Econ 101 Final Exam Review

Both Apple and Samsung have come out with new versions of their smartphones. They each have to decide whether they will charge $1,000 per phone, $750 per phone, or $500 per phone. Their profits (in billions of dollars) are provided in the table below:

Suppose that Apple decides to move first and lets Samsung respond to Apple’s initial decision. What would the equilibrium outcome be for this sequential move game?

• Apples charges a price of $1,000; Samsung charges a price of $750.

• Apples charges a price of $750; Samsung charges a price of $1,000.

• Apples charges a price of $1,000; Samsung charges a price of $1,000.

• Apples charges a price of $500; Samsung charges a price of $500.

• Apples charges a price of $500; Samsung charges a price of $1,000.

Which of the following would cause the supply curve for computers to shift to the right?

• The use of smartphones for email and web browsing has caused many individuals to stop buying new computers.

• An increase in work done remotely due to Covid-19 has caused the demand for new computers to increase.

• Due to a global shortage, the price of microchips, an input in the production of computers, increased.

• New production techniques have reduced the per-unit cost of producing computers.

Consider the market for cable services in Ann Arbor. Assume that there is a monopolist in this market.

Based on this information, which of the following would be TRUE?

1. I. If the monopolist could only charge a single price to all customers, in order to maximize profits, it would charge a price of $40 and sell to 40 thousand customers.

2. II. If this monopolist was successfully able to practice perfect price discrimination, it would sell to 120 thousand customers in this market.

3. III. If this monopolist was successfully able to practice perfect price discrimination, then total economic surplus in this market would increase relative to the case where the monopolist could only charge a single price to all customers.

• I and II only.

• I only.

• II and III only.

• I, II, and III.

• III only.

Cottage Inn is a gourmet pizza restaurant that is headquartered in Ann Arbor, Michigan. You enjoy pizza and often go to Cottage Inn. The total benefit you receive depends on the quantity of slices you consume in a day is provided in the following table.

Based on this information, which of the following is/are true?

1. I. If Cottage Inn charges $3 per slice, then in order to maximize your benefits you would consume a total of four slices of pizza.

2. II. Diminishing marginal benefit is not occurring for you since total benefits continue to increase as you consume each additional slice of pizza.

3. III. If Cottage Inn offered an all-you-can eat pizza buffet special for $10 you would consume at least six slices of pizza.

4. IV. The most you would be willing to pay for an all-you-can eat pizza buffet is $11.

• I, II, and III only.

• I and IV only.

• III and IV only.

• I, III, and IV only.

• I and III only.

During the past few years, the U.S. has maintained tariffs on imported steel. Steel is used as an input into the manufacturing of many domestically made products such as automobiles made by Ford and General Motors. A recent study has indicated that the tariffs have increased the price of steel and resulted in the cost for U.S. companies that use steel as an input to increase by approximately 10%. This has caused a reduction in the domestic quantity supplied in those industries. The tariffs have also created jobs in the U.S. domestic steel industry. The increased cost of steel to domestic demanders of steel in the U.S. has resulted in a net cost of $900,000 annually for every job that has been created in the steel industry (approximately thirteen times the average annual salary of a steel worker in the U.S.). Based on this information, which of the following are likely to be TRUE?

I. Imposing tariffs on imported steel has caused consumer surplus in the domestic U.S. market for steel to decrease.

1. II. Imposing tariffs on imported steel has caused employment in the domestic automobile industry to decrease.

2. III. If the tariffs were eliminated then the gains to U.S. domestic demanders of steel would be greater than the losses to domestic producers of steel in the U.S. steel industry. As a result, firms in the domestic steel industry could be fully compensated for their losses, while still leaving demanders with more economic surplus.

• II and III only.

• III only.

• I and II only.

• I only.

• I, II and III.

According to a 2016 article in the Wall Street Journal, “After years of relative equilibrium, the job market for nurses is heating up in many markets, driving up wages and sign-on bonuses for the nation’s fifth-largest occupation.” Which of the following might explain this phenomenon?

1. I. Many nurses who had delayed their retirement due to the 2008 recession began to retire, resulting in a retirement wave that caused nurses to exit the workforce in greater numbers than new nurses were entering.

2. II. The cost of medical equipment decreased and the substitution effect dominated the scale effect.

3. III. Demand for nurses had increased due to the additional health care coverage associated with job growth over the previous decade since the recession and the Affordable Care Act.

4. IV. A reduction in the growth of wages in other fields during the 2008 recession caused an increase in the number of workers graduating from nursing schools.

• I and III only.

• I and IV only.

• III and IV only.

• I and II only.

• I, II, and III only.

Suppose that the government decides to impose a tax on movie tickets. This situation is illustrated in the following graph. Based on the information contained in the graph, which of the following would be TRUE?

• The demanders and suppliers in this market are evenly splitting the economic burden of the tax.

• The statutory incidence of the tax is on suppliers of movie tickets, therefore suppliers will bear the majority of the economic burden of the tax.

• The demand for movie tickets is more elastic than the supply of movie tickets.

• The price that demanders end up paying, inclusive of the tax, increased by $1 relative to the original equilibrium price, therefore the tax rate is equal to $1.

• The price of movie tickets, inclusive of the tax, has increased for demanders; therefore, demanders of movie tickets will bear the entire economic burden of the tax

A year ago, you graduated from the University of Michigan with a degree in Economics and have decided to open your own economic consulting company. Over the past year, your firm has generated $600,000 worth of revenue. You hired four employees and paid each of them $50,000 over the past year. You also purchased computer equipment that cost a total of $50,000. In order to open your own business, you used $50,000 from your savings. During the past year, you could have earned a 10% rate of return on that money. Instead of opening your own business, you could have gone to work for Amazon and earned $200,000 over the past year. Based on this information, which of the following is/are True?

1. I. Your accounting profit for the year was equal to $350,000. 

2. II. Your economic profit for the year was equal to $100,000.

3. III. You were $55,000 better off opening your own business than you would have been had you worked for Amazon.

4. IV. Your economic profit for the year was equal to $345,000.

• I only.

• I and IV only.

• I and III only.

• II and III only.

• I and II only.

Which of the following scenarios is an example of the supplier having significant bargaining power. Consider only the information contained in the provided scenarios.

• A typical small town will have multiple fast-food restaurants resulting in low profit margins. The restaurants depend on two distributors for necessary items such as napkins, food products, and cleaning and sanitizing products, but one of the available distributors goes out of business.

• Shopping malls act as suppliers of space and rent that space to individual shops and retailers. A high value is placed on stores and retailers who bring in many customers to the mall. Apple draws in so many shoppers that when an Apple store is added to an existing shopping mall, it can lift sales by 10% at the malls in which they operate. In this example, consider Apple as the buyer of rental space.

• Walmart was founded in 1962 and has since become the largest retailer in the world. As a result, Walmart purchases products from their various suppliers in very large quantities and will only purchase from suppliers who are able to offer low prices.

• The automaker General Motors can buy tires from a variety of companies such as Bridgestone, Goodyear, Hankook, and Michelin.

Over the last year, you have observed that the market price for corn in the U.S. has increased and the quantity produced by corn farmers in the U.S. has decreased. You have also observed that the total revenue collectively received by corn farmers in the U.S. has increased. Corn farmers can also use their land to grow soybeans instead of corn.

For each of the following identify whether it could correctly explain the outcomes that you have observed over the last year in the corn market:

Unusually cold weather in both Iowa and Nebraska has destroyed a portion of the corn crop grown in those states and the demand for corn is price elastic.

Answer explanation

This is not a possibility because even those the supply curve does shift left, raising the price and lowering the quantity, the demand for corn can't be price elastic. If the demand was price elastic, then as the price of corn increases, the total revenue should fall rather than rise and people leave to find other less expensive substitutes since they are relatively sensitive to price changes.