101_Practice_Midterm_1 - Economics 101 Practice Midterm 1...

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Economics 101 Practice Midterm 1 MULTIPLE CHOICE 60 POINTS Circle the BEST possible answer for each question. (3 points each) 1. Tom borrowed $100,000 from his parents to buy a house, and repaid the loan in full, plus $5000 interest, one year later when he received his royalty check from his recording contract. His parents have $1 million in the bank at 10 percent interest. The fact that they charged Tom five percent interest for his loan is a. unfair to Tom's sister, because she ends up subsidizing Tom's loan out of her inheritance. b. unfair to Tom, because parents shouldn't charge their children interest. c. inefficient, because it encouraged Tom to buy too large a house. d. all of the above are correct. e. a and c are correct. 2. You are planning a 300 mile round trip to Washington. Except for the cost, you are completely indifferent between driving and taking the bus. You don't know how much it would cost to drive your car, so you call Hertz for an estimate. The person you speak with tells you that for your make of car the costs of a typical 10,000 mile driving year are as follows: Insurance $1000 Interest 3000 2000 Maintenance 1000 Total $7000 At what round-trip bus fare will you be indifferent between driving and taking the bus? a. $210. b. $120. c. $90. d. $60. e. None of the above is correct. 3. As the wage rate per hour increases, the opportunity cost of leisure (i.e., time spent not working) a. remains constant. b. decreases, since the individual can now afford to take more time off. c. increases, since the cost of forgoing one hour's worth of wages increases. d. may increase or decrease, depending on the individual's preferences. e. decreases, since leisure is unpaid. 4. Jane had already bought a $50 ticket to a concert when she was invited out to dinner by a friend. The ticket cannot be resold. Had she known about the dinner invitation in advance, she would not have bought a ticket to the concert. If she is a rational person, she a. should attend the dinner anyway, because the concert ticket is a sunk cost. b. should attend the dinner anyway, if that’s the alternative she likes best.
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This note was uploaded on 03/27/2008 for the course ECON 1110 taught by Professor Wissink during the Spring '06 term at Cornell University (Engineering School).

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101_Practice_Midterm_1 - Economics 101 Practice Midterm 1...

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