ECON 5050 Practice Exam 1 (W&W chapters 1,2,3,10,11,12,13,14 & ERP chapters 4,5,6)
Fall 1997

Use separate sheets of paper as needed to answer. Please be sure to put your name on your answer sheets and the part of the exam you are answering and the number of the question you are answering. When done staple all your answer sheets and your exam together and hand them in.

Part I (20 points): Using separate diagrams for each of the following, with supply and demand clearly labeled, please depict the effect on the equilibrium price and quantity of the good that will be produced and sold.

1) The effect of an increase in incomes on the market for patch kits.

2) The effect of a decrease in the cost of grapes on the grape juice market.

3) The effect of a decrease in the number of teenagers on the market for rollerblades.

4) The effect of an increase in the price of cereal on the market for milk.

5) The effect of an improvement in production technology on the market for telephones.

Part II (20 points): Please explain the following briefly:

1. For each of the following explain whether the statement is normative or positive.
           Rent control eventually tends to reduce the supply of apartments.
           Rent control should be discontinued because it leads to shortages.

2. Whatís the difference between absolute advantage and comparative advantage?

3. Name at least 4 potential roles for government in a market economy and indicate for each what normative goals they may help a society achieve.

4. What is rent seeking?

5. If you were thinking of imposing a tax on a good why would you care about the price elasticity of demand for the good? What are some of the factors that influence price elasticity? (Hint: A classic policy error, made in 1991, was raising the taxes on yachts because the demand for yachts was found to be more elastic than originally expected.)

6. If the price of a good falls by 15% and sales increase by 18%, what is the price elasticity of demand at that price?

7. If the income elasticity of a good is .6, what does this tell you?

8. What difference does it make if the cross price elasticity of x and y is positive or negative?

9. What determines who really bears the greater portion of the burden of a sales tax on a good?

10. If 500 units of good x are currently being sold and the elasticity of demand is 4 and there is a 5% increase in price about how many units do you expect will be sold at the new price?

Part III (10 points):

1. Suppose a monopolist faces the demand schedule below, has fixed costs of 10 and has constant marginal cost of 5. Calculate total and marginal revenue and determine the profit-maximizing price and output for this monopolist. What is the level of profits?

Price Quantity Demanded Total Revenue Marginal Revenue
115 0    
100 1    
83 2    
71 3    
63 4    
55 5    
48 6    
42 7    
37 8    
33 9    
29 10    

Part IV (10 points) : Explain briefly

1. Al and Bob are oligopolists in the same industry. If this is a one time game, given the payoff matrix indicating profits and strategies below, what would be Bobís dominant strategy? How do you know?

Bob charge's $5 Bob charge's $10
Al charge's $5 76 , 85 79 , 80
Al charge's $10 75 , 89 78 , 87

2. What difference might it make if the players knew this game would be repeated many times with the same players?

Part V(20 points): Explain Fully

1. How are markets defined? In particular be sure to address how you know if two firms are in the same market or not and why you might care.

2. Compare and contrast monopolistically competitive firms with perfectly competitive firms and monopolies.

3. Whatís the difference between a public good and a publicly provided good?

4. Compare and contrast CR4 with HHI.

Part VI(20 points): Explain 2 of the following questions Fully

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

2. Discuss some of the key arguments for and against minimum wages.

3. Discuss some of the factors that may be contributing to rising wage inequality.