Intermediate Microeconomics Spring 2005 Midterm Exam K. Yamamoto Answer all the questions in the sections A and B. For the section C, answer any two (2) questions. A. 1.Use the following two statements to answer this question: I. A market is a collection of buyers and sellers that, through actual or potential interactions, determine the price for a product or set of products. II. An industry is a collection of markets for similar or closely related products. a. Both I and II are true. b. I is true, and II is false. c. I is false, and II is true. d. Both I and II are false. 2. Which of the following statements about the diagram below is true? a. Demand is infinitely elastic. b. Demand is completely inelastic. c. Demand becomes more inelastic the lower the price. d. Demand becomes more elastic the lower the price.
3. Use the following statements to answer this question. I. A price-consumption curve is derived by varying the price of asparagus. If the price-consumption curve is an upward sloping straight line, the demand curve for asparagus must be downward sloping. II. Fred consumes only food and clothing. Fred's Engel curve traces out the utility maximizing combinations of food and clothing associated with each and every income level. a. I and II are true. b. I is true, and II is false. c. I is false, and II is true. d. I and II are false. 4. 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. 5.Which of the following is true concerning the income 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. 6. Use the following two statements to answer this question: I. The marginal product of labor is the slope of the line from the origin to the total product curve at that level of labor usage. II The average product of labor is the slope of the line that is tangent to the total product curve at that level of labor usage. a. Both I and II are true. b. I is true, and II is false. c. I is false, and II is true. d. Both I and II are false. 2
B. 1.Which of the following will cause a shift to the left in the supply curve of gasoline? a. A decrease in the price of gasoline. b. An increase in the wage rate of refinery workers. c. Decrease in the price of crude oil. d. An improvement in oil refining technology. e. All of the above. 2.A freeze in Florida s orange growing regions will: a. result in a sharp increase in the price of oranges in the short run because demand and supply are highly inelastic. b. result in a sharp increase in the price of oranges in the short run because demand and supply are highly elastic. c. result in a sharp decrease in the price of oranges in the short run because demand is highly inelastic and supply is highly elastic. d. result in little change in the price of oranges in the short run because supply is infinitely elastic. 3. The slope of an indifference curve reveals: a. that preferences are complete. b. the marginal rate of substitution of one good for another good. c. the ratio of market prices. d. that preferences are transitive. e. none of the above. 4. The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be: a. 2 lemonades for each popcorn. b. 1 lemonades for each popcorn. c. 1/2 lemonade for each popcorn. d. indeterminate unless more information on Fred's marginal utilities is provided. 5. Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying of the good and the income effect results in the person buying of the good. 3
a. more, more b. more, less c. less, more d. less, less 6. Recently, Skooterville has experienced a large growth in population. As a result, the demand curve for telephone service in Skooterville: a. has shifted to the right. b. has shifted to the left. c. has shifted down. d. both (b) and (c) are correct. e. none of the above. 7. Suppose that the demand for artichokes (Q a ) is given as: Q a = 200-4P What is the price elasticity of demand if the price of artichokes is $10? a. 0 b. -0.25 c. -1 d. -4 e. negative infinity 4
8. The price of beef and quantity of beef traded are P* and Q*, respectively. Given this information, consumer surplus is the area: a. 0BCQ* b. ABC c. ACP* d. CBP* e. 0ACQ* 9. Refer to the figure below. The situation pictured is one of a. constant returns to scale, because the line through the origin is linear. b. decreasing returns to scale, because the isoquants are convex. c. decreasing returns to scale, because doubling inputs results in less than double the amount of output. d. increasing returns to scale, because the isoquants are convex. e. increasing returns to scale, because doubling inputs results in more than double the amount of output. 5
10. An individual whose attitude toward risk is illustrated below is a. risk averse. b. risk loving. c. risk neutral. d. none of the above is necessarily correct. 6
11. In the figure below, what is true about the two jobs? a. Job 1 has a lower standard deviation than Job 2. b. All outcomes in both jobs have the same probability of occurrence. c. A risk-averse person would prefer Job 2. d. A risk-neutral person would prefer Job 1. e. Job 1 has a higher expected income than Job 2. 12. The difference between the economic and accounting costs of a firm are a. the accountant's fees b. the corporate taxes on profits c. the opportunity costs of the factors of production that the firm owns d. the sunk costs incurred by the firm e. the explicit costs of the firm 13. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost? a. 500 b. 5Q c. 5 d. 5 + (200/Q) e. none of the above 7
C. Answer any two (2) questions. 1. The currency used by the Confederate States of America during its brief existence from 1861 to 1865 has become a collector's item today. The Confederate Currency supply is perfectly inelastic. As the demand for the collectible increases and some of the old currency is destroyed or no longer of value as a collectible, what happens to the market price? Use the diagram below to explain your answer. P Q 2. Suppose that the government subsidizes housing expenditures of low-income families by providing a dollar-for-dollar subsidy to a family s housing expenditure. The Cunninghams qualify for this subsidy and spend a total of $500 per month on housing: they spend $250 of their own and receive a government subsidy of $250. Recently, a new policy has been proposed that would provide each low income family with a lump sum transfer of $250 which can be used for housing or other goods. Using a graph, demonstrate whether the Cunninghams would prefer the current program, the proposed program, or would be indifferent between the two. 8
3..A local retailer has decided to carry a well-known brand of shampoo. The marketing department tells them that the quarterly demand by an average man is: Q d = 3-0.25P and the quarterly demand by an average woman is: Q d = 4-0.5P The market consists of 10,000 men and 10,000 women. How many bottles of shampoo can they expect to sell if they charge $6 per bottle? 9
4. Margaret s optimal consumption is shown in the diagram below for two different prices of Hy-Vee Cola. Decompose the change in Hy-Vee Cola consumption into income and substitution effects. Do the effects work in opposite directions? 10
5. Complete the following table: Quantity Marginal Average Of Product of Product of Variable Total Variable Variable Input Output Input Input 0 0 1 100 2 190 3 270 4 330 5 360 6 380 11