Which one of the following correctly describes the dividend yield

Economics Final

Authors:

Publisher:

R. Glenn Hubbard and Anthony Patrick O’Brien

Pearson/Prentice Hall

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04/09

BAM223 PRINCIPLES OF ECONOMICS

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in a ti o n

Text: Essentials of Economics

2nd Edition, 2009

ISBN-13: 978-0-13-608623-9 ISBN-10: 013-608623-3

Final Examination

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Principles of Economics

1) Every society faces economic tradeoffs. This means

a. producing more of one good means less of another good can be produced. b. not everyone can have enough goods and services to survive. c. some people live better than others do. d. society’s output cannot be made available to all.

2) Which of the following statements is false?

a. Tradeoffs do not apply when consumers purchase a product for which there is excess supply, such as a stock clearance sale. b. Every individual, no matter how rich or poor, is faced with making tradeoffs. c. Anytime you have to decide which action to take you are facing an economic tradeoff. d. Economics is a social science that studies the tradeoffs we are forced to make because of scarcity.

3) Which of the following is not an example of an economic tradeoff that a firm has to make?

a. whether it should produce more of its product. b. whether it is cheaper to produce with more machines or with more workers. c. whether or not consumers will buy its products . d. whether to outsource the production of a good or service

4) How are the fundamental economic decisions determined in Cuba?

a. Primarily, the government decides because Cuba is a centrally planned economy. b. These decisions are made by the country’s elders who have had much experi- ence in answering these questions. c. Individuals, firms, and the government interact in a market to make these economic decisions. d. The United Nations decides because Cuba is a developing economy.

5) Which of the following correctly describes the relationship between economic efficiency and economic equity?

a. They are both automatically achieved in a free market economy. b. There is no conflict between the two goals. c. There is often a trade-off between the two. d. They always call for opposite outcomes.

Multiple Choice Questions (Enter your answers on the enclosed answer sheet)

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Final Examination

Principles of Economics

6) Which of the following statements best characterizes the disagreements be- tween Paul Samuelson and Jagdish Bhagwati in their debate about outsourc- ing?

a. Their disagreements are grounded in normative economic analysis. They dis- agree over how to interpret the relevant economic statistics. b. Their disagreements are grounded in positive economic analysis. They dis- agree about the relevant economic statistics used in the model. c. Their disagreements are grounded in normative economic analysis. They dis- agree over the types of jobs lost to outsourcing. d. Their disagreements are grounded in positive economic analysis. They dis- agree about the model and the assumptions used in the model.

7) Which of the following statements about profit is true?

a. Profit refers to the revenue received from the sale of a quantity of goods. b. Profit is the difference between a firm’s revenue and its costs. c. Profit is calculated by multiplying price per unit by the number of units sold. d. The terms “accounting profit” and “economic profit” can be used inter- changeably.

8) Which of the following is an example of an activity undertaken by an entre- preneur?

a. holding a position as the president of a liberal arts college b. landscape design for your new home c. running for the president of the United States d. starting your own pet sitting business

9) Suppose when the price of laptops falls, college students buy more laptops. This implies that

a. there is a negative relationship between laptop prices and quantities pur- chased by college students. b. there is a one-to-one relationship between laptop prices and quantities pur- chased by college students. c. there is a direct relationship between laptop prices and quantities purchased by college students. d. there is a positive relationship between laptop prices and quantities pur- chased by college students.

Final Examination

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Principles of Economics

Figure 1-2

10) Refer to Figure 1-2. Calculate the area of the triangle A.

a. $6.3 million b. $3.15 million c. $8.4 million d. $2.1 million

11) You explain to your friend Haslina, who runs a catering service called “Meals in a Zip,” about an economic theory that asserts that consumers will pur- chase less of a product at higher price than they will at lower prices. She contends that the theory is incorrect because over the past two years she has raised the price of her catered meals and yet has seen a brisk increase in sales. How would you respond to Haslina?

a. I will explain to her that there are some omitted variables that have contrib- uted to an increase in her sales such as changes in income. b. Haslina is making the mistake of assuming that correlation implies causation. c. I will explain to her that she confusing positive economic analysis with norma- tive economic analysis. d. Haslina is right; she has evidence to back her claim. The theory must be false.

12) In a production possibilities frontier model, a point inside the frontier is

a. inefficient. Maximum output is not being obtained from available resources. b. allocatively efficient. c. allocatively inefficient. d. productively efficient

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Final Examination

Principles of Economics

13) A production possibilities frontier with a bowed outward shape indicates

a. decreasing opportunity costs as more and more of one good is produced. b. constant opportunity costs as more and more of one good is produced. c. the possibility of inefficient production. d. increasing opportunity costs as more and more of one good is produced. Figure 2-3

14) Refer to Figure 2-3. Carlos Vanya grows tomatoes and strawberries on his land. A portion of his land is more suitable for growing tomatoes and the other portion is better suited for strawberry cultivation. Which of the graphs in Figure 2-3 represent his production possibilities frontier?

a. Graph A b. Graph B c. Graph C d. either Graph A or Graph B e. either Graph B or Graph C

Figure 2-4

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Principles of Economics

Figure 2-4 shows various points on three different production possibilities fron- tiers for a nation. 15) Refer to Figure 2-4. A movement from X to Y

a. is the result of advancements in plastic production technology only, with no change in food production technology. b. is the result of advancements in food production technology only, with no change in the technology for plastic production. c. could occur because of an influx of immigrant labor. d. could be due to a change in consumers’ tastes and preferences. Figure 2-6

German auto producer BMW currently produces two types of automobiles, sports utility vehicles (SUVs) and coupes, in its U.S. plant. Since it opened in 1994, the company has made several strategic production decisions. Figure 2-6 shows changes to its production possibilities frontier in response to some of these pro- duction strategies. 16) Refer to Figure 2-6. Between 1995 and 2003 worker productivity increased so that the total number of vehicles produced increased as the company added more machinery and workers and changed the layout of its factory. This is best represented by the

a. movement from G to H in Graph B. b. movement from L to K in Graph C. c. movement from J to H in Graph B. d. movement from E to F in Graph A. Table 2-2

George Jack

Lawns Mowed 10 6

Gardens Cultivated 5 4

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Final Examination

Principles of Economics

Table 2-2 shows the output per day of two gardeners, George and Jack. They can either devote their time to mowing lawns or cultivating gardens. 17) Refer to Table 2-2. What is George’s opportunity cost of cultivating a garden?

a. two lawns mowed b. one and a half lawns mowed c. two-thirds of a garden cultivated d. one-half of a garden cultivated Table 2-3

Table 2-3 shows the number of labor hours required to produce a digital camera and a pound of wheat in China and South Korea.

18) Refer to Table 2-3. What is South Korea’s opportunity cost of producing one digital camera?

a. 25 pounds of wheat b. 20 pounds of wheat c. 0.05 pounds of wheat d. 60 pounds of wheat

19) Refer to Table 2-3. China has a comparative advantage in

a. both products. b. digital camera production. c. wheat production. d. neither product.

20) Refer to Table 2-3. If the two countries specialize and trade, who should export digital cameras?

a. South Korea b. There is no basis for trade between the two countries. c. They should both be importing digital cameras. d. China

One Digital Camera Wheat (per pound)

China 100 hours 4 hours

south Korea 60 hours 3 hours

Final Examination

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Principles of Economics

Figure 2-10

21) Refer to Figure 2-10. The segment of the circular flow diagram in the Figure shows the flow of funds from market F to economic agents G. The funds rep- resent spending on goods and services. What is market F and who are eco- nomic agents G?

a. F = factor markets; G = firms b. F = factor markets; G = households c. F = product markets; G = firms d. F = product markets; G = households

22) Although it is a popular product, Apple makes little profit from each song downloaded through iTunes. Why does Apple charge only $0.99 to download a song?

a. Although Apple makes a small amount of profit per song, total profit is large because the quantity sold is large. b. The low price makes it more likely that consumers will buy iPods, which are relatively expensive. c. Apple plans to increase the price of downloading songs after it sells a large enough number of iPods. d. Apple cannot raise the price above $0.99 per song because consumers can download songs at even lower prices from Apple’s competitors.

23) The income effect of a price change refers to the impact of a change in

a. the price of a good on a consumer’s purchasing power. b. income on the price of a good. c. demand when income changes. d. the quantity demanded when income changes.

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Final Examination

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24) The Internet has created a new category in the book selling market, namely, the “barely used” book. How does the availability of barely used books affect the market for new books?

a. the demand curve for new books shifts to the left b. the demand curve for new books shifts to the right c. the supply curve for new books shifts to the right d. the supply curve for new books shifts to the left

25) A supply schedule

a. is a table that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to ex- change. b. is a table that shows the relationship between the price of a product and the quantity of the product supplied. c. is a curve that shows the relationship between the price of a product and the quantity of the product supplied. d. is the relationship between the supply of a good and the cost of producing the good.

26) In October 2005, the U.S. Fish and Wildlife Service banned the importation of beluga caviar, the most prized of caviars, from the Caspian Sea. What hap- pened in the market for caviar in the U. S.?

a. The demand curve shifted to the right. b. The demand curve shifted to the left. c. The supply curve shifted to the right. d. The supply curve shifted to the left.

Figure 3-2

Final Examination

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Principles of Economics

27) Refer to Figure 3-2. If the price is $25,

a. there would be a shortage of 200 units. b. there would be a surplus of 300 units. c. there would be a shortage of 300 units d. there would be a surplus of 200 units.

28) Assume there is a shortage in the market for digital music players. Which of the following statements correctly describes this situation?

a. The shortage will cause an increase in the equilibrium price of digital music players. b. The price of digital music players will rise in response to the shortage; as the price rises the quantity demanded will increase and the quantity supplied will decrease. c. Some consumers will be unable to obtain digital music players at the market price and will have an incentive to offer to buy the product at a higher price. d. The demand for digital music players is greater than the supply of digital music players.

29) Select the phrase that correctly completed the following statement. “A posi- tive change in technology caused an increase in the supply of flat-screen televisions. As a result

a. the price of flat-screen televisions decreased and the quantity demanded of flat-screen televisions increased.” b. the price of flat-screen televisions decreased. The lower price caused the supply of flat-screen televisions to decrease.” c. the equilibrium quantity of flat-screen televisions decreased.” d. the price of flat-screen televisions decreased and the demand for flat-screen televisions increased.”

30) “Because apples and oranges are substitutes, an increase in the price of or- anges will cause the demand for apples to increase. This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right.” Which of the follow- ing correctly comments on this statement?

a. The statement is false because a change in the price of apples would not change the demand for apples. b. The statement is false because one cannot assume that apples and oranges are substitutes for all consumers. c. The statement will be true, if consumer tastes for apples and oranges do not change. d. The statement is false because oranges are inferior goods; apples are normal goods.

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Final Examination

Principles of Economics

31) The demand for lobster is lower in the spring than in the summer. If the price of lobster is higher in spring than in summer then

a. there are more substitutes for lobster in summer than there are in spring. b. there is a shortage of lobster in spring and a surplus of lobster in summer. c. the supply of lobster is greater in summer than in spring. d. consumers’ tastes for lobster are greater in spring than in summer.

32) Suppliers will be willing to supply a product only if

a. the price received is less than the additional cost of producing the product. b. the price is higher than the average cost of producing the product. c. the price received is at least equal to the additional cost of producing the product. d. the price received is at least double the additional cost of producing the prod- uct. Table 4-3

Table 4-3 shows the demand and supply schedules for the low-skilled labor mar- ket in the city of Westover. 33) Refer to Table 4-3. If a minimum wage of $7.50 an hour is mandated, what is the quantity of labor supplied?

a. 370,000 b. 380,000 c. 390,000 d. 340,000

Hourly Wage (Dollars)

Quantity of Labor Sup- plied

Quantity of Labor De- manded

$6.00 350,000 390,000

6.50 360,000 380,000

7.00 370,000 370,000

7.50 380,000 360,000

8.00 390,000 350,000

8.50 400,000 340,000

Final Examination

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Principles of Economics

Figure 4-7

Figure 4-7 shows the demand and supply curves for the almond market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at Pf. 34) Refer to Figure 4-7. What is the area that represents producer surplus after the imposition of the price floor?

a. B + E + F b. B + C + D + E c. A + B + E d. B + E

35) Which of the follow is not a result of imposing a rent ceiling?

a. an increase in the quantity demanded of apartments b. a reduction in the quantity supplied of apartments c. the marginal benefit of the last apartment rented is greater than the marginal cost of supplying it d. some consumer surplus is converted to producer surplus

36) If your neighbor burns auto tires in the yard and you can smell them and can- not see sunlight because of the black smoke, you are experiencing

a. a positive externality. b. a private benefit. c. a private cost. d. a negative externality.

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Final Examination

Principles of Economics

37) Vaccinating people against a communicable disease such as influenza not only reduces the chances that the person vaccinated will catch the disease but also reduces the probability that an epidemic of the disease will occur. Which of the following statements is true?

a. The benefits of the influenza vaccination outweigh the costs. b. Reducing the chances that the person vaccinated will catch the disease is a private benefit while reducing the probability of an influenza epidemic is a social benefit. c. Vaccinating people against communicable diseases yields private benefits in excess of social benefits. d. Reducing the chances that the person vaccinated will catch the disease is a private cost while reducing the probability of an influenza epidemic is a social benefit.

38) Which of the following conditions holds in an economically efficient competi- tive market equilibrium?

a. The marginal benefit of the last unit produced and consumed is maximized. b. Producer and consumer surplus are exactly equal in size. c. There are no positive and no negative external effects from consumption and production. d. The deadweight loss is positive but at a minimum.

Figure 4-14

Figure 4-14 shows a market with a positive externality.

Final Examination

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Principles of Economics

39) Refer to Figure 4-14. The deadweight loss due to the externality is repre- sented by the area

a. msn. b. nso. c. mso. d. mtn.

Figure 4-15

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 4-15 illustrates this situation in the toilet paper market.

40) Refer to Figure 4-15. The efficient output is

a. Q3. b. Q1. c. Q2. d. Q4.

41) How has organizing a successful firm in a market economy changed over the last century?

a. There has been no change over the last century. b. It has become easier as more and more firms discover how to do it. c. As government intervention has decreased, firms now have more freedom. d. It has become more difficult to organize an efficient and successful firm.

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Final Examination

Principles of Economics

42) What is the relationship of the owners of a corporation to the corporation?

a. The personal assets of the owners are part of the corporation’s assets. b. The owners of the corporation have a separate legal distinction from the cor- poration. c. The owners of the corporation have no separate legal distinction from the corporation. d. None of the above describes the relationship.

43) When you buy previously-issued shares of Google stock, this transaction takes place in the

a. secondary market. b. bond market. c. primary market. d. bear market.

44) You have a bond that pays $60 per year in coupon payments. Which of the following would result in an increase in the price of your bond?

a. The price of a share of stock in the company falls. b. The likelihood that the firm issuing your bond will default on debt increases. c. Coupon payments on newly-issued bonds fall to $50 per year. d. Coupon payments on newly-issued bonds rise to $80 per year.

45) In June 2007 General Motors (GM) posted a price-earnings ratio of 9.84. If the price of the stock at that time was $36 per share, which of the following must have been true?

a. GM’s earnings per share was 3.66. b. GM’s coupon payment was $35 per year. c. GM’s dividend yield for the year was 26%. d. GM’s revenues that month were $366 million.

46) In 2007, the dividend yield on General Motors (GM) stock fell from 8.6% to 4.4%. Which of the following would have generated that result?

a. The price-earnings ratio rose. b. GM issued bonds with a coupon rate equal to 8%. c. GM announced a decrease in the dividend it would pay per share. d. The closing price of GM stock fell.

Final Examination

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Principles of Economics

47) Which of the following is an example of an implicit cost a firm might incur?

a. taxes owed to the state and federal governments b. the out-of-pocket expense to hire resources c. the revenue a firm generates in using its resources d. the rental value of the office space the company owns and uses for itself

48) What is shown on a firm’s income statement?

a. profits b. revenues c. costs d. All of these are shown on a firm’s income statement.

49) In addition to requiring that CEO’s personally certify the accuracy of financial statements, the Sarbanes-Oxley Act of 2002 also requires that

a. corporations issue financial statements monthly rather than quarterly. b. firms raise funds for expansion through the sale of bonds only, not stocks. c. auditors disclose any potential conflicts of interest. d. CEOs conduct audits of their corporations themselves.

50) Suppose your marginal utility from consuming a third slice of cake is zero, then your total utility from consuming cake is

a. increasing. b. negative. c. decreasing. d. maximized.

51) When the price of summer tank tops falls and you buy more them because they are relatively less expensive, this is called

a. the elasticity effect. b. the deadweight loss effect. c. the income effect. d. the substitution effect.

52) Most film processing companies have a policy of printing every picture on a roll of film and allowing customers to request a refund for pictures that were not clearly developed. The companies do this knowing that most customers do not ask for refunds. This is an example of consumers

a. not taking non-monetary opportunity costs into account.

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Principles of Economics

b. not making themselves aware of the policy regarding refunds. c. failing to ignore sunk costs. d. being overly optimistic about their future behavior.

53) If demand is perfectly price elastic, the absolute value of the price elasticity of demand is

a. less than one. b. more than one. c. infinity. d. equal to the absolute value of the slope of the demand curve.

54) If the market for a product is broadly defined, then

a. there are many substitutes for the product and the demand for the product is relatively elastic. b. the good has many complements. c. there are few substitutes for the product and the demand for the product is relatively inelastic. d. the expenditure on the good is likely to make up a large share of one’s bud- get. Figure 6-2

55) Refer to Figure 6-2. The inelastic segment of the demand curve

a. lies above the midpoint of the curve. b. is coincident with the horizontal axis. c. lies below the midpoint of the curve. d. is coincident with the vertical axis.

Final Examination

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Principles of Economics

Table 6-3

56) Refer to Table 6-3. Over what range of prices is the demand price elastic?

a. over the entire range of prices b. between $8 and $16 c. between $12 and $16 d. between $2 and $8

57) When a firm changes its price, the change in total revenue

a. depends on the value of the price elasticity of demand and the direction of the price change. b. is zero. c. is negative. d. is positive.

58) A characteristic of the long run is

a. there are both fixed and variable inputs b. plant capacity cannot be increased or decreased. c. all inputs can be varied. d. there are fixed inputs.

Price per pound (Dollars)

Quantity Demanded of cheese (pounds)

$16 3

14 4

12 5

10 6

8 7

6 8

4 9

2 10

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Final Examination

Principles of Economics

59) Academic book publishers hire editors, designers, and production and mar- keting managers who help prepare books for publication. Because these em- ployees work on several books simultaneously, the number of people the company hires will not go up and down with the quantity of books the com- pany publishes during any particular year. The salaries and benefits of people in these job categories will be included in

a. marginal cost and total cost but not fixed cost. b. fixed cost but not variable cost and total cost. c. fixed cost and marginal cost but not variable cost. d. fixed cost and total cost but not variable cost.

60) If another worker adds 9 units of output to a group of workers who had an average product of 7 units then the average product of labor

a. will increase. b. will decrease. c. will remain the same. d. cannot be determined from the information given.

Table 7-1

Table 7-1 shows the technology of production at the Matsuko’s Mushroom Farm for the month of May 2007.

Number of workers Mushrooms per day (pounds)

1 12

2 30

3 45

4 50

5 54

6 56

Final Examination

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Principles of Economics

61) Refer to Table 7-1. Diminishing returns set in when the ________ worker is hired.

a. 2nd b. 3rd c. 4th d. None of the above; the production function displays increasing marginal returns.

62) If production displays economies of scale, the long run average cost curve is

a. upward sloping. b. above the short run average total cost curve. c. below the long run marginal cost curve. d. downward-sloping.

63) When a firm’s long-run average cost curve is horizontal for a range of output, then in that range production displays

a. constant average fixed costs. b. increasing returns to scale. c. constant returns to scale. d. decreasing returns to scale.

64) The price of a seller’s product in perfect competition is determined by

a. the individual seller. b. a few of the sellers. c. the average consumer. d. market demand and market supply.

65) All of the following can be used to compute profit per unit except

a. price minus average total cost. b. total profit divided by quantity. c. average revenue minus average total cost d. marginal profit minus marginal cost.

66) Val Alvarado, an accountant, quit his $80,000-a-year job and bought an existing laundry from its previous owner. The lease had five years remaining and required a monthly payment of $4,000. Val’s explicit costs are $3,000 per month more than his revenue. Should Val continue operating his busi- ness?

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Final Examination

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a. If Val’s marginal revenue is greater than or equal to his marginal cost, then he should stay in business. b. Val should continue to run the laundry until his lease runs out. c. Val’s explicit cost exceeds his total revenue. He should shut down his laundry. d. cannot be determined without knowing his revenue

67) A perfectly competitive market is in long-run equilibrium. At present there are 100 identical firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry’s product which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the indus- try?

a. In the short run the typical firm increases its output and makes an above normal profit. b. In the short run the typical firm’s output remains the same but because of the higher price its profit increases. c. In the short run the typical firm increases its output but its total cost also rises. Hence, the effect on the firm’s profit cannot be determined without more information. d. In the short run the typical firm increases its output but its total cost also rises, resulting in no change in profit.