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Economics 101-300

Winter 2008
Final Examination
Form 1
April 23rd, 2008
HONOR CODE FORM
I am the person registered for this class and I am filling in my own scantron form and no
other.
I have not conversed, exchanged notes, looked at other forms, allowed another student to
look at my form, or in any other way cheated while taking this examination.
I have not used a graphing calculator during this examination. I have used an arithmetic
calculator only (or none). I am not sharing calculators.
This examination, and the scantron form I am submitting, is solely my work.
_____________________________________________
Your first and last name, printed
_____________________________________________
Your signature
__________________________________
Your section number

GSI
Yoon
Kelly
Liyun
Seb
JB
Kilsang

Section Information
Section Number
301,302
304,311
305,310
307
306, 308
303,309

Scratch paper to use during the exam and to keep track of answers
Have a great summer everyone!
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Answer

Economics 101-300
Winter, 2008
Final Examination
Form 1
READ ME
You will turn in only the honor code form and your scantron form. Please remember
to fill out the honor code form and detach it from your exam. If you want to check
your score on the final, write your answers on the scratch sheet (which you keep).
An answer key will be posted on CTools within a few days.
Please do not talk with any other students and do not share papers or calculators.
Please take all cell phones off of the desk and turn off. Please remember to fill in your
UM ID number, your discussion section number, and the form number of the exam on
your scantron sheet. We will not grade scantrons without names, UM id numbers,
form numbers, and section numbers (between 301 and 311).
Please read each question carefully. Using the scantron form, fill in the letter that you
choose to be the correct answer. You may use the pages of the exam as scratch paper.
If you have a question, raise your hand and we will do our best to get to you quickly
and answer your question (if we can).
Take your time, and good luck!
1) If only my preferences determined my choices, I would take:
a)
b)
c)
d)
e)

One more economics class


Two more economics classes
Only economics classes for the rest of my college experience
At least one economics class a year for the rest of my life
None of the above

2) The publishing industry is perfectly competitive and all firms are identical. A typical
firm has no fixed costs and uses printing machines as the only input. The marginal
product of a machine is constant (i.e., the machine does not depreciate or slow down
after use). Which of the following best describes a typical firms supply curve?
a)
b)
c)
d)
e)

The supply curve is upward sloping and linear


The supply curve is perfectly inelastic
The supply curve is perfectly elastic
The supply curve is upward sloping and non-linear
The supply curve is downward sloping and linear

3) The government of Michigan imposed a $2 per pack excise tax on cigarettes a couple
of years ago. The market for cigarettes is competitive with a relatively inelastic
demand and a perfectly elastic supply. Prior to the tax, 10,000 cigarettes were traded
on the market. Which of the following statements is/are true about the effects of the
tax?
I. The price paid by consumers will increase by $2 per pack
II. The producer surplus will increase
III. The government will collect $20,000 in revenue
a)
b)
c)
d)
e)

I only
II only
III only
I and III only
I, II and III

4) The market for candy bars is perfectly competitive with an equilibrium price of $2 per
candy bar. Firms produce candy-bars by hiring workers from a perfectly competitive
labor market where the equilibrium wage is $6 per unit of labor. If the marginal
product of labor (MPL) of workers at a firm producing candy bars is given by MPL=11
- 2L, how many units of labor (L) should the firm hire?
W = 6 = VMPL = P*MPL = 2*(11-2L) => 4L = 16
a) 1
b) 2
c) 3
d) 4
e) 5
5) Comcast owns a monopoly on the provision of cable television in Ann Arbor. The
demand for cable television is P = 80 - Q. The marginal cost of providing cable to a
single household is constant at MC = 10 and there are no fixed costs. If Comcast
charges a single price, its profits are $1,225. By how much would Comcasts profits
increase if it could perfectly price discriminate?
DProfits = 0.5*(80-10)*Qe 1225; Qe solves 80-Qe = 10 => Qe = 70
= 0.5*70*70 -1225 = 2450-1225 = 1225
a) $0
b) $612.50
c) $1,225
d) $2,450
e) $4,900
6) Kilsang and Yoon live together because they share a passion for Guitar Hero, an
XBOX 360 game. Kilsang is in charge of cleaning the apartment. The table below
documents Kilsangs and Yoons marginal private benefit from the time Kilsang
spends cleaning-up the apartment. The fourth column represents Kilsangs Total Cost
of time spent cleaning. If you compare Kilsangs cleaning time when he compares all

of the benefits of his cleaning with his cleaning time if he only considers his own
private benefits, what is the difference?
Minutes
Kilsang
Cleans
5
10
15
20
25
30

Yoons
external
MPB
105
95
89
67
42
35

Kilsangs
MPB

Kilsangs
TC

110
69
51
43
38
15

50
119
199
309
459
659

MPC

MSB

50
69
80
110
150
200

215
164
140
110
80
50

a) If Kilsang takes into account the externality of the time he spends cleaning,
hell spend 10 more minutes at it
b) If Kilsang takes into account the externality of the time he spends cleaning, hell
spend 5 more minutes at it
c) If Kilsang takes into account the externality of the time he spends cleaning, hell
spend 15 more minutes at it
d) If Kilsang takes into account the externality of the time he spends cleaning, hell
spend 5 fewer minutes at it
e) If Kilsang takes into account the externality of the time he spends cleaning, hell
spend 10 fewer minutes at it
7) Raja Rani has a monopoly on Indian food in Ann Arbor. His MC is $8 per meal. At
the equilibrium output level, the elasticity of demand is -2. Which of the following
prices could Raja Rani have charged for each meal if it was profit maximizing?
e = -2 => P > MR = MC
a) $2
b) $4
c) $6
d) $8
e) $16
8) Comcast has a monopoly on the provision of cable television in Ann Arbor. The
demand for cable television is P = 80 - Q. The marginal cost of providing cable to a
single household is constant at MC=10 and there are no fixed costs. If Comcast
charges a single price to all households, what is the profit maximizing price?
MR = 80-2Q = 10 = MC => Q = 35 => P = 45
a) 10
b) 25
c) 35
d) 45

e) 70
9) A factory that produces tire molds pollutes River Rouge. A town located downstream
from the factory would like to use River Rouge as a source of clean drinking water.
The factory values its use of the river at $500,000 per year (i.e., that is how much it
would cost the factory to dispose of its waste in an alternative, non-polluting way.)
The town values its use of the river at $400,000 per year. (i.e., that is how much it
would cost the town to drill and operate wells as an alternative source of drinking
water.) Needless to say, the river cannot be used in both capacities. Assume that the
factory and town council bargain without cost over the use of the river and that each
knows the value placed on the river by the other. Which of the following is true?
a) If the town owns the property rights over the river, the factory will not pollute
b) If the town owns the property rights over the river, they will reach an
agreement in which the town gets compensated for allowing the factory to
pollute
c) If the factory owns the property rights over the river, the town will reach an
agreement with the factory that precludes the factory from polluting
d) If the factory owns the property rights over the river, they will reach an agreement
in which the town gets compensated for allowing the factory to pollute
e) None of the above is true.
10) Measles is contagious. Every time a child gets immunized for measles the probability
of contracting measles for all other children decreases. The market for immunization
is perfectly competitive (i.e., price equals marginal cost). A study shows that parents
only immunize their children if the price of immunizing a child is less than or equal to
the perceived private benefits to the child. Based on this information, which of the
following would you expect?
a) The socially optimal level of immunization will be achieved.
b) There will be too much immunization.
c) There will be too little immunization. The socially optimal outcome must be to
have 100% of the population immunized.
d) There will be too little immunization. Parents fail to take into account the
positive externality that the immunization provides in eliminating the
possibility that their child will spread measles to other children.
e) There will be too much immunization. The risk of contracting these diseases is so
small that they cannot justify bearing the costs of immunization.
11) The market for potato chips is best described as monopolistically competitive. The
graph below shows the demand, marginal revenue, marginal cost, and average total
cost curves for POCACHIP, which is produced by the profit maximizing firm Orion.
The marginal cost to produce POCACHIPs is $2, and the fixed cost is $10. Given this
information, which of the following statements is correct?

P($)
a)
b)
c)
d)
e)

Currently, the market is in long run equilibrium


Orion will charge $2
Orions profit is $25
Other firms are expected to enter the market for potato chips
In the long run, the price of a POCACHIP will be $2

12)
7 Yoon is a GSI at the University of Michigan. Last year, he always had either a plate of
spaghetti or a bagel for lunch. Due to a wage increase this year, he decided to spend
Demand
Curve to have more spaghetti but fewer bagels
more money on lunch. As a result,
he decides
than last year. Given this information, which of the following statements is
unambiguously true?
a)
b)
c)
d)
2 e)

Spaghetti is a Giffen good


Bagels are an inferior good
Spaghetti is an inferior good
Bagels are a Giffen good
Bagels and spaghetti are complements

ATC
MC

MR
13) Currently, apples and oranges cost $1 each and Kilsang has the following Marginal
Utility (MU) schedule for apples and oranges. Which of the following would be true
if Kilsangs income increased from $9 to $12?
Q
5
10
Quantity Consumed
MU Apple

1
10

2
9

3
8

4
7

5
6

6
5

7
4

MU Orange

16

12

10

a)
b)
c)
d)
e)

Kilsang would consume more apples but fewer oranges


Kilsang would consume fewer apples but more oranges
Kilsang would consume more apples and more oranges
The change in Kilsangs consumption of oranges is unclear
Kilsang would consume fewer apples and fewer oranges

14) Kelly is a really good Econ 101 student and a rational risk-neutral agent (i.e., she only
cares about maximizing expected value). The value of a perfect score on the final to
Kelly is $10 and the value of any other score is $0. The only way she would get
anything but a perfect score is if all her pencils break during the exam. Pencils cost $2
each. There is a 50% chance that a given pencil breaks during the exam, which
implies a 25% chance that 2 pencils would both break during the exam and a 12.5%
chance that 3 pencils would all break during the exam. If all pencils are destroyed
after the exam (i.e., they provide no value after), which of the following is true?
EV1 = 0.5*10 2 = 3
EV2 = (1-0.25)*10 4 = 3.5

EV3 = (1-0.125)*10 6 = 2.75


a) Kelly should skip the exam because the expected value of taking the exam is
negative regardless of the number of pencils
b) Kelly should take 1 pencil to the exam
c) Kelly should take 2 pencils to the exam
d) Kelly should take 3 pencils to the exam
e) Any number of pencils gives the same expected value because Kelly is risk
neutral
15) Which of the following statements is incorrect if you compare monopolistically
competitive markets to perfectly competitive markets?
a) In both market structures, the profit of firms is zero in long run equilibrium
b) Firms in a monopolistically competitive market are price setters, while firms in a
competitive market are price takers
c) In the long run equilibrium, firms in both markets produce at minimum-cost
output level
d) The product in a monopolistically competitive market is heterogeneous, while that
in the competitive market is homogeneous
e) When the overall market demand increases, the number of firms will increase in
the long run in both markets
16) American airlines cancelled 3,300 flights a couple of weeks ago. The week before
Southwest and other airlines cancelled hundreds of flights. In a congressional hearing
in early April, Three F.A.A. inspectors testified that their agency had allowed
Southwest Airlines to fly uninspected planes, and that the airline had continued to fly
the planes even after it later found cracks in some of them (NYT, April 4, 2008). One
way to think about this situation is to realize that there is a social cost to flying that is
higher than the private cost to the airlines and that a regulatory policy to make the
airlines internalize that social cost was only partially followed by the FAA. Suppose
the following graph illustrates this problem. How much larger are airline companies
revenues because of the FAAs lack of complete oversight (compared to revenues if
the FAA made the companies fully internalize the social cost)?
Social cost supply
(internalize all cost)
P 400

Partial social cost supply


(current FAA activities)

350
300

Private cost supply

200
150
100

25

50

75

100

Q (in 1000s)

200*50 300*25 = 10000-7500


a) $0
b) $2,500,000
c) $3,750,000
d) $7,500,000
e) $10,000,000
17) In which of the following cases is the market outcome socially efficient?
a)
b)
c)
d)
e)

A market with a perfectly price discriminating monopolist


A market with colluding oligopolists who maximize joint profit
A competitive market with a price floor above the equilibrium price
An unregulated market with a natural monopoly
None of the above

18) Currently, the circulation of the Ann Arbor Observer, a monthly newspaper covering
Ann Arbor and its vicinity, is 1,500. The newspaper is sold at newsstands and
delivered by mail. The publisher recently announced its price increase from $2 to $4
due to a recent increase in postage and a drop of advertisement sales in its real estate
section. The demand for the newspaper is known to have an elasticity of -0.6 in this
price range. What can we say about total revenue?
TR = 1500*2 = 3000
(Q1-1500)/(Q1+1500) = -0.6*(4-2)/(4+2) = (-3/5)*(1/3) = -1/5
=> Q1-1500 = -0.2Q1-300 => 1.2Q1 = 1200 => Q1 = 1000 => TR = 4000
a) Total revenue will increase by $1,000
b) Total revenue will increase by $2,000
c) Total revenue will decrease by $1,000
d) Total revenue will decrease by $2,000
e) Total revenue will be unchanged
19) The crude oil market is characterized by a downward sloping demand curve and a
perfectly inelastic supply curve. Crude oil is a factor of production for firms that
refine gasoline. Suppose that collusion in the crude oil market lowers the supply of
crude oil at every price. Which of the following will happen as a result of this
collusion in the market for gasoline if the graph below shows the market for gasoline
before the change in the crude oil market?

D
S

Q
I. The price of gasoline will increase and the increase in price will be borne by
consumers of gasoline
II. The quantity of gasoline traded will decrease and the price to consumers will increase
III. The producer surplus will increase for refineries
a)
b)
c)
d)
e)

I only
II only
III only
I and II only
I and III only

20) Ann enjoys drinking coffee and she is a utility maximizer. She is indifferent between
Starbucks and Espresso Royale (i.e., she views them as perfect substitutes) which are
the only two coffee providers in town. Starbucks charges $3 a cup and Espresso
Royale charges $2 for the same size cup. Ann allocates $60 a month for coffee
expenses. If the price of coffee at Espresso Royale increases to $4 per cup, what will
happen to Annes consumption of Starbucks Coffee?
a)
b)
c)
d)
e)

It will be unchanged because she is indifferent between the two coffee shops
It will increase by 10 cups
It will increase by 20 cups
It will decrease by 10 cups
There is insufficient information to answer this question

21) Mary loves to play the piano. She currently owns a tabletop digital piano. She plans
to buy a real piano when she saves enough money to afford it. For Mary, the digital

piano is a(n) ___________ good, therefore if the price of a digital piano increases her
demand for the digital piano will ____________.
a)
b)
c)
d)
e)

Normal; increase with certainty


Normal; decrease with certainty
Inferior; increase with certainty
Inferior; decrease with certainty
Inferior; either increase or decrease

22) John is a computer programmer living in San Diego. An increase in wage makes him
feel wealthier so he would like to spend more time in a nearby beach. At the same
time, he would like to work more since time spent in the beach is more costly after
the wage increase. The magnitude of the two effects is always identical. Which of the
following best describes Johns labor supply curve (with labor on the horizontal axis
and wage on the vertical axis)?
a)
b)
c)
d)
e)

Horizontal
Vertical
Slanting Upward
Slanting Downward
Backward-bending

23) JB receives $2,000 from his aunt for his half-birthday on August 1st. He wants to
make this money grow over the next three months (August, September and October).
He can either put the money into his savings account and receive a 20% monthly rate
of return (interest compounds at the end of each month) or buy a hotdog stand on
Main Street for $2,000. JB estimates that, because of fluctuating climate and tourism,
the hotdog stand will generate a profit of $400 in August, $450 in September and
$550 in October. At the end of October, he can immediately sell the hotdog stand
back to its previous owner for $2,000. Given this information, which of the following
statements is incorrect?
ER = 2000*(1.2)^3 2000 = 1456; 400*(1.2)^2+450*(1.2)+550 = 1666
a) The lemonade stand offers a better expected rate of return
b) The return on the savings account is $1,456
c) The lemonade stand offers a worse expected rate of return
d) The savings account is a more liquid investment
e) None of the above is incorrect
24) Seb, JB and Yoon like to go to the Dollartron movie theater together on Tuesdays
because the theater gives a free Mega-Jumbo-Popcorn-Slammer for every three
clients that come together. However, every Tuesday, they argue about how to share
the popcorn appropriately. Seb only gets utility from popcorn up to a quarter of the
Mega-Jumbo-Popcorn-Slammer, while Yoon and JB get utility from every last kernel.
Which of the following popcorn allocations fails to meet Pareto optimality?
a) They leave the popcorn on the lap of whoever sits in the middle and each of them
eats at his own pace regardless of the resulting popcorn allocation

b) They split the popcorn in equal thirds so that everyone gets a fair share
c) Seb and JB agree to give Yoon half of the popcorn and get a quarter each
d) They auction off shares of the Mega-Jumbo-Popcorn-Slammer amongst
themselves
e) All of the above are Pareto optimal allocations
25) The twenty families of Smithfield village are contemplating undertaking a public park
project. This park would be accessible to all and large enough so that it could
comfortably accommodate all the families at the same time. The park would cost
$120,000 to build and the city council estimates that every family would get utility
from the park equivalent to $7000 or more. At the town meeting, city council
members argue about the best way to finance the park. Given this information which
of the following statements is incorrect?
a) Raising money with voluntary contributions will lead to the efficient level of
park provision in Smithfield
b) Building the park is Pareto efficient
c) It would be more efficient to finance the park through an entry fee than through
private anonymous contributions
d) Free riding in this case refers to the fact that many citizens will keep their
contributions to the park fund so as to benefit from contributions of others
e) None of the above
26) Ferrari has a monopoly of really fine Italian sports cars. The market is characterized
by a downward sloping demand curve. Ferrari currently produces on the upward
sloping portion of their marginal cost curve and current production also has the
characteristics below. Based on this information, which of the following is/are the
correct advice for Ferrari if the goal is to maximize profits?

I.
II.
III.
IV.
V.

Price:
Quantity:
ATC:
MC:

500
10,000
300
500

Ferrari should increase output


Ferrari should keep output constant
Ferrari should decrease output
Ferrari should shut down in the long run
Ferrari should continue operating in the long run
a)
b)
c)
d)
e)

I and V only
II and IV only
II and V only
III and IV only
III and V only

27) The competitive fireworks market is in equilibrium. Fireworks are a public good
because people who do not pay can still enjoy a fireworks display. On the other hand,
fireworks displays are known to create a small probability of fires. Based on this
information, which of the following best describes the competitive equilibrium when
the social costs and benefits are not taken into account?
a)
b)
c)
d)
e)

It is efficient because its a competitive outcome


More fireworks are produced than is socially optimal
Fewer fireworks are produced than is socially optimal
It may or may not result in a socially optimal quantity of fireworks traded
The price of fireworks is too high when determined by the competitive market

28) Suppose the poorest 20% of the population in Sweden earn 10% of the income and
the richest 20% earn 40% of the income. If the graph below depicts the Post Income
Tax Lorenz Curve (dashed line) and the Pre Income Tax Lorenz Curve for Sweden
(solid curve), which of the following could be true about the tax and re-distribution
system in Sweden?

a) All income is taxed at a flat rate of 50% and the revenue from income tax is redistributed equally amongst all citizens
b) All income is taxed at 100% and income is re-distributed equally amongst all
citizens
ALTHOUGH NOBODY WOULD WORK...
c) There is no income tax in Sweden
d) Income is taxed regressively and the revenue is re-distributed according to the
proportion of tax paid by each citizen
e) Income is taxed progressively and the revenue is re-distributed to the middle class
29) Jet fuel exhaust adds significantly to the carbon-based pollutants in the atmosphere.
Abatement is costly and often means that airlines have to purchase new jets. The
Cum %
graph below shows the Marginal
of Cost of Abatement (MCA) curves for American
New
Income(UA). The federal government decides
Airlines (AA) and United Airlines
to regulate
Lorenz
jet pollutants and issues permits to each of the two firms (for less than the
preCurve
regulation output of pollutants by the firms jet fleets). The government will allow
the firms to trade the permits and keep any permit profits. Which of the following
facts, if true, would guarantee that the two firms would end up trading pollution
permits?
Original
Lorenz
Curve

Cum % of Population

Price/
Cost

MCAAA

MCAUA

Pollution Abated

a) Both AA and UA are profit maximizers


b) Both AA and UA were creating the same level of pollution prior to the
government intervention and the permits were distributed equally
c) The government issued the permits such that the marginal cost of abatement of the
last unit abated was the same for the two firms
d) The government issued the permits such that the total cost of abatement for UA
was greater than the total cost of abatement for AA
e) None of the above would lead AA and UA to trade permits
30) GM and Ford are duopolists in the market for pickup trucks. Each firm can either
produce a High volume of cars or a Low volume of cars in a given year. The two
firms make their production decisions simultaneously (without knowing what the
other will do). The table below gives the profits for the firms depending on the
strategy employed by each firm (GM, Ford). Given this information, which of the
following is true?

GM
High Volume
Low Volume
a)
b)
c)
d)
e)

Ford
High Volume
($1M, $1M)
($500K, $2M)

Low Volume
($2M, $500K)
($1.5M, $1.5M)

The outcome of this strategic game will be Pareto efficient


Both GM and Ford will produce a low volume of trucks in equilibrium
GMs profit will be greater than Fords in the equilibrium of this strategic game
Both GM and Ford have a dominant strategy
None of the above is true

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