1 January 2017

The exam paper consists of two sections: multiple choices in Section A, and essay questions in Section B. Please answer all questions in both sections. You are advised to allocate your time according to the marks allocated to each section or question. Section A: Multiple choices (50 questions, one point each, total 50 points) 1. Forest is a mountain man living in complete isolation in Montana. He is completely self- sufficient through hunting, fishing, and farming. He has not been in the city to buy anything in five years. One can infer a. the scarcity principle does not apply to Forest. b.

Forest is not required to make choices. c. the scarcity principle still applies because more hunting means less fishing and farming. d. Forest is very satisfied. e. Forest is not rational. 2. The cost-benefit principle indicates that an action should be taken a. if the total benefits exceed the total costs. b. based on flipping a coin or speaking with a psychic. c. if the average benefits exceed the average costs. d. if the net benefit (benefit minus cost) is zero. e. if the extra benefit is greater than or equal to the extra costs. 3. With ATMs it is possible to retrieve cash from the bank at any time.

Management Essay Example

One hundred years ago, one could only get cash from the bank during business hours, say, 9 am to 3 pm. The difference is because a. flexibility was not valued 100 years ago. b. it was impossible to provide 24 hour a day service 100 years ago. c. the cost of providing 24 hour a day service is much lower today. d. government forced banks to become more convenient. e. cash is a more popular means of making payments today. 4. Having a comparative advantage in a particular task means that a. you are better at it than other people. b. you give up more to accomplish that task than do others. c. ou give up less to accomplish that task than do others d. you prefer that task over other tasks. 5. Which of the following statements is always true? a. Comparative advantage implies absolute advantage. b. Absolute advantage implies comparative advantage. c. Comparative advantage does not require absolute advantage. d. Absolute advantage requires comparative advantage. e. Comparative advantage requires absolute advantage. -1- 6. Large developed countries can produce more of practically everything than can a small less developed country. Therefore, a. the large country has no incentive to trade with the smaller country. . it would be impossible for the smaller country to have a comparative advantage in making any products that the larger country wants to buy. c. trade between the countries is more likely to benefit the large country and harm the smaller country. d. trade between the countries is more likely to benefit the small country and harm the larger country. e. trade will benefit both countries if each country has a comparative advantage in a traded product. 7. Shelly purchases a leather purse for $400. One can infer that a. she paid too much. b. her reservation price was at least $400. c. her reservation price was exactly $400. . her reservation price was less than $400. e. she paid too little. 8. Which of following is not true of an equilibrium price? a. Consumers who are willing to pay the equilibrium price can acquire the good. b. It measures the value of the last unit sold to consumers. c. It is always a fair and just price. d. Firms who are willing to accept the equilibrium price can sell what they produce. e. It measures the cost of resources required to produce the last unit. 9. You have noticed that there is a persistent shortage of teachers in an inner-city school district in your state. Based on this observation, you suspect that a.

The wage for teachers at those schools is higher than at other schools in the state. b. The wage for teachers at those schools is lower than the equilibrium wage. c. There is an excess supply of teachers. d. The wage for teachers at those schools is the equilibrium wage, but teachers don’t apply economic concepts. e. The reservation price among teachers is lower than for other professions. 10. A regulated maximum price that is above the equilibrium price a. will lead to black markets. b. will have no effect on the market. c. will lead to excess supply in the market. d. will lead to excess demand in the market. e.

Both (a) and (d) are true. -2- 11. Suppose that both supply and demand for DVD players decrease. One can predict that the a. equilibrium price will rise but the equilibrium quantity can increase or decrease. b. equilibrium price and quantity will decrease. c. equilibrium price and quantity will rise. d. equilibrium quantity will fall but the equilibrium price can rise or fall. e. change in price and quantity are both unknown. 12. Suppose the local slaughterhouse produces an unpleasant stench to its neighborhood. The price of meat would then be _______ because not all of the _________ are accounted for in the marketplace. . too high; benefits b. too low; benefits c. too high; costs d. too low; costs e. an equilibrium; costs 13. According to the equilibrium principle, a. unregulated markets tend to reach equilibrium prices and quantities without government regulation. b. once a market has reached equilibrium, price will not change. c. collective action cannot improve on individual action. d. market equilibrium exploits all opportunities for individual gain, but may not exploit gains possible through collective action. e. market equilibrium exploits all collective gains, but may not exploit all potential gains to individuals. 14.

The cross price elasticity for cable TV and satellite TV is estimated to be -0. 3. This implies cable TV and satellite TV are a. normal goods. b. substitutes. c. elastic goods. d. complements. e. unrelated. 15. Suppose that each serving of Mac & Cheese costs exactly $0. 50 no matter how many servings are produced. This means that the price elasticity of supply for Mac & Cheese is______ and the supply is _______. a. one; unitary elastic b. greater than one; elastic c. less than one; inelastic d. infinity; perfectly elastic e. zero; perfectly inelastic -3- 16. “Oil and oil products remain the main fuel for cars, planes, ships, and power plants.

The amount of oil still in the earth is finite. ” According to the information, discovering a perfect substitute for gasoline will _______ the price elasticity of supply of gasoline. a. decrease b. not change c. increase d. make unitary e. None of the above 17. The following data represents the production values for two goods, M and N, i. e. , (M,N): (10,0); (9,2); (8,4); (7,3); (6,6). This data is a. consistent with a production possibilities curve. b. possibly consistent with a production possibilities curve. c. consistent with a convex production possibilities curve. d. not consistent with a production possibilities curve. . consistent with a concave production possibilities curve. 18. Last summer real estate prices in your town soared. You started noticing more For Sale signs in your neighbors’ yards. You conclude that a. people don’t like to live in your neighborhood anymore. b. when housing prices rose, they started to exceed some of your neighbors’ reservation prices. c. the demand curve for housing in your town has shifted to the left while supply remained constant. d. the supply curve for housing in your town has shifted to the right while demand has remained constant. e. unemployment in your town has increased significantly. 9. Marginal utility is a. the minimum utility a person must receive from a good in order to consume it. b. the total opportunity cost of consuming a good. c. the utility an individual gains from consuming an additional unit of a good. d. the cost an individual bears in consuming another unit of a good. e. the amount of utility an individual gains from consuming a good. 20. Suppose Kim is willing to pay $5 for her first ice cream sundae, $4 for a second ice cream sundae, and $2 for a third ice cream sundae. If Kim is able to buy all three ice cream sundaes for $2 a piece, she has realized a consumer surplus of: a. 3. b. $5. c. $2. d. $1. e. $4. -4- 21. Consumer surplus is the difference between: a. the supply curve and the equilibrium price line in a supply/demand diagram. b. the minimum quantity consumers are willing to buy and the amount they actually buy. c. total utility and marginal utility for every unit of a good consumed. d. the total marginal benefit for every unit of a good consumed and total expenditures on the good. e. total revenue and total cost in a market for a good. 22. Suppose you want to make rational dining choices at an all-you-can-eat buffet. How do you apply the rational spending rule? a.

You can’t because the fixed price is a sunk cost that should not be taken into consideration. b. You can’t because once you have paid the sunk cost the price of each serving is zero, and since you can’t divide by zero you cannot apply the rational choice formula. c. You should eat exactly the same amount of every item because the price is the same for each item. d. You should continue to eat until your marginal utility from consuming each item exactly equals your non-monetary costs of staying at the buffet. e. You should continue to eat every item until your marginal utility from consuming each item equals the fixed price of the buffet. 3. A price-taking firm cannot affect its own output price because a. price is determined by consumers, not producers. b. market demand is perfectly elastic, that is, even a tiny increase in price will result in zero quantity demanded. c. it is only one firm among many, so the price is determined in the market as a whole. d. consumer preferences dictate a single price in a competitive market. e. of government statutes, such as price floors and price ceilings. 24. When there are diminishing returns to fertilizer in the production of potatoes, a. output will increase only if fertilizer input is increased. . additional fertilizer causes decreased production. c. doubling fertilizer input will less than double output. d. marginal cost decreases as more fertilizer is added. e. doubling fertilizer input will more than double output. -5- 25. Suppose Jack waits in line and gets in to see a movie he values at $6 while Sam, further back in line, does not get to see the movie he values at $12 because the theater fills up. Which of the following statements is correct? a. The movie theater management needs to install more seats. b. Pareto efficiency is a concept that is not applicable here. c.

Pareto efficiency is achieved because Jack can tell Sam about the movie. d. Jack must have stolen his ticket from Sam. e. Pareto efficiency is not achieved. Use the following table to answer questions 26: Market Price ($) Quantity Demanded 10 80 11 75 12 70 13 65 14 60 15 55 16 50 Quantity Supplied 20 30 40 50 60 70 80 26. What would the new equilibrium quantity be if the government assessed a tax of $3 per unit sold on producers? a. 55 b. 40 c. 50 d. 60 e. 45 27. Assume you own your own business and your explicit costs are $10,000/year. You could earn $11,000 in your next best alternative job.

Your revenue is $12,000/year. What is your economic profit? a. 1,000 b. 2,000 c. 11,000 d. 12,000 e. 22,000 28. If economic profits are negative but accounting profits are positive, then a. normal profits are zero. b. accounting profits are less than implicit costs. c. total revenues are greater than the sum of explicit and implicit costs. d. explicit costs equal implicit costs. e. explicit costs exceed total revenues. -6- Use the following figure to answer questions 29-31: 29. The curve marked II is the firm’s a. marginal cost curve. b. average fixed cost curve. c. total cost curve. d. verage total cost curve. e. average variable cost curve. 30. At an output level of L, average total cost is a. $E. b. $D. c. $C. d. $A. e. $B. 31. At an output level of K, a. Total cost is area AEHF. b. Average total cost exceeds MC by amount $G – $F. c. Average fixed cost is amount $D – $I. d. Average total cost and average variable cost are both falling because marginal cost is less than both. e. Average variable cost exceeds MC by amount $H – $F. 32. You have just won the lottery! You may take your winnings in either a single immediate payment of $1,000,000 or in annual payments of $30,000 forever.

At what interest rate would you be indifferent between these two choices? a. 0. 3%. b. 2%. c. 2. 5%. d. 3%. e. 9%. -7- 33. A minimum wage law that prohibits employers from paying workers less than a specified hourly wage that is above the equilibrium wage a. is an example of a price ceiling. b. results in a labor surplus. c. results in a labor shortage. d. resets the legal wage rate below the equilibrium. e. is the most efficient way to assist the working poor. 34. Which of the following is true at the output level where P=MC? a. The monopolist is maximizing profit. b. The monopolist is not maximizing profit and should increase output. . The monopolist is not maximizing profit and should decrease output. d. The monopolist is earning a positive profit. 35. The monopoly supply curve is the a. same as the competitive market supply curve. b. portion of marginal costs curve where marginal costs exceed the minimum value of average variable costs. c. result of market power and production costs. d. none of the above. 36. A monopolist has determined that at the current level of output the price elasticity of demand is -0. 15. a. The firm should cut output. b. This is typical for a monopolist; output should not be altered. c.

The firm should increase output. d. None of the above is necessarily correct. 37. A monopolist can produce her output in either of two plants (factories). Having sold all of her output she discovers that the marginal cost in plant 1 is $30 while the marginal cost in plant 2 is $20. To maximize profits the firm will a. produce more output in plant 1 and less in plant 2. b. do nothing until it acquires more information on revenues. c. produce less output in plant 1 and more in plant 2. d. produce less in both plants until marginal revenue is zero. e. shut-down plant 1 and only produce at plant 2 in the future. 38.

If the regulatory agency sets a price where average revenue equals average cost for a natural monopoly, output will be a. equal to the competitive level. b. equal to the monopoly profit maximizing level. c. greater than the monopoly profit maximizing level and less than the competitive level. d. greater than the competitive level. -8- 39. If a monopolist’s profits were taxed away and redistributed to its consumers, a. inefficiency would remain because output would be lower than under competitive conditions. b. inefficiency would remain, but not because output would be lower than under competitive conditions. . efficiency would be obtained because output would be increased to the competitive level. d. efficiency would be obtained because output would be increased and profits removed. 40. McDonald’s restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 5 dollars off any special meal. This practice is an example of: a. collusion. b. price discrimination. c. two-part tariff. d. bundling. e. tying. 41. A monopolist can sell its output either in the local market or on an internet auction site (or both).

Having sold all of its output it discovered that the marginal revenue in the local market is $20 while its marginal revenue on the internet auction site is $30. To maximize profits the firm should a. have sold more output in the local market and less at the internet auction site. b. do nothing until it acquires more information on costs. c. have sold less output in the local market and more on the internet auction site. d. sell less in both markets until marginal revenue is zero. e. sell more in both markets until marginal cost is zero. 42. What happens to an incumbent firm’s demand curve in monopolistic competition as new firms enter? . It shifts right. b. It shifts left. c. It becomes horizontal. d. New entrants will not affect an incumbent firm’s demand curve. 43. Because air cargo as an industry involves the generation of pollutants in engine exhaust, the equilibrium price of air cargo services a. is above the optimal level, and quantity is below the optimal level. b. is below the optimal level, and quantity is above the optimal level. c. and quantity of trucking services are both above the optimal level. d. and quantity of trucking services are both below the optimal level. e. must fall in order for the market to reach equilibrium. -9- 44.

If households pay a fixed annual fee for trash disposal, a. households have no incentive to cut back on the amount of garbage they generate. b. that fee will provide households with an incentive to cut back on the amount of garbage they generate. c. that fee will discourage households from throwing out reusable materials. d. that fee will discourage households from throwing out toxic or otherwise harmful materials. 45. When there are externalities, economic efficiency can be achieved without government intervention a. all the time. b. when the externality affects many people and property rights are not well defined. . when the externality affects many people and property rights are well defined. d. when the externality affects only a few parties and property rights are not well defined. e. when the externality affects only a few parties and property rights are well defined. 46. Which of the following move the handling of a common property resource closest to efficiency? a. Ensure that the sellers of the resource are perfectly competitive. b. Ensure that the seller of the resource is a monopolist. c. Ban the sale of the resource. d. Ban the use of the resource. e. Assign a usage fee for access to the resource. 47.

Which of the following is a basic element of any game? a. rules b. winners c. strategies d. all of the above e. non of the above 48. Cartel agreements often fail because of a. increased profits. b. increase costs. c. incentives to cheat. d. the lack of a dominant strategy. e. all of the above. 49. A social norm that discourages body piercing is known as a(n) a. nerd norm. b. fashion norm. c. norm of taste. d. norm against vanity. e. physical norm. – 10 – 50. People can purchase and sell the right to perform activities that cause externalities to arrive at efficient solutions. This describes a. the Tragedy of the Commons. b. positional externality. c. an external benefit. d. the Coase Theorem. e. the problem or unpriced resources. – 11 – Section B: Essay questions [3 questions, 20 points each, total 60 points] Question 1 [20 points]: Consider a developing economy in which the demand for and supply of capital funds are as follow: Demand : Qd = 60 – 4i Supply : Qs = 2i where Qd and Qs are respectively the quantity demanded and quantity supplied in trillion dollars; and i is the interest rate in percentage points. (a) Calculate the equilibrium levels of interest rate and capital funds in this economy. [5 points] (b) Draw the supply and demand curves in a diagram.

Calculate the values of consumer surplus, supplier surplus and economic surplus, and show them on the same diagram. [5 points] (c) The government of that economy is very keen on transforming the economy into an industrialized one by making more capital funds available for investment. Based on the belief that the current equilibrium interest rate is too high, it decides to impose an interest rate ceiling of 5%. Will it succeed in making more funds available for investment? Is the economic surplus under this case greater than that in case (b)? [5 points] (d) Discuss any other costs or benefits of the above interest rate ceiling policy.

Explain why the difference in the economic surplus between case (c) and (b) is likely to be an overestimation or underestimation of the actual gain or loss of the interest rate ceiling policy. [5 points] Question 2 [20 points] : E-commerce is predicted to reduce the cost of intermediary services such as those of travel agencies or investment advisors. Consider the market for air travel. Suppose that, with conventional travel agencies, the market equilibrium price for Hong Kong – Beijing plane tickets is $3,000 per ticket, including a $900 intermediation cost. The quantity bought is 2 million tickets a year.

With e-commerce, however, the intermediation cost falls to $100 per ticket. (a) Using suitable demand and supply curves, show how the intermediation cost affect the original equilibrium in the case of conventional travel agencies. [5 points] (b) Illustrate and explain the new equilibrium with e-commerce. [5 points] (c) Show on a graph what happens to the consumer surplus with e-commerce. [5 points] (d) How does the elasticity of demand for plane ticket affect the extent to which consumers will benefit from e-commerce? Explain your answer with demand and supply curves. [5 points] – 12 –

Question 3 [20 points] Mitchell Electronics produces a home video game that has become very popular with children. Mitchell’s managers have reason to believe that Wright Televideo Company is considering entering the market with a competing product. Mitchell must decide whether to set a high price to accommodate entry or a low, entering deterring price. The payoff matrix below shows that profit outcome for each company under the alternative price and entry strategies. Mitchell’s profit is entered before the comma; Wright’s is after the comma. Wright Televideo Enter Don’t Enter 60, 25 85, 0 0, -20 60, 0 Mitchell Electronics High Price Low Price a. Does Mitchell have a dominant strategy? Explain. [3 points] b. Does Wright have a dominant strategy? Explain. [3 points] c. Mitchell’s managers have vaguely suggested a willingness to lower price in order to deter entry. Is this threat credible in light of the payoff matrix above? Explain. [7 points] d. If the threat is not credible, what changes in the payoff matrix would be necessary to make the threat credible? What business strategies could Mitchell use to alter the payoff matrix so that the threat is credible? [7 points] – END – – 13 –

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