ECON 1100 – Global Economics (Section 08) Exam #2 – Spring 2010 (Version B) – Answer Key Multiple Choice Questions (212 points each): 1. One of the principle functions of money is that it serves as a “unit of account.” This role could be described by recognizing that money is c. used as a basic unit of measuring economic activity. 2. The “Average Costs” of producing a level of output are simply “Total Costs divide by level of output.” In the market for widgets it costs: $40,000 to produce 1,000 units of output, $70,000 to produce 2,000 units of output, and $96,000 to produce 3,000 units of output. Based upon these figures a. this production process would appear to exhibit “Economies of Scale.” 3. In a free market economy, households d. More than one of the above answers is correct. 4. A “seller’s reservation price” d. More than one of the above answers is correct. 5. In 2009, government spending in the U.S. (combined, at all levels of government) as a percentage of GDP was approximately c. 46.22%, higher than the percentage in all but three previous years in the entire history of our country (with the “exceptions” being 1943, 1944, and 1945). 6. The ______________ refers to “who bears the burden of a tax” in terms of “decreased welfare.” c. Incidence of a Tax 7. From this graph, it is clear that b. production/consumption of this good generates a negative externality. 8. In order to maximize Total Social Welfare, _______ units should be traded. b. 7,400 9. At the “free market outcome” (that is, without any government intervention) d. More than one of the above answers is correct. 10. Government Failure may arise because: “Once created, government agencies often take on a ‘life of their own.’ Employees of such agencies often have incentives to ‘expand the scope of their agency’ in order to increase their own job security.” This phenomenon is known as c. Agency Inertia.11. In general, “Deadweight Loss” a. provides a measure of inefficiency, defined as the difference between “maximum possible Total Social Surplus” and “realized Total Social Surplus.” 12. Lead is an important input in the production of Crystal. If the price of Lead were to decrease, then b. Supply for Crystal would increase. 13. Suppose a new per unit tax is placed on sellers of “fast food French Fries.” This tax will _______________ Total Consumers’ Surplus and _______________ Total Producer’s Surplus. d. decrease; decrease. 14. Incomes may differ across different individuals in a free market society due to c. some factors which are under the control of the individual (such as “how much education to acquire”) and some factors which are beyond the control of the individual (such as their “endowment at birth of natural talent and ability”). 15. Which of the following is a good example of a “Pure Public Good”? d. National Defense. 16. ___________ broadly refers to government policies designed to reshape the allocation of wealth, income, and consumption across individuals in society. a. Redistribution 17. Congress has decided to impose a new per unit tax on gasoline. Consider the following two proposals: “Tax A” – a $1 per unit tax imposed on buyers (i.e., buyers would be legally responsible for writing a check to pay the tax); “Tax B” – a $1 per unit tax on sellers (i.e., sellers would be legally responsible for writing a check to pay the tax). We should expect that c. the magnitude of Deadweight Loss would be exactly the same under “Tax A” as under “Tax B.” 18. If each bottle of beer cost $6, then a. Joe would choose to purchase two bottles of beer. 19. If the price of a bottle of beer were to decrease from $4.75 to $3.75, then c. the total value of “Emery’s Consumer’s Surplus” would increase by $2.75. 20. Which of the following could never lead to an increase in the demand for pizzas? c. a decrease in the price of pizzas.21. The reintroduction of the gray wolf into the wilderness of the Western United States during the last several decades c. led to ranchers in the region realizing an “external cost” as a result of an increase in the number of their livestock being killed by wild animals. 22. In the “Circular Flow Diagram,” which of the following items flows from “Households” to “Firms” through the “Markets for Goods and Services”? c. Dollars spent on Finished Goods and Services. 23. When quantity demanded decreases at every possible price, we know that the demand curve has b. shifted to the left. 24. A “4th of July Fireworks display in downtown Atlanta” is c. very “Non-Rival in Consumption.” 25. ____________ suggests that: under certain conditions, the behavior of self-interested decision makers in free markets will lead to outcomes which are good for all individuals in society. d. Adam Smith’s notion of the “Invisible Hand.” 26. The “market failure” associated with the “Free Rider Problem” is a result of a. benefits from consumption which can be realized even by people who do not pay for an item. 27. The efficient level of output for this good is _____ units. b. 2,900 28. To maximize profit, this monopolist would c. charge a price of $10.00 and sell 1,700 units of output. 29. When this monopolist chooses the price and quantity which maximizes profit, d. More than one of the above answers is correct. 30. Graphically, the area below a demand curve but above price illustrates b. Total Consumers’ Surplus. 31. If a productive activity generates some pollution, then in order to maximize Total Social Welfare a society would have to c. carefully compare all of the benefits and all of the costs (including, but not limited to, the costs of the pollution) when deciding how much of the activity is best. 32. An entrepreneur a. is someone who organizes and manages a business, typically with considerable initiative and exposure to risk.33. “Rent Seeking Behavior” can be described as b. the expenditure of real resources in an attempt to secure a fixed economic surplus, as opposed to actions which generate an economic surplus. 34. A “widget” is a good that is both non-excludable and non-rival in consumption. Based upon this information, we would expect that if widgets were simply traded in a free market, then at the “market
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