midterm2 version1 s07

# Principles of Macroeconomics

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1) Assume that your marginal rate of substitution between apricots and peaches is MU P / MU A = -2/3 and that the price of apricots is \$3, while the price for peaches is \$2 per pound. Therefore (at your current position along your budget line) it must be that you are consuming: a) too many apricots and two few peaches to maximize utility. b) just the right amount of apricots and peaches to maximize utility. 2) Bus rides are an inferior good. Therefore the Engel curve for bus rides has a ___________ slope. a) positive b) negative 3) When the price of a normal good decreases the income effect ______________ the substitution effect for a ___________ price effect. a) reinforces /larger b) takes away from/smaller 4) Given a typical production process when average product (AP) decreases, the marginal product (MP) _________________ a) decreases also always. b) first increases and then decreases 5) The diminishing returns in a production process imply that marginal cost is a) decreasing b) increasing 6) As the quantity produced by a firm increases, the difference between average total cost and average variable cost a) increases b) decreases 7) The following is information for Patty’s Pizza Palace: Total Costs = \$ 40,000 Fixed Costs = \$ 10,000 Total Revenue = \$ 35,000 Given this information Patty’s Pizza Palace should: a) shut down.
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