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MBA 525 Microeconomics ~ Potential questions for Exam 1.
This exam will likely cover material from chapters 1-5 in the Franke and Bernanke text, plus any additional class
notes that we went over during the first 2 class sessions. Five essay questions will be on the exam. You must
answer three of these (20 points each). The remaining 40 points on the exam will come from 10 multiple choice
and short answer questions worth 4 points each. All exam questions will be made up of questions similar to those
presented below. Note: some questions here could be expanded upon or combined to form a longer question for the
exam.
ESSAY QUESTIONS
1. Explain the concept of "opportunity cost" and the “no free lunch principle” as they pertain to consumption and
production decisions with limited resources. Use your own words. Provide a consumer example and a firm example of
opportunity cost to support your answer.
2. Explain the principle of diminishing marginal utility. Use an example and provide a graph to support your
answer.
3. Explain the principle of increasing opportunity costs. Upon what assumption is this principle based? Use an
example and provide a graph to support your answer.
4. Explain the cost-benefit principle, and give an example of a cost-benefit analysis decision. How is CBA different
than marginal analysis? Explain what types of decisions can be addressed with each.
5. Price controls. In October of 1996, the minimum wage was raised from $4.25 to $4.75. Draw a graph illustrating
the effects of this change on the market for unskilled labor in the U.S. Can you conclude that raising the minimum
wage would be beneficial? Explain why or why not.
6. Explain the principle of comparative advantage, and what it implies for mutual gains from trade.
7. Explain the concept of price elasticity of demand. What factors determine whether the demand for a particular good
will be “elastic” or “inelastic”? Explain, and give examples of goods for which demand is elastic and goods for which
demand is inelastic. Draw two graphs: One illustrating a very inelastic demand curve, and the other showing a very
elastic demand curve. How is the price elasticity of demand related to changes in firm revenue that result from price
changes?
8. Draw two graphs. One illustrating a very inelastic supply curve, and the other showing a very elastic supply
curve. What factors determine whether the supply of a particular good is elastic or inelastic? Explain. Provide an
example of a type of good for which the supply might be very elastic, and one for which the supply might be very
inelastic.
9. List 3 things that could cause an increase in the demand for a particular good. On a graph that shows both supply
and demand, show the effect of an increase in demand on equilibrium price and quantity. Regarding the effect on
price, explain why we see this change.
10. List 3 things that could cause an increase in the supply of a particular good. On a graph that shows both supply and
demand, show the effect of an increase in supply on equilibrium price and quantity. Regarding the effect on price,
explain why we see this change.
11. Explain the principle of comparative advantage, and what it implies for mutual gains from trade. Provide a
numerical example with two trading partners and production opportunities to illustrate the principle, and show a
mutually beneficial trade between them.
12. Supply and demand example. In 1996 a Suffolk, VA manufacturer built the world’s first self-propelled peanut
harvester. The advantages of the new machine are efficiency and harvest quality. The new machine also eliminates
a problem with old harvesting methods: the traditional tractor ran over and crushed up to 10 per cent of the usable
crop. The new machine does not do this. Carefully explain the changes you expect to see in the market for peanuts.
What will happen in the market for peanut butter (which is produced with peanuts)? What will happen in the market
for jelly (a complement for peanut butter)? Use words and graphs to explain all parts of your answer.
13. Supply and demand example. In 1996 a Suffolk, VA manufacturer built the world’s first self-propelled peanut
harvester. The advantages of the new machine are efficiency and harvest quality. The new machine also eliminates
a problem with old harvesting methods: the traditional tractor ran over and crushed up to 10 per cent of the usable
crop. The new machine does not do this. At the same time, the USDA scientists announced that peanuts contain the
same heart-healthy chemical believed responsible for the beneficial effects of red wine. Carefully explain the
effects you might see in the peanut market and use a graph to support your explanation.
14. Give an example of a decision that would benefit from a cost-benefit analysis. What types of costs and benefits
would need to be quantified to complete the analysis? What difficulties or complications might be encountered in
conducting the cost-benefit analysis?
15. Give an example of a decision that would benefit from marginal analysis. How does this type of analysis differ
from typical cost-benefit analysis?
16. Explain the idea of “consumer surplus” from purchases. Use both words and a graph. Should you purchase a
good if consumer surplus = 0? Explain.
17. Explain and give an example of one of the decision pitfalls. You may use an example where the person did not
act “rationally” or one where they did, just be sure to explain.
18. Explain the “rational spending rule” for finding the optimal combination of 2 (or more) goods to purchase.
SHORT ANSWER QUESTIONS
1. Assume that the price of pizza is $2.00 per slice. The marginal cost of the 3rd slice of pizza is:
a. $0
b. $0.67
c. $6.00
d. $2.00
2. Which of the following best describes the concept of opportunity cost for a particular decision?
a. The prices and quantities of all goods that were not purchased but could have been purchased with the same money.
b. The amount of income left over after the purchase.
c. The value to you of the next unit of the good that is purchased.
d. The value of the next best (but not chosen) alternative.
3. If the quantity demanded of tea increases by 10% when the price of tea decreases by 2%, the price elasticity of
demand for tea is:
a. -2.00
b. 2.00
c. -0.20
d. 0.20
e. -5.00
f. 5.00
4. An increase in your income causes your demand for pinto beans to increase. It must be true that:
a. The law of demand does not apply to pinto beans
b. Pinto beans are a normal good for you
c. Pinto beans are an inferior good for you
d. Pinto beans are subject to government mandated price controls
5. Assume that Chicken and Beef are substitutes. Following an increase in the price of Chicken, all other things equal,
we should expect to see:
a. The demand for Beef will decrease.
b. The demand for Chicken will increase.
c. The demand for Chicken will decrease.
d. The demand for Beef will increase.
e. Both b. and d.
f. Both a. and c.
6. Which of the following goods will have the most inelastic demand?
a. Food
b. Breakfast food
c. Pancakes
d. Pancakes at IHOP
7. Which of the following will cause the supply of bagels to increase?
a. An increase in the price of bagels
b. An increase in the price of flour (an input into the production of bagels)
c. An increase in the number of bagel sellers in the market
d. An advancement in the technology used to produce bagels
e. all of the above
f. a and b only
g. c and d only
8. Agricultural price supports and minimum wages are examples of price floors. An effective price floor is one
that is set (above, below) the equilibrium price, is intended to help (suppliers, demanders), and results in a market
(surplus, shortage).
a. below, demanders, shortage
b. above, demanders, shortage
c. below, suppliers, shortage
d. above, demanders, surplus
e. below, suppliers, surplus
f. above, suppliers, surplus
9. Consider the following data describing the benefits Tiffany receives from trips to the gym per month. Assume
that each trip to the gym costs Tiffany $10.00 and this price accurately represents the marginal costs to Tiffany. If
Tiffany is rational, how many trips to the gym will she take per month?
a.
b.
c.
d.
e.
f.
g.
h.
0
1
2
3
4
5
6
more than 6
Trips to the gym per month
0
1
2
3
4
5
6
Marginal Benefit ($)
0
50
40
30
20
10
5
10. Referring to problem #9 above, the marginal cost of the second trip to the gym is:
a. $0
b. $10.00
c. $20.00
d. higher than the marginal cost of the 3rd trip to the gym due to the principle of diminishing marginal benefit.
e. cannot be determined without more information
11. Suppose that instead of paying per visit, Tiffany bought a membership that allowed her unlimited use for $60 per
month. If this were the case, Tiffany’s marginal cost per trip would be:
a. $0
b. $10.00
c. $20.00
d. higher than the marginal cost of the 3rd trip to the gym due to the principle of diminishing marginal benefit.
e. cannot be determined without more information
Use the following scenario to answer questions 12 & 13:
Suppose that Alex and Brandon are trapped on a desert island where the only food available is fish and coconuts.
Each of the two individuals can spend their time catching fish or gathering coconuts. The table below shows how
much of each task they could accomplish in one day if they spent the whole hour doing just that task. For example,
Alex could catch 5 fish or collect 25 coconuts in one day.
Alex
Brandon
Fish Caught
5
4
Coconuts collected
25
16
______________________________________________
12. According to the theory of comparative advantage, which of the following is TRUE?
a. If Alex specializes in catching fish and Brandon specializes in collecting coconuts, then through trade, both can
be made better off than if they did not specialize and trade.
b. If Brandon specializes in catching fish and Alex specializes in collecting coconuts, then through trade, both can
be made better off than if they did not specialize and trade.
c. Alex should concentrate on both collecting fish and coconuts and should not trade with Brandon, since Brandon
is less efficient.
d. Both Alex and Brandon should concentrate only on collecting coconuts.
13. Which of the following is true regarding acceptable terms of trade for Alex and Brandon?
a. Alex would be willing to give Brandon six coconuts in exchange for one fish, and Brandon would agree to this
trade.
b. Alex would be willing to give Brandon 9 coconuts in exchange for two fish, and Brandon would agree to this
trade.
c. Alex would be willing to give Brandon one coconut in exchange for five fish, and Brandon would agree to this
trade.
d. There are no acceptable terms of trade between these two individuals.
14. Assume the following about good “A”: The price elasticity of supply is 1.75, The income elasticity of demand =
1.5, and the cross price elasticity of demand with respect to the price of good “B” = -2.0. It must be true that:
a. The supply of good A is elastic, good A is an inferior good, and good B is a substitute for A.
b. The supply of good A is inelastic, good A is an inferior good, and good B is a complement for A.
c. The supply of good A is elastic, good A is a normal good, and good B is a complement for A.
d. The supply of good A is inelastic, good A is a normal good, and good B is a substitute for A.
e. None of the above are true
15. Assuming that all jelly doughnuts are of the same quality, the principle of diminishing marginal utility implies
that:
a. The 3rd jelly doughnut consumed will always be more satisfying than the first.
b. The 3rd jelly doughnut consumed will always be more satisfying than the fourth.
c. The marginal utility from the 3rd jelly doughnut will always be less than the marginal utility from the fourth.
d. The marginal utility from the 3rd jelly doughnut will always be greater than the marginal utility from the fourth.
e. Both b and d are true
f. Both a and c are true
g. None of the above are true
16. Your firm currently earns $20,000 in revenue each week by selling 2000 units per week at a price of $10 each.
You have estimated that the price elasticity of demand for your product is -1.75. Given this information, which of
the following is true?
a. Since demand is inelastic, raising price will cause revenue to rise above $20,000 per week.
b. Since demand is elastic, raising price will cause revenue to rise above $20,000 per week.
c. Since demand is elastic, raising price will cause revenue to fall below $20,000 per week.
d. Since demand is inelastic, raising price will cause revenue to fall below $20,000 per week.
e. there is not enough information to answer this question.
17. Assume you are considering buying a car. You have a limited amount to spend and you have it narrowed down
to two final choices, both of which you can afford. You like one of the cars more than the other, but it also has a
much higher price. Which of the following should you consider in order to compare the two cars?
a. you should only consider the marginal utility or satisfaction from the cars
b. you should only consider the prices of the cars
c. you should consider the marginal utility per dollar from the cars
d. you should only consider gas mileage
Refer to the graph to the right for questions 18 - 19:
18.
a.
b.
c.
d.
e.
The value to you of the 10th unit is:
$10.00
$6.00
$4.00
$0
unknown
$
$20.00
$10.00
$4.00
MB
5
10
Q
19. If the price of the good in the figure is $4.00, then consumer surplus is:
a. $80.00
b. $20.00
c. $10.00
d. 10 units
e. 20 units
20. In order to maximize consumer surplus, you should consume up to the point where:
a. total costs = total benefits
b. price = marginal cost
c. marginal benefit = marginal cost
d. marginal benefit is the highest
21. Which of the following best describes the idea of consumer equilibrium?
a. consumer equilibrium is when a consumer finds the optimal combination of goods to consume
b. consumer equilibrium is the difference between what you are willing to pay and what you actually paid.
c. consumer equilibrium is when quantity supplied by firms equals the quantity demanded by consumers.
d. consumer equilibrium is when there are too many buyers in a market, and not everyone is satisfied
22. Fill-in-the-blank: If the quantity demanded of peanut butter decreases by 20% when the price of jelly increases
by 40%, then the cross price elasticity of demand for peanut butter with respect to the price of jelly is
___________.
23. Fill in the blank: If a market is characterized by disequilibrium so that QD is not equal to QS, _________ will
change to bring the market toward equilibrium.
True/False - For each of the following, write “T” if the statement TRUE and “F” if it is False.
24. _____ If a demand curve has a constant slope, then the price elasticity of demand is also constant.
25. _____ A simultaneous increase in both the supply of and the demand for hiking boots will always cause
an increase in the equilibrium quantity of hiking boots and an increase in their price.
26. _____ A good that uses a large portion of your budget will likely have an elastic demand.
27. ____ An increase in the price of Bob Marley CD’s will cause a decrease in the Demand for Bob Marley CD’s
28. _____ Goods with an elastic supply are likely produced with inputs that are rare or hard to acquire .
29. _____ For a linear (constant slope, straight line) demand curve, demand is more elastic at the top of the
demand curve.
30. ______ Your marginal benefit from a unit is the same as your maximum willingness to pay for that unit.
31. ______ Assume that Zeldin consumes both apples and bananas, and that the current price of apples is $2.00 per
pound, and the price of bananas is $3.00 per pound. Zeldin currently receives marginal utility of 16 from apples and 21
from bananas. In order to increase his total utility Zeldin should purchase more bananas and less apples.