Micro Exam 1 [Weston] x

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ECO 3312 .Weston Exam 1Multiple Choice (3 pts ..each) (In many cases,I. Arbitrage is

(a) a synonym for "arbitration".

e the reason that supermarket checkout lines tend to equalize,(c) a process by which inputs are transformed into outputs.(d) the individual goal of economizing behavior.(e) a position taken without any reasons or justification.

Spring 2009

2. The Law of Demand says that(a) the consumer is king; whatever is demanded will be produced,(b) there are no free lunches.(c) no matter how much people have, they still want more.I~; as the price of a good increase, people will demand less of that good.

2. Which of the following illustrates the Law of Demand?(a) A tuition i?crease .causes el1rollm~nt to increase because students believe the quality ofthe education has increased. 11,)0~ Lower computer prices result in more people buying computers.(c) Higher oil prices cause oil companies to drill for more oil.(d) Higher incomes cause more people to take up golfas a sport.(e) The large variety of breakfast cereals in a typical supermarket.

1. Which of the following would cause a movement along the demand curve?(a) A change in the demand.1 lJ A change in the price of the good. l l . ~ ~ ~ _ . ~ . ~ ~ ~ . :(c) A change in tastes and preferences. v ~(d) A change in population ..J(e) A change in people's income. J

4. Which of the following would cause a surplus of oil?(a) The demand for oil decreases, and the price adjusts to the new equilibrium.(b) The supply of oil.decreases, and the price adjusts to the new equilibrium.(c) The supply of oil decreases, and the price is not permitted to change.~ The demand for oil decreases, and the price is not permitted to change.

5. Which of the following best describes the concept of marginal?(a) Average.(b) TotaL(c) Unimportant.. Incremental.

6. Thl;iarginal income tax ratds(a) ~tal tax paid divided by income.'B . the extra amount of tax paid on any additional income divided by the amount of the

additional income.(c) the tax rate applied to people who live on the margins of society.(d) Give me a break. There is no way to apply the marginal concept to tax rates.


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1-7. Assume that the marginal cost of clean air increases, as the air gets cleaner, while themarginal benefit decreases. The optimal level of clean air occurs where the(a) marginal benefit is zero.(b) marginal cost is zero.(c) the difference between marginal cost and marginal benefit is maximized.~ marginal cost equals the marginal benefit.(e) total cost equals the total benefit.

8. ~lich of the following statements is correct? .. .:\ -. _ l'~ As the interest rate increases, the present value of income expected in the future \YN - -V./'I.JI decreases. "T C \ 1" ( J, \(b) As the interest rate increases, the present value of income expected in the futureincreases,(c) Interest rates have no effect on the present value of income expected in the future. y(d) None of the above. y

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9. The price elasti' t : . nan measures the responsiveness ofthe aunt deman~ed . a change in price.price to a change in the quantity demanded.the slope of the demand curve to a change in price. Y

(d) the slope of the demand curve to a change in the quantity demanded. X10. The price of a good increases by 40%, resulting in a 10% decrease in the amount of the good

demanded. The demand for this good is(a) perfectly elastic.(b) elastic.(c) unit elastic.

-10- : q c Tal\&-fo.A.f>inelastic.

(e) perfectly inelastic.- . I - j

II. Which of the following describes the price elasticity oj demand as the price decreases alonga linear demand curve?(a) It is constant.o It is elastic until the halfway point, after which it becomes inelastic.(c) It is inelastic until the halfway point, after which it becomes elastic.(d) It is positive until the halfway point, after which it becomes negative.

12. Which of the following describes total consumer expenditure for a good as the price . . , y .~ . . .decreases along a linear demand curve?(a) It is constant.@ Total expenditure increases until the halfway point, after which it decreases.(c) Total expenditure decreases until the halfway point, after which it increases(d) It is positive until the halfway point, after which it becomes negative.

13. For a given linear demand curve consumer surplus will be greater(a) the more elastic the demand. "1 )(b) the less elastic the demand. r(c) the more the good is a necessity.@ the lower is the price of the good.(e) the higher is the price of the good.

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.14. A Production function shows the quantitative relationship between inputs and

(a) costs.(b) revenues.@ outputs.(d) time.

15. If a firm's production function has constant returns to scale, increasingm all inputs by 10% will cause output to increase by 10%.(b ) any input by 10% will cause output to increase by 10%.(c) the quantity of any input will result in the marginal product of that input being constant.(d) one input by 10% will cause the other input to increase by 10%.

16. The long run is a planning periodo over which the firm can consider all inputs as variable.(b) in which at least one input is viewed as fixed.(c) at least 5 years in length.(d) between 6 months and 5 years in length.

17. In the long-run~ all costs are variable.(b ) fixed cost approach but do reach zero.(c) all variable costs become fixed.(d) there are no marginal costs.

18. The marginal product of labor is(a) the total product divided by the amount of labor used to produce it.< ! U the change in the total product that results from increasing all inputs by the same amount.othe change in the total product resulting from changing the amount of labor used.(d) the tiny extra amount produced when the total product curve is near its peak.

19. Suppose we have the following information about a firm's production technology.Units of Labor Total Product1 10 . . . . ,2 17 I3 22 o J. . . .4 25 ..JWe can infer from this information that as this firm applies more labor it experiences(a) diminishing total product of labor.(b) constant total product of labor.~ constant marginal product of labor.~ diminishing marginal product of labor.(e) negative marginal product of labor.

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20. Diminishing marginal product of an input occurs when(a) all inputs are fixed.(b) all inputs are variable.,0 some inputs are fixed and some are variable.(d) the finn is operating in the long run.

21. When the Ace Corporation hires its 100ihworker, the average product of labor is unaffected.From our knowledge of the relationship between marginals and averages we know that(a) the marginal product of labor is increasing.(b) the marginal product of labor is decreasing.(c) the marginal product of labor is less than the average product. A : V I-~(~) the marginal product of labor is greater than the average product. Pr~ c . . ' "(!) the marginal product of labor is equal to the average product.(f) FALSE. We cannot infer anything from the information given.

22. If the average product of labor increases to a maximum, then decreases,(a) there is a maximum amount of output that Can be produced.(b) fixed cost is Ll-shaped,() average variable decreases to a minimum then increases. o~~ 6P \ ? > f l , . ' ; ( - _ U J c J . ; 0 \ . . . I . . . . J Y 1 f ' ((d) average fixed cost decreases to a minimum then increases.

23. Ajax bakery has a to ~"lX~ st of $4000. Ajax employs 20 workers at $] 00 a week. Iflabor is the only riable cost what is Ajax's weekly total cost?(a) $2000.(b) $4000.If'$6000.Cd) $300.(e) $4100.

LJ,oOOZ~20 --? - c C D 40 lO..c__. U.~--O

24. Marginal cost is the change in lCO~ total cost resulting form a one-unit increase in the amount of labor used.(b) total cost resulting from a one-unit increase in the average cost.@) total cost resulting from a one-unit increase in the amount ofoutput produced.(d) fixed cost resulting from a one-unit increase in the amount of output produced.

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25. Short run marginal cost curves are positive sloping because of(a) Decreasing returns to scale. l _b) Increasing returns to scale.(c) Economies of scale.

< . t Decreasing marginal product. .(e) Decreasing average fixed cost. .A -- \ ,~

1 26. Which of the following are unaffected by the diminishing marginal product of labor?@ The average fixed cost curve. \ ~ r'lcf\~\{:e~ Y ; : J \ , , {(b) The average variable cost curve.;,- I. .I . f 'v(p(c) The average total cost curve. i- 'V ..L(d) The marginal cost curve. t~ FALSE. AIl. o f the cost curves are shaped by the diminishing marginal product of labor ..

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" .27. Ifa firm's production function has constant returns to scale and the firm i

. ut markets, the firms long-run average cost curve will " " " : : = = = = = = = " "be horizontal.be U-shaped.

(c) positive sloping.(d) negative sloping.28. If a firm has a horizontal long-run average cost curve, its long-run marginal cost curve willo be horizontal and equal to the long-run average cost curve.

(b) have positive slope and intersect the long-run average cost curve from below.(c) depend on the shape of the long-run average variable cost curve.(d) be vertical.

729. The slope of the long-run average cost curve for a firm with increasing returns to scale is. (a) zero.(b) infinite. /!(c) positive.

! J ! ) negative.30. Why is economic profit different from accounting profit?(a) Economists do not believe that profit is possible because of arbitrage. Accountants are paid to make a firm look good, so they tend to exaggerate profit.I Economists consider a normal rate of return on investment to be a cost.(d) Economists consider all profits to be the wages of business owners.(e) There is no difference.

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1. (5 pts.) Wh~t are econo~nies of scale'l What are some causes of economies of scale? Whyare economies of scale Important?[C:X\0f)'\ I..LIl) of SeQLll !A I ( i 2 _ W \ 1 ' 1 (y


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For possible partial credit (2 pts. maximum per question). Choose up to ten multiple-choicequestions and justify your answer (in the space below, or on the back ofthe page).

You will not get extra credit for justifying an answer that is correct. Thus your best betis to focus on questions that you are not confident about.

Suggested approaches: (1) What definition or principle is relevant to the question? Howdoes it apply or not apply? (2) Explain why you eliminated the alternate choices. (3)Perhaps the question is vague or misleading. If you think so, explain why.

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ECO3312Weston Exam 1Multiple Choice (3 pts. each)i. The price elasticity of demand measures quantity demanded to a change in price.(b) price to a change in the quantity demanded.(c) slope of the demand curve to a change in price.(d) slope of the demand curve to a change in the quantity demanded.

Spring 2012

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2. The price elasticity of demand is- (a) positive when demand is elastic, negative when demand is inelastic.(b) usually close to 1.~ays greater than 1.

~ a~~ays positive.@ always negative.3. Airline ticket prices are often cheaper when booked well in advance of the flight, more expensivecloser to the time of the flight. If the airline is hoping to increase its revenue, raising prices closer to

t date is based on the assumption thatand for tickets becomes more price-elastic as flight time approaches.t(6) demand for tickets becomes less price-elastic as flight time approaches .

.~ consumers don't care about ticket prices.C d ) consumers don't know that ticket prices increase as flight time approaches.4. If demand is elastic and price decreases

(a) total revenue will decrease because TR =PQ.(b) the % decrease in price will outweigh the % increase in quantity demanded, resulting in an

decrease in total revenue.~ the % increase in quantity demanded will outweigh the % decrease in price, resulting in anincrease in total revenue.(d) the % decrease in quantity demanded will outweigh the % decrease in price, resulting in an

decrease in total revenue. .(e) total revenue will be unaffected; elasticity only pertains to marginal revenue.

5. On a linear demand curvedemand is elastic at high prices.

'(b) demand is inelastic at high prices.(c) elasticity is equal. at all points on the demand curve.(d) demand is elastic at low prices.(e) elasticity is the same as the slope of the demand curve.If a good is inferior the income elasticity for that good is~ negative.( 1 i ) positive, but less. than 1.e~) ~t!ve and greater than one.

~positlve.W positive or negative depending on how inferior the good is.

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7 . 'For a giv en dem and curv e, an increase in the price of the good will(a ) . i nc re as e c on sumer s urp lu s. decrease consum er surplus.(c) hav e no effect on consum er surplus.( d) . d ec re as e p ro du ce r s urp lu s.

8. A th eo ry th at assumes co nsumers can q !.an tify th eir p re feren ces, fo r ex am ple, th at o ne p refers C ok e3.2 t imes as m uch as Pepsi, is using the concept of(a) ordinal utility . ( C\c o \ il l " -c 0 2 . - ; : C b \)'-'.11\+\.~ cardinal utility. \ . _ ,. ( ) _ c J ~ rJ( c) d im in ish in g m arg in al u tility . C'fC Ir\{,U(_ - t,;) ("" .( d) c on sum er so v ere ig nty .

9. T he m a rg in al u ti li ty of coffee consumption to an indiv idual is the change in caused b yco nsumin g an ad ditio nal u nit o f co ffee.(a) price.(b) t ot al d emand .( c) to ta l c on sumptio n.@ ) total-utility.( e) in somn ia .

1 0. T he marginal income tax rate is( a) total tax paid div ided b y incom e.:- ' -. -the e xtra amount of tax paid on any additional in com e div ided b y the am ount of th e addition alincome.(c) the tax rate ap plied to peop le w ho liv e on th e m arg in s of society.00 ' Giv e m e a b reak . T here is no w ay to apply the m arginal concept to tax rates.1 1. T he price of popcorn is $2 .00 per b ox, and the price of peanuts is $1 .00 per b ag. If you go to them ov ies and hav e $10 .00 to spend the m axim um am ount of popcorn you can b uy is

(a) -1/2 box.(b ) 1 b ox.(c) 2 b oxes.05 boxes.'( e) 10 b oxes.I

~ 12 . Mary is' in the g ro cery store. H er shop pin g cart con tains enou gh ap ples and o ran ges to com pletelyexhaust her b udget. She expects the last apple she put in the cart to giv e her a m arginal utility of 1 0,, ;. w hile the last orange w ill g iv e her a m arginal u tility of 25. T he price of oranges is tw ice the price ofapples. In order to m axim ize her total utility M ary should(ar-put b ack som e orariges in order to get som e m ore apples.fi) put b ack som e apples in order to get som e m ore oranges.(c) get m ore oranges an d apples.(d) get less of b oth apples and oranges.( e) do nothing.

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13. An i nd if fe rence curve is a line that shows all the combinations of quantities of two goods that.M' have the same price .. (b) have the same marginal rate of substitution.(c) an individual can afford with a given income."Cit provide the same total utility for an individual.(e) have the same marginal utility for each good.

14. For most goods indifference curves have negative slope because(a) of the Law of Demand.(b) most goods are complementary to some degree.oifboth goods are desirable, the individual must be compensated with more of one good when hegives of some of the other good, if he is to remain indifferent.(d) the income effect outweighs the substitution effect.(e) economists prefer, for the sake of convenience, to use point rather than arc elasticity.

15. Greater Ievels of'utility are achieved by an individual(a) by moving down to the right on the same indifference curve.(b) by moving up to the left on the same indifference curve.(c) on indifference curves that are closer to the origin.(i) on indifference curves that are farther from the origin.( e } ' if the marginal utilities of the last units obtained is equal for all goods.

16. A consumer finds the best affordable combination of two goods where(a) the marginal utility of each good is equal.. (b) the marginal rate of substitution is the greatest. -.(c) the marginal utility of each good is the greatest.(d) the indifference curve is farthest from the budget line. . '"awhere an indifference curve is tangent to the budget line.

17. The price of broccoli falls. The i ncome e ff ec t causes George H.W. Bush to buy less broccoli. We canconclude that(i) George H.W. Bush considers broccoli to be an inferior good.(b) George H.W. Bush considers broccoli to be a normal good.(c) George H.W. Bush considers broccoli to be a bad ..(dJ George H.W. Bush does not have normal, well-behaved, convex preferences.~ broccoli violates the Law of Demand.

18. Which of the following best describes the substitution effectt(a) When the price of a good falls, consumers' real income increases, allowing them to buy more of

the good.(b) When consumers substitute one good for another, they suffer a loss of real income, since if they

wanted more of one good and less of another they would have chosen this in the first place.~ When the price of a good falls they can substitute this good for another good, which is nowrelatively more expensive. .W People can always find alternate means to a goal, or they can choose different goals; hence, there

are no perfectly inelastic demand curves.

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19. Market demand curves are found by(a) multiplying individual prices at each quantity demanded.(b) ing individual prices at each quantity demanded.multiplying individual quantities demanded at each price.d adding individual quantities demanded at each price.

20. Demand curves are generally negative-sloping because@ even when the good is inferior, the positive substitution effect of a price decrease is usuallym ; fer than the negative income effect.(b) e income effect and substitution effect always change in different directions.the income effect of a price change is usually greater than the substitution effect, and the income,effect always causes price and quantity demanded to move in opposite directions.

(d) marginal utility increases as more of a good is purchased.(e) the Law of Demand must be assumed, like the existence ofa point in geometry.

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r,Problems and Short Essays1. (10 pts.) Use either algebra or economic reasoning to explain why the slope of a budget line is thenegative price ratio of the two goods.

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(b) The total revenue to sellers is the number of units sold times the price per unit, or TR = PQ.Find the total. revenue function generated by the above demand function.

2. (15 pts.) A demand function is given by the equation: P = 100 - 2Q .(a) Find the slope of this demand curve.

(c) Find the marginal revenue function ge~erated by the 7bove tot" "revenue function.0 \.R - ~ de': v o..' \ ' i v . e . _ v b TR .

\ Y ' I R _ - = tOo-YQ 1C 1 - : ~5 .(d) Draw the demand curve and its associated marginal revenue curve in the space below.I ~ ~ b

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Micro Exam 1 [Weston] x

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