Exam 1. Number of Pretzels (per 8 hour day) 1080 (4.)

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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 All questions are weighted equally. 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. Number of Pretzels (per 8 hour day) (1.) 1080 (4.) (2.) (3.) slope one cookie to 2 pretzels ) What is the maximum number of pretzels that can be produced in the German Bakery? a) 560 b) 1600 d) 3280 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) pretzels, 1600 ginger bread cookies. d) 1080 pretzels, 1280 ginger bread cookies. 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) 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 pretzels, 1680 ginger bread cookies. d) 5) What should happen to the demand and supply curve of Coke if Pepsi lowers its price?

2 a) Supply shifts to the right, demand to the left. b) Supply shifts to the left, demand to the right. 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 down, quantity goes down. d) Price goes down, quantity goes up. D D' S 7) Which of the following will increase demand for a normal good? a) b) the price of a complement good increases. 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. 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 - Note: As announced during the exam, there is a slight "aberration" in the numbers for this problem in that marginal utility goes negative at 5 tacos and then becomes positive for the sixth. However, even though this consumer is a little weird, you can still deduce the answers to all of the question if you keep the basic principles in mind. 9) What the definition of marginal utility? If you calculated it for the sixth taco, what number would you get? 10) If the consumer has to pay for each taco, what level of consumption will maximize his/her "net benefit" (Total utility - the total amount paid)? 11) If the price was per taco, how many would the consumer purchase? (Just like 10) and what would be the "net benefit of that quantity? 9) What is the consumer s marginal utility of consuming the sixth taco? a) 10 b) 4. d) ) If the price of a taco is 11.75, how many tacos will the consumer purchase optimally? a) 7. b) 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?

3 a) 38. b) d) 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) unchanged. d) elastic. 13) A demand curve with zero price elasticity: a) is horizontal. b) is vertical. 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 d) 3 15) What is the change in total revenue due to the price change for orange growers? a) 200 b) 320 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. 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 have a shortage of 2 d) e) have a surplus of 2 Figure 2

4 Graphs for uestions Figure ) Of the graphs shown in Figure 3, which most likely represents short run total cost? a) 1 b) 2 d) 4 19) Of the graphs shown in Figure 3, which most likely represents average fixed cost? a) b) 2 3 d) 4 20) Of the graphs shown in Figure 3, which most likely represents short run average cost? a) 1 b) 2 3 d) 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? a) 1 b) 3 d) 4 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 ) From the table we can conclude that the TV manufacturer s short-run fixed cost is. a) zero b) 75 d) 400

5 23) At what output level does short-run average total cost of producing TVs reach a minimum? a) 2 b) 3 4 d) 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 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. (To minimize cost using to inputs, P W /MPP W must equal P L /MPP L. 9/30=.3 and is not equal to.1/2=.05. It is cheaper to produce and additional loaf of bread by using wheat than labor.) 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 (AVC= P input /APP input, MC=P input /MPP input ) 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) (AVC is 11 and Price is 10. If you produce you loose fixed cost plus one more dollar for each unit you produce and sell; if you just give up and produce nothing, you just lose fixed cost) b) continue to produce 100 units 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?

6 a) 8.00 b) 6.00 d) 0 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 shown in the MC Typical Firm AC q firm uestions 29 and 30 uestions Figure Market Supply1000 Supply2000 Demand 1,000 10,000 15,000 20,000 50,000 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) market 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 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) 30) How many trains is each of the 1000 firms producing a month? a) zero b) 1 about 7 d) 10 e) 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 d) about 75 per month e) the firms are not making a profit. They are losing money. The price is 5 per train; the average cost is a little more than 3 per train. That is roughly a profit of 2 per train and 15 are being sold... profit is about ) 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 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

7 the right. 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 P= 3, = 10,000 d) Only at this final quantity and price will profits be zero e) P= 5, = 15,000 34) In the final long run equilibrium, there will be toy train firms each producing trains per month. a) b) 2,000 firms, 15 trains 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.. d) in Chancellor Hookers office to complain the Robin William s trailer is in his parking space.