COURSEWORK»FINAL EXAM QUESTIONS

1. This question is about economic efficiency.

a) What is the precise meaning that economists attach to the phrase “economic efficiency?”

b) Consider whether the following situation is economically efficient. In Norway, a hydroelectric plant generates water from rushing streams that flow down a mountain.   During the day, when consumer demand for power is the greatest, the plant is able to satisfy that demand, but still has some excess capacity and could generate more power if the water flows were greater.  Therefore, at night, when there is relatively little demand for electricity, the plant pumps water back up the mountain and then lets it come down during the day to generate additional electricity for use during the day.  It develops that the amount of electricity the plant uses to pump the water up the mountain exceeds the amount of electricity that it generates when they water is permitted to flow back down through the generators. Is this economically efficient?  Why or why not?

2. This question is about opportunity costs.

a) What meaning do economists attach to the phrase “opportunity cost?”

b) Suppose the United States goes to war against Iraq.  What is the opportunity cost of that action?

3.   This question is about the factors of production.

a) What are the four factors of production in economic analysis?

b) What is the cost of using these factors of production? 

c) Who or what is an entrepreneur?

d) What is the cost associated with hiring or acquiring entrepreneurship?

4. Amazon.com has never made a profit by conventional accounting standards.    

a) Does this suggest that investors in Amazon are either dumb or misinformed?  Why or why not?

b) There are dot.com firms such as eBay that are profitable.  What’s the      critical difference between Amazon and eBay?  That is, what are the economic reasons that one firm seems to be doing quite well and the other is struggling?

5. Consider weather forecasting. 

a) Are there externalities attached to weather forecasting?  If so, what are they?

b) Are there reasons why privately owned weather forecasters might not supply the socially optimal amount?

c) All things considered, should weather forecasting be supplied primarily as a public good or as a private good?  Why?

6. “Most of economic theory involves deductive reasoning.  Most of the applications of economic theory involve deductive reasoning.”  Do you agree?  Why or why not?

7. Economists talk a great about concepts such as marginal cost, price elasticity of demand, opportunity costs, etc.  At least 90 percent of the citizens of Virginia (probably much more) don’t know what these things are.   Assuming the previous statements to be true, critique the following statement:   “Theories using terms such as price elasticity of demand ultimately are useless because they are descriptively unrealistic.  People don’t really compute price elasticity coefficients and therefore the theories are failures.”

8. “Human life is priceless.”  Critique this statement.

9. Old Dominion University probably could make the campus safer if it hired additional campus security officers. 

a) Why doesn’t Old Dominion hire more officers?  Is it uninterested in safety?

b) What’s the economic cost of hiring more officers?

10. Northern Virginia is attempting to attract a major league baseball team.  This will require a rather large public subsidy.  

a) What’s the economic argument for such a subsidy?

b) If the argument you outlined in a) is true, then how much should the subsidy be?

c) Many cities commission studies of the economic impact of major league teams.  The studies typically reveal that fans spend significant money on tickets, parking, food, drinks, t-shirts, etc.  Suppose that these would amount to $50 million for a Northern Virginia major league baseball team.   Is this a good measure of the positive economic thrust that a major league team would produce?  Why or why not?

11. Most students on most campuses say, “There is a parking problem.”  Apparently, there are not enough spaces, etc., where and when students want them.     Assume these statements to be true.  Now, critique the following statement:  “The only reason there is a parking problem is because the universities don’t price it properly.”

12. More than 100 years ago, there were hundreds of thousands of buffaloes roaming the western plains and the mountain states.   They began to disappear, and this continued until fewer than 1,000 were still alive.  How does the “Tragedy of the Commons” explain the near extinction of the buffalo?

13. At most big city airports, there are massive air traffic jams during certain times of the day, e.g. 8-10 a.m., and 3-6 p.m.   How would an economist solve this problem?

14. “Anything worth doing is worth doing well.”   Critique from the standpoint of economic analysis. 

24. Anyone with access to the Internet can go on to the Net and acquire information (prices, quality, etc.) about goods and services.  

a) What is the optimal amount of information to acquire?  That is, if I am going to purchase a new Ford automobile, how much time and expense should I go in order to get information about that Ford?

b) Consider a market in which information is not so easily available, or may be inaccurate (used cars may be an example).  What is this condition likely to do to the prices of the used cars and the number sold?

c) What is the likely effect of conditions such as b) on the amount of branding, product differentiation and advertising we observe in that market?   Why?

25. How can it be that the price elasticity of demand for gasoline in the U.S. is about .4, while the price elasticity of demand for gasoline at a specific station (e.g., the Shell station at 49th and Hampton Boulevard) is quite elastic, perhaps in the range of 2.0?  Explain.

26. Use a production possibility curve to show the tradeoff between higher education (HE) and transportation (T) in the budget of the Commonwealth of Virginia.  Suppose we construct lots more highways. Is the cost per unit of those highways likely to increase, decrease, or remain the same?  Why?

27. Suppose a landlord builds new apartment housing near Old Dominion and earns an attractive profit as a result.

a) When this becomes known, what is likely to occur?

b) What would have to be true for your answer in a) not to occur?

c) What role does government often play in these situations?

28. Coca-Cola and Pepsi-Cola usually earn reasonably good profits.  What’s to prevent someone else from entering the soft drink market and competing with Coke and Pepsi? 

29. Said the male student to his girl friend, whom he was trying to impress with his intellectual nature, “All of the alternate routes from Old Dominion University to my house in Virginia Beach take just about the same amount of time when I drive.  That’s the way it is in a competitive market in equilibrium.”  Analyze and critique this statement.

30. The 17 November 2002 performance of Roberta Flack at Constant Center was well attended, but there were empty seats.  Critique the following statement:  “This is prima facie evidence that the people running Constant Center really don’t know what they are doing.”

31. Consider the market for cell telephones (the ones that occasionally ring in class) and “call plans” that provide the purchaser with minutes to use on a cell phone.  

a) How can it be profitable for some of the telecommunications firms to almost give away minutes on very lowed priced call plans?

b) What conditions must be present for such a give away to make money for the telecommunications firms?

c) Why don’t grocery stores give away bread in order to sell you milk?  What’s the difference?

23. What’s the economic cost of not attending our microeconomics class?   What’s the economic cost of attending our microeconomics class?

24. Old Dominion University has raised its tuition in order to increase its revenues and diminish the effects on its programs of reductions in state tax support.

a) What assumption must the President and the Board of Visitors be making about the price elasticity of demand for Old Dominion education? 

b) Ceteris paribus, what is likely to happen to the price elasticity of demand for Old Dominion education as time passes?

c) What if all other public colleges in Virginia also increase their tuition by approximately the same percentage amount as Old Dominion.  What difference, if any, will that make in your answers to a) and b) above?  

25. The United States uses markets to allocate the vast majority of its resources. 

a) What are the strengths of markets as a means of allocating resources?
Weaknesses?

b) Consider “first come, first served” as a means of allocating resources.      What are the strengths and weaknesses of this approach?

c) Consider economic planning by a central government authority.  What are the strengths and weaknesses of this approach?

26. The European Union (EU) is touted as “a common market with no tariff barriers for all of Western Europe” and its supporters say it will bring “unprecedented prosperity” to Europe.  What is the economic rationale for this view?

27. Airline pilots seldom also are employed as bricklayers.  Nor do they typically teach nursing. 

a) What does this have to do with the economic notion of “specialization and division of labor?”

b) How do assembly lines fit into this analysis? Explain.

28. In recent weeks, the value of the U.S. dollar has been falling relative to the Euro, which is now the single currency of all the countries in the European Union.  

a) What is the likely effect of this upon U.S. exports to the EU?  Why?

b) What is the likely effect of this upon U.S. imports from the EU?  Why?

c) What is the likely effect of this upon the prices of goods and services inside the U.S. where there is some foreign competition?

29. Most economists are not big fans of rent controls.  Use supply and demand analysis to explain why.

30. This question is about taxes.

a) Explain what is meant when sales taxes are labeled “regressive.”

b) Consider tuition as a tax paid by students.  Is tuition a regressive tax, or is it progressive, or what?  Explain.

c) Now, consider the public tax subsidy that supports public universities such as Old Dominion.  Currently, this is about $75 million per year.   Are the taxes that Virginians pay to generate this subsidy regressive, progressive, or what?  Explain.

d) Finally, focus on the individuals who attend institutions of higher education.  Does higher education redistribute income inside society from one income group to another when Old Dominion’s 20,000 students attend the institution rather than, say, work at a job at home?  Explain.

31. This question is about the Fed.

a) What is the discount rate?

b) The Fed recently has been reducing the discount rate?  Explain what it is attempting to accomplish.

c) Some economists believe the changes in the discount rate are a rather ineffective means to stimulate the economy in a situation such as we find ourselves in November 2002.  Explain their thinking.

32. “The solution to the outrageously high rates of price inflation we observe in many Latin American countries is actually rather simple.  They have to become much more modest in terms of increases in their money supplies.”     Use the Quantity Equation to explain this thinking.

32. The transportation tax referenda in Northern Virginia and Hampton Roads failed.  The referenda, if approved, would have increased the sales tax in each region to pay for transportation and road improvements.   For example, in Hampton Roads, a “third crossing” would have been constructed from Newport News to Portsmouth and then to Norfolk.   Many economists gave only lukewarm support to the referenda, saying that other means to raise the necessary revenue would be economically more efficient.  Explain, citing specific other ways to raise the revenue that would be economically more efficient.

33. Grocery store chains such as Harris Teeter often publicize the fact that they earn only a one percent profit on their sales.  

a) What, if anything, does this rate of profit tell us about how well Harris Teeter is doing and whether it does or does not have a lot of market power?  Explain.

b) What rate of profit should we pay attention to for purposes of economic analysis?  Explain.

34. Microsoft typically earns profit rates that are much higher than the national average for business firms.  

a) How and why does Microsoft earn these high profits?

b) What conditions must be present for Microsoft to be able to do this in the long-run?

35. Use supply and demand analysis to explain the role and effect of labor unions on wages and the quantity of labor in a specific labor market that you choose.

36. The Wall Street Journal and other newspapers lately have contained numerous articles warning individuals who are invested in bonds, or might choose to do so, that there is increased risk that they might suffer some future financial losses.   What might happen in financial markets that would hurt bondholders?  Explain.

37. Daily newspapers, as well as the financial media, recently have printed articles claiming that,“MBA degrees don’t pay off,” or least that they frequently don’t pay off for most students.

a) What does this mean?  That is, what does it mean to say that a certain college degree such as an MBA won’t pay off?

b) Explain what present value has to do with all of this.

38. Every year, in January, the American Historical Society (AHA) meets for its annual convention.  Professors “give papers” (make scholarly presentations on their research) and universities wishing to hire professors list their jobs and interview applicants.  Those seeking jobs typically come the AHA meeting either with appointments for interviews during the AHA meeting, or hoping to make such appointments.   From the standpoint of economic analysis, the AHA meeting makes the market for historians more “efficient.”  Explain what this means and why.

39. The Law of Diminishing Returns applies to your studying for this examination and developing answers for these questions.  Explain how and why.

40. At the Harris Teeter grocery store, a can of Del Monte corn is $1.10, while a can of the local “not nationally branded” corn sells for only $1.00.  The “not nationally branded” corn typically is not advertised very much, if at all, and would be unknown in another section of the country.  Del Monte, however, is known nationwide.  

a) What does the $.10 per can price difference represent from an economic standpoint?

b) Is this situation good or bad for consumers?

41. Some economists who study computer software markets argue that there is a natural tendency toward monopoly in some of these markets because of the tremendous economies of scale that are available to software makers.

a) What are economies of scale?

b) What are primary sources of economics of scale in software manufacturing, e.g., in the manufacture of a piece of software such as Quicken?

c) Is there an advantage associated with “being first” in software markets, that is, in being the firm to offer a particular product?  Why or why not?