ECONOMICS 10-007 Dr. John Stewart February 12, 2002 Exam 1 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet using a No.2 pencil. Note a)=1, b)=2 and so forth. Please note that some questions have four choices, others have five choices. On the answer sheet make sure that you have written and coded your name, your student ID number and the number of the recitation section you attend (A list of recitations shown on the screen will help you identify your section number). Each failure to follow directions will result in a one question deduction. All questions are weighted equally. Information for uestions 1-4 : Joe likes to attend the Chinese restaurant 35 near Granville Towers. The following table illustrates various levels of total utility and marginal utility for plates of food that Joe may consume from the all you can eat buffet. 35 does not allow Joe to pack up a doggy bag and take food home to consume later. (Before answering the any of the questions, complete the table with missing values) Plates of food 0 1 2 3 4 5 Total Utility 0 18 16 Marginal Utility - 14 1-12 1. The law of diminishing marginal utility hits Joe when he consumes the plate of food. a) 1st b) 2nd c) 3rd d) 4th e) 5th 2. If Joe is rational, under no circumstance would he ever choose to consume a) zero plates b) 1 plate c) two plates d) 3 plates e) 4 or more plates 3. Assuming that Joe has a pocket full of money and that the restaurant charges 10 and allows Joe to eat all he wants, Joe will consume of food and have dollars of consumer surplus a) 0, 0 b) 2, 14 c) 3, 9 d) 3, 19 e) 4, 6 4. Suppose that instead of an all you can eat buffet at a fixed price, 35 charges Joe 6/plate. Joe will choose to consume plates of food and gain dollars of consumer surplus. a) 0, 0 b) 1, 8 c) 1, 14 d) 2, 6 e) 3, 19 5. Suppose General Electric (GE) produces refrigerators. If General Electric were to develop a new kind of technology which enabled them to produce more cheaply (reduce the cost of production), then a) G.E.'s refrigerator supply curve would shift to the right b) G.E.'s refrigerator supply curve would shift to the left c) the demand curve for refrigerators would shift right d) the demand curve for refrigerators would shift left e) there would be a slide along G.E.'s refrigerator supply curve Econ 10-008: Exam1 Page 1 of 7
Information for uestions 6-11: Figure 1 shows a market demand and supply curve for green peas. 6. If the market for peas is competitive, the equilibrium price per ton of peas will be a) 20 b) 25 c) 30 d) 35 e) 40 Price ( per ton) 40 35 30 25 20 D S 7. If the price of peas was fixed by government decree at 35 a ton, there would be a excess of tons per year a) demand, 2 b) demand, 4 c) supply, 2 Figure 1 6 8 10 12 14 uantity (in tons per year) d) supply, 4 e) demand, 8 8. Carrots and green peas are complements on the demand side only. Carrots are sold on a competitive unregulated market where normal assumptions about supply and demand hold. If the price of peas were to increase then we would expect the price of carrots to and the output of carrots to. a) rise, raise b) rise, fall c) fall, rise d) fall, fall e) uncertain 9. Given the information in question 8, the cross price elasticity of the demand for carrots with respect to the price of green peas must be a) equal to 1 b )greater than 1 c) less than 1 d) greater than 0 e) less than 0 10. For a price change from 25 a ton to 30 a ton, the arc price elasticity of demand is a).25 b).5 c) 1 d) 1.667 e) 4 11. At a price of 30 per ton, the point price elasticity of the demand for green peas is a) 1.0 b) 1.2 c) 1.5 d) 1.667 e) 2 Information for uestions 12-15: Table 1 shows the relationship between the number of Vietnamese factory workers and the number of Nike shoes that can be produced. Table I Factory Workers (per week) 1 2 3 4 5 6 7 8 Total Shoes Produced (per week) 800 1800 3000 4000 4800 5400 5600 5600 12. Based on the data in the Table I above, we can see that the average physical product for 6 factory workers is shoes and the marginal physical product of the sixth worker is shoes a) 5400; 200 b) 5400; 600 c) 600; 200 d) 600; 900 e) 900; 600 13. In the Table I above, we are witnessing specialization at work when: Econ 10-008: Exam1 Page 2 of 7
a) the marginal production of additional workers is increasing b) the marginal production of workers is less than their average product c) the total production of workers equals the average production per worker d) the marginal production of workers equals the total production of workers e) the total production of workers is rising 14. Again using Table I, if the wage of a shoe worker is 50 per week and labor is the only variable input, then the average variable cost of 5400 shoes (per week) is a) 32,400 b) 300 c) 50 d).0556 e).00925 15. Finally, using the information in Table I, if the wage of a shoe worker is 50 per week and labor is the only variable input in the short run; the approximate short run marginal cost of the 5400 th shoe produced in a week is a) 60 b) 50 c).0833 d).0556 e).0125 16. A firm using labor and wheat to produce bread is producing 500 loaves of bread. At the current level of input use, the marginal physical product of labor is 20 loaves per unit of labor and the marginal physical product of wheat is 2 loaves per unit of wheat. The price of a unit of labor is 6.00 and the price of a unit of wheat is 1.00. Which statement is most true? a) the firm has chosen the quantities of labor and wheat that minimize the cost of producing 500 loaves of bread. b) the firm could decrease the total cost of producing 500 loaves of bread by increasing the amount of labor used and decreasing the amount of wheat used. c) the firm could decrease the total cost of producing 500 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 500 leaves of bread. Information for uestions 17-20: The following two graphs in Figure 2 represent the firm and the market for a perfectly competitive industry. The left graph depicts the average total, average variable and marginal cost curves facing the individual firm and right graph shows the market supply and demand curves. Assume that all the individual firms in this market are identical and that they are initially operating in the short run. Typical Firm Market MC Supply ATC 8 5 AVC 4 2 Demand 1 0 4 6 8 10 qfirm 0 800 1000 market Figure 2 17. In Figure 2 above, we can see that the short run market equilibrium price is and that at this price, each identical firm in the industry, represented by Figure 2 above, will produce units. a) 8; 8 b) 8; 10 c) 5; 10 d) 4; 8 e) 4; 10 18. Having calculated the profit maximizing quantity the individual firm will produce at the market clearing price in Econ 10-008: Exam1 Page 3 of 7
the short run, we can see that the firm is making economic profits equal to. a) negative; 30 b) negative; 40 c) positive; 30 d) positive; 40 e) zero; 0 19. Given the information from Figure 2 and the fact that all firms are identical, then we can tell that in the short run, there are firms in the industry a) 10 b) 80 c) 100 d) 125 e) 800 20. Given the information in Figure 2, firms will choose to shut down their operation in the short run when price falls below a) 1 b) 2 c) 4 d) 5 e) 8 21. If the wine and beer are substitutes and the price for wine falls, assuming the laws of supply and demand hold in both markets, we can expect the equilibrium price for beer to and the quantity to a) raise, fall b) raise, raise c) fall, raise d) fall, fall 22. If a consumer's demand curve for a product X is price elastic, then which of the following statements is true? a) An increases in the price of X will increase the consumer's total expenditure on the good X. b) An increase in the price of X will decrease the consumer's total expenditure on the good X. c) An increase in the price of X will leave the consumer's total expenditure on good X unchanged. d) The problem does not provide enough information to determine whether a price increase will change total expenditure on good X. 23. A demand curve with infinite price elasticity everywhere on it a) is horizontal. b) is vertical. c) has a negative slope. d) has a very flat slope. 24. Bill s Sandwich shop is currently charging a price of 3.00 per sandwich. At this price Bill is selling 100 sandwiches a day. The marginal cost of producing another sandwich is 2.00. An economist estimates that the price elasticity of the demand curve for Bill s sandwiches at his current output is 4.0. Bill comes to you with this information and asks for your advice. You should tell Bill a) to keep charging 3.00 per sandwich. b) that he can increase profits if he raises his price a little. c) that he can increase profits if he lowers his price a little. d) that he hasn t given you enough information for you to make a recommendation. 25. You are the manager of a perfectly competitive firm and are faced with the following situation. The market price for your product is 10 and you are currently selling 1,000 units. Your total fixed costs are 1,000 while your total variable costs are 9,500. Your short run marginal cost is 9 per unit. Given this information, to maximize profit in the short run you should decide to: a) expand output to cover some more of the fixed costs b) continue to produce 1,000 units c) immediately stop all production d) decrease output so that you can cut down on variable costs Econ 10-008: Exam1 Page 4 of 7
Information for uestions 26-29: Two of Prof. Stewart s former TAs, Volker and Tim, drop out of the Econ Ph.D. program and open the German Bakery on Franklin Street. Volker 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. 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) 26. What is the maximum number of pretzels that can be produced in the German Bakery? a) 560 b) 1600 c) 2160 d) 3280 Figure 3 Number of Cookies (per 8 hour day) 27. 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. 28. 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. 29. 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. 30. The income elasticity of demand for McDonald s hamburgers is -.05 and the cross price elasticity of McDonald s hamburgers and Tum s antacid is 1.3. From this we can conclude a) McDonald s hamburgers are a normal good and that Tum s and burgers are complements. b) McDonald s hamburgers are an inferior good and that Tum s and burgers are complements. c) McDonald s hamburgers are a normal good and that Tum s and burgers are substitutes. d) McDonald s hamburgers are an inferior good and that Tum s and burgers are substitutes. Econ 10-008: Exam1 Page 5 of 7
31. Figure 4 at the right depicts the long run total cost curve for a firm producing electricity. From the diagram we can conclude a) that there are increasing returns to scale in producing electricity. b) that there are decreasing returns to scale in producing electricity. c) that there are constant returns to scale in producing electricity. d) nothing about returns to scale in electricity production. Long Run Total Cost 32. The market fresh milk is perfectly competitive. The market is currently in equilibrium and the price of milk is 2 per gallon. At this price, Jane consumes 3 gallons a week and her marginal utility of the third gallon she consumes is 2. At the equilibrium price, Linda consumes 5 gallons a week. From this we can conclude. a) Linda s marginal utility of the 5 th gallon is greater than 2 b) Linda s marginal utility of the 5 th gallon is less than 2 c) Linda s marginal utility of the 5 th gallon is equal to 2 d) Linda gets more consumer surplus than Jane e) both c) and d) Figure 4 Graphs for uestions 33-36 1 2 3 4 Figure 5 33. Of the graphs shown in Figure 5, which most likely represents short run total cost? 34. Of the graphs shown in Figure 5, which most likely represents average fixed cost? 35. Of the graphs shown in Figure 5, which most likely represents short run average cost? 36. If a firms production technology is subject to constant returns to scale, which of the graphs shown in Figure 5, most likely represents long run average cost? Econ 10-008: Exam1 Page 6 of 7
When you have completed your exam: Print your Name Write your Student ID number (PID) Print your recitation section number (A list of recitation will be on the screen) Section Sign the honor Pledge affirming that you have neither given nor received aid on this exam and have complied with all of the rules of this exam. Signature Tear this form off the back of you exam and turn it in with your answer sheet. You may keep the rest of the exam. Econ 10-008: Exam1 Page 7 of 7