EC101 DD/EE

Final Exam

December 16, 2014

Version 03

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EC101 DD/EE Final Exam F14
INSTRUCTIONS (***Read Carefully***):
ON YOUR QUESTION BOOKLET:
Fill in your name, Student ID, Discussion Section Number (e.g. D5) and your signature.
ON YOUR SCANTRON:
Enter the Course Number (EC101 DD or EE) and date on the lines at the top-left. In the boxes below
that, enter your Student ID, your DISCUSSION SECTION number (D1 - D9, E0 - E9), your NAME
and your EXAM VERSION into the Scantron computer sheet. Be sure that you bubble all entries.
I will subtract up to 5 points as punishment for errors in these data!
DURING THE EXAM:
Students who wish to leave the room for any reason must leave the Question Booklet and Scantron
sheet with the instructor or teaching fellow. Students in EC101DD MUST turn in both the Question
Booklet and the Scantron sheet at the end of the exam and exit from the front of the room. Students in
EC101EE should keep their Question Booklet and turn in only their Scantrons. All students must
show their BU Student IDs as they leave the exam room.
MULTIPLE-CHOICE QUESTIONS:
Choose the BEST answer for each of the multiple-choice questions. (Only ONE answer is allowed,
even when more than one of the answers is technically correct.) On the Question Booklet, CIRCLE
the letter that you chose, and then BUBBLE it on the Scantron sheet.
Never cross out an answer on your Scantron. Use a pencil to bubble your answers, and keep a good
eraser with you. If you bubble the wrong answer on the Scantron, erase your mark COMPLETELY,
and then bubble the correct answer.
***YOU MAY NOT USE A CALCULATOR, CELL PHONE OR LAPTOP.
***However, INTERNATIONAL STUDENTS may use electronic translators or dictionaries.
You have 2 hours (120 minutes) to complete 60 questions. Good luck!

DO NOT OPEN THIS BOOKLET OR TURN IT OVER

[until told to do so]

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1. You paid $10 to see a movie. After half an hour, you

realize that the movie is very boring. If you are
rational in the economic sense, you should
a. wait another half hour because spending $10
for an hour is better than spending $10 for half
an hour.
b. leave immediately and do something more
enjoyable.
c. leave immediately only if you can get a partial
refund of the ticket price.
d. stay until the end because you already paid for
it.

Figure TXA. Suppose the government imposes a $10

per-unit tax on a good.

2. Clean air is a public good, partly because

a. government regulations preserve it.
b. people can enjoy it without paying for it.
c. it promotes public health.
d. only governments have the technology to keep
air clean.
3. Charging high prices for computer applications is
inefficient because
a. the social cost of using applications is high.
b. using applications has negative externalities.
c. using applications has no social cost.
d. applications increase productivity.
4. Jason works 10 hours per week at Star Market and
earns $6.00 per hour. His boss decides to raise his
wage to $12.00 per hour. Then, Jason says to himself,
Great, now I will work more hours and make lots of
money. This implies that
a. he considers leisure to be a luxury good.
b. the income effect on his demand for leisure is
stronger than the substitution effect.
c. the substitution effect on his demand for leisure
is stronger than the income effect.
d. his demand curve for leisure is not downward
sloping.
5. Kamwing buys 40 chocolate bars when their price is
$1.00 per bar. His price elasticity of demand is 1/2.
How many chocolate bars would he buy if the price
changes to $1.20?
a. 32
b. 38
c. 36
d. 42
6. A firm can obtain market power by
a. raising the price of its product.
b. reducing the part of its fixed cost that is not
sunk.
c. increasing its use of fuel and electricity.
d. differentiating its product from those of other
producers.

7. See Figure TXA. The tax causes consumer surplus to

decrease by the area
a. A+B+C+D+F.
b. A.
c. B+C.
d. A+B+C.
8. See Figure TXA. The government collects tax
revenue that is the area
a. C+F.
b. L.
c. B+D.
d. F+G+L.
9. See Figure TXA. The tax will
a. create a deadweight loss of $180.
b. reduce consumer surplus by $24.
c. reduce producer surplus by $72.
d. ALL of the above
10. See Figure TXA. The $10 tax will
a. allocate goods to the consumers with the
highest willingness to pay.
b. cause a $10 increase in consumer prices.
c. result in nonprice rationing.
d. create an excess demand of 20 units.
11. Suppose there is an early freeze in Florida that
reduces the size of the orange crop. If the demand for
oranges is downward sloping, what happens to
consumer surplus in the market for oranges?
a. It is not affected.
b. It increases.
c. It decreases.
d. We would have to know the elasticity of
demand to make this determination.

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12. Suppose rent controls reduce prices in the market for

apartments. Then,
a. those willing to pay the most will get the
apartments.
b. the consumer demand curve will shift out.
c. some consumers will pay lower rents than they
would pay without controls.
d. NONE of the above
Figure PPD. The graph below describes a
profit-maximizing monopolist that can
carry out perfect price discrimination.

17. When all fixed costs are sunk,

a. marginal cost is constant.
b. output will be lower than normal.
c. the firm will go out of business.
d. the firm is operating in the short run.
18. A simultaneous increase in both the demand for radios
and the supply of radios would imply that
a. both the value of radios to consumers and the
cost of producing radios has increased.
b. the value of radios to consumers has decreased
and the cost of producing radios has increased.
c. the value of radios to consumers has increased
and the cost of producing radios has decreased.
d. both the value of radios to consumers and the
cost of producing radios has decreased.
19. Suppose anyone is allowed to take wood from a
public forest. The Tragedy of the Commons refers
to the fact that people would be likely to
a. assign a low value to anything that is free.
b. earn profits by selling the wood that they have
taken.
c. damage the forest by cutting down too many
trees.
d. create pollution by burning the wood for
cooking and heating.

[Hint: Do NOT forget perfect price discrimination.]

13. See Figure PPD. The line Z represents
a. average price.
b. marginal revenue.
c. average variable cost.
d. NONE of the above.
14. See Figure PPD. In order to maximize profits, the
monopolist should produce _____ units.
a. 5
b. 6.25
c. 10
d. 3.33
15. See Figure PPD. The monopolist would earn total
revenues of
a. $37.50.
b. $25.
c. $100.
d. $50.
16. See Figure PPD. Consumer surplus would be
a. $25.
b. 0.
c. $50.
d. $12.50.

20. If the labor supply curve is extremely inelastic, a tax

on labor
a. results in a large tax burden on the firms that
hire labor.
b. has a large deadweight loss.
c. raises a small amount of tax revenue.
d. has little impact on the amount of work that
workers are willing to do.
21. When you calculate your (opportunity) costs of going
to college, what portion of your room-and-board
expenses should be included?
a. your room-and-board expenses minus
room-and-board expenses you would have had
if you werent in college
b. none of your room-and-board expenses
c. your full room-and-board expenses
d. your room-and-board expenses minus the
income you earn while attending college
22. An inward shift in the supply of lettuce could be
caused by
a. a decrease in the price of lettuce.
b. an insect that eats lettuce.
c. a report that lettuce causes cancer.
d. a report that lettuce prevents heart disease.

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Figure EXT. The following graph represents the

market for rubber.

Figure PCM. The graph below describes supply and

demand for a perfectly competitive market.

23. See Figure PCM. In equilibrium, social surplus is

a. $216.
b. $144.
c. $288.
d. $72.
24. See Figure PCM. The equilibrium allocation of
resources is
a. efficient because social surplus is maximized
when 12 units are produced and sold.
b. inefficient because social surplus is maximized
when 20 units of output are produced and sold.
c. efficient because consumers can buy as much
as they want to.
d. inefficient because consumer surplus is smaller
than producer surplus.
25. See Figure PCM. The production and sale of unit 20
would reduce social surplus, because
a. the cost of producing unit 20 exceeds its value
to consumers.
b. consumers place no value on unit 20.
c. at unit 20, the elasticity of supply is infinite.
d. at unit 20, MC > ATC.
26. If the government enacts a $4 excise tax per bottle of
wine and requires the seller to collect the tax revenue
and transfer it to the government, then the tax burden
a. is divided equally between seller and buyer.
b. falls entirely on the buyer.
c. on the seller and the buyer depends on the
elasticities of demand and supply.
d. falls entirely on the seller.

27. See Figure EXT. If 6 units of rubber are produced

and consumed, then
a. there are unexploited social gains of trade.
b. social surplus is maximized.
c. rubber must have positive externalities.
d. the market is in equilibrium.
28. See Figure EXT. If 8 units of rubber are produced
and consumed, then
a. social surplus is maximized.
b. social cost is less than private cost.
c. the market is in equilibrium.
d. the demand curve will shift up.
29. See Figure EXT. In order to reach the social
optimum, the government could
a. impose a tax of $3 per unit.
b. impose a tax of $8 per unit.
c. impose a tax of $2 per unit.
d. apply a price ceiling of $8 per unit.
30. See Figure EXT. An efficient tax would raise ____ of
revenue for the government.
a. $48
b. $30
c. $18
d. NONE of the above is efficient.
31. The distribution of cocaine is run by gangsters,
mainly because
a. gangsters have a comparative advantage in
illegal markets.
b. cocaine is addictive.
c. honest business executives do not want to be
involved with a harmful substance.
d. the cocaine business is highly profitable.

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32. As compared with barter, selling and buying...

a. makes it easier to find trading partners.
b. yields more useful information about market
value.
c. requires the use of a widely accepted medium
of exchange.
d. ALL of the above are true.

Scenario CDU. Two firms X and Y compete with

each other by setting quantities. Each firm must
choose to produce either 1, 2, 3 or 4 units, without
knowing what the other firm has done. AC = MC = 0.
Market demand is given by Q = 9 P.

33. Which of the following is not a reason why voluntary

exchange can lower a buyers welfare.
a. deceptive marketing
b. temptation
c. high prices
d. poor information
34. Why does a firm in a perfectly competitive industry
charge the market price?
a. If a firm charges less than the market price, it
loses potential revenue.
b. If a firm charges more than the market price, it
loses all its customers to other firms.
c. The firm can sell as many units of output as it
wants to at the market price.
d. ALL of the above are correct.
Scenario NRD. The table below shows the payoffs to
the running of positive and negative political
advertisements by two candidates, a Democrat and a
Republican. The payoffs represent the increase or
decrease in the percentage of voters willing to vote for
the candidate. Payoffs are displayed in the chart as
(Democrats payoff, Republicans payoff).
Republican
Positive
Negative
Demo- Positive
(+8, 8)
(6, +6)
crat
Negative (10, +10)
(+4, 4)
Note: Positive advertisements say good things
about the candidate; negative advertisements say
bad things about the candidates opponent.
35. See Scenario NRD. This game is an example of
a. a coordination game.
b. a prisoners-dilemma game.
c. a zero-sum game.
d. NONE of the above
36. See Scenario NRD. How many pure-strategy Nash
equilibria does this game have?
a. 0
b. 1
c. 2
d. 4

37. See Scenario CDU. If X decided to produce 1 unit,

then Ys best response is to produce ___ unit(s).
a. 3
b. 1
c. 4
d. 2
38. See Scenario CDU. Which of the following is a Nash
equilibrium?
a. NONE of the above
b. X produces 2 and Y produces 3
c. X produces 3 and Y produces 3
d. X produces 1 and Y produces 4
39. If, at the current price, there is a shortage of a good,
a. the market must be in equilibrium.
b. the price is below the equilibrium price.
c. sellers are producing more than buyers want to
buy.
d. quantity demanded equals quantity supplied.
40. People accept paper money in return for valuable
goods and services mainly because
a. money is legal tender.
b. the law of most countries requires people to
accept money as payment for any goods or
services they want to sell.
c. almost everyone else accepts money.
d. money is backed by gold in most countries.
41. Shannon bakes cookies and Justin grows vegetables.
In which of the following cases is it impossible for
both Shannon and Justin to benefit from trade?
a. Justin is better than Shannon at baking cookies
and at growing vegetables.
b. Shannon does not like vegetables and Justin
does not like cookies.
c. Shannon is better than Justin at baking cookies
and Justin is better than Shannon at growing
vegetables.
d. ALL of the above are correct.
42. To find the total amount supplied in the market at a
particular price, we must
a. consider all determinants of demand.
b. add up all of the amounts that firms are willing
and able to supply at that price.
c. average the amounts that firms are willing and
able to supply at that price.
d. consider the tastes and preferences of buyers.

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43. Suppose the data show that people who drink wine are
more likely to get cancer than other people. Then it
would be correct to conclude that
a. chemicals in wine cause cancer.
b. most cancer patients were wine drinkers.
c. avoiding wine would reduce the chance of
getting cancer.
d. NONE of the above

Figure MCP. This graph illustrates the condition of

one firm in a market characterized by monopolistic
competition.

Figure QMC. Suppose each firm in a perfectly

competitive market has the following cost curves:

48. See Figure MCP. Line Z on the graph represents

a. average variable cost.
b. demand.
c. average fixed cost.
d. NONE of the above.

44. See Figure QMC. Each firm will remain open in the
short run
a. only if the price is at least $6.
b. at any price greater than zero.
c. only if the MC is less than $6.
d. only if the AVC is at least $6.
45. See Figure QMC. Each firm has a fixed cost of
approximately
a. 0.
b. $6.
c. $9.
d. MORE information is needed.
46. See Figure QMC. In long-run equilibrium, each firm
will
a. produce 3 units.
b. set AVC equal to ATC.
c. shut down.
d. continue to expand.
47. Which of the following is not a determinant of
demand?
a. the price of an input used to produce the good
b. the price of a complementary good
c. the price of a substitute good
d. the expected price of the good next month

49. See Figure MCP. For the short run, the monopolistic
competitor will produce ____ units and charge ____.
a. 9; $5.50
b. 0; $10.00
c. 5; $7.50
d. 6.67; $6.67
50. See Figure MCP. The firms profits are
approximately
a. $16.00.
b. $4.50.
c. $50.00.
d. 0.
51. See Figure MCP. In the long run, this firm will
a. shut down.
b. produce at the same level as now.
c. decrease its output.
d. increase its output.
52. The price elasticity of demand for widgets is 2. At a
price of $10, a store sells 200 widgets per month. The
store owner decides that she wants to sell 260 widgets
per month. What price should she set?
a. $9.50
b. $4.20
c. $7.00
d. $8.50

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53. Capital formation normally requires

a. the availability of advanced technologies.
b. a sacrifice of consumption.
c. the printing of stock certificates.
d. an increase in the money supply.

Scenario EFS. Claudia and Daniel each owns a

jewelry store that sells precious emeralds. The two
stores compete with each other. Each owner has to
choose from two prices: a high price (H) or a low
price (L). Claudia has promised to announce her price
on Tuesday. Daniel will see what price Claudia
announces, and then announce his own price the next
morning. The following chart represents the actions
of the two owners. Profits for each store are in
parenthesis: (Claudias profits, Daniels profits).

54. In a perfectly competitive market, different people

will not exchange the same good at different prices,
because
a. individual consumers normally buy sufficiently
large quantities to obtain the lowest price.
b. sellers offering low prices and buyers facing
high prices would refuse to complete the
exchange.
c. arbitrageurs cannot earn profits unless all prices
are the same.
d. the law requires everyone to sell at the official
price set by the government.
55. Which of the following is an example of a positive
externality?
a. Mary couldnt catch the flu from Sue, because
Sue was vaccinated.
b. Sue caught the flu, because Sue wasnt
vaccinated.
c. Mary caught the flu from Sue, because Mary
wasnt vaccinated.
d. Sue didnt catch the flu, because Sue was
vaccinated.
Table ACC. The data below represent the quantity of
resources that Argentina and Brazil would need to
manufacture one train or one plane.

Argentina
Brazil

Required Resources
Train
Plane
2
3
1
2

56. See Table ACC. The opportunity cost of a plane in

Argentina is ___ train(s); the opportunity cost in
Brazil is ___ train(s).
a. 3/2; 1/2
b. 1/2; 2/3
c. 2/3; 1/2
d. 3/2; 2

58. See Scenario EFS. Claudia must choose a strategy

from a set of ____ possible strategies; Daniel must
choose a strategy from a set of ____ possible
strategies.
a. 4; 4
b. 4; 2
c. 2; 2
d. 2; 4
59. See Scenario EFS. Which strategy will Daniel adopt
in subgame-perfect Nash equilibrium?
a. charge a high price when Claudia charges a low
price, and vice versa.
b. always charge a high price
c. always charge a low price
d. charge the same price as Claudia
60. See Scenario EFS. Which strategy will Claudia adopt
in subgame-perfect Nash equilibrium?
a. charge a high price when Daniel charges a low
price, and vice versa
b. charge the same price as Daniel
c. charge a low price
d. charge a high price

57. See Table ACC. Which country has a comparative

advantage in producing trains? planes?
a. Argentina; Brazil
b. Brazil; Argentina
c. Brazil; Brazil
d. Argentina; Argentina

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