Download MIDTERM EXAMINATION 1

MIDTERM EXAMINATION 1
Intermediate Microeconomics
(ECON 520)
September 13, 2000
Professor D. Weisman
There are two parts to this examination weighted 50 points each. Please write legibly and
think carefully about your answers. You may find that graphical and/or mathematical
analysis will assist you in answering some of these questions. Good Luck!
Part I. Multiple Choice (50 points). Please indicate your choice for the best answer to
each question on the standardized answer sheet provided.
1.
Which of the following is a positive statement?
a.*
A course in microeconomics tends to increase student scores on the law
school admissions test (LSAT).
b.
College football coaches should not be paid more than economics
professors.
c.
Smoking should be restricted on all airline flights.
d.
Requiring all students to take at least one semester of Calculus is a bad
idea.
e.
None of the above.
2.
MBA applications tends to increase during downturns in the economy because
a.
the opportunity cost of earning an MBA is lower during these times.
b.
there are fewer high paying jobs available during these times.
c.
tuition expenses are lower during economic downturns.
d.
student loans are plentiful during economic downturns.
e.*
a and b.
3.
An increase in the price of raw materials for producing automobiles will likely
result in
a.
a decrease in the equilibrium price of automobiles.
b.*
an increase in the equilibrium price of automobiles.
c.
no change in the equilibrium quantity of automobiles.
d.
an increase in the equilibrium quantity of automobiles.
e.
a and c.
Use the following information to answer the next four questions:
The demand for books is:
The supply of books is:
4.
QD = 100 – 2P
QS = 2P
What is the equilibrium price of books?
a.
5
b.
c.*
d.
e.
10
25
20
none of the above.
5.
What is the equilibrium quantity of books sold?
a.
25
b.*
50
c.
40
d.
100
e.
none of the above
6.
The price elasticity of demand at the market equilibrium is
a.
inelastic.
b.
elastic.
c.*
unitary elastic.
d.
inferior.
e.
none of the above.
7.
What is consumers’ surplus if the government imposes a maximum price of 10?
a.
800
b.*
700
c.
900
d.
600
e.
none of the above.
8.
In class, we discussed a recent article that suggests cocaine and marijuana are
complements. If the equilibrium price of cocaine were to fall, the equilibrium
price of marijuana would tend
a.*
rise.
b
fall.
c.
remain unchanged.
d.
b or c.
e.
none of the above.
9.
A business firm faces a demand curve for its product that is given by Q = 24-2P.
What price should this firm charge to maximize revenue?
a.
24.
b.
12.
c.*
6.
d.
48.
e.
none of the above.
10.
The price elasticity of demand is –2. If the price is increased by 10 percent, then
quantity demanded will
a.
increase by 10 percent.
2
b.
c.
d.*
e.
11.
decrease by 10 percent.
increase by 20 percent.
decrease by 20 percent
none of the above.
The own price elasticity of apples is –0.8 and the cross elasticity of apples with
respect to the price of oranges is 0.5. Suppose that the price of apples rises by 10
percent and the price of oranges falls by 4 percent. What will happen to apple
demand?
a.
a 10 percent increase.
b.*
a 10 percent decrease.
c.
a 16 percent increase.
d.
a 5 percent increase.
e.
none of the above.
Use the following information to answer the next 3 questions. The demand for Product 1
is given by Q1 = 60 - 4P1 + 2I + 1P2, where Q1 is the demand for Product 1, P1 is the price
of Product 1, I is income and P2 is the price of Product 2.
12.
Product 1 and product 2 are
a.*
substitutes.
b.
complements.
c.
independent goods.
d.
none of the above.
13.
What is the price elasticity for Product 1 when P1 = 20, P2 = 20 and I = 100.
a.*
-0.4
b.
-2.
c.
-1.
d
-2.5.
e.
none of the above.
14.
What is the income elasticity when P1 = 20, P2 = 20 and I = 100.
a.
0.5.
b.*
1.
c.
2.
d.
4.
e.
none of the above.
15.
You set a price of 10 for your product and realize 200 in revenue. Determine the
demand function that is consistent with this information.
a.
Q = 200P-1.
b.
Q = 100P-1.
c.
Q = 20 - P.
d.
Q = 30 - P.
e.*
a. and d.
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Part II. Problems (50 points). There are two questions and each is worth 25 points.
Show all of your work to receive partial credit. Write legibly and be precise with your
answers.
1.
Analysis of Demand.
a) Two points on a demand curve are P1 = 4, Q1 = 16 and P2 = 12, Q2 = 0. Find the
equation of the linear demand curve: QD = a – bP, where a and b are constants?
b) Construct a graph for the demand function you derived in part a).
c) What is the price that will maximize revenue? What is the price elasticity of
demand at this price?
d) What price will generate consumers’ surplus equal to 16?
2.
Let the demand function for Firestone tires be given by QF = 24 – 2PF + 1q, where
QF and PF are the quantity and price of Firestone tires, respectively, and q is a
quality index for Firestone tires.
a) Graph the demand function for Firestone tires. Make sure that you clearly
indicate the vertical and horizontal intercepts for the demand function.
b) Let the supply function for Firestone tires be given by QF = 2PF- S, where S is
the number of Firestone plants shutdown by the government due to concerns
about tire quality. Derive an expression for the equilibrium price and quantity
of Firestone tires.
c) Using your results from part b), determine how quality changes affect the
equilibrium price? Determine how an increase in the number of plants
shutdown affects the equilibrium price? Provide the economic intuition for your
findings.
d) Would Goodyear tire likely favor or oppose an increase in S? Provide the
economic intuition for your answer.
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