Exam 1. Number of Pretzels (per 8 hour day) Figure 1

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1 ECONOMICS Dr. John Stewart Feb. 11, 1999 Exam 1 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet. On the answer sheet make sure that you have written your name and coded in your student ID number and the number of the recitation section you attend (The list that follows will help you identify your section number). All questions are weighted equally. Section Time & Day TA 801 T 3:30 Volker Grzimek 802 T 4:30 Volker Grzimek 803 W 9:00 Meg (Airu) Cheng 804 W 10:00 Meg (Airu) Cheng 805 W 11:00 Tim Goodger 806 W 12:00 Meg (Airu) Cheng 807 W 1:00 Volker Grzimek 808 W 4:00 Tim Goodger Information for uestions 1-4: Volker finally drops out of the Econ Ph.D. program and opens the German Bakery on Franklin Street. He is very skilled at baking pretzels of which he can produce 200 per hour. He is less qualified at producing ginger bread cookies of which he can produce only 100 per hour. Therefore he persuades Tim to also drop out of the program and join him. Tim can produce 210 ginger bread cookies per hour, but only 70 pretzels. Assume we are always looking at the daily production and both work 8 hours per day. Hint: It might be helpful to draw the production possibility frontier (PPF) first. You can use the grid provided. 1) What is the maximum number of pretzels that can be produced in the German Bakery? a) 560 b) 1600 c) 2160 d) 3280 Number of Pretzels (per 8 hour day) Figure 1 Number of Cookies (per 8 hour day) 2) Where is the kink point located? (The kink point is the point where the PPF changes its slope) a) There is no kink point in this problem. b) 1600 pretzels, 1680 ginger bread cookies. c) 1680 pretzels, 1600 ginger bread cookies. d) 1080 pretzels, 1280 ginger bread cookies. Econ , Exam1 Page 1 of 7

2 3) If Volker and Tim are currently producing 800 pretzels and 2080 ginger bread cookies, What is the opportunity cost of producing an additional pretzel? a) 1/3 ginger bread cookie. b) 1/2 ginger bread cookie. c) 2 ginger bread cookies. d) 3 ginger bread cookies. 4) Which of the following points is NOT on the PPF a) 600 pretzels, 2180 ginger bread cookies. b) 1880 pretzels, 840 ginger bread cookies. c) 1600 pretzels, 1680 ginger bread cookies. d) 1080 pretzels, 1200 ginger bread cookies. 5) What should happen to the demand and supply curve of Coke if Pepsi lowers its price? a) Supply shifts to the right, demand to the left. b) Supply shifts to the left, demand to the right. c) Supply does not shift at all, demand to the left. d) Supply does not shift at all, demand to the right. 6) What happens to the price and quantity of Coke if Pepsi becomes more expensive? a) Price goes up, quantity goes down. b) Price goes up, quantity goes up. c) Price goes down, quantity goes down. d) Price goes down, quantity goes up. 7) Which of the following will increase demand for a normal good? a) the price of a substitute good increases. b) the price of a complement good increases. c) a decrease in the population of the market. d) consumer income falls. 8) The statement that additional units of a commodity are worth less and less to a consumer in terms of its utility is a definition of: a) the optimal purchase rule. b) the law of demand. c) the law of diminishing marginal utility. d) marginal utility. For uestions 9-11 use the following table. The table below shows a hypothetical total utility schedule for a consumer of tacos. uantity consumed Total Utility() Marginal Utility 9) What is the consumer s marginal utility of consuming the sixth taco? a) 10 b) 4. c) 6. d) 40. Econ , Exam1 Page 2 of 7

3 10) If the price of a taco is 11.75, how many tacos will the consumer purchase optimally? a) 7. b) 4. c) 5. d) 1. 11) What will be the consumer s surplus that the consumer will receive if the price of a taco is 11.00? a) 38. b) 30. c) 3. d) 6. 12) If the percentage change in the price of a car is 1% and the resulting percentage change in quantity demanded for cars is.5%, then the price elasticity of demand for cars is: a) unitary elastic. b) inelastic. c) unchanged. d) elastic. 13) A demand curve with zero price elasticity: a) is horizontal. b) is vertical. c) has a negative slope. d) has a very steep slope. Use the following information for questions 14 and 15. The current price for an orange is 2.00 and the total demand for oranges at that price is 100. Now, bad weather hits Florida and the price of oranges rises to At the new price of 4.00, consumers will only demand 80 oranges. 14) Calculate the arc price elasticity of demand for oranges when the price changes from 2.00 to a) 1.00 b) 1.50 c).33 d) 3 15) What is the change in total revenue due to the price change for orange growers? a) 200 b) 320 c) 120 d) ) John. Public receives a permanent rise in his annual salary. If compact discs are normal goods, what will happen to John. Public s demand curve for compact discs? a) The demand curve will shift in. b) The price of compact discs will fall. c) The demand curve will shift out. d) John. Public will buy more cassette tapes which is considered a substitute good. 17) In the supply and demand diagram in Figure 2 to the right, given a price of 7.00, this market will a) be in equilibrium b) have a shortage of 4 c) have a shortage of 2 d) have a surplus of 4 e) have a surplus of 2 Econ , Exam1 Page 3 of 7 Figure 2

4 Graphs for uestions Figure ) Of the graphs shown in Figure 3, which most likely represents short run total cost? 19) Of the graphs shown in Figure 3, which most likely represents average fixed cost? 20) Of the graphs shown in Figure 3, which most likely represents short run average cost? 21) If a firms production technology is subject to constant returns to scale, which of the graphs shown in Figure 3, most likely represents long run average cost? For uestions Use the following table. The table shows short-run total costs as a function of the number to TVs produced by a TV manufacturer. You may fill in the rest of the table as needed to answer the questions. TVs produced Total Cost Average Variable Cost Average Total Cost Marginal Cost 22) From the table we can conclude that the TV manufacturer s short-run fixed cost is. a) zero b) 75 c) 200 d) 400 Econ , Exam1 Page 4 of 7

5 23) At what output level does short-run average total cost of producing TVs reach a minimum? a) 2 b) 3 c) 4 d) 5 24) If the market for TVs is perfectly competitive and the current market price for TVs is 150, how many TVs will the manufacturer described in the table choose to produce and offer for sale. a) 0 b) 4 c) 5 d) 6 25) A firm using labor and wheat to produce bread is producing 1000 loaves of bread per week using 80 hours of labor per week and 400 lbs. Of wheat per week. At this level of input use the marginal physical product of labor is 30 loaves per hour of labor per week and the marginal physical product of wheat is 2 loaves per pound of wheat per week. The price of labor is 9.00 per hour and the price of wheat is.10 per pound. Which statement is most true. a) the firm has chosen the quantities of labor and wheat that minimize the cost of producing 1000 loaves of bread per week b) the firm could decrease the total cost of 1000 loaves of bread by increasing the amount of labor used and decreasing the amount of wheat used. c) the firms could decrease the total cost of 1000 loaves of bread by decreasing the amount of labor used and increasing the amount of wheat used. d) there is not enough information given in the problem to conclude whether or not a change in input mix could decrease the cost of producing 1000 loaves of bread per week 26) In the short run, a farmer producing oranges can only vary the amount of labor he uses to harvest his crop. If the farmer hires 100 hours of labor, he can harvest 200 bushels of oranges per hour and the marginal physical product of labor an hour of labor will be 1 bushel of oranges per hour. The price of labor is 4.00 per hour. Which statement is most true? a) the average variable cost is 4.00 per bushels and the short run marginal cost is 4.00 per bushel. b) the average variable cost is 1.00 per bushel and the short run marginal cost is 4.00 per bushel c) the average variable cost is 2.00 per bushel and the short run marginal cost is 4.00 per bushel d) the average variable cost is 4.00 per bushel and the short run marginal cost is 2.00 per bushel 27) A perfectly competitive firm operating in the short run finds itself facing the following situation: The market price of the firm's product is 10 per unit, the firm is currently producing 100 units of the good and has a total fixed cost of 200 and a total variable cost of 1,100. The short run marginal cost of producing 100 units is 10. Given this information the firm should a) immediately stop all production and produce no output at all. b) continue to produce 100 units c) expand its output so it can cover more of its fixed costs d) decrease it output a little so it can avoid some of its variable costs 28) Your boss is currently able to sell 100 pizzas a day for 8.00 a piece. He is considering lowering the price a little so that he can sell more. If you know that the elasticity of demand is 2, how much additional revenue a day would you estimate that the Pizza Place would receive if it lowered it price by enough to sell one more pizza? a) 8.00 b) 6.00 c) 4.00 d) 0 Econ , Exam1 Page 5 of 7

6 Information for questions Figure 4 shows the market demand and supply wooden toy trains. The market for wooden toy trains is perfectly competitive. uantities are measured in number of trains per week. There are currently 1000 firms supplying the market. Also MC Figure 4 Typical Firm AC qfirm Market Supply1000 Demand 1,000 10,000 15,000 20,000 50,000 shown in the diagram are the average and marginal cost curves of a typical toy train firm. Assume that all firms in the market face identical cost conditions and that there are no fixed inputs in toy train manufacturing. (Thus there is no difference between long run and short run cost curves) 29) Given that there are currently 1000 firms operating in the market a) the equilibrium price will be 1 and the equilibrium market quantity will be 50,000 trains per month b) the equilibrium price will be 3 and the equilibrium market quantity will be 20,000 trains per month c) the equilibrium price will be 3 and the equilibrium market quantity will be 10,000 trains per month d) the equilibrium price will be 3 and the equilibrium market quantity will be 15,000 trains per month e) the equilibrium price will be 5 and the equilibrium market quantity will be 15,000 trains per month 30) How many trains is each of the 1000 firms producing a month? market a) zero b) 1 c) about 7 d) 10 e) 15 31) How much profit will each firm be making at the equilibrium described in question 30 a) 0 per month b) about 5 per month c) about 30 per month d) about 75 per month e) the firms are not making a profit. They are losing money. 32) In the long run, what do you expect to happen in this market? a) Nothing will change; it is in long run equilibrium. b) New firms will enter because there are profits. This will cause the market supply curve to shift to the right. c) New firms will enter because there are profits. This will cause the market demand curve to shift to the left d) Existing firms will leave the market because they are losing money. This will cause the supply curve to shift to the left. e) Existing firms will leave the market because they are losing money. This will cause the demand curve to shift to the right. Econ , Exam1 Page 6 of 7

7 33) In the final long run market equilibrium, price (P) will be and the market quantity () will be a) P= 1, = 50,000 b) P= 3, = 15,000 c) P= 3, = 10,000 d) P= 3, = 20,000 e) P= 5, = 15,000 34) In the final long run equilibrium, there will be toy train firms each producing trains per month. a) 2,000 firms, 10 trains b) 2,000 firms, 15 trains c) 1,000 firms, 15 trains d) 1,666 firms, 15 trains e) 10,000 firms, 1 train Econ 10 Trivia (Sorry no points) In the new movie Patch Adams, filmed in Chapel Hill this past summer, Professor Stewart appears a) as one of the loonies in the psych hospital. b) as a hospital orderly in the noodle scene. c) sitting next to a Jackie Kennedy look-alike in the dignitaries section at the graduation. d) in Chancellor Hooker s office to complain that Robin William s trailer is in his parking space. Econ , Exam1 Page 7 of 7

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