Economics 200 Mid-term
Examination
Fall 2001, Professor Steven
C. Hackett
Name:
___________KEY__________________
Please
provide the best answer to each of the questions below. To get full credit you
must write legibly, show the steps in your computations, and have the correct
answer.
Part
I: Please match the word or phrase on the left with the description on the
right. Each correct match is worth 3 points.
|
Word
or Phrase |
Match |
Description |
|
A.
Scarcity |
Q |
It
is assumed that consumers seek to maximize this, subject to their budget
constraint. |
|
B.
Entrepreneurship |
H |
Defined
as the accumulation of capital, such as factories and machines, used to
produce goods and services. |
|
C.
Ceteris paribus |
K |
This
happens to demand when the price of a consumption substitute rises. |
|
D.
Normative economics |
S |
This
is the change in total cost when one additional unit of output is produced. |
|
E.
Direct relationship |
P |
States
that eventually marginal product will become smaller as more of a variable
factor is added to a fixed factor. |
|
F.
Opportunity cost |
J |
This
happens to current demand when consumers anticipate lower prices in the
future. |
|
G.
Law of increasing opportunity cost |
M |
When
income falls, the demand for these goods rises. |
|
H.
Investment |
N |
A
store will experience this if it raises prices on goods with inelastic
demand. |
|
I.
Inward shift in supply |
E |
This
exists when variable "x" and variable "y" move in the
same direction, as with a supply curve. |
|
J.
Demand decreases |
L |
Examples
include vacations, new cars, and brand name products; NOT day-old bakery
goods, generic products, or dilapidated apartments. |
|
K.
Demand increases |
G |
The
production-possibilities curve is bowed outwards from the origin because of
this. |
|
L.
Normal goods |
R |
In
theory this is the same number for the last unit of each good consumed in a
consumer equilibrium. |
|
M.
Inferior goods |
|
|
|
N.
Rising revenues |
|
|
|
O.
Falling revenues |
|
|
|
P.
Law of diminishing returns |
|
|
|
Q.
Utility |
|
|
|
R.
(Marginal utility)/price |
|
|
|
S.
Marginal cost |
|
|
|
T.
Average variable cost |
|
|
Part
II. Analysis. Each question is worth 4 points.
Use
the following table for questions 1 and 2 below. Suppose that the table below
displays your nephew Zack's utility for rides at the Santa Cruz boardwalk. Zack
has $48 to spend. The Ferris wheel costs $3 per ride, while the others cost $6
per ride.
|
Number
of Rides |
Water
Slide |
Ferris
Wheel |
Haunted
House |
Roller
Coaster |
||||
|
--- |
Total Utility |
MU/P |
Total Utility |
MU/P |
Total Utility |
MU/P |
Total Utility |
MU/P |
|
0 |
0 |
--- |
0 |
--- |
0 |
--- |
0 |
--- |
|
1 |
72 |
12 |
18 |
6 |
84 |
14 |
54 |
9 |
|
2 |
138 |
11 |
33 |
5 |
162 |
13 |
102 |
8 |
|
3 |
198 |
10 |
45 |
4 |
234 |
12 |
144 |
7 |
|
4 |
252 |
9 |
54 |
|
300 |
11 |
180 |
6 |
|
5 |
300 |
8 |
60 |
|
360 |
10 |
210 |
5 |
|
6 |
336 |
6 |
63 |
|
414 |
9 |
234 |
4 |
|
7 |
345 |
|
65 |
|
390 |
4 |
252 |
|
|
8 |
240 |
|
66 |
|
300 |
|
264 |
|
|
9 |
30 |
|
66 |
|
180 |
|
270 |
|
1.
His mom (your sister Maxine), who might have taken an economics class at Chico
State, looked at this information and said that Zack's consumer equilibrium
would be to take the haunted house ride all eight times because it would give
him the highest total utility (300).
a.
What is the maximum total utility that Zack can get from his $48 -- is Maxine
right (show your work)?
==> Maxine is wrong.
b.
How many of each ride will Zack take in his consumer equilibrium (show your
work)?
See work above. 5 haunted house rides and 3 water slide rides.
2.
How will this consumer equilibrium be changed if the price of the Ferris wheel
is increased from $3 to $4?
Even when the Ferris wheel ride was only $3, the marginal
utility per dollar spent (MU/P) was still too low to ever ride the Ferris wheel
even once. Thus when the price of the ride increased, that would not change
Zack's consumer equilibrium because he certainly will not ride it if its price
went up if he didn't when it was still only $3.
Use
the following information for the next two questions. When Leticia's income
rose from $60,000 to $80,000, her consumption of good "A" increased
from 20 to 50, her consumption of good "B" decreased from 60 to 30,
and her consumption of good "C" increased from 30 to 33.
3.
Compute the income elasticity of demand for each of the three goods (show your
work):
Ei
(good "A") = _____3_______ Ei (good
"B") = _____-2.34_______
Ei
(good "C") = _____0.33_______
Example of how to compute income elasticities above:
Ei (good "A") = (% change in QD)/(% change in income) = 30/35 divided by
20,000/70,000 = 0.857/0.286 = 3.
4.
Suppose that you knew that one good was loaves per year of day-old
generic-brand bread, one good was annual number of fine dining experiences at
Leticia's favorite restaurant, and one good was weekly kilowatt-hours of
electricity. Based on the correct answer to question 3 and the nature of these
goods, match the following with letters "A", "B", or
"C":
__B___Loaves per year of day-old generic-brand
bread
__A___Annual number of fine-dining experiences
at Leticia's favorite restaurant
__C___Weekly kilowatt-hours of electricity
Note that "B" is an inferior good, "A" is a
luxury good, and "C" is a necessity, based on the elasticities
calculated in #3.
Use
the following production information for the next three questions. Assume that
labor is paid $100 per day, and that the only other cost is $200 in fixed cost.
|
Daily
Labor Input |
Total
Pages of Text Typed |
Marginal
Product of Labor |
Total
Cost Per Day |
Marginal
Cost |
|
0 |
0 |
--- |
200 |
--- |
|
1 |
40 |
((40-0)/(1-0))=40 |
300 |
(100/40) =
2.50 |
|
2 |
75 |
((75-40)/(2-1))=35 |
400 |
(100/35) =
2.86 |
|
3 |
105 |
((105-75)/(3-2))=30 |
500 |
(100/30) =
3.33 |
|
4 |
130 |
((130-105)/(4-3))=25 |
600 |
(100/25) =
4.00 |
|
5 |
150 |
((150-130)/(5-4))=20 |
700 |
(100/20) =
5.00 |
|
6 |
165 |
((165-150)/(6-5))=15 |
800 |
(100/15) = 6.67 |
5.
Correctly fill in the remainder of the table.
Note: Marginal product is the change in total output (typed
pages) divided by the change in labor. Marginal cost is the change in total
cost divided by the change in output (typed pages).
6.
Does this example illustrate the law of diminishing returns? Briefly explain.
Yes, because marginal product is declining as more and more
labor is added to the production process.
Part
III. Multiple Choice. Each question is worth 4 points.
1.
Which of the following is true about renewable natural resources?
a. They are a type of land resource such as forests, rangelands,
and marine fisheries that naturally regenerate and thus can tolerate a
sustained harvest, but can be depleted from excessive harvest.
b.
They are a type of land resource such as oil, coal, and natural gas that has a
fixed stock.
c.
They are a type of capital resource such as irrigation networks and wastewater
treatment plants that utilize water.
d.
They are a type of capital resource such as air filtration systems in buildings
that renew and refresh polluted air from the outside.
2.
If a production possibilities curve (PPC) has capital on the horizontal axis
and consumer goods on the vertical axis, then which of the following is true?
a.
There is a tradeoff between emphasizing the production of capital today to
benefit people today versus emphasizing the production of consumer goods today
that will generate benefits in the future. (No, prod.
of capital today benefits people in the future, and prod. of consumption goods today
benefits people today)
b.
Greater emphasis on the production of capital today leads to inward shifts in
the PPC, thus decreasing the wealth of people in the future.
c.
Greater emphasis on the production of consumer goods today leads to greater
outward shifts in the PPC, thus increasing the wealth of people in the future.
d. Greater emphasis on the production of capital today leads to
greater outward shifts in the PPC, thus increasing the wealth of people in the
future.
3.
Suppose that each of the 10 members of the Yahoo County Over-90 Singles Club
buys two bowls of lime jello each week at Denny's when each bowl is $1, but
each will buy a third bowl of lime jello per week when Denny's puts jello on
sale for 75 cents. If these folks are the entire market for lime jello, then
which of the following is the correct value for market quantity demanded of
lime jello at a price of $1?
a.
2.
b.
10.
c. 20.
d.
30.
4.
A surplus (excess supply) occurs when:
a.
Demand increases.
b.
Price is below the equilibrium, such as when there is a price ceiling.
c.
Price is at the equilibrium.
d. Price is above the equilibrium, such as when there is a price
floor.
5.
Which of the following is most likely to decrease supply in the market for
pizza?
a.
Cheese prices drop because price supports for dairy farmers are removed. (this would increase supply by reducing costs)
b. Pizza shop employees successfully organize a union and
negotiate a pay increase.
c.
The Surgeon General announces that eating pizza reduces the incidence of
stomach cancer. (this affects demand)
d.
Some hot sandwich shops can also produce pizzas, and consumer demand for hot
sandwiches declines sharply, reducing the profitability of producing hot
sandwiches. (this would increase supply of pizza by
causing sub shops to switch to pizza production)
6.
If the cost of producing a good falls for sellers, then how will this affect
the market equilibrium for that good?
a.
Price will rise and quantity will fall.
b. Price will fall and quantity will rise. (because the supply
curve shifts out when costs fall)
c.
Price and quantity will both rise.
d.
Price and quantity will both fall.
7.
Suppose that the State of California imposes a minimum wage of $8 per hour. In
the entry-level labor market in California fast-food restaurants, the quantity
of labor demanded at $8 per hour is 800 thousand, and the quantity of labor
supplied is 1.2 million. Which of the following is true?
a.
There is a surplus of 1.2 million workers in the labor market.
b.
There is a shortage of 800 thousand workers in the labor market.
c. There is a surplus of 400 thousand workers in the labor
market. (min wage is a price floor, and QS > QD by 400 thousand)
d.
There is a shortage of 400 thousand workers in the labor market.
8.
Which of the following factors will tend to be associated with products with a
highly price-elastic demand?
a.
A very short time period for consumers to respond to price changes.
b.
Few close substitutes.
c. Many very close substitutes. (remember, high price elasticity
means that consumers are very price sensitive, and thus can switch to close
substitutes if price goes up very much).
d.
A per-unit price that is only a very small portion of most peoples' budgets.
9.
Suppose Jinsong likes cookies and coffee. If Jinsong eats more cookies, but
drinks no more coffee, then which of the following is true about the marginal
utility of cookies relative to coffee?
a.
The marginal utility of cookies rises relative to coffee.
b.
The marginal utility of cookies does not change relative to coffee.
c. The marginal utility of cookies falls relative to coffee. (challenging
law of diminishing marginal utility story--as she eats more cookies, marginal
utility of cookies declines. If she isn't drinking any more coffee, marginal
utility of coffee does not change. Thus....)
d.
None of the above.
10.
If total cost is $10,000 when output is zero, and total cost is $12,000 when
output is one, and total cost is $15,000 when output is two, then which of the
following is
true?
a. Total fixed cost is $15,000.
b. The marginal cost of producing the
first unit of output is $12,000.
c. The
marginal cost of producing the second unit of output is $3000.
d. Average fixed cost is $7500 when
two units of output are produced.