged notes, looked at other forms, allowed another student to
look at my form, or in any other way cheated while taking this examination.
I have not used a graphing calculator during this examination. I have used an arithmetic
calculator only (or none). I am not sharing calculators.
This examination, and the scantron form I am submitting, is solely my work.
_____________________________________________
Your first and last name, printed
_____________________________________________
Your signature
__________________________________
Your section number (301..312)

scratch sheet of paper for scribbling

Economics 101-300
Winter, 2006
Final Exam, April 24th, 2006
Form 1
INSTRUCTIONS: Please do not talk with any other students and do not share
papers or calculators. Please remember to fill out the honor code form and detach it
from your exam. You will turn in only the honor code form and your scantron
form. You may use extra sheet of paper or the back side of pages of the exam as
scratch paper. Please read each question carefully. Using the scantron form, fill in the
letter that you choose to be the correct answer. Please make sure that all of the
appropriate identifying information has been filled in on the scantron form. We will
not grade scantrons without names, UM id numbers, form numbers, and section
numbers (between 301 and 312). If you have a question, raise your hand and we
will do our best to get to you quickly and answer your question (if we can).
1) When Sherrie lectures about economics, I like to think about:1
a)
b)
c)
d)
e)

my girlfriend or boyfriend.
the party Im going to the next weekend.
what fun I had on spring break
good times Im going to have this summer.
how important an understanding of economics is to rational policy making.

2) In 2005, the competitive equilibrium price of a pickle was $2. Only one thing about
the pickle market changed in 2006. Phot quit grad school and built a gigantic new
pickle factory in South Carolina. Which of the following statements is correct
following this event?
a)
b)
c)
d)
e)

There is a shortage of pickles and consumer surplus is higher than before.

There is a surplus of pickles and consumer surplus is lower than before.
There is no shortage of pickles and consumer surplus is higher than before.
There is a surplus of pickles and we cant say what happened to consumer surplus.
There is no shortage of pickles and consumer surplus is lower than before.

3) Choose the best description of the economic concept of the Long Run:
a) The Long Run is a time period long enough so that firms can adjust the number of
workers but not the amount of capital they employ.
b) The Long Run is a time period long enough so that firms can adjust the amounts
of all the various inputs they use to produce output.
c) The Long Run is at least10 years.
d) The Long Run is never shorter than about 30 years.
1

There is no incorrect answer to problem # 1. Have a great summer, everyone.

e) The Long Run is a time period long enough so that the market price can fall.
4) Ryan is at Krazy Jims Blimpy Burger (where you can order different numbers of
hamburger paddies on each hamburger) and has to decide how many hamburger
paddies he wants on his hamburger. Each additional hamburger paddy costs $3.
However, Ryan only likes the hamburger paddies if there is a slice of cheese on each
paddy. His utility will reduce to zero if one paddy is without a slice of cheese. Each
slice of cheese costs $2. If the following table represents his utility, how many
hamburger paddies will Ryan order on his hamburger?
Number of paddies
0
1
2
3
4
a)
b)
c)
d)
e)

Utility from hamburger (in $)

0
10
18
23
26

0
1
2
3
4

5) Sherrie is the profit maximizing owner of a local farm which produces organic
tomatoes in the competitive organic tomato industry. Ryan has applied for a job at
Sherries tomato farm. Without Ryan, Sherries farm produces 100 organic tomatoes
a day. If Sherrie hires Ryan, her farm will be able to produce more tomatoes. Under
which of the following completely different scenarios about the market should Sherrie
hire Ryan? The first number tells you the number of organic tomatoes produced each
day if Ryan is hired, the second number tells you the price per tomato, the third tells
you the equilibrium daily wage for farm workers.
a)
b)
c)
d)
e)

110, $2, $25

112, $3, $38
108, $3, $24
105, $4, $22
none of the above

6) Restaurants in Ann Arbor are monopolistic competitors. An unusually large freshman

class arrives in Ann Arbor, and drives up the demand for fast food. We expect that in
the short run profits of Ann Arbor restaurants will ________ and in the long run
profits of Ann Arbor restaurants will __________.
a) rise; return to zero
b) be unchanged; remain unchanged
c) rise; stay high

d) fall; return to zero

e) rise; cannot be determined
7) Wal-Mart employs both male and female workers. Assume that all workers work
exactly the same number of hours per year. Which scenario must be an example of
discrimination against women?
a) Estelle generates $10,000 of revenue per year for Wal-Mart and is paid $10,000
per year.
b) Brian generates $12,000 of revenue per year and Estelle generates $9,000.
c) Brian generates $8,000 of revenue per year and is paid $8,000, while Estelle
generates $6,000 and is paid $6,000.
d) Brian is paid $10,000 per year and Estelle is paid $8,000.
e) Both Brian and Estelle generate $10,000 of revenue per year, and Brian is paid
$10,000 and Estelle is paid $9,000.
8) The market for lemons begins in long run competitive equilibrium, and the
equilibrium price of a lemon is $0.25. Patrick is a lemon farmer, and his farm is just
like all other lemon farms. The U.S. government funds a study on the basis of
recommendations by Olympia Snowe (R-Maine) and the study results suggest that
lemons are sour (coincidentally, Maine has just launched an advertising campaign for
iced mapleade). News of the studys report storms the press and fewer people
demand lemonade. Which of the following must be true as a result of this change in
demand?
a) In the new long run competitive equilibrium there will be fewer lemon farmers.
b) In the new short run equilibrium Patrick will make lower profits from his lemon
farm, but his profits will still be positive.
c) In the new long run competitive equilibrium Patrick will make lower profits than
before.
d) In the new long run competitive equilibrium price will be more than $0.25.
e) In the new long run competitive equilibrium there will be more lemon farmers.
9) Estelle owns a shoelace firm and the shoelace market is competitive. Estelles firm
has a standard cost structure, which means her ATC declines initially at low levels of
output and then rises for higher levels of output. Under which of the following
scenarios should Estelle definitely shut down?
a)
b)
c)
d)
e)

Equilibrium Price=10, ATC=12, AVC = 10, MC is less than 10

Equilibrium Price=12, ATC=12, MC =12
Equilibrium Price=10, ATC=13, MC=12, AVC=12
Equilibrium Price=10, ATC=12, AVC=11, MC=8
Equilibrium Price=8, ATC=20, MC=2

10) In 1786, an uprising of Massachusetts farmers called Shays Rebellion helped

convince people in post-Revolutionary War America of the need for a Constitution to

create a unified federal government. The farmers of Shays Rebellion were upset
because reduced prices for wheat had left them unable to pay their debts. In
economic history, youll learn why the price of wheat fell during this time period.
But you do know what could cause the price of wheat to fall. If wheat and meat are
substitutes, which of the following scenarios must result in reduced prices for wheat?
a) Bad weather for growing wheat and lower prices for meat.
b) Good weather for growing wheat and a shift in preferences towards meat.
c) A new fertilizer improves growth in wheat and a rise in the number of wheat
consumers.
d) Bad weather for growing wheat and higher prices for meat.
e) Increased number of farmers closing their farms and moving to Boston.
11) The picture below depicts the market for electricity in a small country called Corsica.
What is the price (in kilowatts per week) if this natural monopoly maximizes profits?

P
100

60
40
MC
ATC

20
D
50
a)
b)
c)
d)
e)

80

Less than $20.

Exactly $20.
More than $20 but less than $40.
Exactly $40.
More than $40.

12) Because harmful ozone in Mexico City rose three times above the highest level
considered acceptable, the authorities took emergency action to regulate car driving,
which is a source of ozone emissions. According to the new regulation, owners of
cars whose license plate ends with odd numbers can only drive on odd days (Monday,
Wednesday, Friday), while owners of cars with license plates that end in even
numbers can only drive on even days (Tuesday, Thursday, Saturday). Anyone can

drive on Sunday. After six months, harmful ozone was higher than it had been before
the regulation! It is also found that the price of new cars almost doubled. Every car
must have a license plate, and you cant get more than one license plate per car.
Which of the following must have produced this result?
a) The supply of new cars in Mexico City is extremely elastic.
b) Demand for new cars in Mexico city has shifted inward and nothing happened to
supply.
c) Demand for new cars in Mexico city has in from the policy but car retailers have
been importing cool new cars and supply has shifted out.
d) Supply of new cars in Mexico city has shifted outward, but nothing happened to
demand.
e) Gas prices have decreased and taxi drivers went on strike.
13) Rituxan is the first therapeutic antibody approved for the treatment of cancer in the
United States. Genentech has the patent for Rituxin and is a monopolist in its sales.
The table below describes the cost schedule of Genentech for Rituxin and the demand
schedule of consumers. What is the equilibrium price if Genentech is a profit
maximizer?
Quantity
in millions
1
2
3
4
5
6
7
8
9
a)
b)
c)
d)
e)

Cost
Variable Cost in millions of $
(fixed cost = $10 million)
30
41
52
63
74
85
96
107
118

Demand
Price ($)
150
140
130
120
110
100
90
80
70

$130
$130
$90
$150
$80

14) The market for flights to Lone Island is not very competitive. Four large companies
share the market. Their market shares are such that: Northline supplies 10% of all
passenger flights, Southline supplies 10%, Westline supplies 60%, and Eastline
supplies 20%. What is the Hefindahl-Hirschman index (HHI) in this market if
Northline, Eastline and Southline decide to merge?
a) 4,200

b)
c)
d)
e)

4,400
5,200
5,400
6,800

15) In industries where pollution is regulated by government issued tradable pollution

permits, which of the following is always true?
a) After trading, all firms emit the same amounts of pollution
b) Prices for the permits are set by the government
c) Permits are bought by firms whose cost of reducing pollution is relatively high
and sold by firms whose cost of reducing pollution is relatively low
d) Permits are less desirable than taxes to reduce pollution
e) None of the above is always true
16) The introduction of the internet has made it easier for consumers to compare prices
for many goods. Suppose, for instance, that the price of a new textbook at Ulrichs
seems high. On internet sites such as Ebay and Amazon you quickly find a close
substitute, namely, a used textbook, and it is cheap! If everyone else in the market
does what you did (and the demand curve slopes downward and the supply curve
slopes upward), the producer surplus of suppliers of brand-new textbooks would
______
a)
b)
c)
d)
e)

rise.
fall.
become backward bending.
remain unchanged.
cannot be determined.

17) Consider the diagram below. It describes the market for a monopolist who supplies
movie rentals that consumers can watch on the internet at any time at any place. The
monopolist realizes that it might make more profit if it price discriminates. The
monopolist thinks it can perfectly price discriminate because it had its customers take
a survey when they signed up with the firm so it knows quite a bit about the demand
curve. The only catch is that the firm has to pay a fixed cost to dig through its records
and determine the maximum that each of its customers would pay. The monopolist
knows that price discrimination is only worth doing if the extra profit it makes from
price discriminating exceeds the cost of doing so. The monopolist will pay the fixed
cost and perfectly price discriminate

10

MC=ATC

Demand

MR
4
a)
b)
c)
d)
e)

12

Only if the fixed cost is less than $20.

Only if the fixed cost is less than $40.
Only if the fixed cost is less than $16.
Only if the fixed cost is less than $4.
Only if the fixed cost is zero.

18) The mayors office, which is concerned about energy use, has calculated the current
equilibrium number of cars purchased and the socially optimal number of cars
purchased. The mayor concludes that the size of the needed tax increase to reduce the
number of purchased cars will be small. Which of the following facts would lead him
to say this?
a)
b)
c)
d)
e)

The market demand curve for cars is very elastic.

The market demand curve for cars is very inelastic.
The private and social marginal cost schedules are both highly inelastic.
The private marginal cost schedule is highly inelastic.
None of the above.

19) Suppose there are three firms left in the coal industry in West Virginia. Well call
these firms Small, Medium, and Large. Currently, Small pollutes 40 tons per year,
Medium pollutes 60 tons per year, and Large pollutes 120 tons per year. The state
wants to introduce tradable permits as a way to reduce pollution. The states goal is to
reduce total pollution to 120 tons per year. It grants Small 20 permits, Medium 30
permits, and Large 70 permits (one permit allows a firm to pollute one ton per year).
Representatives from all three firms meet in a room to trade the permits for a price.
Each firm faces a constant marginal cost to reduce pollution and the state knows each
firms marginal cost (see table below). What is a possible range of final prices for a
permit if the trading results in an equilibrium?
Marginal Cost to reduce pollution

Small
$10
a)
b)
c)
d)
e)

Medium
$15

Large
$25

$0
$1 to $10
$11 to $14
$15 to $25
More than $25

20) The following table contains information about the oil market in the 1970s and the
early part of this century. Given this information, which of the following statements is
correct?
Oil price/barrel
Barrels (millions)

1978
100
10

1979
120
8

2000
60
20

2001
80
16

a) The demand for oil in the 1970s is more elastic than the demand for oil in the
2000s.
b) The demand for oil in the 1970s is less elastic than the demand for oil in the
2000s.
c) The demand for oil in the 1970s has the same elasticity as the demand for oil in
the 2000s.
d) The demand curve for oil must be linear.
e) The supply curve for oil is the same in both periods.
21) The demand equation for Dell Personal Computers is given by P = 200 5Q. If Dell
wants to maximize its revenue, what will be the equilibrium quantity of computers
sold?
a)
b)
c)
d)
e)

Q = 20
Q = 30
Q = 35
Q = 30
Q = 40

22) During the art fair this summer, the Ben & Jerrys ice cream shop on State Street was
disappointed because revenue was actually lower than during art fair the year before.
Holding everything else constant, which of the following could not be the reason for
this reduction in revenue?
a)
b)
c)
d)
e)

The price of Stucchis ice cream is lower than last year.

The price of Stucchis ice cream is higher than last year.
Peoples income is higher this year and income elasticity for Ben & Jerry is 2.
Peoples income is higher this year and income elasticity for Ben & Jerry is 1.
Peoples income is higher this year and income elasticity for Ben & Jerry is 0.5.

23) Suppose a competitive market is operating at its markets long run equilibrium. What
might a decrease in demand do to a firm with a U-Shape average cost curve?
a)
b)
c)
d)
e)

Increase the marginal cost of production in the short run and long run.
Increase the total cost of production in the long run.
Increase the marginal cost of production in the short run but not the long run.
Decrease the total cost of production in the short run and long run.
Decrease the marginal cost of production in the short run.

24) Suppose a competitive industry is operating at its markets long run equilibrium. One
of the identical firms that produce in this industry reveals to you that Total Cost =
$200 and Marginal Cost = $20. If the demand curve for this industry is given by P =
3000 Q, how many firms are there in the industry?
a)
b)
c)
d)
e)

20
150
208
298
358

25) You get points for this question if you fill in any answer in the scantron sheet.
26) In the graph below, A is the area between Brazils Lorenz curve and the diagonal line.
B is the area between Argentinas Lorenz curve and Brazils Lorenz curve. C is the
area between Argentinas Lorenz curve and the axes. Given those curves, which of
the following statements is correct?
Cumulative % of income
100
Brazil

Argentina
B
C

100
Cumulative % of households

a) The Gini coefficient of Brazil is equal to A/C.

b) The Gini coefficient of Argentina is equal to B/C.

c) The wealthy people in Brazil are richer than the wealthy people in
Argentina
d) The Gini coefficient of Brazil is equal to A/(A+B+C).
e) The income in Brazil is distributed more unequally than the income in Argentina.
27) Which of the following systems of income taxes must lead to a more unequal
distribution of income after taxes than when compared to a situation with no taxes?
a)
b)
c)
d)
e)

A progressive income tax

A regressive income tax
A proportional income tax
A tax system that has horizontal equity
None of the above

28) Bufflehead Inc produces duck feed in the competitive duck-feed industry.
Buffleheads fixed, variable, and total costs are given below. If Bufflehead Inc
correctly maximizes profits by producing five bags of duck feed, which of the
following could be the market price for a bag of duck feed?
Quantity
1
2
3
4
5
6
7
8
a)
b)
c)
d)
e)

Fixed Cost
50
50
50
50
50
50
50
50

Variable Cost Total Cost

4
54
8
58
13
63
19
69
27
77
37
87
49
99
64
114

$4
$9
$11
$15
$77

29) As spring approaches, people who want to sell their homes newly hire lawn painters
to improve the appearance of their lawns. As a result, the equilibrium price for lawnpainting services rises, and equilibrium quantity increases. Given this change, what
happens to producer surplus (PS) in the short run?
a)
b)
c)
d)
e)

PS rises.
PS falls.
PS could rise or fall depending on the elasticity of the supply and demand curves.
PS stays the same.
There is not enough information given to answer this question.

30) Blockbuster and Netflix compete in the oligopolistic movie-rental market. Each is
trying to maximize profits. There is some evidence that consumers dont appreciate
late fees. Each firm, then, must decide whether or not to charge late fees to its
customers. The payoffs (profits) from different strategies of each firm (Netflix first,
Blockbuster second) are given below. What value of X would lead to an equilibrium
where Blockbuster charges late fees, but Netflix doesnt?
Charge late fees
Charge late
Netflix
Fees

200

Blockbuster
Dont charge

300

X
Dont charge
a)
b)
c)
d)
e)

600

800
200

100

0
75
100
301
You cannot tell from information given

31) The face value of bond that matures in one year is $500. This bond has a coupon of
$50. You have heard that the yield on the bond is 15%. What did you have to pay to
buy this bond?
a)
b)
c)
d)
e)

$565
$550
$500
$478
$435

32) Zingermans has market power in the market for international breads. Their
marketing people are concerned, however, that they have been lax and the firm is not
maximizing profits. Youre hired to consult and advise Zingermans and youre given
the following information about the current operation of Zingermans breads. Given
this information, how should Zingermans change its behavior?
Price = $8.00 per loaf
Marginal Revenue = $4.00.
Marginal Cost = $6.00
Total Revenue = $32,000
Total Cost = $28,000
a) Zingermans is producing the profit maximizing number of loaves of bread
dont change behavior.

b)
c)
d)
e)

Zingermans should increase its production of bread for a larger profit.

Zingermans should decrease its production of bread for a larger profit.
Zingermans should shut down immediately.
Zingermans should stay open in the short run but plan to exit in the long run.

33) Suppose Ann Arbor firms produce only two goods: intellectuals and hooded sweat
shirts. The production possibility curve for these two goods reflects increasing
opportunity costs. All production resources are employed. Which of the following
statements is false?
a) The PPC is concave (or bowed outward).
b) The PPC is downward sloping.
c) The opportunity cost for an intellectual increases as more hooded sweatshirts are
produced.
d) The opportunity cost for a hooded sweatshirt decreases as more intellectuals are
produced.
e) None of the above is false.
34) Carmen signs a lease promising to pay $500 each month for one year for a new
apartment. She always keeps her word, and so she will pay the $500 each month
whether she lives in the apartment or not. The $500 each month represents:
a)
b)
c)
d)
e)

Marginal cost.
Sunk cost.
Marginal utility.
A budget constraint.
Variable cost.

35) The owner of Red Hot Lovers has been paying attention to the output of hot dogs she
can make given the technique used in production (the number of grills she has on and
the number of workers in the shift). She has put together these data for hourly
production of hot dogs. The numbers in the center of the table are the number of hot
dogs produced. Given these techniques, which of the following statements is true?
1 grill
2 grills
3 grills
4 grills
a)
b)
c)
d)
e)

1 worker
100
170
230
250

2 workers
150
240
300
320

3 workers
180
300
330
350

4 workers
200
320
350
370

5 workers
210
330
360
375

There is diminishing marginal product of labor

There is constant marginal product of labor
There is increasing marginal product of labor
The marginal product of labor is sometimes negative
The marginal product of labor is diminishing if two grills are used and increasing
if four grills are used.

36) Suppose the price of a University of Michigan t-shirt is $15 and the price of a piece of
sushi is $2. Both U of M t-shirts and sushi are normal goods and they are the only
goods on which you can spend your money. Suppose the price of U of M t-shirts
increases to $20. What is the income effect on your consumption?
a)
b)
c)
d)
e)

Youll consume fewer sushi and fewer t-shirts.

Youll consume fewer sushi and more t-shirts.
Youll consume fewer t-shirts and more sushi.
Youll consume more t-shirts and more sushi.
The income effect only tells what will happen when price changes.

37) Parents worry about putting their kids through college. State college savings plans
are now offered in many states. In one state, parents can put $5,000 into a state fund
if their child is going to college in three years and the childs first year of college is
covered by the state fund. Carmens mom hears that she should definitely invest in
the fund since Carmen is going to college in three years. She does, and when Carmen
goes to college her mom calculates that the interest rate on her savings was
approximately 26% for each of the three years her savings was in the state fund. How
much was tuition at the college that Carmen chose?
a)
b)
c)
d)
e)

$6,300
$10,000
$7,500
$7,938
$15,000

38) The following table shows Jims and Jacks utility of from owning TVs. Jack likes TV
more than Jim, and wouldnt mind having a TV in every room in the house. Which of
the following is correct if there is only one firm that produces TVs and that firm can
perfectly discriminate on price?
Number of TVs
0
1
2
3
4
a)
b)
c)
d)
e)

Jims utility from TV (in $)

0
10
17
23
26

Jacks utility from TV (in $)

0
15
19
22
24

Jim will have to pay $5 for each TV.

Jack will have to pay $5 for each TV.
Jims first TV is more expensive than Jacks first TV.
Jims fourth TV is more expensive than Jacks second TV.
Jims fourth TV is more expensive than Jacks fourth TV.

39) In the long run, the profits of a monopolistically competitive firm are the same as
those of a competitive firm because:
a)
b)
c)
d)
e)

both kinds of firms operate at the minimum of the ATC curve.

both kinds of firms operate at the minimum of the AVC curve.
firms can enter in both kinds of industries.
firms in both industries have to make positive profits or the firms will shut down.
firm size will adjust and the number of firms in the industry cant change.

40) Apple Computer, faced with research, complaints, and litigation claiming that the
iPod can cause hearing loss, issued a new software update that limits the personal
maximum the volume level (stereophile.comApril 2nd ). Why? "We're seeing
folks in their early 20s with ears that look -- audiometrically -- like 50-year-olds'
because they're exposing themselves to louder and louder levels of sound" (Wall
Street JournalJanuary 10th). The government, immediately recognizing the public
health implications, imposes a tax of $10 per MP3 player on Apple and other
manufacturers of MP3 players. If the MP3 player market can be described with
standard supply and demand curves, which of the following statements must be true
as a result of this tax?
a)
b)
c)
d)
e)

The equilibrium quantity of MP3 players will increase.

The producer surplus will increase.
The supply curve of MP3 players will shift down.
The governments tax revenue will be at least as large as any surplus that is lost.
The consumer surplus will decrease.