Download Question #1-#3 are based on the following diagram

UNIVERSITY OF HAWAII AT MANOA
DEPARTMENT OF ECONOMICS
ECON 130 (003): PRINCIPLES OF ECONOMICS (MICRO)
Spring 2003
Professor Russo
Second Mid-term Examination
Thursday, April 10, 2003
Time: 12:00-1:15 AM
Room: SPAL 155
60 MULTIPLE CHOICE QUESTIONS
SELECT THE BEST ANSWER
ONLY ONE CORRECT ANSWER PER QUESTION
ANSWER ALL QUESTIONS
NO PENALTY FOR GUESSING
Signature________________
Name___________________
SSN____________________
Question #1-#3 are based on the following diagram.
1 In the figure above, an optimizing consumer is most likely to select the consumption
bundle associated with
a. point A
b. point B
c. point C
d. point D
e. point E
2 It may be possible for the consumer to reach I2 if
a. the price of Y decreases.
b. the price of X decreases.
c. income increases.
d. All of the above would be correct.
e. None of above would be correct.
3 A consumer is currently consuming some of good X and some of good Y. If good Y is a
normal good for this consumer, a rise in consumer income will cause
a. an increase in the consumption of X.
b. a decrease in the consumption of Y.
c. an increase in the consumption of Y.
d. a decrease in the consumption of X..
e. a decrease in both X and Y.
1
4 A good is considered a normal good when
a. an increase in income decreases consumption of the good.
b. the average consumer chooses to consume the good over other similar goods.
c. an increase in income increases consumption of the good.
d. an decrease in income increases consumption of the good.
e. the average consumer chooses to consume this good at a level consistent with most
other goods.
5 A good is defined as an inferior good when
a. the average consumer does not generally choose to consume this good.
b. an increase in income decreases consumption of the good.
c. an increase in income increases consumption of the good.
d. the good is not equally valued by all consumers.
e. an decrease in income decreases consumption of the good.
6 Which of the commodities below is most likely to be categorized as an inferior good?
a. antique house furniture
b. automobile fuel
c. a used car
d. airline travel
e. computer software
7 When the price of a good decreases, ceteris paribus, the lower price
a. generally encourages the consumption of inferior goods.
b. leads to a parallel shift of the linear budget constraint.
c. will necessarily lead to a decrease in the consumption of goods whose price did not
change.
d. expands the consumer's set of buying opportunities.
e. a loss in well-being since they can no longer purchase the same bundle that they had
previously.
2
Question #8-#10 are based on the following diagram.
8 Assume that the consumer depicted in the graph has an income of $10. The price of
Skittles is $1 and the price of M&M’s is $2. This consumer will choose a consumption
bundle where the marginal rate of substitution is
a. 2.
b. 2/3.
c. 3/2.
d. 1/3.
e. 1/2.
9 Assume that the consumer depicted in the graph has an income of $10. The price of
Skittles is $1 and the price of M&M’s is $2. This consumer will choose to optimize by
consuming
a. bundle A.
b. bundle B.
c. bundle C.
d. bundle D.
e. none of above.
10 Assume that the consumer depicted in the graph faces prices and income such that she
optimizes at point A. According to the graph, what change allows the consumer to move
to point B?
a. a decrease in the price of M&M’s.
b. an increase in the price of M&M’s.
c. an increase in the price of Skittles.
d. a decrease in the price of Skittles.
e. a decrease in the consumer’s income.
3
Use the following information to answer questions 11 and 12.
Joe wants to start his own business. The business he wants to start will require that he
purchase a factory that costs $300,000. He is planning to use $100,000 of his own money,
and borrow an additional $200,000 to finance the factory purchase. Assume the relevant
interest rate is 10 percent.
11 What is the explicit cost of purchasing the factory for the first year of operation?
a. $10,000
b. $20,000
c. $25,000
d. $30,000
e. $40,000
12 What is the opportunity cost of purchasing the factory for the first year of operation?
a. $10,000
b. $20,000
c. $25,000
d. $30,000
e. $40,000
13 When a factory is operating in the short run,
a. total cost and variable cost are usually the same.
b. average fixed cost rises as output increases.
c. it cannot adjust the quantity of fixed inputs.
d. it cannot alter variable costs
e. fixed cost rises as output increases.
14 In the long run,
a. all inputs are considered to be variable.
b. variable inputs change to fixed inputs.
c. some inputs, such as plant and machinery, remain fixed.
d. variable inputs are rarely used.
e. average fixed cost and total fixed cost are the same.
4
The set of lines below reflect information about the cost structure of a firm in the short run.
Use the figure to answer questions 15 through 18.
15 Which of the lines is most likely to represent average variable cost?
a. A
b. B
c. C
d. D
e. None of above
16 Which of the lines is most likely to represent marginal cost?
a. A
b. B
c. C
d. D
e. None of above
17 This particular firm is necessarily experiencing diminishing marginal product when
(i) line A is rising.
(ii) line B is rising.
(iii) line C is rising.
a. (i) only
b. (iii) only
c. (i) and (ii)
d. all of the above
e. none of above
18 Line A is necessarily U-shaped because of
a. diminishing marginal product.
b. increasing marginal product.
c. the fact that decreasing marginal product follows increasing marginal product.
d. the fact that increasing marginal product follows decreasing marginal product.
e. none of above is correct.
5
The figure below depicts a production function for a firm that produces cookies. Use the
figure to answer questions 19 through 21.
19 As the number of workers increases,
a. marginal product increases, but at a decreasing rate.
b. total output increases, but at a decreasing rate.
c. marginal product increases.
d. total output decreases.
e. (b) and (c) are the corrects answers.
20 With regard to cookie production, the figure implies
a. decreasing cost of cookie production.
b. increasing marginal product of workers.
c. diminishing marginal product of workers.
d. diminishing marginal cost of cookie production.
e. constant return to scales of cookie production.
21 The slope of the total product curve reveals information about the
a. average product of workers.
b. Average total product of workers.
c. total product of workers.
d. fixed product of workers.
e. marginal product of workers.
6
Use the following information to answer questions 22 through 25.
Teacher's Helper is a small company that has a subcontract to produce instructional materials
for disabled children in public school districts. The owner rents several small rooms in an
office building in the suburbs for $600 a month and has leased computer equipment that costs
$480 a month.
Output
(Instructional
Modules per
month)
0
1
2
3
4
5
6
7
8
9
10
Fixed
Cost
1,080
1,080
Variable
Cost
Total
Cost
400
1,480
1,350
1,900
2,500
2,430
Average
Fixed Cost
------
Average
Variable
Cost
------
Average
Total Cost
Marginal
Cost
------
-----400
450
965
475
216
4,280
700
4,100
5,400
7,300
135
10,880
980
22 What is the marginal cost of creating the tenth instructional module in a given month?
a. $108
b. $155
c. $1,080
d. $1,500
e. $2,500
23 What is the average variable cost for the month if 6 instructional modules are produced?
a. $180.00
b. $533.33
c. $700.00
d. $713.33
e. $780.00
24 What is the average fixed cost for the month if 10 instructional modules are produced?
a. $108
b. $250
c. $980
d. $1,080
e. $1,250
25 One month, Teacher's Helper produced 18 instructional modules. What was the average
fixed cost for that month?
a. Can't tell from the information given.
b. 60
c. 80
d. 108
e. 811
7
26 If the total cost function is given by: Total Cost = 60Q – 12Q2 + Q3, then the total fixed
cost is
a. 60
b. 12
c. 0
d. 60Q
e. 60Q – 12Q2
27 If the total cost function is given by: Total Cost = 50 + 111Q – 7Q2 + (1/3)Q3, then the
average variable cost is
a. 50
b. 50 + 111Q
c. 50 + 111Q – 7Q2
d. 50/Q + 111 – 7Q + (1/3)Q2
e. 111 – 7Q + (1/3)Q2
28 The cost to produce an additional unit of output is the firm’s
a. variable cost.
b. average variable cost.
c. marginal cost.
d. productivity offset.
e. total cost
29 Average total cost equals
a. change in total costs / change in quantity produced.
b. (fixed costs + variable costs) / change in quantity produced.
c. change in total costs / quantity produced.
d. (fixed costs + variable costs) / quantity produced.
e. fixed costs / quantity produced.
8
Use the information for a competitive firm in the table below to answer questions 30 through
32.
Quantity
Total Revenue
Total Cost
0
$0
$ 10
1
9
14
2
18
19
3
27
25
4
36
32
5
45
40
6
54
49
7
63
59
8
72
70
9
81
82
30 At which level of production is average revenue equal to marginal cost?
a. 1.
b. 3.
c. 5.
d. 6.
e. 8.
31 If this firm chooses to maximize profit it will choose a level of output where marginal
cost is equal to
a. 5.
b. 7.
c. 8.
d. 9.
e. 11.
32 The maximum profit available to this firm is
a. $2.
b. $3.
c. $4.
d. $5.
e. $6
9
The graph below depicts the cost structure for a firm in a competitive market. Use the graph
to answer questions 33.
33 When market price is at MC2, a firm producing output level Q2 would experience
a. profits equal to (MC2 - MC1)  Q2.
b. zero profits.
c. losses equal to (MC2 - MC1)  Q2.
d. losses because P < ATC.
e. profits equal to (MC3 - MC1)  Q2.
34 A firm's short-run supply curve is part of which of the following curves?
a. marginal cost
b. average variable cost
c. marginal revenue
d. average total cost
e. average fixed cost
35 Which of the following statements are most likely to be true for the air transportation
industry?
(i) In the short-run, the cost of the airplane is sunk.
(ii) The opportunity cost of a flight is the variable cost.
(iii) As long as total revenue exceeds fixed cost, the airlines should continue operating.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. All above statements are true.
e. All above statements are false.
10
The figure below depicts the cost structure of a firm in a competitive market. Use the figure
to answer questions 36 through 38.
36 When market price is P1, a profit maximizing firm's total revenue can be represented by
the area
a. P3  Q2.
b. P1  Q3.
c. P1  Q2.
d. P2  Q2.
e. P2  Q4
37 When market price is P4, a profit maximizing firm's total cost can be represented by the
area
a. P4  Q1
b. P1  Q4
c. P4  Q4
d. P2  Q4
e. Total costs cannot be determined from the information in the figure.
38 When market price is P1, a profit maximizing firm's total profit or loss can be represented
by which area?
a. (P3 - P1)  Q2; loss
b. P1  Q3; profit
c. (P2 - P1)  Q1; loss
d. (P2 - P1)  Q1; profit
e. We can't tell because we don’t know fixed costs.
11
Use the information in the table below to answer questions 5 through 8.
Quantity
Price
1
13
2
13
3
13
4
13
5
13
6
13
7
13
8
13
9
13
39 The price and quantity relationship in the table is most likely that faced by a firm in a
a. monopoly.
b. concentrated market.
c. strategic market.
d. competitive market.
e. None of above
40 Over which range of output is average revenue equal to price?
a. 1 to 5
b. 3 to 7
c. 3 to 6
d. 5 to 9
e. average revenue is equal to price over the whole range of output.
41 Over what range of output is marginal revenue declining?
a. None; marginal revenue is constant over the whole range of output.
b. 1 to 6
c. 1 to 3
d. 3 to 7
e. 7 to 9
12
Use the following information to answer questions 42 through 44
As part of an estate settlement Mary received $1 million. She decided to use the money to
purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in
a risk free bond fund she could have made $100,000 each year. She also quit her job with
Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc.
was $75,000 per year.
42 At the end of the first year of operating her new business, Mary’s accountant reported an
accounting profit of $150,000. What was Mary's economic profit?
a. $25,000 profit
b. $150,000 profit
c. $50,000 profit
d. $25,000 loss
e. $50,000 loss
43 What are Mary's opportunity costs of operating her new business?
a. $25,000
b. $75,000
c. $100,000
d. $150,000
e. $175,000
44 How large would Mary's accounting profits need to be to allow her to reach the zero
economic profit equilibrium?
a. $125,000
b. $150,000
c. $175,000
d. $200,000
e. $275,000
13
Use the figures below to answer questions 45 through 48.
45 When the market is in long-run equilibrium at point A in panel (b), the firm represented
in panel (a) will
a. exit the market.
b. be at zero-profit equilibrium.
c. earn negative accounting profit.
d. all of the above
e. none of the above
46 Assume that the market starts in equilibrium at point A in panel (b). An increase in
demand from Demand0 to Demand1 will result in
a. a new market equilibrium at point D.
b. a new market equilibrium at point C.
c. rising prices and falling profits for existing firms in the market.
d. falling prices and falling profits for existing firms in the market.
e. an eventual increase in the number of firms in the market and a new long-run
equilibrium at point C.
47 If the market starts in equilibrium at point C in panel (b), a decrease in demand will
ultimately lead to
a. more firms in the industry, but lower levels of production for each firm.
b. a new long-run equilibrium at point D in panel (b).
c. fewer firms in the market.
d. all of the above
e. none of the above.
48 When a firm in a competitive market, like the one depicted in panel (a), observes market
price rising from P1 to P2, it is most likely the result of
a. an increase in market supply from Supply0 to Supply1.
b. an increase in market demand from Demand0 to Demand1.
c. entrance of new firms into the market.
d. the exit of existing firms in the market.
e. all of the above.
14
Use the figures below to answer questions 49 through 51
49 Assume that the consumer depicted in the graph has an income of $50 and currently
optimizes at point A. When the price of marshmallows decreases to $2.50, the
optimizing consumer will choose to purchase how many units of marshmallows?
a. 4
b. 8
c. 16
d. 20
e. 24
50 Assume that the consumer depicted in the graph has an income of $100. If the price of
chocolate chips is $5.00, the optimizing consumer would choose to purchase
a. 13 marshmallows and 7 chocolate chips.
b. 10 marshmallows and 10 chocolate chips.
c. 8 marshmallows and 12 chocolate chips.
d. 6 marshmallows and 14 chocolate chips.
e. 9 marshmallows and 10 chocolate chips.
51 Assume that the consumer depicted in the graph has an income of $50. Using the
information above, which of the following price-quantity combinations would be on her
demand curve for marshmallows if the price of chocolate chips is $5?
a. $5, 8
b. $5, 4
c. $2.50, 2
d. $2.50, 8
e. $2.50, 4
15
Question #52-#53 refer to the following diagram
$/Q
B
A
PM
F
E
G
LRS:
LMC=LATC
PC
H
J
K
D
0
QM
QC
MR
Q
52 If this is a monopoly market, then the gross social benefits are equal to
a. A+B+E+F
b. A+B+E+F+H
c. A+B+E+F+G
d. A+B+E+F+G+H
e. A+B+E+F+G+H+J+K
53 If this is a competitive market, then the gross social benefits are equal to
a. A+B+E+F
b. A+B+E+F+H
c. A+B+E+F+G
d. A+B+E+F+G+H
e. A+B+E+F+G+H+J+K
16
Quantity of Good y
U1
U0
A
C
B
U1
U0
xA
xC
xB
Quantity of Good x
54 Consider the diagram above. The consumer’s initial position is A. After the decline in the
price of good x, the consumer selects consumption bundle B. From the graphical
decomposition of the price effect, we can conclude that:
a. Good x is a normal good over the relevant range and that the substitution effect and
income effect reinforce each other. Therefore, the ordinary demand curve for good x
is downward sloping.
b. Good x is an inferior good over the relevant range and that the income effect only
partially offsets the substitution effect. Therefore, the ordinary demand curve for
good x is downward sloping.
c. Good x is an inferior good over the relevant range and that the income effect
completely overwhelms the substitution effect. Therefore, the ordinary demand curve
for good x is upward sloping, over the relevant range.
d. Good x is Giffen good.
e. Both answers (c) and (d) are correct.
17
Quantity of Good y
U1
U0
B
U1
A
C
U0
x A x B xC
Quantity of Good x
55 Consider the diagram above. The consumer’s initial position is A. After the decline in the
price of good x, the consumer selects consumption bundle B. From the graphical
decomposition of the price effect, we can conclude that:
a. Good x is a normal good over the relevant range and that the substitution effect and
income effect reinforce each other. Therefore, the ordinary demand curve for good x
is downward sloping.
b. Good x is an inferior good over the relevant range and that the income effect only
partially offsets the substitution effect. Therefore, the ordinary demand curve for
good x is downward sloping.
c. Good x is an inferior good over the relevant range and that the income effect
completely overwhelms the substitution effect. Therefore, the ordinary demand curve
for good x is upward sloping, over the relevant range.
d. Good x is Giffen good.
e. Both answers (c) and (d) are correct.
18
Quantity of Good y
B
A
C
xB
xA
xC
Quantity of Good x
56 Consider the diagram above. The consumer’s initial position is A. After the decline in the
price of good x, the consumer selects consumption bundle B. From the graphical
decomposition of the price effect, we can conclude that:
a. Good x is a normal good over the relevant range and that the substitution effect and
income effect reinforce each other. Therefore, the ordinary demand curve for good x
is downward sloping.
b. Good x is an inferior good over the relevant range and that the income effect only
partially offsets the substitution effect. Therefore, the ordinary demand curve for
good x is downward sloping.
c. Good x is an inferior good over the relevant range and that the income effect
completely overwhelms the substitution effect. Therefore, the ordinary demand curve
for good x is upward sloping, over the relevant range.
d. Good x is Giffen good.
e. Both answers (c) and (d) are correct.
19
57 For a profit maximizing monopolist
a. P = MR = MC.
b. P > MR > MC.
c. P > MR = MC.
d. P > MR < MC.
e. P = MR > MC.
58 For a non-discrimination monopolist, profit is determined by which of the following
equations?
a. Profit = Total Revenue - Total Cost
b. Profit = (TR/Q - TC/Q) x Q
c. Profit = (Price - Average Total Cost) x Quantity
d. all of the above
e. none of above
59 A profit maximizing firm's short-run shut down criterion is
a. Average Revenue > Marginal Cost.
b. Price < Average Variable Cost.
c. Price < Average Total Cost.
d. Average Revenue > Average Fixed Cost.
e. Average Revenue > Average Variable Cost.
60 In the long run all of a firm's costs are variable. In this case the exit criterion for a profitmaximizing firm is
a. Average Revenue > Marginal Cost.
b. Average Revenue < Marginal Cost
c. Price > Average Total Cost.
d. Average Revenue > Average Fixed Cost.
e. Price < Average Total Cost.
20