Final Practice Exam

A sandal workshop (illustrative) is a price taker with a fixed cost of 50 dollars a day; its total cost is 50, 78, 96, 110, 130, 155, and 188 dollars for 0 to 6 pairs, and its variable cost at 4 pairs is 80 dollars. The market price drops to 24 dollars a pair, and the workshop's best output at that price is 4 pairs. What should it do today?

Select one.

• Shut down, because any loss is a reason to close
• Operate, because 24 dollars is above its lowest average total cost
• Shut down, because 24 dollars is below its lowest average total cost of 31
• Operate, because it loses 34 dollars by operating and 50 by closing

In an illustrative market for used e-bikes of one model, half are good and half are lemons. A good e-bike is worth 1,600 dollars to a buyer and 1,400 dollars to its owner; a lemon is worth 600 dollars to a buyer and 400 dollars to its owner. A buyer who cannot tell the two kinds apart offers the average of the two buyer values. How much is the offer?

Select one.

• 1,100 dollars
• 900 dollars
• 1,600 dollars
• 600 dollars

Yoga studios in one city are earning economic profit, and new studios can open freely. Picture one established studio's graph, with classes per week across the bottom and dollars up the side: a downward-sloping demand curve and a U-shaped average-total-cost curve. What happens as time passes?

Select one.

• Its demand curve shifts right as the city's market grows, and profit rises
• Its demand curve shifts left until price equals average total cost
• Its average-total-cost curve shifts down until price equals marginal cost
• Nothing moves, because a differentiated service blocks new rivals

A tomato greenhouse (illustrative) takes the crate price and the wage as given. With 0 to 6 workers it fills 0, 20, 50, 75, 90, 100, and 105 crates a day, so the marginal product of the 1st to 6th worker is 20, 30, 25, 15, 10, and 5 crates. Tomatoes sell for 2 dollars a crate, so the value of the marginal product of the 1st to 6th worker is 40, 60, 50, 30, 20, and 10 dollars. The daily wage drops from 35 to 25 dollars, and nothing else changes. What happens?

Select one.

• The greenhouse hires 4 workers, a shift of its labor demand curve to the right
• The greenhouse hires 5 workers, a movement along its labor demand curve
• The greenhouse still hires 3 workers, because its labor demand curve has not moved
• The greenhouse hires 4 workers, a movement along its labor demand curve

A furniture workshop takes on more carpenters when buyers want more tables and lets some go when sales slow. Why do economists call the workshop's demand for carpenters a derived demand?

Select one.

• Because it comes from buyers' demand for the furniture
• Because carpenters' wages are set by law, not by the market
• Because carpenters decide how many hours they want to work
• Because the workshop's floor space is fixed in the short run

On one fixed orchard (illustrative), 0 to 6 pickers fill 0, 14, 40, 61, 76, 85, and 88 crates of apples a day. Starting with which picker does the law of diminishing marginal returns show up?

Select one.

• The 1st picker, since every picker works the one orchard
• The 3rd picker, since the extra crates first get smaller there
• The 2nd picker, since the extra crates are largest there
• The 6th picker, since that picker adds the fewest crates

People debating whether to put a price on carbon emissions make many kinds of claims. Which claim rests on a value judgment rather than on evidence?

Select one.

• A price on emissions raises the cost of goods whose production releases carbon
• Households' present living costs should count for more than uncertain gains decades away
• Under one common price, firms that can cut emissions cheaply tend to cut the most
• If only some regions price carbon, some production may shift to regions that do not

A small print shop (illustrative) has one press. With 0 to 6 workers it prints 0, 10, 26, 48, 64, 75, and 81 posters an hour. How many posters does the 5th worker add?

Select one.

• 75 posters
• 15 posters
• 64 posters
• 11 posters

In an illustrative economy, households ranked from the poorest fifth to the richest receive 4, 9, 15, 24, and 48 percent of income. A Lorenz curve plots the cumulative share of income against the cumulative share of households. At 40 percent of households, what share of income has this Lorenz curve reached?

Select one.

• 13 percent
• 9 percent
• 28 percent
• 40 percent

An apple orchard (illustrative) takes the price of apples and the wage as given. With 0 to 6 workers it picks 0, 10, 35, 55, 70, 80, and 85 bushels a day, so the marginal product of the 1st to 6th worker is 10, 25, 20, 15, 10, and 5 bushels. The daily wage is 55 dollars. The price of apples rises from 3 to 5 dollars a bushel, so the value of the marginal product of the 1st to 6th worker becomes 50, 125, 100, 75, 50, and 25 dollars. Which describes the orchard's response?

Select one.

• It hires 4 workers, and its labor demand curve shifts right
• It hires 3 workers, a movement along an unchanged labor demand curve
• It hires 5 workers, with labor demand shifting to the right
• It hires 4 workers, a movement along its labor demand curve

Offered a fair coin flip that pays 100 dollars on heads and costs 100 dollars on tails, most people say they would turn it down, even though on average the bet neither gains nor loses. Which pattern from behavioral economics does this show?

Select one.

• Anchoring
• Present bias
• Loss aversion
• The power of defaults

True or false: even with no rivals at all, a monopolist that raises its price sells fewer units, because its demand curve still slopes down.

True or false.

• True
• False

Two electricians have the same training and experience. One repairs power lines on tall towers in all weather and earns more per hour than the other, who wires new houses. Which force best explains the gap in pay?

Select one.

• Human capital, because the tower electrician has more training
• A compensating differential for risky, unpleasant work
• A movement along the utility's labor demand curve
• A binding minimum wage for tower work

The only rail link between two towns (illustrative) faces demand P = 28 − Q, where P is the fare in dollars and Q is hundreds of trips a day, and its marginal cost is a constant 8 dollars a trip, with no fixed cost. As a monopoly it sells 10 hundred trips at 18 dollars and earns a profit of 100; competitive service would sell 20 hundred trips at 8 dollars. How large is the monopoly's deadweight loss, in hundreds of dollars a day?

Select one.

• 100, the line's profit
• 50, the triangle on the trips never taken
• 150, the surplus riders lose
• 200, the consumer surplus with competition

Keiko quit a job paying 31,000 dollars a year to run a mobile bicycle-repair service (illustrative). She uses a van she already owns, which a neighbor would rent from her for 4,000 dollars a year. Which of these is an implicit cost of her service?

Select one.

• The fuel she buys for each trip
• The fee she pays for a business license
• The 4,000 dollars of van rent she gives up
• The spare parts she orders each month

A jam kitchen (illustrative) sells in a perfectly competitive market. Its average variable cost is 26, 21, 18, 17, 19, and 23 dollars and its average total cost is 62, 39, 30, 26, 26.2, and 29 dollars for 1 to 6 cases of jam. Below what price should it stop making jam in the short run?

Select one.

• 17 dollars, the lowest average variable cost
• 26 dollars, the lowest average total cost
• 12 dollars, the lowest marginal cost of any case
• 36 dollars, the kitchen's fixed cost

A dumpling stand (illustrative) pays 45 dollars a day for its stall and equipment whether or not it cooks, and its total cost is 45, 70, 88, 103, 122, 147, and 180 dollars for 0 to 6 trays of dumplings a day. Which statements about the stand are true? Select all that apply.

Select every option that applies.

• It owes its 45 dollars of fixed cost even on a day it cooks no trays.
• The extra cost of its 1st tray is 70 dollars.
• Spreading the 45 dollars over more trays lowers its average fixed cost with each added tray.
• Each added tray's marginal cost includes a share of the 45 dollars.

After signing up for a plan that pays for any cracked phone screen, an owner stops using a protective case, something the plan's provider cannot see. Which problem is this?

Select one.

• Adverse selection, because the owner's carelessness was hidden before the deal
• A positive externality, because other phone owners gain from the plan
• Anchoring, because the plan's price set the owner's expectations
• Moral hazard, because the owner's unseen behavior changes once covered

Two bike shops (illustrative) each choose a high or a low price. Monthly profit, in thousands of dollars and written (first shop, second shop), is (12, 12) if both price high, (5, 16) if the first prices high and the second low, (16, 5) if the first prices low and the second high, and (8, 8) if both price low. When the second shop prices high, which price earns the first shop more, and why?

Select one.

• High, because both shops earn 12 when both price high
• Low, because 8 is more than 5
• Low, because the first shop earns 16 instead of 12
• High, because 12 beats the 5 in the other column

An inventor holds a patent on a new kind of water filter, so for years no other firm may sell a copy of it. Which barrier to entry shields the inventor's firm from rivals?

Select one.

• Economies of scale, because one firm can make filters most cheaply
• Control of a key resource, such as the only source of a material
• No barrier, because buyers could choose not to buy a filter
• Legal protection, because the patent keeps copies off the market

In an illustrative market for tire retreading, inverse demand is P = 15 − Q ⁄ 5 and inverse supply is P = 5 + Q ⁄ 5, with P in dollars per tire and Q in tires per day. Each retread releases fumes that do 2 dollars of harm to neighbors who neither buy nor sell retreads. Which line is the marginal social cost?

Select one.

• P = 7 + Q ⁄ 5, the supply curve with the harm added to each tire
• P = 5 + Q ⁄ 5, the supply curve, because it shows the seller's cost
• P = 3 + Q ⁄ 5, the supply curve moved down by the harm
• P = 17 − Q ⁄ 5, the demand curve with the harm added

A pottery studio (illustrative) has a fixed cost of 24 dollars a day, and its total cost is 24, 38, 50, 60, 76, 100, and 132 dollars for 0 to 6 bowls a day. At which output is the cost per bowl, counting all costs, at its lowest, and how much is it?

Select one.

• 10 dollars, at the 3rd bowl
• 12 dollars, at 3 bowls
• 19 dollars, at 4 bowls
• 4 dollars, at 6 bowls

A rug weaver (illustrative) is a price taker with a fixed cost of 40 dollars a week; its total cost is 40, 75, 100, 120, 145, 185, and 235 dollars for 0 to 6 rugs, so its marginal cost is 35, 25, 20, 25, 40, and 50 dollars for the 1st to 6th rug. Rugs sell for 45 dollars, and the weaver makes 5 a week, where average total cost is 37 dollars. What is its weekly profit?

Select one.

• 40 dollars
• 225 dollars
• 8 dollars
• 185 dollars

A market for potted herbs (illustrative) has demand Qd = 80 − 2P and supply Qs = 3P − 20, with P in dollars and quantities in pots per week. Suppose the price sits at 26 dollars. What would sellers and buyers see?

Select one.

• A shortage of 30 pots per week, which pushes the price up
• A surplus of 6 pots per week, which pushes the price down
• No gap at all, because every pot offered is sold
• A surplus of 30 pots per week, which pushes the price down

An economist calls a claim normative when it reports bad news and positive when it reports good news.

True or false.

• True
• False

One of the following claims about trade is a value judgment rather than a testable prediction. Which one is it?

Select one.

• The nation ought to tax imported bicycles to shield its own bike makers
• Opening trade can raise the combined output of two partners
• Imports can move some factory jobs from one region to another
• Trading between two opportunity costs leaves both partners with more

A market for cotton tote bags (illustrative) begins with demand Qd = 96 − 6P and supply Qs = 6P − 24, with P in dollars and quantities in bags per day. Cotton becomes more expensive, so sellers offer 24 fewer bags at every price and supply becomes Qs = 6P − 48; demand is unchanged. What is the new outcome?

Select one.

• Supply shifts left; the price falls to 8 dollars and the quantity falls to 24 bags per day
• Supply shifts right; the price falls to 8 dollars and the quantity rises to 48 bags per day
• Demand shifts left; the price falls to 8 dollars and the quantity falls to 24 bags per day
• Supply shifts left; the price rises to 12 dollars and the quantity falls to 24 bags per day

Two roommates share the cooking and the cleaning, and their opportunity costs for each chore differ. One roommate can still end up with the lower opportunity cost in both chores.

True or false.

• True
• False

A furniture shop's production possibilities frontier (illustrative) allows 36 lamps when the shop builds 25 tables, and at most 80 lamps if it builds no tables. Which description of a plan for 25 tables and 50 lamps is correct?

Select one.

• Inside the frontier, since 50 lamps is fewer than the shop's 80
• Outside the frontier, since it needs 14 more lamps than the shop can make
• On the frontier, since the shop is able to build 25 tables
• Outside the frontier, since it needs 14 more tables than the shop can make

The only bakery in a remote village (illustrative) sells a loaf for 5 dollars, and its marginal cost is 3 dollars a loaf. Its Lerner index, the markup of price over marginal cost as a share of the price, is (5 − 3) ⁄ 5 = 2 ⁄ 5. Which sentence says what that means?

Select one.

• The bakery sells that share of all the bread bought in the village
• Two-fifths of each loaf's price is markup over marginal cost
• The loaf's price is that share of the bakery's marginal cost
• The index is zero, because the bakery has no rivals

Which events would shift the demand curve for movie-theater tickets? Select every one that applies.

Select every option that applies.

• The price of a movie ticket rises
• The price of a streaming subscription, a substitute, rises
• A new housing development near the theater brings many new residents
• The price of a movie ticket falls
• Viewers come to prefer the big screen after a popular film festival

True or false: a rail yard's noise does 500 dollars a month of harm to a recording studio next door, and soundproof walls would cost 350 a month. If the rail yard holds the right to make noise and the two can bargain cheaply, the walls still get built.

True or false.

• True
• False

A manager at an illustrative pottery studio says: "Keep hiring until a potter's marginal product, counted in bowls, equals the daily wage of 90 dollars." Bowls sell for 6 dollars each. Which correction fixes the manager's rule?

Select one.

• Compare the average product in bowls with the daily wage instead
• Compare the marginal product with the price of a bowl instead of the wage
• Compare the bowl price times the marginal product with the wage
• Hire until the total wage bill equals the studio's total revenue

True or false: a firm in monopolistic competition can go on earning economic profit in the long run, as long as its product stays a little different from its rivals'.

True or false.

• True
• False

In a market (illustrative) with demand Qd = 60 − 2P and supply Qs = 2P − 12, a 4-dollar subsidy per unit paid to sellers lets buyers pay 16 dollars while sellers receive 20, so since both sides gain, total surplus climbs above its no-subsidy level of 288 dollars a day.

True or false.

• True
• False

When economists label a good inferior, they are saying that it is cheaply made or of poor quality.

True or false.

• True
• False

A market for bottled cold brew (illustrative) has demand Qd = 200 − 10P and supply Qs = 10P − 40, with P in dollars and Q in bottles per day; untaxed, it clears at 12 dollars and 80 bottles. With a 6-dollar tax per bottle, buyers pay 15 dollars, sellers keep 9, and 50 bottles sell. How large is the deadweight loss?

Select one.

• 300 dollars a day
• 180 dollars a day
• 90 dollars a day
• 45 dollars a day

Two ice-cream vans (illustrative) at one beach each decide whether to advertise. Weekly profit, in hundreds of dollars and written (first van, second van), is (3, 3) if both advertise, (9, 1) if only the first advertises, (1, 9) if only the second advertises, and (6, 6) if neither does. What is each van's dominant strategy?

Select one.

• Advertise for both vans, since advertising pays more whatever the rival does
• Skip advertising for both, since both skipping pays them the most together
• Advertise for the first van only, since it earns 9 when the rival skips
• Neither van has one, since each van's best choice depends on what its rival does

Two gravel quarries (illustrative) each choose a high or a low price. Monthly profit, in thousands of dollars and written (first quarry, second quarry), is (15, 15) if both price high, (5, 21) if the first prices high and the second low, (21, 5) if the first prices low and the second high, and (9, 9) if both price low. The owners secretly agree that both will price high. If the second quarry keeps the deal, how much more a month does the first gain by cheating with a low price?

Select one.

• 6 thousand dollars
• 12 thousand dollars
• 15 thousand dollars
• 16 thousand dollars

The EPA's Acid Rain Program caps power plants' sulfur dioxide output and lets them buy, sell or bank allowances. How much may a unit emit for each allowance it holds?

Select one.

• One ton of sulfur dioxide
• One ton of carbon dioxide
• One hundred tons of sulfur dioxide each day
• Any amount, as long as the plant pays a fee