ECON 2510 Practice for Final Exam with Elaine Peterson


Part I (30 points):  Please explain the following briefly:

1. What is the difference between microeconomics and macroeconomics?

2. What is the distinction between positive and normative economics?

3. What does elasticity of supply tell us?

4. What's the difference between a change in supply and a change in the quantity supplied?

5. What are the four major industry structures?

6. Which industry structure is most common and why?

7. Describe unionism’s greatest period of growth.

8. What’s the difference between a progressive and a regressive tax?

9. What’s the difference between a horizontal merger and a vertical merger?

10. Give an example of an externality.

11. What percentage of children in the U.S. live below the poverty line?

12. What is Medicare and why was it created?

13. Why might it be desirable to allow monopolies?

14. What’s the difference between a private good and a public good?

15. What determines the demand for a resource such as labor?


Part II (15 points):  Graph each of the following using clear labels to depict the effect on the equilibrium price & quantity of the good.

1. The effect of an increase in incomes on the market for macadamia nuts.

2. The effect of a decrease in the cost of mozzarella cheese on the pizza market.

3. The effect of a bumper crop of peanuts on the market for jelly.

4. The effect of an increase in the price of ice cream on the market for hot fudge.

5. The effect of a recession on the market for do-it-yourself books.


Part III (25 points): Use a diagram and clearly label the axes and curves for each of the following.

1. Depict an oligopolistic firm using the kinked demand model of oligopoly.  Why is there a kink involved?

2. Depict a natural monopoly.  Without regulation what level of output would they produce?  In what sense is there a deadweight loss to society?

3. Depict a monopsony.  Be sure to indicate how much they will buy and how much they will pay.  In what sense is there a deadweight loss to society?

4. Explain graphically why economists might advocate taxing production of a good which produces a negative externality.

5. Draw a Lorenz curve for a society in which the lowest 20% of families has 1% of income, the second 20% has 8%, the third 20% has 16%, the fourth has 25% and the fifth has 50%.  Assuming that taxes and transfers make the income distribution more even, how would that tend to change your graph?


Part IV (20 points) :  Choose the best  answer.

1. The law of diminishing marginal utility states that:

A)    Additional units of consumption yield less extra satisfaction.

B)     Additional units of consumption result in declines in total satisfaction.

C)    Additional units of consumption yield no additional satisfaction.

D)    Consumers stop purchasing additional units of a good when diminishing marginal utility begins.

E)     The level of satisfaction produced by a good at the margin is independent of the level of consumption.


2. The substitution effect of a price change is brought about by:

A)    A change in nominal income of the consumer

B)     A change in real income caused by a price change

C)    A shift in the demand curve caused by a price increase of the good

D)    A change in the relative prices due to a change in the price of a good

E)     Inflation


3. A government-imposed price ceiling on gasoline would tend to:

A) Create a shortage of gasoline                                   B) Create a surplus of gasoline

C)    Encourage more gasoline stations to open    D) Encourage more exploration for oil

E) All of the above


4. If price elasticity were 2.4 and the price of the good increased by 4 percent, we would expect a change in quantity sold of:

A) 9.6%                       B) -9.6%                      C) 1%                         

D) Cannot tell from the above information.        E) Need to know income elasticity


5. Which of the following terms is best associated with oligopoly markets?

A) Entry                       B) Dominance              D) Differentiation

D) Independence          E) None of the above


6. Which of the following would tend to be associated with a strong demand for a resource?

A)    Relatively low marginal product.

B)     Relatively low market price of the final good.

C)    Relatively strong marginal product of the resource.

D)    Relatively elastic demand for the good.

E)     Relatively elastic supply of resource


7. If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will:

A)    increase the quantity demanded by about 2.5 percent.

B)     decrease the quantity demanded by about 2.5 percent.

C)    decrease the quantity demanded by about 25 percent.

D)    increase the quantity demanded by about 25 percent.

E)     increase the quantity demanded by about 250 percent


8. A tight monetary policy in the United States is likely to cause:

A)    A depreciation of the dollar                              

B)     An appreciation of the dollar

C)    An increase in exports

D)    No change in the value of the dollar on foreign exchange markets

E)     Inflation


9. Which of the following statements is true?

A)    Muhammad Yunus founded the Grameen Bank.

B)     The Grameen Bank makes micro loans to extremely poor people with business ideas.

C)    Muhammad Yunus is an economist who won the Nobel Peace Prize in 2006.

D)    Grameen Bank loans have a payback rate of about 98% even though the borrowers are often women who had incomes below $1 per day.

E)     All of the above.


10. The Law of Demand:

A)    Is a generalization about the relationship between price and quantity demanded

B)     Is a rigid relationship between price and quantity demanded

C)    Is generally valid for periods of less than one year

D)    Is shown as a positive relationship between price and quantity demanded

E)     Is shown as a negative relationship between price and quantity demanded


Part V (10 points) : CHOOSE ONE of the following and explain fully, feel free to use examples and graphs

1. What are the four major industry structures and what are the main distinguishing characteristics of each?

2. What tradeoffs do we face in choosing whether to intervene in agricultural markets?

3. Explain each part of the following statement: “[a] A competitive producer must look to average variable cost in determining whether or not to produce in the short run, [b] to marginal cost in deciding on the best volume of production, [c] and to average total cost to calculate profits or losses.” [d] Why might a firm produce at a loss in the short run rather than close down?

4. What are the major potential reasons for government intervention in a market economy?

5. Discuss some of the key antitrust legislation that has been passed.

6. How does Baumol explain the rise in the real cost of health care as well as the increasing percent of GDP going to health care?

7. Describe the effect you would expect from insurance on the quantity of health care demanded.  Is there reason for concern?  Be sure to consider the importance of elasticity in your essay.