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First Exam

1.  "If a given society had no economic problem, then no commodity in that society would have a cost." Assume that the statement is correct. Explain it, making clear your understanding of what the basic economic problem is and what the economic concept of cost is.

2. Consider two firms in downtown San Francisco, one which owns the building in which it is located and the other which rents. There is a significant increase in downtown rents, and the manager of the firm which owns its building notes: "Faced with higher costs, our renter neighbor had to move, but, because we own our building, our costs are not rising and we don’t have to move." Comment on the manager’s economic logic concerning the use of the input his building represents.

3.  Draw a production possibilities curve diagram for an economy.

    a.  Under what circumstances would a society be at a point inside of the curve?

    b.  Could it ever get to points outside of the curve? Explain.

    c.  Explain how the slope you have given the curve illustrates an important cost concept. (Your answer should show your understanding of the concept.)

4.  Assume that the quantity demanded of a commodity, say, Z, were zero until its price was as low as $20 per unit. From a price of $20 to $5, the quantity demanded increases one unit for every $1 decrease in price. At a price of $5, the quantity demanded does not change with further decreases in price. Draw a graph of the demand function just described.

5.  What will happen to the demand for movie admissions if:

    a)  the price of an admission increases?

    b)  the rental price of movie videos increases?

    c)  the supply of movies increases?

    d)  the supply of rental movie videos decreases?

6. Headline in a city newspaper: "Rent Control Causes a Scarcity of Apartments."

    a)  Based on your understanding of what effects rent control laws have, do you think the statement uses              correct economic terminology? Explain.

    b)  In a diagram, show what happens in the apartment market when there is rent control.

7. Consider this statement: "In inflation-adjusted terms, the price of VCR's has fallen each year for the past several decades, yet the quantity supplied of such machines has gone up each year. It is clear, then, that the famous "Law of Supply" doesn’t really work."

Comment on the economic logic or illogic behind the statement, making clear your understanding of the law of supply and the supply function.

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Second Exam

1.  Three boxes sit on a table, each with two items inside. One box is red, one is white, and one is blue. One box contains a ticket to a Star Wars movie and a ticket to a Star Trek movie; one contains a bottle of Coke and an order of french fries; and one contains a pair of sunglasses and a bottle of shampoo. You do not know which box contains which items, but you know the following information on cross price elasticities of demand between the pairs of items in the boxes:

    Blue box +1.5         Red box, -l.5         White box 0.0

A cross price elasticity of -1.5 means a 1% change in the price of one item will cause what change in the quantity demanded of the other item?

If you wanted the coke and fries, which box would you choose? Explain why you chose that box.

2.  Assume:

a) Sandrine has maximized utility in the expenditure of her income on truffles and pearls.
b) The MU of the last pearl purchased is 400 utils.
c) The MU of the last truffle purchased is 100 utils.
d) The price of a truffle is $500.

What is the price of a pearl?

3. "When total revenue just equals total cost, the firm makes no profit. That’s simple accounting." Is this statement correct? Explain, making clear your understanding of the economic meaning of profit.

4. Sally sells seashell necklaces. Her AVC is constant at $5 and is equal to her MC. Her demand schedule for necklaces is given below. If Sally pursues the usual goal of a business firm, how many necklaces will she choose to produce and sell?

# neck-laces Price
1 $17
2 15
3 13
4 11
5 9
6 7

5. Draw a diagram in which the short run supply curve for the competitive firm can be identified. In the diagram, identify that curve. Does the curve you have identified include price levels which are below the firm’s average total cost at all output levels and, therefore, which cause losses? If so, why? If not, why not?

6. In perfectly competitive long run equilibrium, price equals marginal cost.   Explain the significance of this.  What problem would occur if price were greater than marginal cost?

7. Supply curves are almost always drawn with a positive slope. Can they ever have zero or negative slope? Explain.

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Third Exam

1. "Monopoly is bad." Is this so?  Explain.  Is it ever good?   Explain.

2.  What is price discrimination?  Why are the professional services ideal commodities for the practice of price discrimination?

3. Adam Smith remarked on the role of government 200 years ago in his book, The Wealth of Nations. He believed government should do three things:

a) Provide national defense against foreign threats.

b) Provide a legal system that protects citizens and their property.

c) Provide major public works such as bridges, roads, and harbors which could not profitably be provided by private businesses.

What might be the effects on economic efficiency and equity in the modern U.S. economy if the government were confined to those three things? Is there anything else that one could argue government should do? Explain.

4. Light houses (and modern coastal warning devices) are provided by governments, not private businesses. Why is this? Explain in detail the case for public provision.

5. What is the problem with consumer information that leads to significant government regulation in our society?  Why don't sellers of products or businesses specializing in the production and sale of information provide adequate information for consumers to make good decisions?

6. If all polluting activities of businesses had to cease, prices of products would increase. Is this a good result or a bad result? Explain with the aid of a diagram.

7. What does it mean to say that the regulatory system has been "captured"? Does it matter if it is captured? Explain.  Your explanation should make clear your understanding of the purposes of regulation in the modern economy.

8. What is the Gini Coefficient?  What has happened to it in the past 20 years?  Is there cause for concern?  Explain.

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(July 2001)