Economics 103-01-02
October 8, 1997

1. Define or identify: (3 points each)
a. monopolistic competition
b. marginal social cost d. microeconomics
c. income elasticity of demand e. opportunity cost

2. Were it not for the law of diminishing returns, the worlds wheat supply could be grown in a flower pot. Explain. (10 points)

3. Often it is claimed that a tax on the sale of a specific good will simply be passed on to consumers. What is necessary for this to happen? In what cases might very little of the tax be passed on to consumers? (10 points)

4. Using supply and demand analysis (and graphs) explain how each of the following affect the quantify and price of oil. In each case, explain the factor or factors involved. (25 points)
a. Tax credits for home insulation
b. Completion of the Alaskan oil pipeline
c. Decontrol of oil prices
d. Discovery of oil in Mexico and the North Sea
e. Mass production of smaller rather than larger automobiles
f. Increased use of nuclear power
g. The wreck of the Exxon Valdese ship

4. Assume a firm in the industry is facing the following cost and revenue situation:

Price Quantity ___ ___ Total Total ___ ___ ___
Fixed Variable Cost Cost

$20 0 ___ ___ $10 $ 0 ___ ___ ___
20 1 ___ ___ 10 10 ___ ___ ___
20 2 ___ ___ 10 15 ___ ___ ___
20 3 ___ ___ 10 20 ___ ___ ___
20 4 ___ ___ 10 30 ___ ___ ___
20 5 ___ ___ 10 50 ___ ___ ___
20 6 ___ ___ 10 80 ___ ___ ___

What will be the operating position of this firm? Explain. What will be the quantity of output? The price? How will the industry react to this? On the grid below illustrate:
a. the current cost and revenue conditions of this firm and the operating conditions;
b. the long run equilibrium position of this firm. (30 points)

5. In the Wall Street Journal on Tuesday, October 7 a front page article by Anne Wilde Mathews begins as follows:
"Every two weeks, in an unobtrusive office building here, about 20 shipping-line managers [who work for different firms] gather for their usual meeting. They sit around a conference table, exchange small talk over bagels and coffee and then begin discussing what they will charge to move cargo across the Atlantic Ocean."

Should you and I as consumers be consumers be concerned about this report? Explain why officials at the Justice Department might ordinarily be concerned about this as well? (What legislation might make this matter of interest to them?) (10 points)