NameTest Form A

Economics 1Final Exam

December 9, 2008

True-False Questions: Fill in Bubble A for True, Bubble B for False.

1. A profit-maximizing monopolist will sell more units of a good than the amount of the goodthat would be sold in a competitive equilibrium.

2. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue ofthe good is negative at that quantity.

3. A monopolist faces a downward-sloping demand curve for its product. In order to maximizeits profits, it will choose the output that maximizes its marginal revenue.

4. If Person A has absolute advantage over Person B in the production of Good X, then PersonA must also have comparative advantage over Person B in the production of Good X.

5. If the world price for a good exceeds the autarky price for the good, opening the internationalmarket to domestic producers will decrease the consumer surplus of domestic consumers ofthe good.

6. A competitive equilibrium for a good will maximize the number of trades of the good forwhich both the buyer and seller have a positive profit.

7. Suppose the demand curve for a good slopes down, and the supply curve for that good slopesup. If the supply curve shifts and the demand curve does not shift, the equilibrium price andquantity will move in opposite directions.

8. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduc-tion in sellers’ profit and consumers’ surplus caused by a sales tax of $20 per unit will exceedthe amount of revenue collected by the tax.

9. We can expect there to be excess demand in a market where a legal price ceiling is set lowerthan the competitive equilibrium price.

Economics 1 2

10. If a firm’s average variable cost does not change as it increases its output, the firm’s marginalcost equals its average variable cost.

Multiple Choice Questions

11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it wouldhave to lower its price to $87 per unit. What is the marginal revenue of the 11th unit?

(a) $90

(b) $87

(c) $77

(d) $57

(e) $80

12. The demand curve for Econ 1 textbooks is given by the equation P = 100 − Q, where P isthe price of the book and Q is the number of books sold. The variable cost of producing andselling a textbook is constant at $20 per book. The fixed cost is zero. What price would aprofit-maximizing monopolist charge for the book?

(a) $20

(b) $90

(c) $40

(d) $60

13. Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem.Also assume that the textbook is sold by a profit-maximizing monopolist. How much higheror lower are the total profits of buyers and sellers than those profits would be in a competitiveequilibrium for the textbook?

(a) Totals profits are $200 higher than they would be in a competitive equilibrium.

(b) Total profits are $600 higher than they would be in a competitive equilibrium.

(c) Total profits are $300 lower than they would be in a competitive equilibrium.

(d) Total profits are $800 lower than they would be in a competitive equilibrium.

14. If a monopolist that charges the same price to all customers faces a demand curve that slopesdownward to the right, we can reasonably expect that the firm

(a) must lower prices if it hopes to increase its profits.

(b) will have no effect on the price of the product it sells.

(c) will find that its marginal revenue is less than the price of the product it sells.

(d) will find that its marginal revenue is greater than the price of the product it sells.

Final Exam 3

15. The small island nation of Ruritania is populated by two farmers, Alf and Barney. Eachfarmer has 100 acres. The land can be used either for growing wheat or as pasture for beefcattle. Alf’s land is better than Barney’s land. Each acre that Alf plants to wheat will yield50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds ofbeef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year,and each acre that Barney devotes to pasture will yield 30 pounds of beef per year.

(a) Alf’s farm has absolute advantage in the production of beef and comparative advantage in theproduction of wheat.

(b) Barney’s farm has comparative advantage in the production of beef.

(c) Barney’s farm has comparative advantage in the production of wheat.

(d) Alf’s farm has comparative advantage in both beef and wheat.

(e) More than one of the above statements is true.

16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acreof land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas ismore productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons ofgrapefruit. Farmers in each state sell their crops in a national market. If the price of cottonin this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmersin each state grow?

(a) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(b) Farmers in both states will grow cotton but no grapefruit.

(c) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(d) Farmers in both states will grow grapefruit but no cotton.

(e) Farmers in both states will grow some of each crop.

17. Prices have changed in the market described above. Now the price of cotton is $150 per ton,and the price of grapefruit is $200 per ton. After the change, what will farmers in each stategrow?

(a) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(b) Farmers in both states will grow cotton but no grapefruit.

(c) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(d) Farmers in both states will grow grapefruit but no cotton.

(e) Farmers in both states will grow some of each crop.

Economics 1 4

18. For each hour of labor, Country A can produce 20 pounds of rutabagas or 16 pounds of grapes.For each hour of labor, Country B can produce 10 pounds of rutabagas or 4 pounds of grapes.The theory of comparative advantage implies that, under these conditions, Country A wouldfind it advantageous to:

(a) export rutabagas and import grapes.

(b) export grapes and import rutabagas.

(c) export both rutabagas and grapes and import nothing.

(d) import both rutabagas and grapes and export nothing.

(e) grow all the rutabagas and grapes it consumes and neither import nor export.

19. In ”Clothes Will Cost Less, but Some Nations Pay,” Marshall, Iritani and Dickerson outlinesome of the consequences of phasing out the Multifiber Arrangement (MFA). Which of thefollowing options best describes the MFA?

(a) The MFA was a system of tariffs on imports of clothing from Asian to the US, Canada, andEurope.

(b) The MFA was a system of subsidies for textile manufacturers in the US that allowed them tocompete with cheaper imports from Asia.

(c) The MFA was a system of quotas determining the amounts of certain types of clothing thatvarious countries could export into the US, Canada and Europe.

(d) The MFA prescribed workplace and labor conditions that foreign textile manufacturers had tosatisfy to export their products to the US, Canada, and Europe.

20. The article ”Depressing Times,” published in The Economist on November 13, 2008, describesa harmful effect of a fall in the inflation rate that is ”too far, too fast.” What is that harmfuleffect?

(a) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the cost of the loans that consumers and firms have taken out.They rush to pay off those loans, which reduces their demand for goods and services, causingfurther price reductions and unemployment.

(b) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the demand for goods and services, which drives up wage ratesand decreases employment.

(c) A general fall in prices makes US exports less competitive in international markets, which leadsto a cutback in domestic production and employment.

(d) A general fall in prices reduces the value of assets held by banks and other financial institutions.They are less willing to lend as a result, which decreases employment in manufacturing andother businesses.

Final Exam 5

21. The supply function for fresh strawberries is given by the equation Ps(Q) = 4 + 4Q. Thedemand function is given by the equation Pd(Q) = 85− 5Q where Q is the number of crates ofstrawberries sold. In competitive equilibrium, how many crates of strawberries will be sold?

(a) 6

(b) 9

(c) 14

(d) 40

(e) None of the above.

22. Mike owns and operates a restaurant. He pays his staff $10,000 per month and spends $8,000per month on food, utilities, and other supplies. Because he owns the restaurant building,Mike doesn’t pay rent. However, he could rent the building to someone else for $2,000 permonth. If he did close his restaurant and rent his building to someone else, he would haveto find a job. Mike believes that he could work for someone else at a salary of $3,000 permonth. What is the opportunity cost to Mike of continuing to operate his restaurant?

(a) $10,000 per month

(b) $18,000 per month

(c) $20,000 per month

(d) $21,000 per month

(e) $23,000 per month

23. A spider mite infestation reduced the fall harvest of apples in Washington. As a result of theinfestation, the harvest decreased by 15%, but the revenue of apple ranchers only decreasedby 10%. The demand curve did not change. What was the price elasticity of demand forapples in Washington?

(a) −2.0

(b) −0.5

(c) −0.66

(d) −1.5

(e) −3.0

Economics 1 6

24. The demand curve for motel rooms is downward sloping, and the supply curve for motelrooms is upward sloping. Also, the demand curve for gasoline is downward sloping, and thesupply curve for gasoline is upward sloping. Because families on summer vacation trips buylots of gasoline and also rent motel rooms, gasoline and motel rooms are complements. Anincrease in the price of gasoline decreases summer travel, which decreases the demand formotel rooms. Suppose there is a shift up in the supply of gasoline, with less gasoline suppliedat every price. What would happen to the price of motel rooms and the number of motelrooms rented?

(a) The price of motel rooms would rise, and the number of motel rooms rented would fall.

(b) The price of motel rooms would rise, and the number of motel rooms rented would rise.

(c) The price of motel rooms would fall, and the number of motel rooms rented would fall.

(d) The price of motel rooms would fall, and the number of motel rooms rented would rise.

25. Ten residents of Greenfield are willing to pay someone as much as $8 a week to mow theirlawn, and ten residents are willing to pay someone as much as $6 a week to mow their lawn.Thirty teenage boys are willing to mow a lawn each week if they receive at least $5 for thejob. Suppose the city of Greenfield imposes a tax of $2 a week on each resident who hiresa teenage boy to mow his or her lawn. How will that tax affect the competitive equilibriumprice of lawn mowing?

(a) The price would fall by $2.

(b) The price would rise by $2

(c) The price would not change.

(d) The price would fall by $1.

(e) The price would rise by $1.

26. The Bergstrom Box Company (BBC) makes cute Swedish boxes to sell to gullible Americantourists. If it employs one worker, it can make and sell 6 boxes per day. If it employs twoworkers, it can make and sell 10 boxes per day; and if it employs 3 workers, it can make andsell 12 boxes per day. Each box sells for $10. If the wage of a worker is $30 per day, howmany workers should BBC hire?

(a) 0 workers per day

(b) 1 worker per day

(c) 2 workers per day

(d) 3 workers per day

(e) 5 goats and no workers

Final Exam 7

27. There are six box companies in Sweden (including Bergstrom Box Company). Each companyhas the same relationship between labor employed and output as Bergstrom Box Companydescribed in the previous question. Each company can also sell its boxes for a price of $10per box. There are 5 workers in Sweden willing to work in a box company for $25 per dayor more, and there are 6 workers willing to work in a box company for $35 per day. What isthe competitive equilibrium wage for box company workers in Sweden?

(a) $25 per day

(b) $30 per day

(c) $35 per day

(d) $40 per day

(e) $60 per day

28. The town of Sweet Harmony has 100 families. Seventy of those families have a child, and 30do not. Thirty of the families with a child are willing to pay as much as $6,000 to educatetheir child, and the other forty are willing to pay as much as $3,000. Each educated childcreates a positive externality of $10 for each family in Sweet Harmony. The cost of educatinga child is $5,000. If each family must pay the cost of educating its child, how many childrenwill be educated, and what is the total profit (including external benefits) of all familiesderived from the education of Sweet Harmony’s children?

(a) 30 children will be educated, and the total profit is $30,000.

(b) 30 children will be educated, and the total profit is $60,000.

(c) 30 children will be educated, and the total profit is $90,000.

(d) 70 children will be educated, and the total profit is $50,000.

(e) 70 children will be educated, and the total profit is $120,000.

29. Suppose the town of Sweet Harmony described in the previous question enacts a subsidy forfamilies that educate their children. Each family who sends their child to school receivesa subsidy of $1,000. This subsidy is financed by a tax on the residents of Sweet Harmony,which is shared equally among families in the town. Compared to the equilibrium describedin the previous question, how will this subsidy affect the number of children educated andthe total profit (including external benefits) of all families in Sweet Harmony?

(a) 40 more children will be educated, and total profits will decrease by $40,000.

(b) 40 more children will be educated, and total profits will increase by $75,000.

(c) 40 more children will be educated, and total profits will decrease by $25,000.

(d) no more children will be educated, and total profits will not change.

(e) no more children will be educated, and total profits will decrease by $50,000.

Economics 1 8

30. The demand for tax accountants in Richtown, Connecticut, is given by the demand functionQ = 4, 000− 25P, where Q is the number of clients seeking to hire a tax accountant and P isthe price accountants charge their clients. Each accountant can complete tax forms for 200clients each year. The time an accountant takes to complete a tax form for any one clienthas an opportunity cost of $50. Each accountant must also pay the city $10,000 per year fora license to practice accounting in Richtown. The license fee and the opportunity cost arethe only costs an accountant has. In long-run equilibrium (when accountants can enter andexit the accounting practice in Richtown), how many accountants will practice in Richtown?

(a) 6

(b) 7

(c) 8

(d) 9

NameTest Form B

Economics 1Final Exam

December 9, 2008

True-False Questions: Fill in Bubble A for True, Bubble B for False.

1. If the world price for a good exceeds the autarky price for the good, opening the internationalmarket to domestic producers will decrease the consumer surplus of domestic consumers ofthe good.

2. A monopolist faces a downward-sloping demand curve for its product. In order to maximizeits profits, it will choose the output that maximizes its marginal revenue.

3. Suppose the demand curve for a good slopes down, and the supply curve for that good slopesup. If the supply curve shifts and the demand curve does not shift, the equilibrium price andquantity will move in opposite directions.

4. A profit-maximizing monopolist will sell more units of a good than the amount of the goodthat would be sold in a competitive equilibrium.

5. If a firm’s average variable cost does not change as it increases its output, the firm’s marginalcost equals its average variable cost.

6. We can expect there to be excess demand in a market where a legal price ceiling is set lowerthan the competitive equilibrium price.

7. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduc-tion in sellers’ profit and consumers’ surplus caused by a sales tax of $20 per unit will exceedthe amount of revenue collected by the tax.

8. A competitive equilibrium for a good will maximize the number of trades of the good forwhich both the buyer and seller have a positive profit.

9. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue ofthe good is negative at that quantity.

Economics 1 2

10. If Person A has absolute advantage over Person B in the production of Good X, then PersonA must also have comparative advantage over Person B in the production of Good X.

Multiple Choice Questions

11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it wouldhave to lower its price to $87 per unit. What is the marginal revenue of the 11th unit?

(a) $77

(b) $87

(c) $57

(d) $90

(e) $80

12. The demand curve for Econ 1 textbooks is given by the equation P = 100 − Q, where P isthe price of the book and Q is the number of books sold. The variable cost of producing andselling a textbook is constant at $20 per book. The fixed cost is zero. What price would aprofit-maximizing monopolist charge for the book?

(a) $90

(b) $60

(c) $40

(d) $20

13. Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem.Also assume that the textbook is sold by a profit-maximizing monopolist. How much higheror lower are the total profits of buyers and sellers than those profits would be in a competitiveequilibrium for the textbook?

(a) Total profits are $600 higher than they would be in a competitive equilibrium.

(b) Total profits are $300 lower than they would be in a competitive equilibrium.

(c) Total profits are $800 lower than they would be in a competitive equilibrium.

(d) Totals profits are $200 higher than they would be in a competitive equilibrium.

14. If a monopolist that charges the same price to all customers faces a demand curve that slopesdownward to the right, we can reasonably expect that the firm

(a) will have no effect on the price of the product it sells.

(b) must lower prices if it hopes to increase its profits.

(c) will find that its marginal revenue is greater than the price of the product it sells.

(d) will find that its marginal revenue is less than the price of the product it sells.

Final Exam 3

15. The small island nation of Ruritania is populated by two farmers, Alf and Barney. Eachfarmer has 100 acres. The land can be used either for growing wheat or as pasture for beefcattle. Alf’s land is better than Barney’s land. Each acre that Alf plants to wheat will yield50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds ofbeef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year,and each acre that Barney devotes to pasture will yield 30 pounds of beef per year.

(a) Barney’s farm has comparative advantage in the production of beef.

(b) Barney’s farm has comparative advantage in the production of wheat.

(c) Alf’s farm has comparative advantage in both beef and wheat.

(d) Alf’s farm has absolute advantage in the production of beef and comparative advantage in theproduction of wheat.

(e) More than one of the above statements is true.

16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acreof land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas ismore productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons ofgrapefruit. Farmers in each state sell their crops in a national market. If the price of cottonin this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmersin each state grow?

(a) Farmers in both states will grow grapefruit but no cotton.

(b) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(c) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(d) Farmers in both states will grow cotton but no grapefruit.

(e) Farmers in both states will grow some of each crop.

17. Prices have changed in the market described above. Now the price of cotton is $150 per ton,and the price of grapefruit is $200 per ton. After the change, what will farmers in each stategrow?

(a) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(b) Farmers in both states will grow grapefruit but no cotton.

(c) Farmers in both states will grow cotton but no grapefruit.

(d) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(e) Farmers in both states will grow some of each crop.

Economics 1 4

18. Mike owns and operates a restaurant. He pays his staff $10,000 per month and spends $8,000per month on food, utilities, and other supplies. Because he owns the restaurant building,Mike doesn’t pay rent. However, he could rent the building to someone else for $2,000 permonth. If he did close his restaurant and rent his building to someone else, he would haveto find a job. Mike believes that he could work for someone else at a salary of $3,000 permonth. What is the opportunity cost to Mike of continuing to operate his restaurant?

(a) $10,000 per month

(b) $20,000 per month

(c) $18,000 per month

(d) $21,000 per month

(e) $23,000 per month

19. Ten residents of Greenfield are willing to pay someone as much as $8 a week to mow theirlawn, and ten residents are willing to pay someone as much as $6 a week to mow their lawn.Thirty teenage boys are willing to mow a lawn each week if they receive at least $5 for thejob. Suppose the city of Greenfield imposes a tax of $2 a week on each resident who hiresa teenage boy to mow his or her lawn. How will that tax affect the competitive equilibriumprice of lawn mowing?

(a) The price would rise by $2

(b) The price would fall by $2.

(c) The price would not change.

(d) The price would fall by $1.

(e) The price would rise by $1.

20. The supply function for fresh strawberries is given by the equation Ps(Q) = 4 + 4Q. Thedemand function is given by the equation Pd(Q) = 85− 5Q where Q is the number of crates ofstrawberries sold. In competitive equilibrium, how many crates of strawberries will be sold?

(a) 14

(b) 40

(c) 6

(d) 9

(e) None of the above.

Final Exam 5

21. For each hour of labor, Country A can produce 20 pounds of rutabagas or 16 pounds of grapes.For each hour of labor, Country B can produce 10 pounds of rutabagas or 4 pounds of grapes.The theory of comparative advantage implies that, under these conditions, Country A wouldfind it advantageous to:

(a) import both rutabagas and grapes and export nothing.

(b) export rutabagas and import grapes.

(c) export grapes and import rutabagas.

(d) export both rutabagas and grapes and import nothing.

(e) grow all the rutabagas and grapes it consumes and neither import nor export.

22. In ”Clothes Will Cost Less, but Some Nations Pay,” Marshall, Iritani and Dickerson outlinesome of the consequences of phasing out the Multifiber Arrangement (MFA). Which of thefollowing options best describes the MFA?

(a) The MFA prescribed workplace and labor conditions that foreign textile manufacturers had tosatisfy to export their products to the US, Canada, and Europe.

(b) The MFA was a system of subsidies for textile manufacturers in the US that allowed them tocompete with cheaper imports from Asia.

(c) The MFA was a system of tariffs on imports of clothing from Asian to the US, Canada, andEurope.

(d) The MFA was a system of quotas determining the amounts of certain types of clothing thatvarious countries could export into the US, Canada and Europe.

23. The demand curve for motel rooms is downward sloping, and the supply curve for motelrooms is upward sloping. Also, the demand curve for gasoline is downward sloping, and thesupply curve for gasoline is upward sloping. Because families on summer vacation trips buylots of gasoline and also rent motel rooms, gasoline and motel rooms are complements. Anincrease in the price of gasoline decreases summer travel, which decreases the demand formotel rooms. Suppose there is a shift up in the supply of gasoline, with less gasoline suppliedat every price. What would happen to the price of motel rooms and the number of motelrooms rented?

(a) The price of motel rooms would fall, and the number of motel rooms rented would fall.

(b) The price of motel rooms would rise, and the number of motel rooms rented would rise.

(c) The price of motel rooms would rise, and the number of motel rooms rented would fall.

(d) The price of motel rooms would fall, and the number of motel rooms rented would rise.

Economics 1 6

24. The article ”Depressing Times,” published in The Economist on November 13, 2008, describesa harmful effect of a fall in the inflation rate that is ”too far, too fast.” What is that harmfuleffect?

(a) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the demand for goods and services, which drives up wage ratesand decreases employment.

(b) A general fall in prices makes US exports less competitive in international markets, which leadsto a cutback in domestic production and employment.

(c) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the cost of the loans that consumers and firms have taken out.They rush to pay off those loans, which reduces their demand for goods and services, causingfurther price reductions and unemployment.

(d) A general fall in prices reduces the value of assets held by banks and other financial institutions.They are less willing to lend as a result, which decreases employment in manufacturing andother businesses.

25. A spider mite infestation reduced the fall harvest of apples in Washington. As a result of theinfestation, the harvest decreased by 15%, but the revenue of apple ranchers only decreasedby 10%. The demand curve did not change. What was the price elasticity of demand forapples in Washington?

(a) −0.5

(b) −2.0

(c) −1.5

(d) −0.66

(e) −3.0

26. The Bergstrom Box Company (BBC) makes cute Swedish boxes to sell to gullible Americantourists. If it employs one worker, it can make and sell 6 boxes per day. If it employs twoworkers, it can make and sell 10 boxes per day; and if it employs 3 workers, it can make andsell 12 boxes per day. Each box sells for $10. If the wage of a worker is $30 per day, howmany workers should BBC hire?

(a) 0 workers per day

(b) 1 worker per day

(c) 2 workers per day

(d) 3 workers per day

(e) 5 goats and no workers

Final Exam 7

27. There are six box companies in Sweden (including Bergstrom Box Company). Each companyhas the same relationship between labor employed and output as Bergstrom Box Companydescribed in the previous question. Each company can also sell its boxes for a price of $10per box. There are 5 workers in Sweden willing to work in a box company for $25 per dayor more, and there are 6 workers willing to work in a box company for $35 per day. What isthe competitive equilibrium wage for box company workers in Sweden?

(a) $40 per day

(b) $35 per day

(c) $25 per day

(d) $30 per day

(e) $60 per day

28. The town of Sweet Harmony has 100 families. Seventy of those families have a child, and 30do not. Thirty of the families with a child are willing to pay as much as $6,000 to educatetheir child, and the other forty are willing to pay as much as $3,000. Each educated childcreates a positive externality of $10 for each family in Sweet Harmony. The cost of educatinga child is $5,000. If each family must pay the cost of educating its child, how many childrenwill be educated, and what is the total profit (including external benefits) of all familiesderived from the education of Sweet Harmony’s children?

(a) 30 children will be educated, and the total profit is $30,000.

(b) 30 children will be educated, and the total profit is $90,000.

(c) 30 children will be educated, and the total profit is $60,000.

(d) 70 children will be educated, and the total profit is $50,000.

(e) 70 children will be educated, and the total profit is $120,000.

29. Suppose the town of Sweet Harmony described in the previous question enacts a subsidy forfamilies that educate their children. Each family who sends their child to school receivesa subsidy of $1,000. This subsidy is financed by a tax on the residents of Sweet Harmony,which is shared equally among families in the town. Compared to the equilibrium describedin the previous question, how will this subsidy affect the number of children educated andthe total profit (including external benefits) of all families in Sweet Harmony?

(a) 40 more children will be educated, and total profits will decrease by $25,000.

(b) 40 more children will be educated, and total profits will decrease by $40,000.

(c) 40 more children will be educated, and total profits will increase by $75,000.

(d) no more children will be educated, and total profits will not change.

(e) no more children will be educated, and total profits will decrease by $50,000.

Economics 1 8

30. The demand for tax accountants in Richtown, Connecticut, is given by the demand functionQ = 4, 000− 25P, where Q is the number of clients seeking to hire a tax accountant and P isthe price accountants charge their clients. Each accountant can complete tax forms for 200clients each year. The time an accountant takes to complete a tax form for any one clienthas an opportunity cost of $50. Each accountant must also pay the city $10,000 per year fora license to practice accounting in Richtown. The license fee and the opportunity cost arethe only costs an accountant has. In long-run equilibrium (when accountants can enter andexit the accounting practice in Richtown), how many accountants will practice in Richtown?

(a) 7

(b) 8

(c) 6

(d) 9

NameTest Form C

Economics 1Final Exam

December 9, 2008

True-False Questions: Fill in Bubble A for True, Bubble B for False.

1. A profit-maximizing monopolist will sell more units of a good than the amount of the goodthat would be sold in a competitive equilibrium.

2. We can expect there to be excess demand in a market where a legal price ceiling is set lowerthan the competitive equilibrium price.

3. Suppose the demand curve for a good slopes down, and the supply curve for that good slopesup. If the supply curve shifts and the demand curve does not shift, the equilibrium price andquantity will move in opposite directions.

4. If Person A has absolute advantage over Person B in the production of Good X, then PersonA must also have comparative advantage over Person B in the production of Good X.

5. If the world price for a good exceeds the autarky price for the good, opening the internationalmarket to domestic producers will decrease the consumer surplus of domestic consumers ofthe good.

6. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduc-tion in sellers’ profit and consumers’ surplus caused by a sales tax of $20 per unit will exceedthe amount of revenue collected by the tax.

7. If a firm’s average variable cost does not change as it increases its output, the firm’s marginalcost equals its average variable cost.

8. A competitive equilibrium for a good will maximize the number of trades of the good forwhich both the buyer and seller have a positive profit.

9. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue ofthe good is negative at that quantity.

Economics 1 2

10. A monopolist faces a downward-sloping demand curve for its product. In order to maximizeits profits, it will choose the output that maximizes its marginal revenue.

Multiple Choice Questions

11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it wouldhave to lower its price to $87 per unit. What is the marginal revenue of the 11th unit?

(a) $77

(b) $90

(c) $87

(d) $57

(e) $80

12. The demand curve for Econ 1 textbooks is given by the equation P = 100 − Q, where P isthe price of the book and Q is the number of books sold. The variable cost of producing andselling a textbook is constant at $20 per book. The fixed cost is zero. What price would aprofit-maximizing monopolist charge for the book?

(a) $90

(b) $20

(c) $40

(d) $60

13. Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem.Also assume that the textbook is sold by a profit-maximizing monopolist. How much higheror lower are the total profits of buyers and sellers than those profits would be in a competitiveequilibrium for the textbook?

(a) Totals profits are $200 higher than they would be in a competitive equilibrium.

(b) Total profits are $300 lower than they would be in a competitive equilibrium.

(c) Total profits are $800 lower than they would be in a competitive equilibrium.

(d) Total profits are $600 higher than they would be in a competitive equilibrium.

14. If a monopolist that charges the same price to all customers faces a demand curve that slopesdownward to the right, we can reasonably expect that the firm

(a) will find that its marginal revenue is less than the price of the product it sells.

(b) must lower prices if it hopes to increase its profits.

(c) will have no effect on the price of the product it sells.

(d) will find that its marginal revenue is greater than the price of the product it sells.

Final Exam 3

15. The small island nation of Ruritania is populated by two farmers, Alf and Barney. Eachfarmer has 100 acres. The land can be used either for growing wheat or as pasture for beefcattle. Alf’s land is better than Barney’s land. Each acre that Alf plants to wheat will yield50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds ofbeef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year,and each acre that Barney devotes to pasture will yield 30 pounds of beef per year.

(a) Alf’s farm has comparative advantage in both beef and wheat.

(b) Alf’s farm has absolute advantage in the production of beef and comparative advantage in theproduction of wheat.

(c) Barney’s farm has comparative advantage in the production of wheat.

(d) Barney’s farm has comparative advantage in the production of beef.

(e) More than one of the above statements is true.

16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acreof land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas ismore productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons ofgrapefruit. Farmers in each state sell their crops in a national market. If the price of cottonin this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmersin each state grow?

(a) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(b) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(c) Farmers in both states will grow grapefruit but no cotton.

(d) Farmers in both states will grow cotton but no grapefruit.

(e) Farmers in both states will grow some of each crop.

17. Prices have changed in the market described above. Now the price of cotton is $150 per ton,and the price of grapefruit is $200 per ton. After the change, what will farmers in each stategrow?

(a) Farmers in both states will grow cotton but no grapefruit.

(b) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(c) Farmers in both states will grow grapefruit but no cotton.

(d) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(e) Farmers in both states will grow some of each crop.

Economics 1 4

18. For each hour of labor, Country A can produce 20 pounds of rutabagas or 16 pounds of grapes.For each hour of labor, Country B can produce 10 pounds of rutabagas or 4 pounds of grapes.The theory of comparative advantage implies that, under these conditions, Country A wouldfind it advantageous to:

(a) import both rutabagas and grapes and export nothing.

(b) export rutabagas and import grapes.

(c) export both rutabagas and grapes and import nothing.

(d) export grapes and import rutabagas.

(e) grow all the rutabagas and grapes it consumes and neither import nor export.

19. The demand curve for motel rooms is downward sloping, and the supply curve for motelrooms is upward sloping. Also, the demand curve for gasoline is downward sloping, and thesupply curve for gasoline is upward sloping. Because families on summer vacation trips buylots of gasoline and also rent motel rooms, gasoline and motel rooms are complements. Anincrease in the price of gasoline decreases summer travel, which decreases the demand formotel rooms. Suppose there is a shift up in the supply of gasoline, with less gasoline suppliedat every price. What would happen to the price of motel rooms and the number of motelrooms rented?

(a) The price of motel rooms would fall, and the number of motel rooms rented would rise.

(b) The price of motel rooms would rise, and the number of motel rooms rented would rise.

(c) The price of motel rooms would fall, and the number of motel rooms rented would fall.

(d) The price of motel rooms would rise, and the number of motel rooms rented would fall.

20. The article ”Depressing Times,” published in The Economist on November 13, 2008, describesa harmful effect of a fall in the inflation rate that is ”too far, too fast.” What is that harmfuleffect?

(a) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the demand for goods and services, which drives up wage ratesand decreases employment.

(b) A general fall in prices makes US exports less competitive in international markets, which leadsto a cutback in domestic production and employment.

(c) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the cost of the loans that consumers and firms have taken out.They rush to pay off those loans, which reduces their demand for goods and services, causingfurther price reductions and unemployment.

(d) A general fall in prices reduces the value of assets held by banks and other financial institutions.They are less willing to lend as a result, which decreases employment in manufacturing andother businesses.

Final Exam 5

21. A spider mite infestation reduced the fall harvest of apples in Washington. As a result of theinfestation, the harvest decreased by 15%, but the revenue of apple ranchers only decreasedby 10%. The demand curve did not change. What was the price elasticity of demand forapples in Washington?

(a) −0.66

(b) −2.0

(c) −0.5

(d) −1.5

(e) −3.0

22. The supply function for fresh strawberries is given by the equation Ps(Q) = 4 + 4Q. Thedemand function is given by the equation Pd(Q) = 85− 5Q where Q is the number of crates ofstrawberries sold. In competitive equilibrium, how many crates of strawberries will be sold?

(a) 40

(b) 9

(c) 14

(d) 6

(e) None of the above.

23. Mike owns and operates a restaurant. He pays his staff $10,000 per month and spends $8,000per month on food, utilities, and other supplies. Because he owns the restaurant building,Mike doesn’t pay rent. However, he could rent the building to someone else for $2,000 permonth. If he did close his restaurant and rent his building to someone else, he would haveto find a job. Mike believes that he could work for someone else at a salary of $3,000 permonth. What is the opportunity cost to Mike of continuing to operate his restaurant?

(a) $21,000 per month

(b) $10,000 per month

(c) $20,000 per month

(d) $18,000 per month

(e) $23,000 per month

Economics 1 6

24. In ”Clothes Will Cost Less, but Some Nations Pay,” Marshall, Iritani and Dickerson outlinesome of the consequences of phasing out the Multifiber Arrangement (MFA). Which of thefollowing options best describes the MFA?

(a) The MFA was a system of quotas determining the amounts of certain types of clothing thatvarious countries could export into the US, Canada and Europe.

(b) The MFA was a system of subsidies for textile manufacturers in the US that allowed them tocompete with cheaper imports from Asia.

(c) The MFA was a system of tariffs on imports of clothing from Asian to the US, Canada, andEurope.

(d) The MFA prescribed workplace and labor conditions that foreign textile manufacturers had tosatisfy to export their products to the US, Canada, and Europe.

25. Ten residents of Greenfield are willing to pay someone as much as $8 a week to mow theirlawn, and ten residents are willing to pay someone as much as $6 a week to mow their lawn.Thirty teenage boys are willing to mow a lawn each week if they receive at least $5 for thejob. Suppose the city of Greenfield imposes a tax of $2 a week on each resident who hiresa teenage boy to mow his or her lawn. How will that tax affect the competitive equilibriumprice of lawn mowing?

(a) The price would not change.

(b) The price would fall by $1.

(c) The price would fall by $2.

(d) The price would rise by $2

(e) The price would rise by $1.

26. The Bergstrom Box Company (BBC) makes cute Swedish boxes to sell to gullible Americantourists. If it employs one worker, it can make and sell 6 boxes per day. If it employs twoworkers, it can make and sell 10 boxes per day; and if it employs 3 workers, it can make andsell 12 boxes per day. Each box sells for $10. If the wage of a worker is $30 per day, howmany workers should BBC hire?

(a) 0 workers per day

(b) 2 workers per day

(c) 3 workers per day

(d) 1 worker per day

(e) 5 goats and no workers

Final Exam 7

27. There are six box companies in Sweden (including Bergstrom Box Company). Each companyhas the same relationship between labor employed and output as Bergstrom Box Companydescribed in the previous question. Each company can also sell its boxes for a price of $10per box. There are 5 workers in Sweden willing to work in a box company for $25 per dayor more, and there are 6 workers willing to work in a box company for $35 per day. What isthe competitive equilibrium wage for box company workers in Sweden?

(a) $40 per day

(b) $30 per day

(c) $25 per day

(d) $35 per day

(e) $60 per day

28. The town of Sweet Harmony has 100 families. Seventy of those families have a child, and 30do not. Thirty of the families with a child are willing to pay as much as $6,000 to educatetheir child, and the other forty are willing to pay as much as $3,000. Each educated childcreates a positive externality of $10 for each family in Sweet Harmony. The cost of educatinga child is $5,000. If each family must pay the cost of educating its child, how many childrenwill be educated, and what is the total profit (including external benefits) of all familiesderived from the education of Sweet Harmony’s children?

(a) 30 children will be educated, and the total profit is $90,000.

(b) 70 children will be educated, and the total profit is $50,000.

(c) 30 children will be educated, and the total profit is $30,000.

(d) 30 children will be educated, and the total profit is $60,000.

(e) 70 children will be educated, and the total profit is $120,000.

29. Suppose the town of Sweet Harmony described in the previous question enacts a subsidy forfamilies that educate their children. Each family who sends their child to school receivesa subsidy of $1,000. This subsidy is financed by a tax on the residents of Sweet Harmony,which is shared equally among families in the town. Compared to the equilibrium describedin the previous question, how will this subsidy affect the number of children educated andthe total profit (including external benefits) of all families in Sweet Harmony?

(a) 40 more children will be educated, and total profits will increase by $75,000.

(b) 40 more children will be educated, and total profits will decrease by $25,000.

(c) 40 more children will be educated, and total profits will decrease by $40,000.

(d) no more children will be educated, and total profits will not change.

(e) no more children will be educated, and total profits will decrease by $50,000.

Economics 1 8

30. The demand for tax accountants in Richtown, Connecticut, is given by the demand functionQ = 4, 000− 25P, where Q is the number of clients seeking to hire a tax accountant and P isthe price accountants charge their clients. Each accountant can complete tax forms for 200clients each year. The time an accountant takes to complete a tax form for any one clienthas an opportunity cost of $50. Each accountant must also pay the city $10,000 per year fora license to practice accounting in Richtown. The license fee and the opportunity cost arethe only costs an accountant has. In long-run equilibrium (when accountants can enter andexit the accounting practice in Richtown), how many accountants will practice in Richtown?

(a) 8

(b) 9

(c) 7

(d) 6

NameTest Form D

Economics 1Final Exam

December 9, 2008

True-False Questions: Fill in Bubble A for True, Bubble B for False.

1. A monopolist faces a downward-sloping demand curve for its product. In order to maximizeits profits, it will choose the output that maximizes its marginal revenue.

2. If the world price for a good exceeds the autarky price for the good, opening the internationalmarket to domestic producers will decrease the consumer surplus of domestic consumers ofthe good.

3. Suppose the demand curve for a good slopes down, and the supply curve for that good slopesup. If the supply curve shifts and the demand curve does not shift, the equilibrium price andquantity will move in opposite directions.

4. If a firm’s average variable cost does not change as it increases its output, the firm’s marginalcost equals its average variable cost.

5. A competitive equilibrium for a good will maximize the number of trades of the good forwhich both the buyer and seller have a positive profit.

6. A profit-maximizing monopolist will sell more units of a good than the amount of the goodthat would be sold in a competitive equilibrium.

7. We can expect there to be excess demand in a market where a legal price ceiling is set lowerthan the competitive equilibrium price.

8. If the demand curve for a good is inelastic at a particular quantity, the marginal revenue ofthe good is negative at that quantity.

9. If the demand curve slopes downwards and the supply curve slopes upwards, the total reduc-tion in sellers’ profit and consumers’ surplus caused by a sales tax of $20 per unit will exceedthe amount of revenue collected by the tax.

Economics 1 2

10. If Person A has absolute advantage over Person B in the production of Good X, then PersonA must also have comparative advantage over Person B in the production of Good X.

Multiple Choice Questions

11. A monopolist can sell 10 units of a good for a price of $90 per unit. To sell 11 units, it wouldhave to lower its price to $87 per unit. What is the marginal revenue of the 11th unit?

(a) $57

(b) $77

(c) $87

(d) $90

(e) $80

12. The demand curve for Econ 1 textbooks is given by the equation P = 100 − Q, where P isthe price of the book and Q is the number of books sold. The variable cost of producing andselling a textbook is constant at $20 per book. The fixed cost is zero. What price would aprofit-maximizing monopolist charge for the book?

(a) $60

(b) $90

(c) $20

(d) $40

13. Assume the same demand curve and costs for Econ 1 textbooks as in the previous problem.Also assume that the textbook is sold by a profit-maximizing monopolist. How much higheror lower are the total profits of buyers and sellers than those profits would be in a competitiveequilibrium for the textbook?

(a) Totals profits are $200 higher than they would be in a competitive equilibrium.

(b) Total profits are $800 lower than they would be in a competitive equilibrium.

(c) Total profits are $300 lower than they would be in a competitive equilibrium.

(d) Total profits are $600 higher than they would be in a competitive equilibrium.

14. If a monopolist that charges the same price to all customers faces a demand curve that slopesdownward to the right, we can reasonably expect that the firm

(a) will find that its marginal revenue is less than the price of the product it sells.

(b) must lower prices if it hopes to increase its profits.

(c) will find that its marginal revenue is greater than the price of the product it sells.

(d) will have no effect on the price of the product it sells.

Final Exam 3

15. The small island nation of Ruritania is populated by two farmers, Alf and Barney. Eachfarmer has 100 acres. The land can be used either for growing wheat or as pasture for beefcattle. Alf’s land is better than Barney’s land. Each acre that Alf plants to wheat will yield50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds ofbeef per year. Each acre that Barney plants to wheat will yield 25 bushels of wheat per year,and each acre that Barney devotes to pasture will yield 30 pounds of beef per year.

(a) Alf’s farm has comparative advantage in both beef and wheat.

(b) Barney’s farm has comparative advantage in the production of beef.

(c) Alf’s farm has absolute advantage in the production of beef and comparative advantage in theproduction of wheat.

(d) Barney’s farm has comparative advantage in the production of wheat.

(e) More than one of the above statements is true.

16. Farmers in the states of Texia and Californas can grow both cotton and grapefruit. An acreof land in Texia yields either 2 tons of cotton or 1 ton of grapefruit. Land in Californas ismore productive. An acre of land in Californas yields either 3 tons of cotton or 4 tons ofgrapefruit. Farmers in each state sell their crops in a national market. If the price of cottonin this market is $100 per ton and the price of grapefruit is $300 per ton, what will farmersin each state grow?

(a) Farmers in both states will grow cotton but no grapefruit.

(b) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(c) Farmers in both states will grow grapefruit but no cotton.

(d) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(e) Farmers in both states will grow some of each crop.

17. Prices have changed in the market described above. Now the price of cotton is $150 per ton,and the price of grapefruit is $200 per ton. After the change, what will farmers in each stategrow?

(a) Farmers in both states will grow cotton but no grapefruit.

(b) Farmers in Texia will grow grapefruit but no cotton, and farmers in Californas will grow cottonbut no grapefruit.

(c) Farmers in Texia will grow cotton but no grapefruit, and farmers in Californas will grow grape-fruit but no cotton.

(d) Farmers in both states will grow grapefruit but no cotton.

(e) Farmers in both states will grow some of each crop.

Economics 1 4

18. Ten residents of Greenfield are willing to pay someone as much as $8 a week to mow theirlawn, and ten residents are willing to pay someone as much as $6 a week to mow their lawn.Thirty teenage boys are willing to mow a lawn each week if they receive at least $5 for thejob. Suppose the city of Greenfield imposes a tax of $2 a week on each resident who hiresa teenage boy to mow his or her lawn. How will that tax affect the competitive equilibriumprice of lawn mowing?

(a) The price would fall by $1.

(b) The price would not change.

(c) The price would rise by $2

(d) The price would fall by $2.

(e) The price would rise by $1.

19. A spider mite infestation reduced the fall harvest of apples in Washington. As a result of theinfestation, the harvest decreased by 15%, but the revenue of apple ranchers only decreasedby 10%. The demand curve did not change. What was the price elasticity of demand forapples in Washington?

(a) −0.5

(b) −2.0

(c) −0.66

(d) −1.5

(e) −3.0

20. In ”Clothes Will Cost Less, but Some Nations Pay,” Marshall, Iritani and Dickerson outlinesome of the consequences of phasing out the Multifiber Arrangement (MFA). Which of thefollowing options best describes the MFA?

(a) The MFA prescribed workplace and labor conditions that foreign textile manufacturers had tosatisfy to export their products to the US, Canada, and Europe.

(b) The MFA was a system of tariffs on imports of clothing from Asian to the US, Canada, andEurope.

(c) The MFA was a system of subsidies for textile manufacturers in the US that allowed them tocompete with cheaper imports from Asia.

(d) The MFA was a system of quotas determining the amounts of certain types of clothing thatvarious countries could export into the US, Canada and Europe.

Final Exam 5

21. The supply function for fresh strawberries is given by the equation Ps(Q) = 4 + 4Q. Thedemand function is given by the equation Pd(Q) = 85− 5Q where Q is the number of crates ofstrawberries sold. In competitive equilibrium, how many crates of strawberries will be sold?

(a) 9

(b) 14

(c) 40

(d) 6

(e) None of the above.

22. For each hour of labor, Country A can produce 20 pounds of rutabagas or 16 pounds of grapes.For each hour of labor, Country B can produce 10 pounds of rutabagas or 4 pounds of grapes.The theory of comparative advantage implies that, under these conditions, Country A wouldfind it advantageous to:

(a) export rutabagas and import grapes.

(b) export grapes and import rutabagas.

(c) export both rutabagas and grapes and import nothing.

(d) import both rutabagas and grapes and export nothing.

(e) grow all the rutabagas and grapes it consumes and neither import nor export.

23. Mike owns and operates a restaurant. He pays his staff $10,000 per month and spends $8,000per month on food, utilities, and other supplies. Because he owns the restaurant building,Mike doesn’t pay rent. However, he could rent the building to someone else for $2,000 permonth. If he did close his restaurant and rent his building to someone else, he would haveto find a job. Mike believes that he could work for someone else at a salary of $3,000 permonth. What is the opportunity cost to Mike of continuing to operate his restaurant?

(a) $20,000 per month

(b) $10,000 per month

(c) $21,000 per month

(d) $18,000 per month

(e) $23,000 per month

Economics 1 6

24. The demand curve for motel rooms is downward sloping, and the supply curve for motelrooms is upward sloping. Also, the demand curve for gasoline is downward sloping, and thesupply curve for gasoline is upward sloping. Because families on summer vacation trips buylots of gasoline and also rent motel rooms, gasoline and motel rooms are complements. Anincrease in the price of gasoline decreases summer travel, which decreases the demand formotel rooms. Suppose there is a shift up in the supply of gasoline, with less gasoline suppliedat every price. What would happen to the price of motel rooms and the number of motelrooms rented?

(a) The price of motel rooms would fall, and the number of motel rooms rented would rise.

(b) The price of motel rooms would rise, and the number of motel rooms rented would rise.

(c) The price of motel rooms would rise, and the number of motel rooms rented would fall.

(d) The price of motel rooms would fall, and the number of motel rooms rented would fall.

25. The article ”Depressing Times,” published in The Economist on November 13, 2008, describesa harmful effect of a fall in the inflation rate that is ”too far, too fast.” What is that harmfuleffect?

(a) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the demand for goods and services, which drives up wage ratesand decreases employment.

(b) A general fall in prices reduces the value of assets held by banks and other financial institutions.They are less willing to lend as a result, which decreases employment in manufacturing andother businesses.

(c) A general fall in prices makes US exports less competitive in international markets, which leadsto a cutback in domestic production and employment.

(d) A general fall in prices increases the value of the dollar, the quantity of goods and services thata dollar can buy. This increases the cost of the loans that consumers and firms have taken out.They rush to pay off those loans, which reduces their demand for goods and services, causingfurther price reductions and unemployment.

26. The Bergstrom Box Company (BBC) makes cute Swedish boxes to sell to gullible Americantourists. If it employs one worker, it can make and sell 6 boxes per day. If it employs twoworkers, it can make and sell 10 boxes per day; and if it employs 3 workers, it can make andsell 12 boxes per day. Each box sells for $10. If the wage of a worker is $30 per day, howmany workers should BBC hire?

(a) 1 worker per day

(b) 2 workers per day

(c) 0 workers per day

(d) 3 workers per day

(e) 5 goats and no workers

Final Exam 7

27. There are six box companies in Sweden (including Bergstrom Box Company). Each companyhas the same relationship between labor employed and output as Bergstrom Box Companydescribed in the previous question. Each company can also sell its boxes for a price of $10per box. There are 5 workers in Sweden willing to work in a box company for $25 per dayor more, and there are 6 workers willing to work in a box company for $35 per day. What isthe competitive equilibrium wage for box company workers in Sweden?

(a) $40 per day

(b) $30 per day

(c) $35 per day

(d) $25 per day

(e) $60 per day

28. The town of Sweet Harmony has 100 families. Seventy of those families have a child, and 30do not. Thirty of the families with a child are willing to pay as much as $6,000 to educatetheir child, and the other forty are willing to pay as much as $3,000. Each educated childcreates a positive externality of $10 for each family in Sweet Harmony. The cost of educatinga child is $5,000. If each family must pay the cost of educating its child, how many childrenwill be educated, and what is the total profit (including external benefits) of all familiesderived from the education of Sweet Harmony’s children?

(a) 30 children will be educated, and the total profit is $90,000.

(b) 30 children will be educated, and the total profit is $60,000.

(c) 30 children will be educated, and the total profit is $30,000.

(d) 70 children will be educated, and the total profit is $50,000.

(e) 70 children will be educated, and the total profit is $120,000.

29. Suppose the town of Sweet Harmony described in the previous question enacts a subsidy forfamilies that educate their children. Each family who sends their child to school receivesa subsidy of $1,000. This subsidy is financed by a tax on the residents of Sweet Harmony,which is shared equally among families in the town. Compared to the equilibrium describedin the previous question, how will this subsidy affect the number of children educated andthe total profit (including external benefits) of all families in Sweet Harmony?

(a) 40 more children will be educated, and total profits will decrease by $25,000.

(b) 40 more children will be educated, and total profits will decrease by $40,000.

(c) 40 more children will be educated, and total profits will increase by $75,000.

(d) no more children will be educated, and total profits will not change.

(e) no more children will be educated, and total profits will decrease by $50,000.

Economics 1 8

30. The demand for tax accountants in Richtown, Connecticut, is given by the demand functionQ = 4, 000− 25P, where Q is the number of clients seeking to hire a tax accountant and P isthe price accountants charge their clients. Each accountant can complete tax forms for 200clients each year. The time an accountant takes to complete a tax form for any one clienthas an opportunity cost of $50. Each accountant must also pay the city $10,000 per year fora license to practice accounting in Richtown. The license fee and the opportunity cost arethe only costs an accountant has. In long-run equilibrium (when accountants can enter andexit the accounting practice in Richtown), how many accountants will practice in Richtown?

(a) 9

(b) 7

(c) 8

(d) 6

ANSWER KEYTest Form AEconomics 1Final Exam

December 9, 2008

ExamQuestionNumber Answer

1 F2 T3 F4 F5 T6 F7 T8 T9 T

10 T11 D12 D13 D14 C15 C16 D17 A18 B19 C20 A21 B22 E23 E24 C25 C26 C27 D28 B29 D30 B

ANSWER KEYTest Form BEconomics 1Final Exam

December 9, 2008

ExamQuestionNumber Answer

1 T2 F3 T4 F5 T6 T7 T8 F9 T

10 F11 C12 B13 C14 D15 B16 A17 D18 E19 C20 D21 C22 D23 A24 C25 E26 C27 A28 C29 D30 A

ANSWER KEYTest Form CEconomics 1Final Exam

December 9, 2008

ExamQuestionNumber Answer

1 F2 T3 T4 F5 T6 T7 T8 F9 T

10 F11 D12 D13 C14 A15 C16 C17 D18 D19 C20 C21 E22 B23 E24 A25 A26 B27 A28 D29 D30 C

ANSWER KEYTest Form DEconomics 1Final Exam

December 9, 2008

ExamQuestionNumber Answer

1 F2 T3 T4 T5 F6 F7 T8 T9 T

10 F11 A12 A13 B14 A15 D16 C17 C18 B19 E20 D21 A22 B23 E24 D25 D26 B27 A28 B29 D30 B