Download the name for the relationship between two goods whose cross price

Exam 2 VERSION B
Econ 202 Fall 2006
Dr. Claudia Strow
Name__________________________
Please read and sign the following statement. Failure to sign the statement will prevent your exam from
being graded. I hereby promise that I have neither given nor received help on this exam. Furthermore, I have not
and will not discuss the contents of this exam with anyone who has not yet taken the exam from any of Dr. Strow’s
classes. I understand that doing so, giving, or receiving help in any other form or fashion constitutes cheating and
will result in a grade of zero on the exam and potentially an F in the course.
Signed ________________________________
I. Fill in the Blank below with the appropriate term or phrase (do not use abbreviations) (18 pts)
a. ________________________ The change in total output when one additional unit of labor is hired
b. ________________________ a firm which is owned by stock shareholders
c._________________________ When the long run average total cost curve is downward sloping, this
concept is illustrated.
d. ________________________The name for the relationship between two goods whose cross price
elasticity of demand is less than zero.
e. _______________________The curve connecting all combinations of goods which offer an
individual identical levels of utility.
f.
_______________________The time period during which at least one input is fixed
II. Problem: (16 points)
Road Rules driving school currently instructs 125 students a day. According to a 6 month rental contract,
Road Rules rents fully gassed cars for $2000 total in rental fees per day. They also have 4 months
remaining on their building lease, which runs $50 a day. It spends $450 in wages for its instructors each
day. While they can hire and fire workers at will, they must pay rent for the cars and their building no
matter how many lessons they give. (Show your work to receive any partial credit in the following.)
a. How long is the short run for Road Rules?
_________months
b. Fill in the following information considering Road Rules’ costs
Total Cost________________
Total Fixed Cost___________
Total Variable Cost _________
Average Total Cost __________
Average Fixed Cost__________
Average Variable Cost________
c. If Road Rules instead instructed 150 students a day, its total costs of operating would be $2600. What
is the approximate marginal cost of the 150th student?
MC=______________
III. Multiple Choice (3 points each)
1. When, the price of good X rises from $1 to $1.50, the quantity demanded of good Y rises
from 300 to 500. What is the cross price elasticity for these two goods?
a. -1.25
b. 1.25
c. -0.8
d. 0.8
e. None of the above
2. Suppose the price elasticity of demand for peaches is -3, while for bananas it is -5. If an equal
sized tax is placed on the producers of peaches and bananas, then ceteris paribus
a. consumers of peaches will pay a smaller burden of the tax than consumers of bananas
b. consumers of peaches will bear a larger burden of the tax than consumers of bananas
c. consumers of peaches will pay a the same burden of the tax as consumers of bananas
d. Consumers of peaches and bananas will both bear no burden of the tax since their
demands are elastic
e. Consumers of peaches and bananas will both bear no burden of the tax since their
demands are inelastic
3. If Pizza Queen increases the price of pizza from $15 to $17, then the quantity demanded falls
from 300 to 250. What is the price elasticity of demand for pizza at Pizza Queen?
a. -2.13
b. -0.18
c. -1.45
d. -0.69
e. None of the above
4. Suppose that the income elasticity for pizzas is 0.5. This would mean that pizzas are
a. a normal luxury good
b. a normal necessity good
c. an inferior good
d. a substitute good
e. a complementary good
5. Suppose that the income elasticity of peaches is -1.5. If income levels fall by 20%, then we
would expect that the demand for canned peaches will
a. rise by 30%
b. fall by 30%
c. fall by 13.3%
d. rise by 13.3%
e. do none of the above
6. If the price elasticity of demand for widgets is -3, then an increase in the price of widgets will
cause
a. total revenue to fall since the demand for widgets is elastic
b. total revenue to fall since the demand for widgets is inelastic
d. total revenue to rise since the demand for widgets is elastic
e. total revenue to rise since the demand for widgets is inelastic
7.
P
d1
d2
d3
Q
In the above graph,
a. d2 is relatively more elastic than d3 and d1 is perfectly inelastic
b. d2 is relatively more elastic than d3 and d1 is perfectly elastic
c. d2 is relatively more inelastic than d3 and d1 is perfectly elastic
d. d2 is relatively more inelastic than d3 and d1 is perfectly inelastic
e. none of the above statements are true
8. As Carl eats one more slice of pie, his marginal utility of the 3rd slice is 12 utils. His first 2
slices of pizza gave him a total utility of 30. Chucky’s total utility from consuming 3 slices of
pizza is
a. 42
b. 30
c. 12
d. 4
e. none of the above
9. Jimmy is currently using his allowance to buy 10 ice cream cones and 5 snickers bars a
month. At this level of consumption, the Marginal Utility of the last ice cream cone is 10 Utils
and the marginal utility of the last snickers bar is 8 utils. An ice cream cone costs Jimmy $1.50,
while a snickers bar costs Jimmy $1. Jimmy would increase his utility next month by
a. consuming more snickers (and less ice cream cones so as to stay within his budget
constraint)
b. consuming more ice cream cones (and less snickers so as to stay within his budget
constraint)
c. consuming less snickers and less ice cream cones
d. keeping his consumption of snickers and ice cream cones exactly the same
10. A consumer buys only two goods, apples and bananas. A bunch of bananas costs $4, and a
bag of apples costs $2. If the marginal utility of the last bunch of bananas bought is 100, what is
the marginal utility of the last bag of apples bought?
(Assume that the consumer maximizes her utility.)
a. 2
b. 1/2
c. 50
d. 100
e. none of the above
11. Which of the following statements is NOT true concerning the graph below depicting
Martha’s budget constraint and preferences for Buffalo Wings and Ribs?
Buffalo Wings
200
X
Y
V
Z
U3
U2
U1
W
250 Ribs
a. At point Z Martha does not spend all of her income
b. Point Y is unaffordable
c. Martha will choose to consume at point V
d. If the price of ribs is $2, then Martha’s total income must be $500
e. Point Y would give Martha more utility than Point V and point X gives Martha more
utility than point Z
12. On the graph above, if the price of ribs falls and ribs and buffalo wings are normal goods,
then Martha should
a. consume less ribs according to only the income effect.
b. consume more buffalo wings according to only the substitution effect
c. consume more ribs according to both the substitution and income effect
d. consume less buffalo wings according to both the substitution and income effect
13. Suppose that a consumer’s original budget line was AB in the figure below, but now it has
changed to line CD. Which of the following must have occurred?
Good Y
A
C
a.
b.
c.
d.
e.
D B
Good X
the price of good X must have risen
the price of good X must have fallen
the price of good Y must have risen
the consumer’s income must have fallen
the consumer’s income must have risen
14. Hadley’s Hole Repair is a sole proprietorship considering incorporating. One aspect of
incorporating would be that
a. Hadley’s would then have limited liability for the losses of the firm
b. corporate profits are regulated by the government; the profits of a sole proprietor are
not
c. Hadley himself would gain control over all phases of the operations
d. dividends on profits would no longer face double taxation
e. both a and d would occur
Table 1: Refer to this table for the next two questions.
L
TP
0
200
1
250
2
320
3
410
4
480
15. In Table 1, what is the Average Product for 4 workers?
a. 480
b. 120
c. 70
d. 160
e. none of the above
16. In Table 1, with which worker does diminishing returns to labor set in?
a. 1st
b. 2nd
c. 3rd
d. 4th
e. none of the above
17. Big O Tires is trying to decide whether to rent more machinery or hire more workers. The
machinery rents for $80 a day whereas the workers must be paid $70 a day. The marginal
product of another unit of machinery is 240 tires, whereas the marginal product of another
worker is 230 tires. Big O can adjust both the amount of machinery it rents and the amount of
workes it hires. If Big O wants to stay at the same level of production but lower its costs of
producing, it should:
a. rent more machinery (and employ fewer workers)
b. hire more workers (and rent fewer machines)
c. hire less workers and rent less machinery
d. stay at their current ratio of machinery and workers, since it is optimal for production
Q (TP)
TFC
TVC
TC
ATC
240
AVC
MC
0
1
50
2
30
3
90
Fill in the above chart for Television production to answer questions 18-19. The chart itself will
not be graded.
18.
The Average Total Cost of 3 Televisions is
a. $210
b. $300
c. $90
d. $130
e. none of the above
19. The Marginal Cost of the 2nd Television is
a. $60
b. $10
c. $20
d. $150
e. none of the above
20. Jimmy John’s sells submarine sandwiches using the following production function:
Q= K *L2
What is the marginal product of the 3rd worker if capital is fixed at 3 units?
a. 9
b. 15
c. 3
d. 27
e. none of the above
21. Bob could be working for a painting company earning an annual salary of $30,000. He
decides instead to open his own house painting business. His annual expenses will include
$2,000 for advertising, $1,000 for equipment rental, $500 for supplies, and a $35,000 salary for
an assistant. Bob will cover his start up expenses by removing money from his savings on which
he was earning an annual interest of $1,000. Assuming there are no additional expenses, Bob’s
annual implicit costs will equal
a. $31,000
b. $35,000
c. $34,500
d. 79,500
e. none of the above
22. Joe’s Tackle shop has implicit costs equal to $50,000 and accounting profit equal to
$30,000. The total revenue of Joe’s Tackle shop is $100,000. Given this information, Joe’s
economic profit must be
a. $70,000
b. $50,000
c. $20,000
d. -$20,000
e. -$50,000