University of Guelph
College of Management and Economics
Department of Economics
ECON*2310: Intermediate Microeconomics
Winter Semester 2011
MIDTERM 2
March 12, 2011
THIS VERSION HAS MISTAKES. TO GRADE YOUR ANSWERS I WILL USE AN
ANSWER KEY WHICH IGNORES THE QUESTIONS WITH INCORRECT
ANSWERS. I WILL POST A CORRECTED VERSION FOR YOU TO PRACTICE
FROM.
The midterm consists of 50 multiple choice questions. You have 90 minutes. Write down
your name, student number AND THE EXAM VERSION on the scantron. Return all
materials to the invigilators. If you are still in the exam room after 85 minutes, you must
remain seated for the last five minutes of the exam.
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1. An uncompensated price change
A. requires compensation payments by the seller.
B. is not the same as the price changes we normally observe. That is why compensation
is needed.
C. is the same as the price changes we normally observe. There is no addition or
subtraction to income to ensure that the price change does not alter consumer utility.
D. requires compensation payments by the buyer.
2. According to Figure 6.1,
A. Soup is a normal good
B. Soup is an inferior good
C. Soup is a Giffen good
D. Bread is an inferior good
3. The Lespeyers consumer price index
A. understates the annual rate of increase in the cost of living.
B. overstates the annual rate of increase in the cost of living.
C. provides an accurate measure of the rate of increase in the cost of living.
D. none of the above
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4. Refer to Figure 6.4. If the price of computers is $1,000, then consumer surplus is equal
to
A. $175,000
B. $525,000
C. $1,000
D. $262,500
5. Refer to Figure 6.4. Assume that the government imposes a $500 tax which increases
the price of computers from $1000 to $1500. What is the change in consumer surplus
when the price of computers increases from $1,000 to $1,500?
A. $350,000
B. -$350,000
C. $500
D. -$500
E. $1,000
6. Refer to Figure 6.4. What is the tax revenue that is collected by the government from
imposing the computer tax?
A. $175,000
B. $350,000
C. $87,500
D. -$500
E. $1,000
7. What is the welfare loss, that is, the difference between the revenue collected by the
government and the compensating variation for the consumer?
A. $175,000
B. $350,000
C. $87,500
D. -$500
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8. Suppose a consumer's nominal income is $50,000 and the cost-of-living index is 1.3.
The consumer's real income is
A. $50,000
B. $65,000
C. $53,000
D. $38, 462
9. The change in the cost of living over time is referred to as
A. Inflation
B. Substitution bias
C. A fixed-weight price index
D. Real income
10. Which of the following statements is true, assuming leisure is a normal good?
A. If the income effect is sufficiently large, the labor supply curve will bend backwards
B. If the income effect is sufficiently small, the labor supply curve will bend backwards
C. If the income effect is sufficiently large, the labor supply curve will disappear
D. If the income effect is sufficiently large, the labor supply curve will shift to the left
11. Refer to Figure 6.5, which depicts the change resulting from a wage decrease. By
how many hours does leisure change as a result of the income effect?
A. 2
B. 3
C. 4
D. 5
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12. Which of the following best describes labor force participation rates for men and
women over the period 1960 to 2000?
A. Labor force participation rates increased more for men than for women
B. Labor force participation rates for both men and women decreased
C. Labor force participation rates for men increased while labor force participation rates
for women decreased
D. Labor force participation rates for men declined while labor force participation rates
for women increased
13. If a good is inferior, then whenever the compensated demand curve intersects the
uncompensated demand curve,
A. The uncompensated demand curve is steeper than the compensated demand curve
B. The compensated demand curve is steeper than the uncompensated demand curve
C. Both curves will have the same slope
D. The compensated demand curve will be upward-sloping
14. When income effects are zero,
A. There is no difference between the uncompensated demand curve and the
uncompensated demand curve
B. The uncompensated demand curve will be relatively far from the compensated
demand curve
C. The compensated demand curve will be steeper than the uncompensated demand curve
D. The uncompensated demand curve will lie close and above the compensated demand
curve
15. A firm has increasing returns to scale if
A. A proportional change in the use of all inputs produces a more than proportional
change in output
B. A proportional change in the use of all inputs produces a less than proportional change
in output
C. A proportional change in the use of all inputs produces the same proportional change
in output
D. An increase in capital leads to an increase in output
16. Refer to Figure 7.6. Graph A represents
A. Increasing returns to scale
B. Decreasing returns to scale
C. Constant returns to scale
D. Diminishing marginal returns
17. If MPL = 7 and MPK = 4, then MRTSLK is equal to
A. 7/4
B. 4/7
C. 4*7
D. -4/7
E. none of the above
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18. One reason that firms will experience increasing returns to scale is
A. The law of diminishing marginal returns
B. The specialization of inputs as scale increases
C. There is some fixed input that isn't being taken into consideration
D. Large firms may be difficult to manage effectively
19. For the Cobb-Douglas production function F(L,K) = ALαKβ, a factor-neutral
technical change would be represented by
A. An increase in the value of α
B. An increase in the value of β
C. Values of α and β for which α + β >1
D. An increase in the value of A
20. If Q represents a firm's level of output, W represents the wage paid to labor (L) and R
is the cost of capital (K), then which of the following represents the firm's isocost line?
A. C(Q) = FC + VC(Q)
B. C(Q) = FC(Q) + VC(Q)
C. C(Q) = WL + RK
D. C(Q) = (W+R)Q
21. Suppose the marginal rate of technical substitution for labor with capital is 5, the
marginal product of labor is 8 and the marginal product of capital is 4. Assuming the law
of diminishing marginal product applies to both labor and capital, this firm
A. Is minimizing the cost of producing its output
B. Could reduce costs by substituting workers with capital
C. Could reduce costs by substituting capital with workers
D. Could reduce the cost of producing the output by reducing workers and capital by the
same proportion
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Questions 22 to 26 refer to the following problem.
Julia spends all her money on airtime for her wireless phone and gas for her car. The
utility she gets from wireless and gas consumption is U = W+ 20 G . Her MRS for gas
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with wireless minutes is MRSGW =
. Julia can spend $40 and wireless minutes cost
G
$0.5 per minute. The initial price of gas is $1 per litre. The price of gas increases from $1
per litre to $2.5 per litre.
22. Julia’s initial optimal consumption bundle when the price of gas is $1 per litre is
_____ gas and _____ wireless.
A. 4; 30
B. 4; 60
C.15; 30
D. 4; 90
E. 25; 30
23. Julia’s optimal consumption bundle when the price of gas is $2.5 per litre is _____
gas and _____ wireless.
A. 4; 30
B. 4; 60
C.15; 30
D. 4; 90
E. 25; 30
24. Following the increase in the price of gas, Julia’s compensated consumption bundle is
_____ gas and _____ wireless.
A. 4; 30
B. 4; 60
C.15; 30
D. 4; 90
E. 25; 30
25. Following the increase in the price of gas, Julia’s substitution effect is
A. An increase in consumption of gas of 21 litres.
B. A decrease in consumption gas of 21 litres.
C. An increase in consumption of gas of 30 litres.
D. A decrease in consumption gas of 30 litres.
E. None of the above.
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26. Following the increase in the price of gas, the compensating variation for Julia is
A. $50
B. -$50
C. $15
D. -$15
E. zero
Questions 27 to 30 refer to the following problem.
Consider the Cobb-Douglas production function F(L,K) = ALαKβ. The marginal product
of labor is given by MP L = αALα-1Kβ and the marginal product of capital is given by
MP K = βALαKβ-1. Suppose that α = 2, β = 3, the firm has 3 units of capital and the firm's
general productivity level is 20.
27. What is the firm's short-run production function?
A. F(L,K) = 2/3LαKβ
B. F(L) = 180L2
C. F(L,K) = 20L2K3
D. F(L, K) = 20
28. What is the firm's long-run production function?
A. F(L,K) = 2/3LαKβ
B. F(L) = 180L2
C. F(L,K) = 20L2K3
D. F(L, K) = 20
29. If the firm employs 10 workers, what is the marginal rate of technical substitution for
labor with capital?
A. 0.10
B. 0.67
C. 0.30
D. 10
E. 0.33
30. This firm's technology exhibits _________ returns to scale.
A. increasing
B. decreasing
C. constant
D. zero
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Questions 31 to 33 refer to the following problem.
Suppose a firm's production function is given by Q = F(L,K) = 5LK, where L is the
amount of labor and K is the amount of capital. For this particular Cobb-Douglass
production function, MRTS LK = (K/L). The wage rate is $100 per unit of labor and the
rental rate of capital is $50 per unit of capital.
31. What is the least-cost combination of capital and labor if the firm produces 1000 units
of output?
A. L=50, K=50
B. L=100, K=50
C. L=50, K=100
D. L=100, K=100
32. If the firm currently uses 10 units of capital, what is its short-run cost function?
A. C SR (Q) = 50L
B. C SR (Q) = 12.5Q
C. C SR (Q) = Q/10
D. C SR (Q) = 500 + 2Q
33. What is the firm's long run cost function?
A. C(Q) = 50L
B. C(Q) = 12.5Q
C. C(Q) = Q/10
D. C(Q) = 500 + 2Q
34. A ______ cost is ______ if the firm doesn't incur the cost if it produces no output.
A. Fixed; sunk
B. Fixed; explicit
C. Variable; sunk
D. Fixed; avoidable
35. If Q represents a firm's level of output, W represents the wage paid to labor (L) and R
is the cost of capital (K), then which of the following represents the firm's isocost line?
A. C(Q) = FC + VC(Q)
B. C(Q) = FC(Q) + VC(Q)
C. C(Q) = WL + RK
D. C(Q) = (W+R)Q
36. Isocost lines associated with ______ total cost lie ______ the origin.
A. Lower; farther from
B. Higher; farther from
C. Higher; closer to
D. Sunk; closer to
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37. Suppose that MP L = 50 and MP K = 30. If W = 25 and R = 15, then a firm
A. Is producing its output at the lowest possible cost
B. Could reduce costs by employing more labor and less capital
C. Could reduce costs by employing more capital and less labor
D. Could minimize costs by employing more of both inputs
38. Suppose that MP L = 50 and MP K = 30. If W = 25 and R = 10, then a firm
A. Is producing its output at the lowest possible cost
B. Could reduce costs by employing more labor and less capital
C. Could reduce costs by employing more capital and less labor
D. Could minimize costs by employing more of both inputs
39. When the marginal product curve lies above the average product curve, then the
average product
A. Is rising
B. Is declining
C. Is optimized
D. Is flat
E. None of the above
40.Suppose that the production function can be expressed as Q=KL. Which of the
following combinations of labour and capital (L, K) lie on the same isoquant?
A. (3, 3) and (4, 4)
B. (1, 2) and (3, 4)
C. (2, 4) and (4, 8)
D. (2, 6) and (3, 4)
E. None of the above
41. Suppose a firm is committed to spending $10,000 in labour and capital costs. The cost
of labour is $10, and the cost of capital is $50. Which of the following labour and capital
combinations (L, K) represent a point on the firm’s isocost line?
A. (1,000; 200)
B. (200; 1,000)
C. (100; 180)
D. (100; 100)
42. All fixed costs are sunk costs: true or false?
A. True.
B. False.
C. Not enough information to answer.
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Questions 43 and 44 refer to the following problem.
Suppose that a firm’s production function is Q = KL, with MP L = K and MP K = L.
Further suppose that W = $10 and R = $250.
43. Suppose the firm wants to produce 1800 units of output. What is the cost-minimizing
combination of labour and capital (L, K)?
A. (30, 60)
B. (60, 30)
C. (25, 50)
D. (50, 25)
44. Suppose that the same firm now reduces output because it wants to spend only $1000
on production. What is the best combination of labour and capital (L, K) to produce the
new output level in the cheapest way?
A. (30, 60)
B. (60, 30)
C. (25, 50)
D. (50, 25)
45. If the production function is given as Q = K + 2L, the price of capital is $2 and that of
labour is $4,
A. only labour should be used to produce output.
B. only capital should be used to produce output.
C. capital and labour yield the same output per dollar spent and so many cost minimizing
bundles of inputs are possible.
D. the technology is a fixed proportions technology and so twice as much capital should
be used as labour.
E. the technology is a fixed proportions technology and so twice as much labour should
be used as capital.
46. Suppose a manager is deciding how to allocate workers between two plants. The
marginal product of labor in plant 1 is 5 units of output. The marginal product of labor in
plant 2 is 7 units of labor. What should the manager do?
A. Move workers from plant 1 to plant 2 because MPL is greater in plant 1 than in plant 2
B. Move workers from plant 1 to plant 2 because MPL is greater in plant 2 than in plant 1
C. Move workers from plant 2 to plant 1 because MPL is greater in plant 1 than in plant 2
D. Move workers from plant 2 to plant 1 because MPL is greater in plant 2 than in plant 1
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47. Suppose the base year for a Lespeyres index is 2001. The value of the index is 1.3 in
2004 and 1.6 in 2006. By how much did the cost of the bundle increase between 2004
and 2006?
A. .3%
B. 23%
C. .23%
D. 60%
48. Whenever a firm uses input X but not input Y, then
A. MRTS XY >= P X /P Y at the chosen input combination
B. MRTS XY <= P X /P Y at the chosen input combination
C. MRTS XY = P X /P Y at the chosen input combination
D. MRTS XY = - P X /P Y at the input combination
49. True or false: The income effect for a Giffen good is larger than the substitution
effect.
A. True.
B. False.
C. Not enough information to answer.
50. If labor is measured along the horizontal axis and capital is measured along the
vertical axis, an increase in the wage rate will cause the isocost line to
A. Rotate to the left along the labor axis, causing the firm to use less labor and more
capital
B. Rotate to the right along the labor axis, causing the firm to use less labor and more
capital
C. Rotate to the left along the labor axis, causing the firm to use less capital and more
labor
D. Rotate to the right along the labor axis, causing the firm to use less capital and more
labor
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