Auburn University
Spring 1994
U-102: Political Economy
Dr. Johnson
Midterm Exam #1 Version #1
Instructions: This is a closed-book, in class examination. You will
have the entire class period in which to work. Pick the
one best answer to each of the following questions and
record your answers by blackening in the appropriate dots on your large
blue Scan Sheet with a number 2 pencil. Be sure to fill in your
name in the appropriate field on your Scan Sheet and
blacken the corresponding dots in the columns below. Please write your
signature on the space for that purpose on the scan
sheet. If you consent to have your exam score publicly
posted by your student I.D. number, please write in your student
identification number and blacken in the corresponding dots in
the "Identification" field just below the signature bloc on your scan
sheet. If you do not want your score posted, you should
still write your I.D. number in the boxes, but do not
blacken the corresponding dots. Important: for your exam to be correctly
graded, you must enter the correct Version number of
your exam (above) in the V/J box of your scan sheet (right after the
boxes for your I.D. number) and blacken the dot corresponding to this
number.
1. Which of the following was not identified in this
course as one of the three basic economic problems faced by all
societies that constitute the central subjects of study of the
discipline of economics?
- a. What goods and services are to be produced?
- b. Why is one good or service preferred to another by consumers?
- c. How are goods and services to be produced?
- d. For whom are goods and services to be produced?
2. A resource or good or service would be defined by an
economist as "scarce" in a particular economy if:
- a. it is not possible for everyone to consume as much of it as they
would choose at a price of zero.
- b. it exists only in limited, finite quantities.
- c. it exists only in such small quantities that no more than a small
proportion of the population can consume any.
- d. it is no longer available in the normal quantities available in
the past.
3. The XYZ Corporation can turn out 100 thousand widgets per month at a
total cost of $1,000,000 per month. It can turn out 101 thousand widgets
per month at a total cost of $1,005,000 per month. The "marginal cost"
for the additional thousand widget batch is:
- a. $5000 per thousand.
- b. $10 per widget.
- c. $9,950.50 per thousand.
- d. $1,005,000.
4. If a firm can sell as much of its product as it wishes at the going
competitive market price, and it wants to earn as much profit as
possible, it should:
- a. produce the quantity of output at which marginal cost of the last
unit is at its lowest possible level.
- b. produce as much output it possibly can, so that fixed costs are
spread across the largest number of units.
- c. produce the quantity of output where average per unit costs are
exactly equal to the price.
- d. produce the quantity of output at which marginal cost for the
last unit equals the going price.
5. Use statements 1 and 2 to determine the best answer below:
- Other things being equal, the quantity of a good or service demanded
within a given time period tends to decrease as its price increases.
- Other things being equal, the quantity of a good or service that
firms and industries will offer for sale in a given time period tends to
increase as its price increases.
- a. 1 is true and 2 is true.
- b. 1 is true and 2 is false.
- c. 1 is false and 2 is true.
- d. 1 is false and 2 is false.
6. Compared to a traditional hunter-gatherer economy, a market economy
- a. typically makes more extensive use of remunerative incentives to
motivate co-operation in economic activities.
- b. typically makes less extensive use of moral incentives to
motivate co-operation in economic activities.
- c. typically involves a more specialized and complex division of
labor in economic activities.
- d. all of the above.
7. Use statements 1 and 2 to determine the best answer below:
- Roughly two-thirds of the tangible property in the U.S. consists of
items owned by households and reserved for direct
consumption by the members of the household, while the
other one-third or so represents productive resources
in the ownership of business, government or non-profit organizations.
- Roughly 30% of the value of productive resources in the U.S. consist
of property owned by Federal, state or local government agencies.
- a. 1 is true and 2 is true.
- b. 1 is true and 2 is false.
- c. 1 is false and 2 is true.
- d. 1 is false and 2 is false.
8. The predominant legal form of ownership of private businesses in the
present day U.S. (as measured by the percentage of total productive
assets owned in that way) is:
- a. sole proprietorship.
- b. partnership.
- c. limited liability corporation.
- d. producers' cooperative.
9. In the average month, Grok can either dig 24 baskets of edible roots
or kill 8 deer. If Grok chooses to divide his time between the two
activities, he can normally kill one deer in the same amount of time it
takes him to dig three baskets of roots. In the average month, his
fellow tribesman Og can either dig 8 baskets of roots or kill 4 deer.
If Og chooses to divide his time between the two activities, he can
normally kill one deer in the same amount of time it takes him to dig
two baskets of roots. At present, without trade, Grok is dividing his
time so as to produce (and consume) 12 baskets of roots and 4 deer per
month, while Og is producing (and consuming) 4 baskets of roots and 2
deer per month. Both would like to have more for their families to eat.
Which of the following is correct?
- a. Grok has an absolute advantage in both root-digging and
deer-hunting and therefore has nothing to gain from specialization and
trade with Og.
- b. Og has a comparative advantage in both root-digging and
deer-hunting and therefore has nothing to gain from specialization and
trade with Grok.
- c. Grok has a comparative advantage in root-digging and a
comparative disadvantage in deer-hunting, while Og has a comparative
advantage in deer-hunting and a comparative disadvantage in
root-digging. Both could gain through trade if each specialized more in
his area of comparative advantage.
- d. Grok has a comparative advantage in deer-hunting and a
comparative disadvantage in root-digging, while Og has a comparative
advantage in root-digging and a comparative disadvantage in
deer-hunting. Both could gain through trade if each specialized more in
his area of comparative advantage.
10. Making another person aware that the people around him will think
more highly of him if he performs a particular action (and will despise
him as a traitor to the group if he doesn't) is an example of using
a(n):
- a. coercive incentive.
- b. normative (moral) incentive.
- c. remunerative incentive.
- d. altaic incentive.
11. Which of the following pairs is the best example of complementary
goods?
- a. electricity and natural gas.
- b. Time and Newsweek.
- c. iron ore and anthracite coal.
- d. popcorn and pretzels.
12. Use statements 1 and 2 to determine the best answer below:
- Other things being equal, an increase in consumer incomes
will shift the demand curve for any given good (or service) that is not
an inferior substitute to the right -- that is, more of the good
will be demanded at any given price than would have been the case at
lower incomes.
- Other things being equal, an increase in the size of the
population within a market area will normally shift the demand curve for
any given good or service in that area to the left -- that is, less of
the good will be demanded at any given price than would have been the
case with the lower population.
- a. 1 is true and 2 is true.
- b. 1 is true and 2 is false.
- c. 1 is false and 2 is true.
- d. 1 is false and 2 is false.
13. Use statements 1 and 2 to determine the best answer below:
- Other things being equal, an increase in the price of one of
the raw materials used to produce a good or service will normally shift
the supply curve for that good or service to the left -- that is,
less of the final good or service will be offered for sale at any
given price than would be the case if the raw material were still
available only at the previous price.
- Other things being equal, imposing a 15% payroll tax on wages
paid out by firms producing a particular good would normally shift the
supply curve for that good to the left -- that is, less of the
good will be offered for sale at any given price than would have been
the case without the tax.
- a. 1 is true and 2 is true.
- b. 1 is true and 2 is false.
- c. 1 is false and 2 is true.
- d. 1 is false and 2 is false.
14. Other things remaining equal, we would expect an increase in
the price of frankfurters
- a. to increase total sales of frankfurters.
- b. to increase the demand for hot dog buns.
- c. to decrease the demand for hot dog buns.
- d. to decrease the demand for hamburger buns.
15. The equilibrium price of a good on a free competitive market will be
a price at which
- a. for each buyer, the marginal benefit of the last unit of the good
bought equals its marginal (opportunity) cost to him or her.
- b. the greatest quantity of the good will be exchanged.
- c. for each seller, the marginal revenue brought in by selling the
last unit sold equals the additional cost of his producing that extra
unit.
- d. the quantity of the good supplied equals the quantity demanded.
- e. all of the above.
16. If the production of a good involves a positive externality,
then from society's point of view free competitive markets will tend to
produce
- a. too much of the good.
- b. none of the good.
- c. the proper amount of the good.
- d. too little of the good.
17. Use statements 1 and 2 to choose the correct answer:
- The consumption of a "pure public good" by one individual does not
reduce the availability of that good to other individuals.
- Many kinds of "public goods" are provided only by the government or
by non-profit organizations rather than by profit-seeking private
business because the benefits derived from a public good cannot
practically be limited to only those consumers that paid for them.
- a. 1 is true and 2 is true.
- b. 1 is true and 2 is false.
- c. 1 is false and 2 is true.
- d. 1 is false and 2 is false.
18. Before passage of the Civil Rights Act of 1964, it was not illegal
for the "apartment for rent" ads in U.S. newspapers to contain racially
exclusionary language such as "no colored people need apply" (and in
fact significant numbers of ads used to contain words to that effect).
A history graduate student hoping to document changes in the amount of
racial discrimination in American life went through all the old
newspapers for 1923 through 1963 for two large American cities and
calculated the percentage of rental ads that contained racial
restrictions for each city in each year from 1943 through 1963. City A
had strict and effectively enforced rent control laws in effect only
from 1943 through 1946, while City B had similar rent controls in effect
for the entire period from 1943 through 1963. The economic theory of
price ceilings would be most consistent with which of the following
possible findings of the study?
- a. The percentage of racially exclusionary ads in City A increased
sharply in 1943 and remained at this higher (and slowly increasing
level) until dropping sharply in 1947, and then stayed at lower levels
for all the years after 1947.
- b. The percentage of racially exclusionary ads in City B increased
sharply in 1943 and remained at this higher (and gradually increasing
level) until it dropped sharply in 1947, staying at these lower levels
after 1947.
- c. The percentage of racially exclusionary ads randomly fluctuated
slightly up and down at more or less the same annual levels in City A as
in City B for the whole period of 1923 through 1963.
- d. The percentage of racially exclusionary ads decreased from year
to year at the same nearly constant rate in both City A and City B from
1943 through 1963.
19. Which of the following is the best example of a pair of goods that
are "close substitutes" for each other?
- a. beer and pretzels.
- b. nylon and silk.
- c. anthracite coal and iron ore.
- d. steak and potatoes.
20. According to Miller, Benjamin and North in The Economics of
Public Issues, the greatest financial benefits from the US
government's agricultural price support and acreage restriction programs
have gone to
- a. urban consumers.
- b. owners of large farms that were already producing the particular
crop when acreage restrictions and permits were adopted.
- c. owners of small farms that were already producing the particular
crop when acreage restrictions and permits were adopted.
- d. major food processors like Quaker Oats.
- e. new farmers just beginning to grow the particular crop.
21. Which of the following is the best example of a "public good"?
- a. an opera performance.
- b. medical care.
- c. the Boston Turnpike.
- d. national defense.
- e. elementary school textbooks.
22. The net benefits (total benefits minus total costs) of consuming an
economic good are at a maximum when amounts of the good consumed reach
the total number of units where
- a. the average benefits per unit exactly equal the average costs per
unit.
- b. the additional benefit provided by the last unit consumed exactly
equals the additional cost incurred to add that last unit.
- c. the total benefits produced are a maximum, irrespective of costs.
- d. the total costs are at a minimum, regardless of benefits.
23. A substantial portion of the cost incurred by producing a good that
does not get charged to the producers or purchasers of that good but
rather is born by one or more "third parties" indicates we are dealing
with
- a. a merit good.
- b. an inferior substitute good.
- c. a negative externality.
- d. a positive externality.
- e. a complementarity.
24. There has been a shift in the market demand schedule for a commodity
if
- a. the total production of the commodity has increased.
- b. consumers now want to purchase more of the commodity at any given
price than previously.
- c. the commodity sells at a higher price than previously.
- d. less of the commodity is being purchased than previously.
- e. producers now want to sell more of the commodity at any given
price than previously.
25. According to Professor Johnson's lecture, which of the following
would not be among the groups that are most likely to
benefit from legislation substantially raising the minimum wage?
- a. skilled workers who already make more than the new minimum wage.
- b. manufacturers of labor-saving machinery for industries employing
large amounts of unskilled labor.
- c. owners of firms whose employees already make more than the new
minimum wage but which compete with firms employing a lot of unskilled
labor.
- d. unskilled job seekers with disadvantaging traits such as lack of
experience, low education, racial minority status, a criminal record,
etc.
26. A "natural monopoly" in the technical economic sense occurs when
- a. increasing economies of scale make it possible for one company to
produce the total quantity of a good demanded more cheaply and
efficiently than two or more companies can.
- b. one company acquires the legal right to be the sole producer of
a good through political influence.
- c. one company is so much richer than others that it can force all
the others out of business by selling at a loss for a long time.
- d. an ambitious Congressman discovers an unregulated aspect of the
economy.
27. Adam Smith's concept of the "invisible hand" (in your selection from
The Wealth of Nations) could best be described as referring to
- a. an economic system in which individuals unintentionally promote
a more general public interest in the process of pursuing their own
individual self-interest.
- b. a system to help unemployed people regain their dignity and self-
respect by concealing from them the fact that their income is being
provided by indirect government assistance.
- c. a mysterious divine intervention in the affairs of men whereby
God works his will in the economy.
- d. the force of altruism and unselfish love that moves men to
cooperate for the economic betterment of all.
28. Use statements 1 and 2 to choose the best answer below:
- According to Pool and LaRoe's The Instant Economist, if the
government wishes to increase the level of economic activity, it can do
so either by increasing government expenditures or by
increasing taxes.
- According to Pool and LaRoe's The Instant Economist, if the
government wants to increase the amount of investment (and thus increase
the level of economic activity), it can do so by expanding the money
stock so as to lower interest rates.
- a. 1 is true and 2 is true.
- b. 1 is true and 2 is false.
- c. 1 is false and 2 is true.
- d. 1 is false and 2 is false.
29. If the demand for a product is "highly elastic,"
- a. a 10% increase in the price of the product may be expected to
lead to an increase of more than 10% in the amount of the product
demanded.
- b. a 10% increase in the price of the product may be expected to
lead to a decrease of more than 10% in the amount of the product
demanded.
- c. a 10% increase in the price of the product may be expected to
lead to an increase of less than 10% in the amount of the product
demanded.
- d. a 10% increase in the price of the product may be expected to
lead to a decrease of less than 10% in the amount of the product
demanded.
30. In a market economy, when the available amount of a raw material (or
other resource with many valuable uses) is for some reason no longer
sufficient to supply all of the producers that have been regular
purchasers of that material in the past, economic theory would predict
that typically
- a. producers continue to purchase the same quantities of the
material in shortage as before and then all just have to shut down when
it runs out.
- b. producers using the material agree among themselves (and with the
suppliers of the material) to create a rationing arrangement whereby all
established customers each receive the same proportional share of the
reduced supplies of the material as before at the same price as before.
- c. government must step in to publicize the shortage and to enforce
conservation of the material by outlawing its use for producing
designated low priority goods.
- d. the price of the material in shortage will rise, thus encouraging
profit-seeking users of the material to use less of it by shifting to
cheaper substitutes and/or by cutting back production of their goods to
lower levels.
31. According to Miller, Benjamin and North in The Economics of
Public Issues, which of the phenomena below do not
represent typical patterns of market adjustment to a sudden large jump
in a region's population that greatly increases the demand for rental
housing and leads to rapid rent increases?
- a. Some renters in larger apartments (empty nesters, widows,
widowers) move to smaller, cheaper apartments to save money.
- b. Some non-landlords decide to become landlords by renting out
spare rooms in their houses or large apartments.
- c. There is an increase in "doubling up" as single renters hunt for
roommates to share the higher rental expenses.
- d. In the longer run, the now unusually high profitability of the
rental housing business attracts investors who wish to enter the
business by building new apartments, often flooding the market within a
few years and unwittingly forcing down rents.
- e. All of the above are quite typical housing market adjustment
mechanisms.
32. The part of government economic policy that is concerned with
deciding the amount of revenues to be raised through taxation and with
deciding on the total amount of money the government will spend on its
various programs is
- a. regulatory policy.
- b. fiscal policy.
- c. monetary policy.
- d. social insurance policy.
33. Which of the following best explains why the invention of money was
a productivity enhancing social institution?
- a. Money increases wealth by earning interest.
- b. Money greatly lowers the high transaction costs involved in
barter trade and thus facilitates greater specialization and division of
labor according to comparative advantage.
- c. Money payments can be used as an incentive to encourage higher
productivity.
- d. Money can be saved and used later, whereas many material goods
will spoil or waste away if not promptly consumed.
34. Use statements 1 and 2 below to choose the best answer below:
- According to Miller, Benjamin and North in The Economics of
Public Issues, restrictions on importing foreign goods into the U.S.
adversely affect the interests of American consumers by pushing up the
prices of foreign goods while enabling U.S. producers of similar goods
to hike their own prices.
- According to Miller, Benjamin and North in The Economics of
Public Issues, the costs of import restrictions to American
consumers are typically more than counterbalanced by their savings as
taxpayers, since import restrictions save American jobs and thus avoid
the need to pay welfare and unemployment benefits to the workers who
would otherwise be displaced.
- a. 1 is true and 2 is true.
- b. 1 is true and 2 is false.
- c. 1 is false and 2 is true.
- d. 1 is false and 2 is false.
35. Examine the supply and demand diagram below. Which of the following
would be the likely consequence of a shift in the industry's demand
curve from D1 to D2, other things remaining equal?
- a. a decrease in the price of the good, and a decrease in the
quantity of the good sold.
- b. an increase in the price of the good, and an increase in the
quantity of the good sold.
- c. a decrease in the price of the good, and an increase in the
quantity of the good sold.
- d. an increase in the price of the good, and a decrease in the
quantity of the good sold.
[Graph omitted in HTML version]
36. Consider the following supply and demand diagram for dilithium
crystals (used for many civilian commercial purposes but also essential
for operation of the warp drive systems in Federation starships). Which
of the following would be a reasonable explanation for the shift in the
industry's supply curve from S1 to S2?
- a. Starfleet has just reduced its order of battle by decommissioning
three new starships, which no longer require regular supplies of
dilithium crystals.
- b. A new technological breakthrough has now made it possible to
substitute inexpensive sodium chloride crystals for expensive dilithium
crystals in certain important civilian applications.
- c. There has recently been a new discovery of an extensive and much
more easily mined deposit of dilithium crystals in the Asteroid Belt.
- d. The government of Xantar (the planet which produces and exports
98% of all dilithium crystals on the market) has just imposed a new 15%
severance tax on the value of all dilithium crystals mined on Xantar,
payable by the mining companies.
- e. The Federation's General Assembly has just imposed an effective
price ceiling on all sales of dilithium crystals that is below the
equilibrium price.
[Graph omitted in HTML version]
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