Study Questions for ECON 101 Midterm Exam II-(Fall 2015/2016) Multiple Choice Questions Assuming that the price of cola is $1 each, and burgers cost $2 each fill the table below. Then, answer the following two questions according to the table. Number of Colas Total Utility MUc MU / $ Number of Burgers Total Utility 1 6 1 10 2 10 2 14 3 13 3 15 4 15 4 15 5 16 5 7 MUb MU / $ 1 - ) Which of the two goods demonstrates the law of diminishing marginal utility? a. Cola only. b. Burgers only. c. Both cola and burgers. d. Neither cola nor burgers. 2 - ) If the consumer has only $8 to spend, what would be the optimal consumption of both goods for this consumer? a. 4 colas and 2 burgers. b. 5 colas and 1 burger. c. 2 colas and 3 burgers. d. 4 colas and 4 burgers.
3 - ) If MUa / Pa=1.5 and MUb / Pb=3 for a consumer who is spending her entire budget, then to maximize utility she should a. buy more of product A and less of product B. b. buy more of product B and less of product A. c. not change her situation. d. None of the above. 4 - ) A fall in the price of Pepsi that causes a household to shift its purchasing pattern away from substitutes and toward Pepsi is the a. income effect of a price change. b. substitution effect of a price change. c. complementary effect of a price change. d. diminishing marginal utility effect of a price change. 5 - ) Assume leisure is a normal good. The substitution effect of a wage decrease implies a demand for leisure and a labor supply. a. lower; higher b. higher; lower c. higher; higher d. lower; lower 6 - ) Economic costs a. include both a normal rate of return on investment and the opportunity cost of each factor of production. b. are equal to the direct costs of hiring all factors of production. c. are the opportunity cost of each factor of production minus any interest charges paid on borrowed funds. d. are equal to total revenue minus accounting profit.
7 - ) The explanation for why marginal cost is positive and rising in the short run is marginal product of labor in the production process. a. a zero b. a constant c. an increasing d. a diminishing 8- ) The information a firm needs to know with the objective of maximizing profit includes: a. The market price of the output b. The techniques of production that are available c. The prices of inputs d. All of the above 9 - ) Firms that are earning zero economic profits are a. breaking even b. shutting down in the long run c. earning less than a normal rate of return d. shutting down in the short run 10 - ) In the long run, a firm a. can vary all inputs, but it cannot change the mix of inputs it uses b. has no fixed factors of production c. can shut down, but it cannot exit the industry d. must make positive economic profits 11 - )If marginal product is greater than average product, then a. average product must be decreasing. b. marginal product must be decreasing. c. marginal product must be increasing. d. marginal product could either be increasing or decreasing.
Table 1 Inputs Required to Produce a Product Using Alternative Technologies 12 - ) Refer to Table 1. Which technology is the most capital intensive? a. A b. B c. C d. D 13- ) Refer to Table 1. If the hourly wage rate is $10 and the hourly price of capital is $50, which production technology should be selected? a. A b. B c. C d. D 14 - ) A factory produces 1,000 radios a year. Average variable cost (AVC) is $10 and total fixed cost is $5,000. Thus, the factory s total cost (TC) a. Equals $5,010. b. Equals $6000 c. Equals $15000 d. Equals $5,000,000 15 - ) A characteristic of perfect competition is that a. It is difficult for new firms to enter the industry b. The firm can influence the product s price c. The firms in the industry produce a homogenous product d. The firm produces a large share of the industry s total product 16 - ) In perfect competition, the marginal revenue curve a. and the demand curve facing the firm are identical. b. is always above the demand curve facing the firm. c. is always below the demand curve facing the firm.
d. intersects the demand curve when marginal revenue is minimized. 17 - )Refer to the Table below. Assume that fruit baskets are sold in a perfectly competitive market. The market price of a fruit basket is $22. To maximize profits, Exotic Fruit should sell fruit basket(s). a. Three b. Four c. Five d. Six 18 - ) If a firm's demand curve is perfectly elastic, then at the profit maximizing level of output a. P = MR = MC. b. P > MR > MC. c. P < MR < MC. d. P > 0 and MR = 0.
Essay Questions 1 - ) What is the key differentiation between the short run and the long run for the profitmaximizing firm?. 2 - ) The table presented below gives a hypothetical total utility schedule for Ali. Calculate Ali s marginal utility schedule and explain the relationship between total utility and marginal utility. Number of Apples Total Utility Marginal Utility 0 0-1 100 2 200 3 275 4 325 5 350 6 360 7 360 8 350 3 - ) Refer to the chart below to answer the following questions. Output TFC TVC MC P=MR TR TC ATC 0 $25 0-20 - 1 10 20 2 15 20 3 25 20 4 45 20 5 75 20 a) Complete the blank columns. b) How many unit of output firm will sell to maximize its profit? How much profit will it make?
c) Calculate AVC and AFC when output is 4 units. d) Suppose the market price falls to $10 per unit of output. At this price, how many units of output will the firm sell? 4 - ) Suppose that Leyla s monthly income is 200 $/month and she spends her income on two goods: Entertainment and books. The price of entertainment is Pe=$20 and price of books Pb=$10. Answer the following questions. a. Suppose she spends all her money on these two goods. Sketch her budget constraint. Show at least 4 points on this constraint which are attainable (Put books on the horizontal axis). b. Last month she went to entertainment 5 times and bought 10 units of books. Is this attainable for her? Show it on the figure you sketched in a. c. Suppose the price of entertainment increased to $25. Sketch her new budget line. Can you tell from this information how she could allocate her budget between the two goods in order to maximize her utility? d. Suppose that Leyla s income doubled. Show her new budget line on a separate graph.
5 ) The number of repairs produced by a computer retail shop depends on the number of workers as follows: Number of Workers Number of Repair Marginal Product Average Product 0 0-1 8 2 20 3 35 4 45 5 52 6 57 7 60 a. For what range of labor input are there increasing returns to labor? b. For what range of labor input is marginal product greater than average product? What is happening to average product as employment increases over this range? c. For what range of labor input is marginal product smaller than average product? What is happening to average product as employment increases over this range?