Practice Exam 1.

1. What is the fundamental problem that an economic system must deal with?

2. If the principle of increasing costs did not hold, what shape would PPFs be? Draw one for this case. Show (on a typical PPF) how increasing costs are implicit in the shape of your PPF.

3. Give an example showing the derivation of market demand from individual demand. Market supply from individual supply.

4. Give examples of positive and normative economic statements.

5. Show what happens to the demand for a paperback book when a movie based on the book is released.

6. There has been a decline in sales of tennis racquets recently. Manufacturers blame high fees for using courts. Illustrate and explain using a figure showing changes in supply and/or demand.

7. Equilibrium price increases and quantity remains the same. Show changes in supply and/or demand which could explain this. Price increases and quantity decreases. What is the simplest explanation? Illustrate.

8. What is the opportunity cost of a 4 week summer vacation to Africa if: plane fare is $1,500, food expenses are $5/day, lodging is $20/day, and you have to give up 4 weeks of summer work at $250/week?

9. Compare the shape of the PPFs for apples and pears to that for apples and Apples (i.e. computers).

10. Explain how equilibrium prices are established in the market.

11. What are the two kinds of efficiency we have discussed? Give the definition of each.

12. What is a market equilibrium? What is efficient about this outcome?


Practice Exam 2

1. Show that an increase in the demand for labor could cause a temporary shortage of labor. What happens to wage rates over time in this case?

2. Why is there an equity vs. efficiency tradeoff? Discuss the minimum wage law as an example of this. Are efficiency losses large relative to equity gains with minimum wage laws? Is your answer an example of positive or normative economics?

3. Draw a Lorenz curve. What does it measure? Show on the same graph a country with high income equality compared to one with more inequality.

4. What groups are better off today than 20 years ago? What groups are worse off?

5. Define price elasticity of demand, price elasticity of supply, income elasticity of demand, and cross-price elasticity of demand. Give an example of calculating each quantity. What type(s) of elasticity does elastic and inelastic refer to? Define and give examples of each. How do normal, inferior, complements, and substitutes fit in with all of this?

6. Use a pair of graphs (demand and total revenue) to illustrate each of the 6 changes in TR given in table 7(20)-2.

7. Show, using appropriate graphs, each of the 6 "Practical Applications" listed immediately after the Quick Review 7(20)-2.

8. Show that price floors lead to surpluses, and price ceilings lead to shortages.

9. Give and explain 3 possible reasons for growing income inequality in this country. Who proposes each?

10. What are possible causes of increases in household income? What do the latest statistics suggest about median household income levels? What is the best explanation for these changes?

11. Why might businesses sometimes choose to set the price of a good at a non-equilibrium level?

12. Give examples of goods with inelastic and elastic demand.

13. Demonstrate why AOL customers get busy signals most evenings.

14. Who benefits from increases in the minimum wage?


 Practice Exam 3

 1. What relationship must hold for a firm to maximize profit? How are price and MR related in perfect competition?

2. Why would a firm expand output if MR>MC? What should the firm do, and why, if MRAC?

3. If free entry and exit did not hold for pure competition would productive efficiency result? Explain!

4. Give an argument for government interference in competitive markets.

5. Give in words what is meant by MC, AC, TC, TVC, TFC, AFC, AVC, and ATC. Write all the relationships between these which you can.

6. What is meant by utility? In what sense are diamonds more valuable than water?

7. Explain utilitarianism. hat is the efficiency argument for increasing income equality in society?

8. What are long run profit levels in pure competition? Why?

9. Give all pairs of total and marginal quantities which we use (e.g. total utility and marginal utility.) Give the definition of marginal in each case. Do the same for totals and averages.

10. How much information does one business need to know about market conditions? Contrast that with that needed in a command and control (centrally planned) economy.

11. Draw a typical TPPL curve and a typical TC curve.

12. Contrast the idea of diminishing returns with that of economies of scale. Give examples of each.

13. What do economists assume is the primary objective of most firms?

14. Give examples of implicit and explicit costs. How are these used in the economists' definition of profit? If economic profit is zero, what can you say is likely about accounting profit?


Practice Exam 4

 1. Compare long run profit levels and characteristics of pure competition, monopoly, monopolistic competition, and oligopoly. Why do they differ?

2. What was the dominant strategy for the payoff matrix used in our "tournament" of strategies?

3. Would the dominant strategy always be followed in a repeated game? Explain.

4. Why would a desire for a continuing business relationship reduce the problem of moral hazard (a form of "cheating" or defecting) between parties to an agreement?

5. Define a public good. Why do private markets undersupply, or not supply such goods?

6. Show that in monopolistic competition firms have too much capacity.

7. Give an example where social benefits = profits + consumer benefits.

8. Under what conditions does it make sense for a business to be the first into a market - before it may even fully understand the market? (Use the Boeing-Airbus example).

9. Give two examples of negative externalities (also called external costs) and two examples of positive externalities (also called external benefits).

10. How could a system of transferable pollution permits internalize emissions (make the external costs of these a normal cost of doing business), resulting in efficient levels of emissions? (Assume perfect compliance and no monitoring costs.)

11. Show that a tax equal to the externality caused by polluting emissions causes the market to reduce emissions to the "efficient" level.

12. The intersection of supply and demand gives the efficient output (and price), providing there are no ______________?

13. What do markets do well? Where do they fail to do well?