ECO 365 Final Exam Answer Guide
- Last Updated: Feb 4th, 2017
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- Version: 2017 Exam Version - 30 Answers + Explanations
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The exhibit given below shows the demand curve for Good X, labeled D. At a price of $8 per unit, the quantity demanded of Good X is 5 units. A decrease in price to $4 per unit increases the quantity demanded to 8 units. Assuming that a decrease in price leads to new consumers buying the good, what is the consumer surplus received by the new consumers in the market?
Explanation: The consumer surplus is the area located in the small triangle in the photo above. This problem is solved by taking the length of the base (3) and the height (2), then finding the area with the formula A = (h*b) /2). So 3*2 / 2 = $3 surplus
Suppose both Ross and Vivian produce butter and cheese. When Ross works for 10 hours a day, he produces 6 pounds of butter and 24 pounds of cheese. When Vivian works for the same hours, she produces 20 pounds of cheese and 40 pounds of butter. Ross's opportunity cost of producing a pound of butter is:
4 pounds of cheese
Explanation: First of all, you can ignore everything about Vivian, as we only need Ross’s information to solve this question. Ross’s ratio of butter to cheese production is 6 to 24 or (0.25). So the opportunity cost is 1/0.25 or 4 pounds of cheese
Penelope has recently started a printing business in Duluth. She had to pay a fee to obtain a trade license from the Minnesota government and took a loan from the local bank to purchase inkjet printers, laser printers, and screen printers. She employs 20 workers who are paid a wage of $30 per hour. She is also a trained ballet dancer who used to earn an average of $50,000 a year. Penelope's implicit cost of running the business is:
the amount she used to earn as a ballet dancer
Explanation: The key word here is “implicit”. An implicit cost is the opportunity that a person will forgo when starting a business, which is usually their salary from a past career.
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In 1997, the federal government reinstated a 10 percent excise tax on airline tickets. The industry tried to pass on the full 10 percent ticket tax to consumers but was able to boost fares by only 4 percent. From this you can conclude that the:
- Demand for airline tickets is perfectly inelastic.
- Supply of airline tickets is perfectly inelastic.
- Demand elasticity for airline tickets is greater than zero in absolute value.
- Supply elasticity of airline tickets is less than infinity.
Explanation: In this example, we see demand increase by 4% relative to 10% price increase. This means airline tickets has a PED of -0.4, thus greater than zero as an absolute value.
Many call centers that provide telephone customer services for U.S. companies have been established in India, but few or none have been established in China. Why?
- Indian labor costs are equal to Chinese labor costs.
- China is at a more advanced stage of economic development than India.
- China lacks the political infrastructure to support call centers.
- Chinese labor lacks the specific language skills needed to make call centers profitable in China.
Explanation: Indian culture specifies English as an official language and it spoken fluently throughout the country. In contrast, Chinese culture speaks Mandarin or Cantonese and vastly fewer citizens speak English fluently.
There are many restaurants in the city of Raleigh, each one offering food and services that differ from those of its competitors. There is also free entry of sellers into the market, and each seller serves a very small fraction of the total number of meals served each day. The restaurant industry in Raleigh is best characterized as:
- Perfectly competitive.
- An oligopoly.
- A pure monopoly.
- Monopolistically competitive.
- perfectly vertical
- perfectly horizontal
Explanation: When resources in the economy are fixed, businesses must make tradeoffs when choosing which products or services to produce. For example, where there is X tons of steel available, the economy will naturally balance the PPF with a downward facing slope based on the economic possibilities for this resource.
2. Refer to the table shown. The average product when eight workers are employed is
7. The price of a ticket to a rock concert is set at $35. All the tickets for the concert sell out 1 hour after they go on sale and there are still 1,000 fans who want to buy tickets. It follows that
- the quantity of tickets demanded is equal to the quantity supplied at the $35 price.
- the equilibrium price of tickets to the concert is less than $35.
- the equilibrium price of tickets to the concert is more than $35.
- the equilibrium price of tickets to the concert is $35.
Explanation: If the price of tickets were at equilibrium, there would not be any customers still wanting to buy tickets. The only way to reduce the demand is to raise the prices of the tickets, thus the price of concert tickets must be higher to reach equilibrium.
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