MSU EC 201 KANG FINAL EXAM EOC UPDATED ACTUAL
QUESTIONS AND CORRECT ANSWERS
Question:
1. 1.04) The U.S. government is evaluating a project to build a new lighthouse in South Carolina. The cost
will be $5 million. The estimated value of all the benefits (including nonmonetary benefits) of the
lighthouse is $8 million. Describe how you would use the concept of opportunity cost to determine
whether the lighthouse should be built?
Answer:
The benefits should be compared to the opportunity cost. The opportunity cost is the value of the best
forgone alternative. The opportunity cost in this example is the value of the benefits to be gained by
spending the $5 million on the next most desirable project. If those benefits are greater than $8 million,
then the other project makes sense and it should be done before the lighthouse. If they are less than $8
million, then the lighthouse makes sense.
Question:
2. 1.11) The making of the movie Waterworld cost a total of $180 million. It generated a total of $130
million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to
rebuild the set. An additional $50 million was spent to finish the movie. The sunk cost, once the movie set
sank, was _______.
Answer:
$70 million
Question:
3. 2.01) If the economy is producing at a point inside the production possibilities frontier, which of the
following must be true?
Answer:
More of both goods can be produced
Question:
4. 2.02) Which points represent a production level that could be economically efficient?
Answer:
B and C (points on the curve)
Question:
5. 2.10) Which of the following graphs shows the correct change in the production possibilities frontier
curve if a new technology is invented that increases the productivity of watch manufacturing?
Answer:
Option B (Increase in number of watches)
Question:
6. 2.17) Looking at the production of handbags and phones once again, if a firm has 6 workers with three
workers producing handbags and three workers producing phones, what is the marginal cost of producing
one additional phone if a worker changes from handbag production to phone production?
, Answer:
1.25 handbags
Question:
7. 2.19) A pizza parlor can make 100 pizzas in an evening. They make 40 pepperoni pizzas and 60 extra
cheese pizzas. 100 people order pizza, but 50 people would like a pepperoni pizza and 50 would like an
extra cheese pizza. This pizza parlor is what?
Answer:
Technically efficient, but not allocatively efficient nor economically efficient
Question:
8. 4.08) Indicate which of the following will cause a movement along a demand curve. Which will shift the
demand curve to the left? Which will shift the demand curve to the right? Will demand increase or
decrease?
Answer:
An increase in the price of the good -> A movement along a demand curve, no change in demand An
increase in income for a normal good -> Shift the demand curve to the right and an increase in demand A
decrease in the price of a substitute good -> Shift the demand curve to the left and a decrease in demand
Expectations of falling income in the near future -> Shift the demand curve to the left and a decrease in
demand. (If the good is normal.) Expectations of rising prices in the near future -> Shift the demand curve
to the right and an increase in demand now
Question:
9. 4.09) Since 1950, the labor force participation rate of women with young children has been increasing
dramatically. In accordance with this trend, one would predict that there has been _______________.
Answer:
An increase in the demand for child care services
Question:
10. 4.10) An increase in the prices of inputs will cause the equilibrium price to ______________ and the
equilibrium quantity to ______________.
Answer:
Increase; decrease
Question:
11. 4.11) If (1) the cost of manufacturing computers decreases and (2) at the same time the quality
improves, making computers more useful for households, which of the following is most likely to happen?
Answer:
Equilibrium price may increase or decrease; equilibrium quantity will increase
Question:
12. 5.09) An increase in an inelastic demand will cause (a greater or lesser or same) change in the
equilibrium quantity than the same increase in an elastic demand.
Answer:
A greater
QUESTIONS AND CORRECT ANSWERS
Question:
1. 1.04) The U.S. government is evaluating a project to build a new lighthouse in South Carolina. The cost
will be $5 million. The estimated value of all the benefits (including nonmonetary benefits) of the
lighthouse is $8 million. Describe how you would use the concept of opportunity cost to determine
whether the lighthouse should be built?
Answer:
The benefits should be compared to the opportunity cost. The opportunity cost is the value of the best
forgone alternative. The opportunity cost in this example is the value of the benefits to be gained by
spending the $5 million on the next most desirable project. If those benefits are greater than $8 million,
then the other project makes sense and it should be done before the lighthouse. If they are less than $8
million, then the lighthouse makes sense.
Question:
2. 1.11) The making of the movie Waterworld cost a total of $180 million. It generated a total of $130
million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to
rebuild the set. An additional $50 million was spent to finish the movie. The sunk cost, once the movie set
sank, was _______.
Answer:
$70 million
Question:
3. 2.01) If the economy is producing at a point inside the production possibilities frontier, which of the
following must be true?
Answer:
More of both goods can be produced
Question:
4. 2.02) Which points represent a production level that could be economically efficient?
Answer:
B and C (points on the curve)
Question:
5. 2.10) Which of the following graphs shows the correct change in the production possibilities frontier
curve if a new technology is invented that increases the productivity of watch manufacturing?
Answer:
Option B (Increase in number of watches)
Question:
6. 2.17) Looking at the production of handbags and phones once again, if a firm has 6 workers with three
workers producing handbags and three workers producing phones, what is the marginal cost of producing
one additional phone if a worker changes from handbag production to phone production?
, Answer:
1.25 handbags
Question:
7. 2.19) A pizza parlor can make 100 pizzas in an evening. They make 40 pepperoni pizzas and 60 extra
cheese pizzas. 100 people order pizza, but 50 people would like a pepperoni pizza and 50 would like an
extra cheese pizza. This pizza parlor is what?
Answer:
Technically efficient, but not allocatively efficient nor economically efficient
Question:
8. 4.08) Indicate which of the following will cause a movement along a demand curve. Which will shift the
demand curve to the left? Which will shift the demand curve to the right? Will demand increase or
decrease?
Answer:
An increase in the price of the good -> A movement along a demand curve, no change in demand An
increase in income for a normal good -> Shift the demand curve to the right and an increase in demand A
decrease in the price of a substitute good -> Shift the demand curve to the left and a decrease in demand
Expectations of falling income in the near future -> Shift the demand curve to the left and a decrease in
demand. (If the good is normal.) Expectations of rising prices in the near future -> Shift the demand curve
to the right and an increase in demand now
Question:
9. 4.09) Since 1950, the labor force participation rate of women with young children has been increasing
dramatically. In accordance with this trend, one would predict that there has been _______________.
Answer:
An increase in the demand for child care services
Question:
10. 4.10) An increase in the prices of inputs will cause the equilibrium price to ______________ and the
equilibrium quantity to ______________.
Answer:
Increase; decrease
Question:
11. 4.11) If (1) the cost of manufacturing computers decreases and (2) at the same time the quality
improves, making computers more useful for households, which of the following is most likely to happen?
Answer:
Equilibrium price may increase or decrease; equilibrium quantity will increase
Question:
12. 5.09) An increase in an inelastic demand will cause (a greater or lesser or same) change in the
equilibrium quantity than the same increase in an elastic demand.
Answer:
A greater
