Econ 1 Final exam study guide
The final exam will have five of these problems.
All answers must be oompletely in your own words. Do not show your answers to anyone. Duplicate answers will get a score of zero.
1. Author and publisher. If an author earns a royalty (income) of 10% of the total sales revenue of his or her book, and all the author cares about is maximizing money income on that book, then does the author prefer that the price of the book be greater than, less than, or equal to the price set by the profit-maximizing publisher? And why?
2. Lump sum subsidy. Suppose that there are a million corn farmers in atomistic competition, all producing an identical type of corn. Wheat farmers are also in atomistic competition. Both corn and wheat farmers are in long-run equilibrium. Assume that the marginal cost in farming is upward sloping. Then in an election year, Congress enacts a law that gives all corn farmers a lump-sum subsidy every year. Anyone who enters the corn industry and meets a minimal requirement gets the subsidy. Assume that all farmers seek to maximize profits. In the new long-run equilibrium, what is the effect of the corn-farm subsidy on the quantity of corn produced on each farm? Does the quantity increase, decrease, or stay the same?
3. True or false, and explain why: at the maximum of the average product of labor, the average product must equal the marginal product.
4. True or false and explain why: a competitive firm cannot be in equilibrium if the marginal product of labor is greater than the average product.
5. True or false and explain why: unskilled labor receives low wages because its average product is below that of skilled labor.
6. True or false and explain why: if there is no price discrimination, a profit-maximizing monopolist always sets its price where the demand is elastic.
7. Explain why a tax on land value will not generally be a burden on landowners who buy land after the tax has been enacted.
8. Explain why a person who buys share of stock in a monopoly company that gets economic profit will not generally get a greater rate of return on the price of the stock than a person who buys shares of stock of a competitive firm that gets zero profit.