Introduction to Agricultural Economics

Agricultural Economics 105

Spring 2013 Second Hour Exam – Version 1

Name____________________________ Section _____________

There is only ONE best correct answer per question. Place your answer on the attached

sheet. DO NOT RIP THE ANSWER SHEET FROM THE TEST. HAND IN BOTH THE

TEST AND ANSWER SHEET. Each question is worth 2 1/2.

1. Monopolies exist because of

a. the ease of entry and exit to the industry.

b. a homogeneous product.

c. the Sherman Antitrust Act.

d. increasing returns to scale in the short run.

e. none of the above.

2. A binding price floor in a market is set

a. above equilibrium price and causes a shortage.

b. above equilibrium price and causes a surplus.

c. below equilibrium price and causes a surplus.

d. below equilibrium price and causes a shortage.

e. a binding price floor has no impact on the market.

3. When a price ceiling is imposed in a market and the ceiling is binding

a. price no longer serves as a rationing device.

b. the quantity supplied at the price ceiling exceeds the quantity that would have been

supplied without the price ceiling, i.e. a surplus.

c. buyers and sellers both benefit equally in terms of welfare increases.

d. buyers and sellers both are harmed equally in terms of welfare decreases.

e. a binding price celling has no impact on the market.

4. The rate at which firms are willing to substitute between two products in the current period

is known as

a. marginal rate of technical substitution (MRTS).

b. marginal rate of substitution in utility (MRS).

c. production possibility curve (PPC).

d. marginal physical product (MPP).

e. marginal rate of product transformation (MRPT).

Refer to the following figure for questions 5 – 7.

5. Because of the high cost of beef steaks, the federal government is considering placing a

price ceiling on steaks because of the need and right for high quality food. What are the

market equilibrium price and quantity sold before the ceiling, and price and quantity sold

in the market place after imposition of the ceiling?

a. P1, Q2 and Pc, Q2.

b. P1, Q2 and Pc, Q3.

c. Pc, Q2 and Pc, Q1.

d. P1, Q3 and Pc, Q2.

e. P1, Q2 and Pc, Q1.

6. If the government imposed the price ceiling as illustrated in the figure, we would predict in

terms of consumer surplus, consumers would

a. gain area c and lose area b.

b. lose area b + d.

c. gain area c and lose area b + d.

d. lose area d.

e. gain area a + c.

7. Which area gives total economic surplus after imposition of the ceiling floor?

a. area b + d

b. area a + c + h

c. area a + c

d. area h

e. area a + c + h – b - d

S

Refer to the following figure for questions 8 - 10. This figure represents the amount of capital

and labor necessary to produce GPS units.

8. What is changing between the three isocost lines given in the figure?

a. price of labor relative to capital

b. price of capital relative to labor

c. total costs

d. level of output

e. technology

9. Assuming the price of labor is $10 / unit and capital is $5 / unit and the firm has $60,000 to

spend, what is the least cost combination of inputs that maximizes production?

a. use all labor as this input is cheaper

b. tangency between lines C and D

c. tangency between lines B and E

d. tangency between lines A and F

e. need to know MR and MC curves

10. Which isoquant is associated with the smallest output level?

a. A

b. B

c. C

d. E

e. F

11. Education is often used as an example of a public good because education, kindergarten

through 12th

grade, is provided by the federal and state governments to all children.

a. True

b. False

For questions 12 - 13, refer to the following isoquant graph associated with the production of

GPS units (isoquant levels of output are 1, 2, and 3 GPS units) used on agricultural tractors and

isocost line (dashed line).

12. Notice for any isocost line other than an isocost line with the same slope as the isoquants,

the isocost and isoquant will be tangent at one of the axis. Why?

a. Intel and ADM chips are perfect substitutes in production

b. Intel and ADM chips are perfect compliments in production

c. 3 Intel chips and 3 ADM chips go together to create one GPS unit

d. a and c

e. b and c

13. What is the marginal rate of technical substitution (MRTS) between Intel and ADM chips?

a. One – half

b. One

c. Two

b. Three

c. Six

14. According to the American Farm Bureau, between 2002 and 2007 slightly over 4 million

acres of agricultural land in the U.S. and 7 million rural acres were converted to developed

uses. This is a concern because

a. this rate has been increasing over time.

b. wasteful land use is the problem and not development.

c. 91% of our fruit and 78% of our vegetables are produced in urban influenced areas.

d. scenic lands are being lost along with farmland.

e. all of the above.

15. A student snoring loudly in AGEC 105 while you are trying to listen to the lecture is an

example of

a. an externality.

b. violation of the exclusivity characteristic of property rights.

c. an example of nonrival and nonexcluability in consumption associated with the

provisions of a public good.

d. all are correct.

e. a and b.

For questions 16 – 17, refer to the following production possibility curve and isorevenue line for

your new business venture of making TAMU designer shirts and blue jeans. Let shirts sell for

$40 / shirt and blue jeans for $50 / jean.

16. Your production possibility curve depends on

a. money capital available (costs).

b. technology used.

c. labor hired.

d. physical capital such as buildings.

e. all of the above.

17. Your business partner suggest you produce output levels at point A, after taking AGEC 105

you tell your business partner

a. point A is infeasible but points D and B are feasible as they lie on the isorevenue line.

b. point A is infeasible but we should produce at point C to be conservative in our new

business venture.

c. point A is feasible and provides our new firm the largest output, therefore, maximizes

our revenue and profits.

d. our profit maximizing point is B.

e. point E lies on the PPC curve so is feasible with blue jeans selling at a higher price

than shirts we should produce more blue jeans than shirts.

18. If the MPP of labor is 30 and the MPP of machinery is 10 and the price of labor is $15 and

the price of machinery is $2, you should

a. use more machinery as its marginal physical product per last dollar spent is more than

for machinery.

b. use more labor as its marginal physical product per last dollar spent is more than for

machinery.

c. increase the amount of labor as its MPP is higher.

d. increase the amount of machinery as it is the cheaper input (lower price).

e. you are at the optimal levels of input use.

19. Externalities could be either positive or negative. For a positive externality in which

society receives larger benefits (larger willingness to pay) than the individual, which curve

best illustrates this situation? In the graph the dashed lines represent the demand and

supply curves in the situation with no externality.

a. A

b. B

c. C

d. D

e. both A and C

20. A per unit tax on gasoline is sometimes mentioned as a way to reduce air pollution from

automobiles. This is an example of

a. marginal pollution control costs.

b. lump sum tax.

c. marginal abatement cost.

d. the government providing a private good, clean air.

e. internalization of negative externality.

For questions 21 – 22 use the following supply and demand table.

Price Quantity

Supplied

Quantity

Demanded

9 20 0

8 18 2

6 14 6

5 12 8

4 10 10

2 6 14

1 4 16

21. What is the equilibrium price and quantity in a perfectly competitive market?

a. Price = 8 and quantity = 18.

b. Price = 4 and quantity = 10.

c. Price = 2 and quantity = 14.

d. Price = 6 and quantity = 14 and 6.

e. Price = 5 and quantity = 12 and 8.

22. If price is $8, the market is experiencing

a. a change to a monopoly.

b. a shortage of 16 units.

c. a change to monopolistic competition.

d. surplus of 16 units.

e. no real change as a price of $8 is the market equilibrium price.

23. Which of the following forms of market competition do not incur social costs?

a. Monopoly

b. Perfect competition

c. Monopolistic competition

d. Oligopoly

e. all except b

24. In the U.S., the wireless provider market share is dominated by four companies, Verizon

(31%), AT&T (27%), Sprint (16%), and T-mobile (12%). Which of the following forms of

market competition would best describe this industry?

a. Monopoly

b. Perfect competition

c. Monopolistic competition

d. Oligopoly

e. Duopoly

The U.S. government spent 21 years fighting Microsoft in an antitrust battle. The U.S.

government contends Microsoft is a monopoly. For questions 25 – 28 assume the government is

correct and Microsoft is a monopoly. Use the following diagram to answer the questions.

25. What is the equilibrium price and quantity of Windows operating systems sold assuming it

is a monopoly?

a. P1, Q1

b. P2, Q2

c. P3, Q3.

d. P1, Q1

e. P3, Q2

26. By breaking up the monopoly the government hopes to move the industry to perfect

competition, if the government is successful what is the equilibrium price and quantity?

a. P1, Q1

b. P2, Q2

c. P3, Q3.

d. P1, Q1

e. P3, Q2

27. Which area represents Microsoft’s total costs assuming it is a monopoly?

a. A + B + C + D

b. C + D + F + H

c. H

d. I + J

e. I

28. The reason society is against monopolies is deadweight loss. In going from a monopoly to

perfect competition, producer surplus gains are area G and losses are area C+D? Why?

a. In a monopoly, producers can charge whatever they want.

b. Consumers gain in transitioning from a monopoly to perfect competition so

producers must lose.

c. Producers gain because quantity sold is lower in perfect competition and gain

because of the higher price in a monopoly.

d. Producers lose because the government fines businesses found to be in violation of

antitrust laws.

e. Producers gain because quantity sold is higher in perfect competition, but lose

because the price is lower in perfect competition.

29. The number of pool stores in the BCS area has increased from one in the early 1970’s to

approximately 20 stores / providers. This change in the market can best be described as

a. changing from a monopoly to an oligopoly.

b. changing from a monopoly to perfect competition.

c. changing from a monopoly to monopolistic competition.

d. changing from a monopoly to an oligopoly.

e. no real change in the market structure just a higher demand for pools.

30. Water use in the U.S.

a. has been increasing overtime because of increases in population.

b. has increased until the 1980’s then has been fairly constant despite increases in

population.

c. has been decreasing since the 1970’s because of technological advances in irrigation

and industry.

d. has not changed much since the 1960’s because of decreased agricultural lands and

technological advances.

e. is not a real problem because of the large total amount of water in the U.S.

31. The optimal level of pollution

a. is zero because pollution places a cost on individuals that are not associated with the

production of the pollution.

b. as argued by economists - should be determined by the marketplace just like any

other good.

c. has been decreasing since the 1970’s because of technological advances in pollution

control and implementation of government regulations.

d. is determined by the intersection of the marginal cost of control and marginal

damage curves.

e. is at the tangency point between an individual’s utility curve and budget constraint

for a pollution control device.

32. The free rider problem arises when

a. public goods are excludable and so consumers who do not pay for the good cannot

consume the good..

b. public goods are nonexcludable and so consumers who do not pay for the good

cannot be prevented from consuming the good.

c. public goods are nonrival and so consumers who do not pay for the good cannot be

prevented from consuming the good.

d. public goods are rival and excludable and so consumers who do not pay for the good

cannot consume the good..

e. is a fallacy of economic theory..

33. The differences between a per unit tax and a lump sum tax in a market are

a. a per unit tax influences output and price but a lump sum tax does not.

b. a lump sum tax influences output and price while also decreasing profits.

c. both taxes influence output and prices but a lump sum tax being like a fixed cost

influences profits more than a per unit tax.

d. both taxes influence output and prices but a per unit tax being like a variable cost

influences profits more than a per unit tax.

e. a lump sum tax is better as it influences profits the big corporations make.

34. New Zealand fisheries have a transferable quota system in that to be able to fish you must

own a quota. The quotas can only be sold and owned by the Maori group of people of New

Zealand. This can best be described as a violation of which property right characteristic.

a. Universality

b. Exclusivity

c. Transferability

d. Enforceability

e. Specificity

Assume that only two companies manufacture shock absorbers for mountain bikes: Shock! and

TBITAD (To brake is to admit defeat). Both firms have the option of adopting a low key (and

less expensive) or an aggressive (and more expensive) advertising approach. The payoffs (in

thousands of dollars per month) associated with each approach are shown in this payoff matrix in

the order Shock!, TBITAD.

TBITAD

Low Key Aggressive

Shock ! Low Key 25, 25 -20, 50

Aggressive 50, -10 0, 0

35. What is Shock!’s best strategy and profit assuming TBITAD goes Low Key?

a. Aggressive.

b. Low Key.

36. Assuming that the two firms cannot collude with each other. What are the best strategies

for Shock! and TBITAD?

a. Low Key, Low Key.

b. Low Key, Aggressive.

c. Aggressive, Low Key.

d. Aggressive, Aggressive.

37. Assuming that the two firms can collude with each other. What are the best strategies for

Shock! and TBITAD?

a. Low Key, Low Key.

b. Low Key, Aggressive.

c. Aggressive, Low Key.

d. Aggressive, Aggressive.

38. Product differentiation:

a. only exists in the mind of the consumer.

b. is frequently used by firms to shift the demand curves for their commodities to the

right.

c. causes the price elasticity of demand to become more inelastic.

d. is often used as a means by which firms can exert some influence over the prices of

their outputs.

e. b, c, and d are correct.

39. When monopolistic competition is compared with perfect competition, the

monopolistically competitive industry produces:

a. a higher level of output at a lower per unit cost.

b. a greater variety of products but at a higher per unit cost.

c. a greater variety of products but at a lower per unit cost.

d. a smaller variety of products but at a lower per unit cost..

e. the same level of output but at a higher per unit cost.

40. Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of

owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking.

Assuming Dick has the legal right to keep the dog, a possible private solution to this

problem is that

a. Jane pays Dick $400 to get rid of the dog.

b. Dick pays Jane $650 for her inconvenience.

c. Jane pays Dick $650 to get rid of the dog.

d. Dick pays Jane $700 for her inconvenience. e. There is no private solution that would improve this situation.

41. The Coase theorem states that:

a. if there are external costs in production, the government must intervene in the market

to assure that the efficient level of output is produced.

b. public goods should be produced up to the point where the additional benefit received

by society equals the additional cost of producing the good.

c. under certain conditions, private parties can arrive at the efficient solution without

government involvement.

d. the private sector will fail to produce the efficient amount of a public good because of

the free-rider problem. e. government intervention may improve society’s welfare.

There are 41 questions, only 40 will be graded. Please pick the one question you do not

want graded by placing XXX in the answer line. If you do not pick a question to not be

graded, question 1 will not be graded.

Test Version 1 Name

Question Answer Question Answer

1

22

2

23

3

24

4

25

5

26

6

27

7

28

8

29

9

30

10

31

11

32

12 33

13

34

14

35

15

36

16

37

17

38

18

39

19

40

20

41

21

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