MID-TERM #1: Thursday February 12th
1. Please be in your seats five minutes before class starts so that we can start on time. You
will have the full class period to complete the test.
2. I will provide the test booklet and the Scantron. You need to bring a calculator, a pencil, a
pen and a ruler with you.
3. The test is open book. You may bring the required text, your class notes, and your
homeworks with you.
4. The test will comprise two sections: Section 1 will consist of 20 multiple choice questions,
each worth 2 points. Section 2 will comprise 3 - 4 short answer/problem questions, and
will be worth 60 points in total.
REVIEW SESSION #1: Tuesday February 10th
1. Please visit the book’s website for additional study questions at:
http://myphlip.pearsoncmg.com/cw/mplistres1.cfm?vbookid=152
2. The answers to the multiple choice questions below are highlighted in bold.
3. The answers to the short problems will follow – have a go at doing them first!
Sample Multiple Choice Questions
1.
Which of the following is a positive statement:
a.
The President of the United States ought to be elected by a direct vote of the
American people rather than the Electoral College.
b.
Too few adults can afford to go to college, so tax credits for tuition should be
introduced.
c.
The economic theory of consumer behavior is founded on the assumption
that consumers prefer more of any good to less.
d.
All of the above.
2.
Which of the following markets has the most restrictive geographic boundary:
a.
The market for retail gasoline.
b.
The market for housing.
c.
The market for gold.
d.
The market for beef.
3.
If the actual price were below the equilibrium price in the market for bread:
a. A surplus would develop that cannot be eliminated over time.
b. A surplus would develop, which market forces eliminate over time.
c. A shortage would develop which market forces would tend to exacerbate.
d. A shortage would develop, which market forces eliminate over time.
4.
Tires and automobiles are complementary goods. As a result, we would expect:
a.
the demand curve for automobiles to shift right when the prices of tires
increase.
b.
the prices of automobiles to increase when the supply curve of tires shifts left.
c.
the demand curve for automobiles to shift left when the prices of tires
increase.
d.
some tires to be given away with some automobiles.
Use the following diagram to answer the next 2 questions.
Price
X
A
B
C
.5X
D
E
.5Y
Quantity
Y
5.
At point A, demand is:
a.
perfectly inelastic.
b.
inelastic, but not completely inelastic.
c.
elastic, but not infinitely elastic.
d.
infinitely elastic.
6.
At point C, demand is:
a.
completely inelastic.
b.
inelastic, but not completely inelastic.
c.
unit elastic.
d.
elastic, but not infinitely elastic.
7.
The assumption of transitive preferences implies indifference curves must:
a.
not cross one another.
b.
have a positive slope.
c.
be L-shaped.
d.
be convex to the origin.
8.
Indifference curves are convex to the origin because of:
a.
transitivity of consumer preferences.
b.
the assumption of a diminishing marginal rate of substitution.
c.
the assumption that more is preferred to less.
d.
the assumption of completeness.
Good Y
Good X
9.
Alvin’s preferences for good X and good Y are shown in the diagram below. Based on
the diagram, it can be inferred that:
a.
Alvin does not consider good X as “good”.
b.
Alvin will never purchase any of good Y.
c.
Alvin regards good X and good Y as perfect substitutes.
d.
Alvin regards good X and good Y as perfect complements.
10.
A consumer has $100 per day to spend on product A, which has a unit price of $7, and
product B, which has a unit price of $15. What is the slope of the budget line if good A
is on the horizontal axis and good B is on the vertical axis:
a.
-7/15.
b.
-7/100
c.
-15/7.
d.
7/15.
11.
An individual demand curve can be derived from which of the following curves:
a.
price-consumption
b.
price-income
c.
income-substitution
d.
income-consumption
Income
What is this
curve?
Food Units
per Week
12.
The curve in the diagram above is called:
a.
the price-consumption curve.
b.
the demand curve.
c.
the income-consumption curve.
d.
the Engel curve.
13.
Which of the following is true concerning the substitution effect of a decrease in price:
a.
It will lead to an increase in consumption only for a normal good.
b.
It always will lead to an increase in consumption.
c.
It will lead to an increase in consumption only for an inferior good.
d.
It will lead to an increase in consumption only for a Giffen good.
Clothing
(Units per Week)
C
A
B
F1
F2
F3
Food
(Units per Week)
14.
A consumer’s original utility maximizing market basket of goods is shown in the
diagram above as point A. Following a price change, the consumer’s utility maximizing
market basket changes is at point B. The substitution effect of the price change in food
on the quantity of food purchased is:
a.
the change from F3 to F1.
b.
the change from F3 to F2.
c.
the change from F2 to F1.
d.
the change from F1 to F2.
15.
A function that indicates the maximum output per unit of time that a firm can produce,
for every combination of inputs with a given technology, is called:
a.
an isoquant.
b.
a production possibility curve.
c.
a production function.
d.
an isocost function.
16.
The marginal product of an input is:
a.
total product divided by the amount of the input used to produce this amount of
output.
b.
the addition to total output that adds nothing to profit.
c.
the addition to total output due to the addition of one unit of all other inputs.
d.
17.
the addition to total output due to the addition of the last unit of an input,
holding all other inputs constant.
The rate at which one input can be reduced per additional unit of the other input, while
holding output constant, is measured by the:
a.
marginal rate of substitution.
b.
marginal rate of technical substitution.
c.
slope of the isocost curve.
d.
average product of the input.
Sample Short Answer/Problem Questions:
Question 1: Basics of Supply and Demand
1a)
1b)
Suppose that we are analyzing the market for hot chocolate. Sketch a basic supply and
demand diagram, and state the impact on the equilibrium price and quantity of each of
the following events affecting the hot chocolate market:
i.
winter starts and the weather turns sharply colder
ii.
a better method of harvesting cocoa beans is introduced
iii.
the price of coffee falls
iv.
the price of cocoa beans increases
v.
the Surgeon General of the US announces that drinking a cup of hot chocolate each
day cures arthritis
The demand for books is: Qd = 120 - P
The supply of books is:
Qs = 5P
i.
ii.
iii.
What is the equilibrium price and quantity of books?
What would happen in the market if the government were to set a price ceiling
of P = $15?
What would happen in the market if the government were to set a price floor of
P = $15?
Question 2: Consumer Behavior
2a)
The following combinations of goods X and Y represent various market baskets.
Consumption is measured in pounds per month. Explain which market basket(s) is
(are) preferred to other(s), and if there is any uncertainty over which is preferable
given the information below, point this out as well.
Market Basket
A
B
C
D
Units of X
4
16
15
3
Units of Y
6
7
3
2
2b).
Jane lives in a dormitory that offers soft drinks and chips for sale in vending machines.
Her utility function is U = 3SC (where S is the number of soft drinks per week and C
the number of bags of chips per week), so her marginal utility of S is 3C and her
marginal utility of C is 3S. Soft drinks are priced at $0.50 each, chips $0.25 per bag.
i.
Write an expression for Jane’s marginal rate of substitution between soft drinks and
chips.
Use the expression generated in part (i) to determine Jane’s optimal mix of soft drinks
and chips.
If Jane has $5.00 per week to spend on chips and soft drinks, how many of each
should she purchase per week?
ii.
iii.
2c).
i.
ii.
iii.
iv.
Draw a set of indifference curves for the following pairs of goods:
Hamburgers and carrots for a vegetarian (vegetarians do not eat meat)
Peanut butter and jelly for an individual that will not eat peanut butter sandwiches or
jelly sandwiches, but loves peanut butter and jelly sandwiches.
Tickets for Knott’s Berry Farm (KBF) and Universal Studios (US) for a tourist that
believes that KBF and US are perfect substitutes.
Ice cream and pie if these are goods that you like, but if you consume enough of
either, you get sick of them.
Question 3: Individual and Market Demand
3a)
Suppose demand is given by Q = 100 – 4P. Graph this demand curve, and determine
the quantity demanded when the price = $10. What is the level of consumer surplus
when the price = $10, and how does this change if the price is raised to $20?
3b)
Suppose you are the manager of a theater, and you currently charge the same
admission price to everyone, regardless of their age. An economist calculates the
price elasticity of demand, and tells you that at the current price, demand by adults is
inelastic and demand by children is elastic. If you want to increase your total revenue,
how should you adjust the admission price?
3c)
The president of Michigan State University is concerned about increasing operating
costs, and decides to raise tuition fees in an attempt to increase total revenue. Do you
think the rise in tuition fees will accomplish the president's goal?
3d)
Suppose the Daily Newspaper estimates that if it raises the price of its newspaper
from $1.00 to $1.50, its subscribers will fall from 50,000 to 40,000. Using the arc
method, what is the price elasticity of demand for the Daily Newspaper? What does
this tell us about consumer responsiveness?
3e)
Briefly explain the substitution effect and the income effect when the price decreases
for a normal good.
Question 4: Production
4a)
What is a production function? How does a long-run production function differ from a
short-run production function?
4b) Explain what an isoquant is. How does the slope of an isoquant relate to the marginal
rate of technical substitution?
4c) Complete the following table:
Quantity of
Variable Input
0
1
2
3
4
5
6
4d)
Total Output
Marginal Product of
Variable Input
Average Product of
Variable Input
0
100
190
270
330
360
380
You manage a department in a large corporation. Tow years ago, you had 20 workers
and produced 40,000 units. The company allocated 10 more workers to your
department, and output increased to 45,000. You just received a memo from your
boss indicating that he is very concerned about the department. Explain why and how
might you defend yourself?