ANSWERS TO FINAL (ON CHAPTERS 12-15 AND 18-20) ECO 304 SPRING 2007

UDAYAN ROY

The answers to the multiple-choice questions are given on the last two pages. The
answers to the short-answer questions are given after each such question on pages 9
and 10.

Chapter 12

Table 12-2
Ski Weekend Trip
Value to Allyn $85
Value to Pam $75
Value to Greg $65
Value to Dana $40

____ 1. Refer to Table 12-2. The price of a weekend ski pass is $38 and this is also the actual unit cost of
providing a weekend of skiing for one person. If the government imposes a tax of $15 on each
weekend ski pass, the deadweight loss associated with the tax is
a. $2.
b. $37.
c. $52.
d. $97.
____ 2. If a poor family has three children in public school and a rich family has two children in private
school, the benefits principle of taxation would suggest that
a. the poor family should pay more in taxes to pay for public education than the rich family.
b. the rich family should pay more in taxes to pay for public education than the poor family.
c. the benefits of private school exceed those of public school.
d. public schools should be financed by property taxes.
____ 3. The theory that the wealthy should contribute more to police protection than the poor because
they have more to protect is based on
a. the ability-to-pay principle.
b. a consumption tax plan.
c. the benefits principle.
d. property tax assessments.

Chapter 13

Figure 13-5
____ 4. Refer to Figure 13-5. Which of the curves is most likely to represent average total cost?
a. A
b. B
c. C
d. D
____ 5. Refer to Figure 13-5. Which of the curves is most likely to represent average fixed cost?
a. A
b. B
c. C
d. D
____ 6. Refer to Figure 13-5. Which of the curves is most likely to represent average variable cost?
a. A
b. B
c. C
d. D
____ 7. Refer to Figure 13-5. Which of the curves is most likely to represent marginal cost?
a. A
b. B
c. C
d. D

Chapter 14

____ 8. Which of the following statements best reflects a price-taking firm?

a. If the firm were to charge more than the going price, it would sell none of its goods.
b. The firm has no incentive to charge less than the going price.
c. The firm can sell as much as it wants to sell at the going price.
d. All of the above are correct.
____ 9. If a firm in a competitive market reduces its output by 20 percent, then as a result the price of its
output is likely to
a. increase.
b. remain unchanged.
c. decrease by less than 20 percent.
d. decrease by more than 20 percent.

2
____ 10. The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. As the market for
wheat is competitive, the Wheeler Wheat Farm maximizes its profit by choosing
a. to produce the quantity at which average total cost is minimized.
b. to produce the quantity at which average fixed cost is minimized.
c. to sell its wheat at a price where marginal cost is equal to average total cost.
d. the quantity at which market price is equal to the farm's marginal cost of production.
____ 11. In 1999, sheepherders in the western United States slaughtered 10,000 sheep and buried them in
large open pits rather than truck them to the market to be sold. This behavior is most likely
explained by
a. sheepherders making a shut-down decision to save the variable cost of transporting sheep
to a slaughter house.
b. sheepherders making an exit decision to recover the fixed cost of raising the sheep.
c. the rising marginal cost of producing sheep.
d. irrational behavior of sheepherders.
____ 12. When profit-maximizing firms in competitive markets are earning profits,
a. market demand must exceed market supply at the market equilibrium price.
b. market supply must exceed market demand at the market equilibrium price.
c. new firms will enter the market.
d. the most inefficient firms will be encouraged to leave the market.
____ 13. A competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces
has a marginal cost of $22. It follows that the production of the 50th unit of output
a. increases the firm's total revenue by $20.
b. increases the firm's total cost by $22.
c. decreases the firm's profit by $2.
d. All of the above are correct.
____ 14. The competitive firm's short-run supply curve is that portion of the
a. average variable cost curve that lies above marginal cost.
b. average total cost curve that lies above marginal cost.
c. marginal cost curve that lies above average variable cost.
d. marginal cost curve that lies above average total cost.
____ 15. In long-run equilibrium of a competitive market, the number of firms in the market adjusts so that
the price is equal to
a. sunk cost.
b. the maximum value of marginal cost.
c. the minimum value of average total cost.
d. the minimum value of average variable cost.
____ 16. When firms are neither entering nor exiting a perfectly competitive market,
a. total cost must equal total revenue.
b. economic profits must be zero.
c. average revenue must equal average total cost.
d. All of the above are correct.

Figure 14-9

3
____ 17. Refer to Figure 14-9. Assume that the market starts in equilibrium at point A in panel (b). An
increase in demand from Demand 0 to Demand1 will result in
a. a new market equilibrium at point D.
b. an eventual increase in the number of firms in the market and a new long-run equilibrium
at point C.
c. rising prices and falling profits for existing firms in the market.
d. falling prices and falling profits for existing firms in the market.

Chapter 15

____ 18. Encouraging firms to invest in research and development and individuals to engage in creative
endeavors such as writing novels is one justification for
a. resource monopolies.
b. natural monopolies.
c. government-created monopolies.
d. breaking up monopolies into smaller firms.
____ 19. For a profit-maximizing monopolist,
a. P > MR = MC.
b. P = MR = MC.
c. P > MR > MC.
d. MR < MC < P.

Figure 15-2

4
____ 20. Refer to Figure 15-2. The demand curve for a monopoly firm is depicted by curve
a. A.
b. B.
c. C.
d. D.
____ 21. Refer to Figure 15-2. The marginal cost curve for a monopoly firm is depicted by curve
a. A.
b. B.
c. C.
d. D.
____ 22. Refer to Figure 15-2. The monopolist will produce at the level
a. Q1
b. Q2
c. Q3
d. Q4
____ 23. The socially efficient level of production occurs where the marginal cost curve intersects which
of the following curves?
a. average variable cost
b. average total cost
c. demand
d. marginal revenue
____ 24. Antitrust laws allow the government to
a. prevent mergers.
b. break up companies.
c. promote competition.
d. All of the above are correct.
____ 25. A perfectly price-discriminating monopolist is able to
a. maximize profit and produce a socially-optimal level of output.
b. maximize profit, but not produce a socially-optimal level of output.
c. produce a socially-optimal level of output, but not maximize profit.
d. exercise illegal preferences regarding the race and/or gender of its employees.

5
 Chapter 18

____ 26. The marginal product of labor is defined as the change in

a. output per additional unit of revenue.
b. output per additional unit of labor.
c. revenue per additional unit of labor.
d. revenue per additional unit of output.
____ 27. The value of the marginal product of any input is equal to the marginal product of that input
multiplied by the
a. additional revenue.
b. marginal cost of the output.
c. change in total profit.
d. market price of the output.
____ 28. If the wage exceeds the value of the marginal product of labor, then hiring another worker
a. decreases the firm's total revenue.
b. increases the firm's profit.
c. increases the firm's total cost.
d. All of the above are correct.
____ 29. A competitive, profit-maximizing firm hires workers up to the point where the
a. marginal product equals zero.
b. marginal revenue product equals zero.
c. marginal product equals the wage.
d. value of the marginal product equals the wage.
____ 30. If the price of airline tickets falls, what will happen to the demand curve for flight attendants?
a. It will shift upward.
b. It will shift to the left.
c. It will shift to the right.
d. It will remain unchanged; price changes do not shift demand curves.

Chapter 19

____ 31. In recent years, the ratio of earnings of the typical U.S. college graduate to the earnings of the
typical high school graduate without additional education has
a. risen as the demand for skilled labor has increased relative to the demand for unskilled
labor.
b. risen as the demand for skilled labor has decreased relative to the demand for unskilled
labor.
c. fallen as the demand for skilled labor has increased relative to the demand for unskilled
labor.
d. fallen as the demand for skilled labor has decreased relative to the demand for unskilled
labor.
____ 32. Economists have proposed the following hypotheses to explain the rising wage gap between
skilled and unskilled workers.
(i) increasing the role of unions in setting skilled wage scales
(ii) increasing international trade
(iii) technological change

a. (i) and (iii) only

b. (ii) and (iii) only
c. (i) and (ii) only

6
 d. (iii) only
____ 33. Evidence from a 1988 study of the market for professional basketball players
a. found no evidence of consumer-driven wage discrimination.
b. found some evidence of consumer-driven wage discrimination.
c. found that measurement of marginal productivity was very difficult for basketball players.
d. indicated that sports with strong player associations are unlikely to experience wage
discrimination.
____ 34. In the early twentieth century, racial segregation of streetcars in the southern cities was largely
opposed by
a. streetcar firms.
b. government officials.
c. Sherman antitrust laws.
d. All of the above are correct.
____ 35. If employers are profit-maximizers, then
a. competition will always eventually eliminate employment discrimination.
b. employment discrimination may persist if consumers discriminate.
c. employment discrimination will persist because it is always profitable.
d. compensating differentials will not exist.

Chapter 20

____ 36. Raising total utility is which political philosophy's prime objective?
a. Utilitarianism
b. Liberalism
c. Libertarianism
d. None of the above are correct.
____ 37. As a result of the trade-off between achieving income equality and providing incentives to work,
an optimal redistribution policy
a. can never be funded through taxes on wage income.
b. must always achieve a full egalitarian society.
c. is only consistent with transfers to the middle class.
d. always falls short of a full egalitarian society.
____ 38. In the story of the leaky bucket, a fundamental problem with government redistribution
programs is described. As long as the government only has "leaky buckets" at its disposal
a. Affirmative-action programs are doomed to failure.
b. it should not try to reach complete equality in income.
c. full egalitarian policies will always dominate competing policy options.
d. equality of economic opportunity is an unattainable goal.
____ 39. Liberalism is a label that was coined for the view espoused by
a. Robert Nozick.
b. John Stuart Mill.
c. John Rawls.
d. Jeremy Bentham.
____ 40. Liberalism is founded on a premise that behind a "veil of ignorance"
a. justice can never be agreed upon.
b. no one would be considered in an "original position".
c. everyone would agree to just and fair rules to redistribute income.
d. justice is a matter of political philosophy.
____ 41. The maximin criterion is attributed to which political philosophy?

7
 a. Utilitarianism
b. Liberalism
c. Libertarianism
d. None of the above are correct.
____ 42. The maximin criterion suggests that the focus of social policy would be to
a. expropriate the factors of production from the capitalist class.
b. ensure an egalitarian distribution of income.
c. elevate the well-being of those at the bottom of the income distribution.
d. elevate the well-being of all workers.
____ 43. The political philosophy that believes that the government should continue to redistribute income
until everyone in society has exactly the same income is
a. utilitarian
b. liberal
c. libertarian
d. None of the above are correct.

8
ANSWERS FINAL ECO 304 SPRING 2007 UDAYAN ROY

Short-Answer Part

1. Should fines for violations of the law (such as fines for parking violations) be
higher the richer the violator is? (Norway has a system of this kind.) Explain the
effect of such a policy on both efficiency and fairness.

Yes and No.

From the fairness angle, one might want the punishment for law breaking to hurt
every law breaker equally. If so, making the rich pay heavier fines may be the way
to go. On the other hand, making richer people pay stiffer fines for law breaking
would amount to punishing people for being successful. To those who believe that
the punishment should fit the crime, this may seem unfair.

From the efficiency angle, making richer people pay higher fines may promote
efficiency. Laws often exist in order to make our societies more productive. If richer
people are required to pay stiffer fines for law breaking, they would be less likely to
violate such laws and the reduce law breaking would make society more productive.
On the other hand, people often violate laws when being law abiding makes them
less productive. (For example, you might drive faster than the speed limit to save
time so as to get more work done.) Given this inevitability, more output would be
produced for any given level of law-breaking if those that break the law are the most
productive citizens in the community. In other words, given that some law-breaking
will occur, it would be more efficient if the law breakers are the most productive
people in society, such as a $300 per hour lawyer. Such an efficient outcome would
not come about if fines rise with income. Moreover, if fines for breaking the law rise
with income, the incentive to work hard and get rich will be reduced. This too would
reduce efficiency and create deadweight losses.

2. We saw in chapter 14 (on perfect competition) that, in the long run, each firm
earns zero profit. Why would anyone be in business if profits were always zero in
the long run? Explain.

The answer is straight from the textbook. Profit = Revenue Cost, and Cost =
Explicit cost + Implicit cost, where explicit cost is the direct payment made by a firm
for raw materials and labor bought from outsiders, and implicit cost is the market
value of the resources used by the firm that are owned by the firms owners. Then,
profit = 0 implies that revenue = explicit cost + implicit cost. That is, when profits
are zero, the firm has enough revenues to pay non-owners for the explicit costs and
also to pay the owners the market value of their resources.

3. When people hear that I live in rental accommodation, they tend to be shocked.
They typically claim that the cost of living in accommodation that one rents is
much higher than the cost of living in accommodation that one owns. I then tend

9
 to counter their claim by pointing out that in that case they (or people like them)
would start buying up houses to rent out to people like me for a profit. As a result,
the price of houses would rise and rents would fall till the aforementioned gap in
costs is eliminated. Therefore, the cost of housing would not depend on whether
one rents or owns. Do you agree or disagree with my argument? Explain.

The argument is clearly correct, assuming the housing market is perfectly

competitive. If you agree with my argument, all you need to do is to flesh out the
argument given in the question itself. Suppose the cost of renting a home over a
typical persons lifetime is $200,000 and the cost of owning that home for the same
length of time is only $150,000, then people will start buying homes to rent out
because of the possibility of making a $50,000 profit as a landlord. But this will
increase the demand for homes and increase the supply of rental units. The latter
development will reduce rents. This process will continue till the cost of renting
eventually becomes equal to the cost of owning. So, there is little reason to think that
renting is more expensive than owning.

If you disagree with the argument, you will have to argue that the real estate market
does not work in the same way as the competitive market in an economics textbook.

4. Suppose all high school graduates are capable of working as waiters. Suppose all
high school graduates, including waiters, earn $10 an hour. Then suppose that
restaurant goers, following a sudden onset of generosity, begin the new practice of
leaving tips. These tips add $2 an hour to waiters wages.

However, an economist predicts that, in the long run, workers will not be better
off; their wages will eventually drop to $8 an hour so that, even after the tip is
added, they will still be making $10 an hour. She also predicted that although
restaurant owners would now have to pay lower wages to their waiters, their
profits would not increase in the long run because they would be forced to reduce
their prices. Therefore, the only beneficiaries of the restaurant goers generosity
would be the diners themselves! The tips they give would come back to them as
lower prices! Do you agree or disagree with the economists argument? Explain,
assuming perfect competition.

Again, the argument is clearly correct, assuming the labor market is perfectly
competitive. If you agree with the argument, all you need to do is to flesh out the
argument given in the question itself.

If you disagree with the argument, you will have to argue that the labor market does
not work in the same way as the competitive market in an economics textbook.

10
ANSWER SHEET FINAL ECO 304 SPRING 2007 UDAYAN ROY

NAME: ________________________________

1 23
2 24
3 25
4 26
5 27
6 28
7 29
8 30
9 31
10 32
11 33
12 34
13 35
14 36
15 37
16 38
17 39
18 40
19 41
20 42
21 43
22

11
Final Microeconomics Spring 2007 Udayan Roy
Answer Section

MULTIPLE CHOICE

1. ANS: A DIF: 3 REF: SECTION: 2

OBJ: TYPE: M
2. ANS: A DIF: 2 REF: SECTION: 3
OBJ: TYPE: M
3. ANS: C DIF: 1 REF: SECTION: 3
OBJ: TYPE: M
4. ANS: B DIF: 2 REF: SECTION: 13.3
OBJ: TYPE: M
5. ANS: D DIF: 2 REF: SECTION: 13.3
OBJ: TYPE: M
6. ANS: C DIF: 2 REF: SECTION: 13.3
OBJ: TYPE: M
7. ANS: A DIF: 2 REF: SECTION: 13.3
OBJ: TYPE: M
8. ANS: D DIF: 2 REF: SECTION: 14.1
OBJ: TYPE: M
9. ANS: B DIF: 1 REF: SECTION: 14.1
OBJ: TYPE: M
10. ANS: D DIF: 2 REF: SECTION: 14.2
OBJ: TYPE: M
11. ANS: A DIF: 2 REF: SECTION: 14.2
OBJ: TYPE: M
12. ANS: C DIF: 2 REF: SECTION: 14.2
OBJ: TYPE: M
13. ANS: D DIF: 2 REF: SECTION: 14.2
OBJ: TYPE: M
14. ANS: C DIF: 2 REF: SECTION: 14.2
OBJ: TYPE: M
15. ANS: C DIF: 2 REF: SECTION: 14.3
OBJ: TYPE: M
16. ANS: D DIF: 2 REF: SECTION: 14.3
OBJ: TYPE: M
17. ANS: B DIF: 2 REF: SECTION: 14.3
OBJ: TYPE: M
18. ANS: C DIF: 1 REF: SECTION: 15.1
OBJ: TYPE: M
19. ANS: A DIF: 2 REF: SECTION: 15.2
OBJ: TYPE: M
20. ANS: A DIF: 1 REF: SECTION: 15.2
OBJ: TYPE: M
21. ANS: C DIF: 2 REF: SECTION: 15.2
OBJ: TYPE: M
22. ANS: D DIF: 2 REF: SECTION: 15.2

12
 OBJ: TYPE: M
23. ANS: C DIF: 2 REF: SECTION: 15.3
OBJ: TYPE: M
24. ANS: D DIF: 2 REF: SECTION: 15.4
OBJ: TYPE: M
25. ANS: A DIF: 2 REF: SECTION: 15.5
OBJ: TYPE: M
26. ANS: B DIF: 1 REF: SECTION: 18.1
OBJ: TYPE: M
27. ANS: D DIF: 2 REF: SECTION: 18.1
OBJ: TYPE: M
28. ANS: C DIF: 2 REF: SECTION: 18.1
OBJ: TYPE: M
29. ANS: D DIF: 2 REF: SECTION: 18.1
OBJ: TYPE: M
30. ANS: B DIF: 2 REF: SECTION: 18.1
OBJ: TYPE: M
31. ANS: A DIF: 2 REF: SECTION: 19.1
OBJ: TYPE: M
32. ANS: B DIF: 2 REF: SECTION: 19.1
OBJ: TYPE: M
33. ANS: B DIF: 2 REF: SECTION: 19.2
OBJ: TYPE: M
34. ANS: A DIF: 2 REF: SECTION: 19.2
OBJ: TYPE: M
35. ANS: B DIF: 2 REF: SECTION: 19.2
OBJ: TYPE: M
36. ANS: A DIF: 1 REF: SECTION: 2
OBJ: TYPE: M
37. ANS: D DIF: 2 REF: SECTION: 2
OBJ: TYPE: M
38. ANS: B DIF: 3 REF: SECTION: 2
OBJ: TYPE: M
39. ANS: C DIF: 1 REF: SECTION: 2
OBJ: TYPE: M
40. ANS: C DIF: 1 REF: SECTION: 2
OBJ: TYPE: M
41. ANS: B DIF: 1 REF: SECTION: 2
OBJ: TYPE: M
42. ANS: C DIF: 1 REF: SECTION: 2
OBJ: TYPE: M
43. ANS: D DIF: 1 REF: SECTION: 2
OBJ: TYPE: M

13