ECON , SPRING 2011 Principles of Microeconomics Mock Exam 2 for Mid-term Exam 2 Instructor: Sung Ick Cho

Transcription

1 ECON , SPRING 2011 Principles of Microeconomics Mock Exam 2 for Mid-term Exam 2 Instructor: Sung Ick Cho 1) If demand is perfectly inelastic, the absolute value of the price elasticity of demand is A) zero. B) less than one. C) more than one. D) equal to the absolute value of the slope of the demand curve. 2) Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a ton to $180 a ton and quantity sold decreased from 800 tons to 240 tons. What is the absolute value of the price elasticity of demand? A) 0.11 B) 0.37 C) 2.69 D) ) Jaycee Jeans sold 40 pairs of jeans at a price of $40. When it lowered its price to $20, the quantity sold increased to 60 pairs. Calculate the absolute value of the price elasticity of demand. Use the midpoint formula. A) 1.67 B) 1.0 C) 0.6 D) 0.53 Figure 6-4

2 4) Refer to Figure 6-4. Which of the following statements is true about the price elasticity of demand? A) The elasticity coefficient is constant along the demand curve. B) The elastic portion of a straight-line downward sloping demand curve corresponds to the segment above the midpoint. C) The inelastic portion of the demand curve corresponds to the segment above the midpoint. D) At the midpoint of the demand curve, the elasticity coefficient is zero. 5) Refer to Figure 6-4. At the midpoint of the demand curve, in absolute value, A) the price elasticity coefficient is at a maximum. B) the price elasticity coefficient is at a minimum. C) the price elasticity coefficient is zero. D) the price elasticity coefficient is one. 6) When demand is unit-elastic, a change in price causes total revenue to stay the same because A) the percentage change in quantity demanded exactly offsets the percentage change in price. B) buyers are buying the same quantity. C) total revenue never changes with price changes. D) the change in profit is offset by the change in production cost.

3 7) Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is A) negative, so Sefton considers potatoes to be an inferior good. B) positive, so Sefton considers potatoes to be an inferior good. C) positive, so Sefton considers potatoes to be a normal good and a necessity. D) negative, so Sefton considers potatoes to be a normal good. Table 9-1 Quantity of Total Utility Quantity of Total Utility Pita Wraps Bubble Tea Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is $6 and the price of a glass of Bubble Tea is $3. Table 9-1 shows his total utility from different quantities of the two items. 8) Refer to Table 9-1. What is Keegan's optimal consumption bundle? A) 3 pita wraps and 3 bubble teas B) 3 pita wraps and 4 bubble teas C) 4 pita wraps and 2 bubble teas D) 5 pita wraps and 0 bubble teas

4 9) Suppose Joe is maximizing total utility within his budget constraint. If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20, then, using the rule of equal marginal utility per dollar spent, the extra satisfaction received from the last shirt must be A) 2,000 units of utility. B) 500 units of utility. C) 100 units of utility. D) 80 units of utility. 10) Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car because A) car buyers are irrational. B) the total utility of less expensive cars is greater than that of luxury cars. C) the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars. D) luxury cars cost a lot more than non-luxury cars. 11) Grace Makutsi finally bought a pair of blue shoes that she had been coveting for a long time. In less than a week she discovered that the shoes were uncomfortable. Grace went back to wearing her old pair and stashed away the new pair. When asked by her boss, Mma Ramotswe why does she not simply give away the new pair, she said: "But I paid so much for them." Grace's behavior A) is rational: she should not discard a valuable item. B) ignores the fact that the purchase price is now a sunk cost and has no bearing on whether she should give them away or not. C) supports the endowment effect which states that ownership of an item makes it more valuable. D) is rational because the more you pay for an item the more valuable it is. 12) Arnold Kim began blogging about Apple products during his fourth year of medical school. Kim's Website, MacRumors.com, became so successful that he decided to give up his medical career and work full time on his Website, despite the

5 nearly $200,000 he had invested in his education. In making his decision, Kim decided to ignore the money and time he spent on his education. Economists would say that Kim made a A) rational decision to ignore these sunk costs. B) poor decision since he had already invested his time and money on his medical career. C) poor decision since doctors are in greater demand than bloggers. D) hasty decision by not waiting to recoup his financial investment before giving up his medical career. 13) If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal product of the fifth worker is A) 2 chairs. B) 3 chairs. C) 4 chairs. D) 38 chairs. Figure ) Refer to Figure Diminishing returns to labor set in A) after L1. B) after L2.

6 C) after L3. D) immediately. 15) Refer to Figure Short run output is maximized at A) L1. B) L2. C) L3. D) insufficient information to determine 16) Average fixed costs of production A) remain constant. B) will rise at a fixed rate as more is produced. C) graph as a U-shaped curve. D) fall as long as output is increased. 17) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output? A) $65 B) $50 C) $15 D) It is impossible to determine without additional information. 18) Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous products. C) sellers are price takers. D) a horizontal demand curve for individual sellers. 19) The price of a seller's product in perfect competition is determined by A) the individual seller. B) a few of the sellers.

7 C) market demand and market supply. D) the individual demander. Figure ) Refer to Figure If the firm is producing 700 units, A) it is making a profit. B) it is making a loss. C) it should cut back its output to maximize profit. D) it should increase its output to maximize profit. 21) Refer to Figure If the firm is producing 200 units, A) it breaks even. B) it is making a loss. C) it should cut back its output to maximize profit. D) it should increase its output to maximize profit. Figure 11-4

8 Figure 11-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. 22) Refer to Figure If the market price is $30, the firm's profit-maximizing output level is A) 0. B) 130. C) 180. D) ) Refer to Figure If the market price is $30, should the firm represented in the diagram continue to stay in business? A) No, it should shut down because it is making a loss. B) No, it should shut down because it cannot cover its variable cost. C) Yes, because it is covering part of its fixed cost. D) Yes, because it is making a profit. Figure 11-6

9 Figure 11-6 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. 24) Refer to Figure At price P2, the firm would A) lose an amount equal to its fixed cost. B) lose an amount more than fixed cost. C) lose an amount less than fixed cost. D) break even. 25) Refer to Figure Identify the short-run shut down point for the firm. A) a B) b C) c D) d