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Unformatted text preview: C:\Documents and Seltingleissiiileesktoplworking on\e2mup_10 |7iU9_OV.Lloc H . ._ I F... 6: MA\ceU?wEZ-r Hie-F001 K Vl Part 1: Multiple Choice - Circle the best answer. Do them ALL. 1. Dina consumes only pizza and soda. If the price of pizza and soda both double and so does Dina's money income, we can deduce that Dina's budget constraint will A. shift out but remain parallel to the old one. . B. swivel in so that the slope of the budget constraint is doubled. C. shift in but remain parallel to the old one. D. swivel out so that the slope of the budget constraint is halved. E. remain unchanged. 2. Geert lives in Amsterdam and has nicely behaved preferences over bike frames and bike tires. His indifference curve map betWeen these two goods is most likely A. made up of linear indifference curves. made up of “L” shaped indifference curves. C. made up of indifference curves that bow “cut” away from the origin. D. made up of indifference curves that are positively sloped. E. made up of indifferences curves that cross each other. 3. Ima Werker has 24 hours of time she can use either sleeping or working. Working is her only source of income. The market wage for Ima is $10/hour. Ima gets utility from consuming hours of sleep and spending dollars on all other goods. Both sleep and “all other geods” are normal goods for Ima, and lma’s preferences are very nicely behaved. Suppose Ima’s wage is increased to $1 S/hour, BUT only after she orks more hours from what she is currently working. Which one of the following statements is true? 6 [ma must consume less sleep and therefore must work more hours. B. Ima might consume less sleep and therefore might work more hours. C. Ima must consume less sleep and must work the same amount of hours. D. Ima‘s income effect and substitution effect must work in the same direction. E. lma’s income effect and substitution effect must cancel each other out. 4. Hesha Sleander gets utility from consuming pounds of food and dollars of all other goods each month. Hesha has $5000 of income this month. The price of food is $5.00/pound. Hesha has very nicely behaved preferences and is currently optimizing her utility by buying 100 pounds of food. Suppose Hesha is given $2,000 in food stamps (that can only be used for food). If now Hesha considers buying 300 pounds of food and asks you your opinion, you can conclude that A. Hesha is at her new optimum bundle. Hesha’s indifference curve is tangent to her new budget line. @Hesha is not using up all her food stamp money and so can not be at her new optimum bundle. D. Hesha is spending $5,500 on all other goods. E. I-Iesha would rather have $2000 in food stamps than $2000 in money. C:\Documents and Scttingleisslnk\Desktop\wm‘king Oll‘ifiZl'l'lupfilUl_'lU97OV.dDC 5. Suppose the price of hamburgers falls and you discover that they are now relatively cheaper than chicken sandwiches. This the substitution effect. B. the law of diminishing marginal utility. C. the income effect. D. the law of increasing demand. E. a change in preferences. you wish to eat more hamburgers because is an example of 6. Given that MRSxmarginal rate of substitution and ERSZeconomic rate of substitution and using absolute values to compare, Point D represents a point where we C135 MRSxy < ERSXy B. MRSxy = ERSxy C. MRSxy is increasing as we consume more x and less y along 1C1. D. MRSxy > ERSxy E. Not all income has been spent. good x 7. Assume Octavia is a nicely behaved utility In cheese only. Assume both goods are normal go everything else constant, Octavia will A. consume less beef and more cheese. B. consume less beef, however, her cheese consumption may increase, decrease or remain unchanged. consume more beef, however, her cheese consumption may increase, decrease or remain unchanged. consume more cheese, however. her beef consumption may increase, decrease or remain unchanged. E. consume more beef and more cheese. aximizing consumer who spends all her income on beef and ods. When the price of cheese decreases, holding 8. John consumes only two goods: bread and butter. His weekly income is $400, and at current market prices he can afford a total of 100 loaves of bread OR 200 pounds of butter, or any combination on a straight line between these two extremes. If John is a successful utility maximizer with nicely behaved preferences. then at an optimal bundle John’s marginal rate ofsubstitution between bread and butter (assuming you have butter on the horizontal axis in an indifference curve budget line diagram) is: . 2. B: 1/2. . 4 D. 1/4. E. 0. f‘:\Documcnls and Settings\Wissinlc\Deskiop\working on\e2rnup__ [0 I nggOVrIoc 9. Consider Joy’s budget line over the only two goods she consumes at the Celtics game, peanuts and soda. If the vendors increase the price of peanuts holding everything else constant then A. Joy’s budget line will shift parallel to itself, inward to the left. B. Joy’s budget line will shift parallel to itself, outward to the right, Joy’s budget line will pivot from the “only buy soda point” and get either steeper or flatter. D. Joy’s budget line will pivot from the “only buy peanuts point” and get either steeper or flatter. E. Joy’s budget line will not change, but her preference will. 10. Which one of the following is a correct statement about the relationship between average product (AP) and marginal product (MP) for a typical short run production function? A. If AP MP, then total product (TP) is at a maximum. 13. If TP is declining then AP is negative. . If MP is falling, then AP must also be falling. If AP exceeds MP, then AP is falling. e. If AP is at its maximum, then MP is also at its maximum. 1 1. In perfect competition, the marginal revenue curve for a typical firm A. is always above the demand curve facing the firm. B. is always below the demand curve facing the firm. . increases at an increasing rate. sand the perceived demand curve facing the firm are identical. E. intersects the demand curve when marginal revenue is minimized. 12. Tom's is a very nicely behaved consumer who is currently spending all his income on grape juice and coffee. His marginal utility from grape juice (MUg) is currently 100 utils per ounce and his marginal utility from coffee (MUC) is 50 utils per ounce. If grape juice costs 40 cents per ounce and coffee costs 25 cents per ounce, which of the following statemenns) is/are correct: I. Tom is maximizing his utility. II. We need to know Tom’s total utils from consumption of grape juice and coffee to decide if he is maximizing his utility. III. Tom is not maximizing his utility. IV. Tom should increase consumption of grape juice and cut down on coffee to maximize his utility. V. Tom should increase consumption of coffee and cut down on grape juice to maximize his utility. A. I only II only @III and IV D. III and V E. None of the above. C:\Documents and Settings\Wissink\Desktop\working on\e2mup_l 01_t097OV.doc 13. If the marginal product obtained from the last dollar spent on labor is less than the marginal product obtained from the last dollar spent on capital, then the firm A. should use more labor and less capital to minimize costs. should use less labor and more capital to minimize costs. C. is minimizing costs. D. is maximizing profit. B. should increase the price paid to labor and decrease the price paid to capital to minimize costs. 14. The law of diminishing marginal returns applied to a firm’s cost structure implies . decreasing marginal costs everywhere. increasing marginal costs eventually. C. decreasing average variable costs eventually. D. decreasing average fixed costs everywhere. E. increasing marginal costs everywhere. 15. Assuming all fixed costs are sunk, a firm should shut down in the short run if A. its fixed costs exceed its revenues. B. it is suffering a loss. @‘ its variable costs exceed its revenues. D. its fixed costs exceed its variable costs. E. its total costs exceed its revenues. 16. You own a building which has four possible uses: a bomb shelter, a massage parlor, a fireworks warehouse, and a hamster obedience school. The value of the building in each use is $2.000; $3,000; $4,000; and $5,000, respectively. You decide to open a fireworks warehouse. The opportunity cost of using this building for a fireWOrks warehouse is A. $2,000, the value if the building is used as a bomb shelter. $5,000, the value if the building is used for a hamster obedience school. C. $3,333, the average of the values if the buildings is used for either a bomb shelter, hamster obedience school. D. $3,000, the value if the building is used. as a massage parlor. E. $0, since you own it, it costs you nothing to use. a massage parlor, or a 17. Wheat is produced in a perfectly competitive market. Market demand for wheat increases, incre the market price of wheat. This will cause the individual wheat farmer's marginal revenue to his or her profit maximizing level of output to . stay the same, stay the same. increase; increase C. decrease; increase D. increase; decrease E. decrease; decrease asing and (J :\Documenls and Setlings\Wissilik\Desl(top\wn rk ing {111\132I11l.||)_] U l_ll’]9__OV.doc 18. Zach took $400,000 out of his bank account to buy an oven to use in his new cookie business. His bank account gives him 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per box. Also, during the first year, the cookie business incurred $9,000 in costs for all other cookie making expenses. Zach’s oven has not depreciated at all in the first year of business. Zach's economic profit for the year was A. Ell—406,000. $—6,000. ‘. $3,000. D. $6,000. E. $~3 94.000 19. A profit 111aximizing price-taking firm makes air conditioners. The prevailing market price for an air conditioner is $93. This firm’s total cost information for a typical day is given in the table below: Number of Air Total Costs Work space Work space “3.5? Q :: Mr ~_—__ .C,c,>n.dit_iorers .- Ms: A _ 1m- T iqu .. 0 $0 ">4 L 29 "- .80 55 r = L— $100 I—ZB flqg W% b 1 2 3 $3150 I) 1 5.3% .-\r: 013x57 :._§/é§ 4 [_ $229 _ a fil 0 (EL u GEES»? |_ ‘73 '01: w a t‘% ._.; 3 1 $33 _4 2&0 n - a HE'S“ How much profit will this firm earn on a typical day? A. $86. B. $129. C. $152. ® $155. E. $153. 20. Fang can mend as many roofs as she wishes for $5/hour. She also runs a business that takes 20 hours/week of her time and the accounting fixed cost is $40/week. If the business earns $80/week, then A. Fang makes an economic profit. Fang makes an economic loss and she should shutdown in the short run. C. Fang's accounting profit is negative. D. Fang makes an economic loss but she should not shut down temporarily. E. Fang just breaks even. C:\Documenls and Settings\Wissink\Desi(lop\working on\e2mup_]0 I_lD97O\/.doc '/ 5‘ flwflrés‘ :?"°’E£:“"3""37V Part II: PROBLEMS - ANSWER EACH PROBLEM IN THE SPACE PROVIDED. I . The graph below depicts three cost curves for a perfectly cor - ‘ 'tive firm operating in the short run. The current market price for the good produced by this firm i mt; : "gas; Sm QC) Seriesz Viral-=- jt— Series-:3 ssrm C- l,“ AAAAAAAAAANN 04mmammwmm04mwhmmwmm04 i abel the two a es d each pithe three series (abbre iations will do) “ Us? [gigamgftj L: ., tijEMfi/E éi’u ‘ r 0"" Wen/v" OW \JEm 2 B. Draw the marginal rev nue fu ction for the firm on the graph. WW 'icwq'w ‘Elt . f, j" C. On the graph label the short~run profit—maximizing output of the firm. {1+ ‘= [3—0 D. Indicate on the graph the level of economic profits or losses earned by the firm and calculate the dollar 9' value of profits or losses. T: r/QX'Zas ._, (gr-’20 :_ (iv—7Q, O if ~ ,7 B. At what price on this gra 11 would the firm earn zero economic profit? N w § (0 U a i Uzi/we, NE. W 9::ij amt) SD 037 %:’70 ¢ ‘3 "" F. Ifthe price fell to $4, what would the firm do? C:\Documenls and Settings\WissinldDesktolnworking on\c2nulp_]0 l_it)9_O\/.doc éfflwha’f / 2. The federal government is considering a program to help give low income families with young adults the incentive to have them consume more college education. Suppose the status quo is that a representative low income student’s family has an income of $40,000 per year. This income is spent on only two items: "all other goods.” which have a price of $1 per unit, and on units of college education, which have a price of $1,000 per unit. The typical family under the status quo maximizes utility and chooses to consume 25 units of college education. Assume that college education is a normal good. Assume that the typical family’s indifference curve map is very nicely behaved and looks typical. fightsw A. PUTTING $aog on the vertical and units of college on the horizontal, graph the family's budget- 2 fl), ,3; |ine/indifference—curve diagram representing the status quo. You must label and determine all critical 3 {hr Ma information about this utility maximizing status quo position. I {SW A W Suppose now that the government decides to support education by paying half of the cost per unit of ..MW;__,_ college education. That is, they effectively reduce the price the family w111 pay to $500 per unit of college education. On your graph in part (a) indicate how the family's budget—Iine/indifference-curve J19 5" I}; "j diagram would change. C. What can you say about the new optimal bundle for the typical family? Where will it be located relative Efaamajig 1'0 the original equilibrium? Will families be better off, as compared to the original status quo. as a C consequence of the program? Explain. D. Suppose now that the government, in order to reduce its deficit, decides to lower the price of college A education units to $500/unit but ALSO then takes income away from families in such a way that the hymn-"wig r typical family will still be able to just afford their original bundle, but at that new set of prices which ' includes the government’s policy of splitting the $1000 per unit price. On your graph in part (a) indicate how the family's budget-line/indifference—curve diagram now looks. WWW B. What can you say about where the typical family will end up once this twist is included? A; - ‘5. ea so. + Sam mm W Wka ~30 (1. mo: ELI-{AKA E‘clLMCo—‘XKW \‘é, _ C:\Dooumcnts and SettingsiWissink\Desktop\working onle2mup_lOljDSLOVdoc ANSWERS TO ALL THE MULTIPLE CHOICE QUESTIONS I E. 2. B. 3 A. 4 C. 5 A. 6 A. 7 D. Octavia will consume more cheese. When price of cheese decreases.-there are two effects. From the substitution effect. Octavia will consume more cheese and less beef. From the income effect, she will consume more beef and cheese. Hence combining these two effects together. cheese consumption will increase and beef consumption may increase decrease or remain unchanged. 8 B. V: since the indifference curve must be tangent to the budget line, and the slope ofthe budget line is '/2. At the point of tangency, the slope ofthe indifference curve (i.e., the MRS) must also by ‘/2. 9 C. An increase in the price ofpeanuts means that she can now afford less ofthem, assuming her income stays the same. She can still afford the same amount ofsoda, since the price of soda has not changed. So the soda intercept in her budget diagram is still the same. but the peanut intercept changes. Therefore, C is the correct answer. l0 D. ll D. 12 C. If Tom is optimizing his consumption bundle, then the bangs for buck for grapejuice and coffee should be same. i.e., MUJG} /P_{G} # MU__{C} /Pg{C}. Here we can see that MU_ {G} lPi {G} =100/40=2.5 ¢ 2.0=50/25:MUg{C} IPJC}. By increasing grapejuice consumption, Tom will reduce MU‘ {G} and by cutting down on coffee he will increase MU_{C} so that MU‘ {G} / P_ {G} :MU_{C} / PJC} holds. 13 B. [4 B. l5 C. [6 B. 17 B. l8 B. 19 D. The firm will produce an additional unit as long as the price ($93) exceeds the marginal cost ofthe next unit. As a result. the firm produces 5 air conditioners. Then its total revenue is $93 *5:$465, and its total cost is $3 10. As a result. the profit is $155. 20 B. Correct. [1" Fang operates, she makes 80 - 5 x 20 — 4O : $60 ($60 loss). lfFang shuts down she makes «$40 on the business. So, she should shut down. A is wrong because she makes an economic loss either way. C is wrong because she makes an accounting profit. D is wrong because her revenue does not cover her variable costs (her own labor), so she loses less by shutting down. E is wrong because she makes an economic loss either way. Notice that it is wrong to give Fang credit for the opportunity cost of her time as additional revenue in the shutdown case because that is already reflected in the calculation ofthe economic profit from operating. ...
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This note was uploaded on 09/19/2010 for the course ECON 1101 taught by Professor Evans during the Fall '08 term at Cornell University (Engineering School).

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