Economics 200 Mid-term
Examination
Fall 2002, 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: There is one unique matching word or phrase for each description. Each
correct match is worth 3 points.
|
Word
or Phrase |
Match |
Description |
|
A.
Scarcity |
P |
1.
This law implies increasing marginal cost. |
|
B.
Entrepreneurship |
H |
2.
Defined as the accumulation of capital, such as factories and machines, used
to produce goods and services. |
|
C.
Ceteris paribus |
K |
3.
This happens to demand when the price of a consumption complement falls. |
|
D.
Economic growth |
U |
4.
This is total variable cost divided by quantity produced. |
|
E.
Direct relationship |
T |
5.
This cost only exists in the short run. |
|
F.
Opportunity cost |
L |
6.
When income rises, the demand for these goods rises. |
|
G.
Law of diminishing marginal utility |
J |
7.
This happens to current demand when consumers anticipate lower prices in the
future. |
|
H.
Investment |
O |
8.
A store will experience this if it reduces prices on goods with inelastic
demand. |
|
I.
Inward shift in supply |
E |
9.
This exists when variable "x" and variable "y" move in
the same direction, as with a supply curve. |
|
J.
Demand decreases |
M |
10.
Examples include day-old bakery goods, generic products, run-down used cars,
or dilapidated apartments. |
|
K.
Demand increases |
D |
11.
An outward shift in a production possibilities frontier illustrates this. |
|
L.
Normal goods |
R |
12.
In theory this is the same number for the last unit of each good consumed in
a consumer equilibrium. |
|
M.
Inferior goods |
Q |
13.
Measures the level of consumer satisfaction. |
|
N.
Rising revenues |
G |
14.
This law implies downward-sloping demand curves. |
|
O.
Falling revenues |
|
|
|
P.
Law of diminishing returns |
|
|
|
Q.
Utility |
|
|
|
R.
(Marginal utility)/price |
|
|
|
S.
Marginal cost |
|
|
|
T.
Fixed cost |
|
|
|
U.
Average variable cost |
|
|
Part
II. Analysis. Each question is worth 3 points.
Use
the following table for questions 1 and 2 below. Suppose that the table below
displays your nephew Mack's utility for rides at the Santa Cruz boardwalk. Mack
has $48 to spend. The Spinning Saucers costs $3 per ride, while the others cost
$6 per ride.
|
Number
of Rides |
Typhoon |
Giant
Dipper |
Haunted
House |
Spinning
Saucers |
||||
|
--- |
Total Utility |
MU/P |
Total Utility |
MU/P |
Total Utility |
MU/P |
Total Utility |
MU/P |
|
0 |
0 |
--- |
0 |
--- |
0 |
--- |
0 |
--- |
|
1 |
84 |
14 |
54 |
9 |
72 |
12 |
18 |
6 |
|
2 |
162 |
13 |
102 |
8 |
138 |
11 |
33 |
5 |
|
3 |
234 |
12 |
144 |
7 |
198 |
10 |
45 |
4 |
|
4 |
300 |
11 |
180 |
6 |
252 |
9 |
54 |
3 |
|
5 |
360 |
10 |
210 |
|
300 |
8 |
60 |
|
|
6 |
414 |
9 |
234 |
|
336 |
6 |
63 |
|
|
7 |
390 |
|
252 |
|
345 |
|
65 |
|
|
8 |
300 |
|
264 |
|
240 |
|
66 |
|
|
9 |
180 |
|
270 |
|
30 |
|
66 |
|
1.
Mack's mom (your sister Joy), who might have taken an economics class at Sonoma
State, looked at this information and said that Mack's consumer equilibrium
would be to ride the Typhoon six times because it would give him the highest
total utility (414).
a.
What is the numerical value for the maximum total utility that Mack can get from
his $48 -- is Joy right (show your work)?
The consumer equilibrium occurs at 5 rides on the Typhoon (which yields 360 utils), and 3 rides on the Haunted House (which yields 198 utils). Together they yield a total utility of 558 utils.
Joy is wrong.
b. How
many of each ride will Mack take in his consumer equilibrium (show your work)?
Order: Typhoon first three rides, then Haunted house twice, then Typhoon twice, then Haunted House one more time. This is a consumer equilibrium because (i) all of the budget is spent, (ii) total utility is maximized, and (iii) MU/P is equal for last units consumed.
2.
How will Mack's consumer equilibrium be changed if the price of the Spinning
Saucers ride is increased from $3 to $4?
Mack’s consumer equilibrium will be unchanged, since he consumed no Spinning Saucer rides at $3, he will still consume none of this ride at a higher price, ceteris paribus.
Use
the following information for the next two questions. When Geraldo's income rose
from $50,000 to $80,000, his consumption of good "A" increased from
30 to 60, his consumption of good "B" decreased from 10 to 5, and his
consumption of good "C" increased from 20 to 23.
3.
Compute Geraldo's income elasticity of demand for each of the three goods (show
your work):
Apply formula: %DQD / %DI using midpoints
approach
Ei
(good "A") = ____1.45________ Ei (good
"B") = ______-1.45______
Ei
(good "C") = _____0.30_______
4.
Suppose you knew that one good above was number of two-day-old glazed
doughnuts, one good was annual number of fine dining experiences at Geraldo's
favorite restaurant, and one good was weekly therms of natural gas. Based on
the correct answer to question 3 and the nature of these goods, match the
following with letters "A", "B", or "C":
__A___Annual number of fine-dining experiences at
Geraldo's favorite restaurant
__C___Weekly therms of natural gas
__B___Number of two-day-old glazed doughnuts
Use
the following production information for the next three questions. Assume that
labor is paid $90 per day, and that the only other cost is $150 in fixed cost.
|
Daily
Labor Input |
Total
Pages of Text Typed |
Marginal
Product of Labor |
Total
Cost Per Day |
Marginal
Cost |
|
0 |
0 |
--- |
150 |
--- |
|
1 |
30 |
30 |
240 |
3.00 |
|
2 |
65 |
35 |
330 |
2.57 |
|
3 |
95 |
30 |
420 |
3.00 |
|
4 |
120 |
25 |
510 |
3.60 |
|
5 |
140 |
20 |
600 |
4.50 |
|
6 |
155 |
15 |
690 |
6.00 |
5. Correctly
fill in the remainder of the table.
6.
Does this example illustrate the law of diminishing returns? Briefly explain.
Yes, marginal product declines as more labor is used from the third laborer onwards.
Part
III. Multiple Choice. Each question is worth 4 points.
1.
Why is the production possibilities curve (PPC) normally bowed outwards from
the origin?
a.
The law of diminishing marginal returns.
b.
The law of diminishing marginal utility.
c.
The law of demand.
d. The law of increasing opportunity cost.
2.
If a production possibilities curve (PPC) has consumer goods on the horizontal
axis and capital on the vertical axis, then which of the following is true?
a.
Greater emphasis on the production of capital today leads to inward shifts in
the PPC, thus decreasing the wealth of people in the future.
b.
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.
c. 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.
d.
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.
3.
Suppose that the 5 members of the Yahoo County Under-10 Lemonade Vendor Club
represent all of the sellers of lemonade in Yahoo county, and they all price at
25 cents per cup. Member Montez reports he sold 5, member Shonte reports she
sold 10, member Avril reports she sold 20, member Mikey reports he sold 9, and
member Aiko reports she sold 17. What is market quantity supplied for lemonade
in Yahoo county at a price of 25 cents?
a.
17.
b.
47.
c. 61.
d.
125.
4.
A shortage (excess demand) occurs when:
a.
Demand decreases.
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 increase supply in the market for
pizza?
a. Cheese prices drop because price supports for dairy farmers are removed.
b.
Pizza shop employees successfully organize a union and negotiate a pay
increase.
c.
The Surgeon General announces that eating pizza increases the incidence of
stomach cancer.
d.
Consumer incomes decline.
6.
If the cost of producing a good rises for sellers, then how will this affect
the supply/demand market equilibrium for that good?
a. Price will rise and quantity will fall.
b.
Price will fall and quantity will rise.
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 $7.50 per hour.
In the entry-level labor market in California fast-food restaurants, the
quantity of labor demanded at $7.50 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 shortage of 800 thousand workers in the labor market.
b. There is a surplus of 400 thousand workers in the labor market.
c.
There is a shortage of 400 thousand workers in the labor market.
d. There
is a surplus of 1.2 million workers in the labor market.
8.
Which of the following best describes products that have a large, positive
cross-price elasticity of demand?
a.
The goods are strong consumer complements.
b.
The goods are weak consumer complements.
c. The goods are strong consumer substitutes.
d.
The goods are weak consumer substitutes.
9.
Makiko has a downward-sloping demand for tea cookies. Given this, which of the
following is true?
a.
Makiko's marginal utility for tea cookies remains constant as she eats more and
more of them.
b.
Makiko's marginal utility for tea cookies rises as she eats more and more of
them.
c. Makiko's marginal utility for tea cookies falls as she eats more and more of them.
d.
None of the above.
10.
If total cost is $10,000 when output is zero, and total cost is $11,000 when
one unit of output is produced, and total cost is $13,000 when two units of
output are produced, then which of the following is true?
a.
The marginal cost of producing the first unit of output is $10,000.
b.
The marginal cost of producing the second unit of output is $11,000.
c. Average fixed cost is $5000 when two units of output are produced.
d.
Total fixed cost is $34,000.