101_plim_1-07_Q_A - Cornell University Department of...

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Cornell University Spring 2007 Department of Economics Prof. R.H. Frank Your name_____________________________________________ Your signature__________________________________________________ Your TA’s name____________________________________ Economics 101 First Preliminary Examination For each of the 20 multiple-choice questions below, circle the best response.
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1. At point A on the demand curve shown below, 36 18 0 20 P Q A a. a small increase in price will increase total expenditure, and a small reduction in price will reduce total expenditure. b. a small increase in price will reduce total expenditure and a small reduction in price will increase total expenditure. c. total expenditure will rise if price either rises or falls by a small amount. d. total expenditure will fall if price either rises or falls by a small amount. e. none of the above. Answer: b , because demand is elastic with respect to price at point A. 2. The MIT meal plan charges students $6 per meal for the first 60 meals eaten each semester, then $4 per meal for all meals in excess of 60. Dennis and Elizabeth know from experience that they always eat at least 100 meals per semester under the meal plan. The cost of eating an outside restaurant meal a. is $2 higher in September than in December, because of the lower opportunity cost of eating on the meal plan in December. b. is $2 higher in December than in September, because of the lower opportunity cost of eating on the meal plan in December. c. is the same in December as in September. d. is $2 lower in December than in September. e. None of the above. Answer: c . Since they always eat at least 100 meals on the meal plan, eating an off campus meal at any time during the semester means their campus meal plan bill will be lower by exactly $4. 3. When thinking about whether to buy a car, the cost of insurance a. should be ignored because it is a sunk cost. b. should be ignored because it is a fixed cost. c. is a relevant marginal cost. d. is not a relevant decision factor if you live in a state that requires you to have automobile insurance. e. is less important than the cost of gasoline. Answer: c , since if you don’t buy a car you won’t have to buy insurance. 4. Last year, AT&T researchers estimated that a manned mission to the moon to install a communications relay station would result in a future revenue stream with present value of $100 billion. And since their estimate of the present value of all costs attributable to the project was only $80 billion, the company decided to invest. Now, six months into the project, an unforeseen change in the competitive climate has reduced the estimate of the present value of the project’s revenues to only $50 billion. Unfortunately, this happened after the company had already incurred $40 billion in project costs, none of which can be recovered. Assuming that AT&T is risk-neutral and believes that all revenue and cost estimates are unbiased, should it proceed with this project? a. No, because the marginal benefit of the project no longer exceeds its marginal cost.
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101_plim_1-07_Q_A - Cornell University Department of...

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