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Unformatted text preview: C:\Documents and Sellings‘xWissinldDasktop\working Oll‘\627] 017f0970V‘doc Econ ll]0 — Wissink - F09 — November 5, 2009 - PRELIM #2 — MULTIPLE CHOICE ANSWERS Yo-u.rTQ.Ll...—N£tid:4 __ .. -- YOUR C.U. STUDENT NUMBER: YOUR TA’s NAME: Romita (Tuesdays pm) Roland (Wednesdays am) Xinli (Thursdays am to pm) Wei (Wednesdays am) Freeha (Fridays am) MC= Prob 1= Prob 2= 5" :2...‘ #He to CIRCLE THE BEST ANSWER FOR EACH QUESTION 1 a b c 2 a b c 3‘—-—| a b Q 4 a G) c 5 a hi 6:) 6 a b " c 7 a b c 8 ——| a b c 9 a b c 10 a b G 11 a b (E) 12 ® b c 13 a ® 0 14 _ a (9 c d e 15 ® b c 1 d e 15 a b c d GD _—J Prob 3= )6: TOT= IOC‘J C;\Documcnts and Settings\Wissink\Deskt0p\working on\e2_lOl_f09__OV.tloc Part I: Multiple Choice - Circle the best answer on ANSWER SHEET PROVIDED. Do them ALL. 1. Suppose that the price of a bag of tortilla chips is $3, and the price of a jar of salsa is $2. Holding the consumer’s spending on chips and salsa constant, how many bags of chips must the consumer forego to buy an additional 6 jars of salsa? d5 __ g ~- 3 K A. Obags PVC/5 3 F§ I m-a "2. l. 5" B. 2 bags '5 2'- C. 3 bags I j; 4 bags Nam—kg \‘2. __ . 6 bags 3.. gee we ’3 ’ ‘ TON“ P9 2. As long as indifferenCe curve maps are verwigflyjehaved with indifference curves bowed “in” toward the origin, utility maximization will take place \3, ‘ A. where the consumer spends exactly half of his income on each good. B. where the budget constraint intersects the indifference curve. C. where the consumer spends all of his income on one of the goods. at the point at which the indifference curve isjust tangent to the budget constraint. V; E. anywhere along the budget line, so long as all income is spent. 3. F or a normal good like mocha lattes, the income and substitution effects ofa price decrease for mocha I lattes, ceteris paribus, ? J/ g A. “Wes-fl? in opposite directions to increase or decrease the quantity demanded of the good. N Victims“) B. t in the same direction at low prices, but Opposite directions at high prices. 5 T— SE— © work in the same direction to increase the quantity demanded of the good. & M D. Wm opposite directions at low prices, but in the same direction at high prices. Q (Elem JCT” E. carpal/each other out. 4. lma Werker has 24 hours of time she can use either sleeping or working. Working is her only source of income. The market wage for [ma is SUD/hour. Iina gets utility from consuming hours ofsleep and spending dollars on all other goods. Both hours of sleep and spending dollars on all other goods are normal goods for lma, and lma’s preferences are yery nicely behaved. Suppose Ima’s wage is increased to if: i S/hour, ceteris paribus. Whlch one ofthe followrng statements is true? U) ( at “MA . Ima must consume less sleep and therefore must work more hours. lma might consume less sleep and therefore might work more hours. M ~ lma must consume less sleep and must work the same amount of hours. U $.29 Ima’s income effect and substitution effect must work in the same direction. B /S. ‘g'oima’s income effect and substitution effect must cancel each other out. (9 ) C Jr "whirl: ‘3” Q‘i 63; (:58 C:\l')ocuments and Settings\Wissink\Desktop\working on\e2_l 01_fl)9_OV.doc 5. 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 $2000 in food stamps (that can only be used for food). If now Hesha considegg buying 193 pounds of food and asks you your opinion, you can conclude that _ goo 7kg ;; | 3; OZ) Hesha is at her new Optimum bundle. 54% ~ .. -\— q \ \ “$9 . . . . . W15 Y') SGXV} I-Iesha’s indifference curve 13 tangent to her new budget line. {flux/~98, I'iesha is not using up all her food stamp money and so can not be at her new Optimum bundle. ._ . Hesha is spending $5,500 on all other goods. E. Hesha would rather have $2000 in food stamps than $2000 in money. 6. Given that MRS=marginal rate of good y substitution and ERS:economic rate of substitution and using absolute values to compare, Point B represents a point where the A. MRSxy < ERSxy B. MRSxy : ERSxy C. MRSxy is increasing as we consume more x and less y along 1C1. w' MRSxy > ERSxy E. Not all income has been spent. good x 7. Assume Octavia is a nicely behaved utility maximizing consumer who Spends all her income on beefand cheese only. Assume both goods are normal goods. When the price of cheese decreases, holding 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. .__. m... ._ _... __.a consume more beef and more cheese. \ _- 8. 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? Mi AP = MP, then total product (FF) is at a maximum. 6th ,B/l'l‘" 'l‘P is declining then AP is negative If MP is falling, then AP must also be falling. ‘ P If AP exceeds MP, then AP is falling. JF/H’AP is at its maximum, then MP is also at its maximum. / m P C.‘\Documents and Settingleissink\Desktop\working on\62_101__m¥}70\!.doc ,. 9. In perfect competition, the marginal revenue curve for a typical firm . . L": V" :- A. is always above the demand curve facmg the firm. P _“‘_"—‘C? m g B. is always below the demand curve facing the firm. increases at an increasing rate. “6- and the perceived demand curve facing the are identical. E. intersects the demand curve when marginal revenue is minimized. 10. A firm in a perfectly competitive market has no control over the market price of the output it Sells because “A? there is free entry and exit into and out of the industry. it takes input prices as given. éeveiy firm's product is a perfect substitute for every other firm's product. E;- the government imposes price ceilings on the products produrzed in perfectly competitive industries. Ecthe market demand for products produced in perfectly competitive industries is perfectly elastic. 11. Assuming all fixed costs are sunk, a firm should shut down in the short run if ,Jk‘ its fixed costs exceed its revenues. L @‘it is suffering a loss. P B if O‘V C' @ ts variable costs exceed its revenues. - its fixed costs exceed its variable costs. fits total costs exceed its revenues. 12. Phil's Eraser Head Company is a perfectly competitive firm producing 5000 replacement pencil erasers per day. At this output level, price exceeds this firm’s marginal cost. It follows that producing One more eraser will cause this firm's 5 = 51:, O Q "profits to increase Z .7 M 2 m :2” P . total cost to decrease. ~(‘ (I? profits to decrease. CL . f Bf profits to remain unchanged. 30 m \r M E? marginal revenue to fall. 13. 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 1 é $ -406,000. if: (9,00 0 6% gQJu—A— («3:33 T: ‘l, 00 ('9 $—6.000. == .3. 5'1”) ~ -. a - o‘ (3. $3,000. P IMQMLTCGSAS _. \ch3 0 D. EB 6,000. "‘””"“ wwwwflwmm-.. E. $494,000 Apr 5'53000 40w (0ng "9 2,],an U‘I 5;? MC; Ci‘iDocumenls and Settings\Wissink\Desktop\working on\e2_10l_'lD97OV.doc 14. Suppose that a given firm experiences decreasing marginal product of labor with the additi 1 of each labor hour, right from the very first hour of labor employed. In this case, average variable cost 1 1 be . zero at all quantities. aft)“ B..)rising at all quantities. ‘5 E) 6'. falling at all quantities. ‘ 43. U-shaped. _ *E'. constant at all Quantities. L 15. If Franco's Pizza Parlor knows that the marginal cost at q:500 pizzas is $3.50 and that the average total c st at qISOO pizzas is $3.30, then _ _ g 3 .i C9 average costs are rising at q- = 500 pizzas. Z): SOC? m C ‘” f5 o B. average costs are falling at q = 500 pizzas. 0,}: «z. (L 3: C. total costs are falling at q = 500 pizzas. 5 . \ . i D. variable costs must be falling at q~=500 pizzas. 3V)“;- m (-4 7 0dr; ' *5 E. fixed costs must be falling at q=500 pizzas. fad }AL‘ ((—37; UP q 16. Bree and Dan have the same cost structures for stringing tennis rackets except thaEree used her own mone to buy her stringing machine while Dan borrowed money from the bank to buy his. The prevailing market interest rate is 12% for both savings and borrowing for both Bree and Dan. Both Bree and Dan would work for Venus Williams and earn salaries of $40,000/year if they quit working for themselves and joined her “team”. Assume that the stringing business is a perfectly competitive industry. Which one of the following is true? A. Bree earns more accounting profitnandmmore Wmic profit than Dan does. B. Bree earns the same accounting profit and more at? profit as Dan does. . Bree earns the same accortntiusgcprofit and the same c omic profit as Dan does. \ 'y’ ree earns less accounting profit and less economic profit than Dan does. W . *3 rec earns more accounting profit and the sa‘%norflic profit as Dan does. m. We, K8000 C:\Documents and Scllings\Wissinl<\Desktop\working on\e2_10lflm970V doe Part II: PROBLEMS - ANSWER EACH PROBLEM IN THE SPACE PROVIDED. 1. The diagram shows three budget lines and three i differe for a erson who consumes o ' ‘fenugreek and cardamom. The consumer's income i $480 per week. The price of cardamom is $2. E O E m E as U ___1 _______ __ l i a - u E 90 $3; “ I ‘ “ Fenugreek '30 "‘4 if: Price of Quantity of :7 \BF 3 AD Fenugreek Fenugreek ' _ C $3L+ 35% z 4 kasmngflw Mikel:- 4r. Aka/W -e came“ (MI "1-. m) ag 1%— = *o ‘3“- r) Mr Mg. ¢A 80 q Foam Emu“ m I U (1 L{S’O :; ‘ Ill _J E _J :5— 9. EQAWQAMQ we: “‘3; C:\Documcnts and Settings\Wissinlc\Desktop\working on\e2_10!u_f09_7Cl\/.doc A. Based on the diagram, determine three price and quantity pairs on this consumer‘s demand curve for fenugreek. Enter this information in the table above. Sic—rodfle . (O B. Suppose that the price of fenugreek is currently the lowest of the. three prices entered in your table. Now ‘ suppose the price of fenugreek increaSes to the next higher price, as indicated by the budget lines in the graph. Using a straightedge, carefully draw in your diagram additional budget line(s) as needed to illustrate the income, substitution and total effects of this price increase, Make sure to label your bundles and indicate the income, substitution and total effects with reference to these bundles. C. Based on part (b), by how many units, and in what direction, does consumption of fenugreek change for the TOTAL EFFECT? M 9 D. Does fenugreek appear to be a normal or inferior good over this price change? Briefly defend your claim. 94 B. What is the Marginal Rate of Substitution at the original optimizing bundle (when the price of fenugreek is lowest)? ANSWERS: FE; Conn WW eWflWO won/‘5; mgr/\BBLDW EL; UO‘t‘W- SL5 3 7:. A476 Solosr‘fiuhw‘m fWe‘i 3 A ‘?b Inc we €§¥CS¥ 3 b a B . . {3: m. e 2. Tam 5-we- s A *‘i a: w LE Subgk’mbmhwflm Fmficfi =3 E’ ELM- C‘mf’oj“ =- E of). our.er . cweqm a do €95er E; w a), 3% mm a. N" (€15.89 Wm incwwfi' tee-m again WA; -7 LLB 13L. E" “he B We Womb—ow“ at amid-"5. Ye hug—"wek J aliaw‘flnbw ekeceia. 69mm“ E. MR3a¥lowmllelAd i5 Pd CL; C‘\Documents and Settingsz'issinlc\Desktop\working on\e2il0177109770Vdoc 2. Ima Baker runs her own bakery specializing in cheese—cakes. Every week she pays $500/week in rent for a store—front bakery shop. Ima also uses her garage to store cheese-cake recipes. Her garage can be rented out for $60 a week in the real estate. market. lma uses cream cheese and Ima‘s labor to make her-'cheese— - cakes. The table below shows the relationship between number of hours lma works on baking cheese—cakes - and how many she can bake in a week. It also shows the number of pounds of cream cheese lma must use as a function of how many cheese-cakes she bakes. Cream cheese Sells for $2/pound. The maximum number of cheese-cakes she can make a-week is 1,100. Ima also happens to be a great teacher and Cornell offers to pay her $100/hour to teach cheese—cake baking. She can do the teaching work at her convenience for as many hours as she wants each week. She would get $100 per hour for each hour of teaching she sells to Cornell. Some cost information for lma is also given in the table. 6100* $total M economic $marginal ' costs costs lbs. of q = # of cream cheese- cheese cakes 0 10 100 $680.00 4 l 20 200 $1,000.00 9 l 30 300 "$1,520.00 16 40 400 $2,240.00 500 $3,160.00 600 $4,280.00 _ .___._. 700 $5,600.00 $7,120.00 $8,840.00 1000 $10,760.00 121 l 110 - 1100 l $12,880.00 L" A. Fill in the marginal cost column using which ever formula you prefer (Abowd style or traditional style). 0 l‘: A") “a”? 7l’V’lOD cool air Trwtspx-i'lfibhcé) a, g Cr‘iDocumenls and Setti11g5\Wissink\Desktop\working oxi\e2WlOl_“l09_O\/tdoc B. Suppose that the cheese-cake market is perfectly, competitive and that the going price for a cake is P = $16.20/cake. How many cheese—cakes eachweek should Ima bake if she tries to maximize her economic profit? . . a . What are her economic profits at this solution? Dr C q I). What are Ima's accounting profits at this solution? a E How would your answers to part (B) change if suddenly real estate prices plunged and now [ma can only 0’ ‘ rem her garage for $30 a week? ANSWERS: I r W“? B $$|4,2,0 §mrwll¢.2_o_—z{? :ifiODcakan $690 ~sz time? erg" W" 0W“ ” m‘W'C-‘A 6?... ~ _ v QM» \xw “Vi/me, Elie/eta; “it leWV$-> a. ll (pr-I a. "l A I "\0 Cat-“cm. TY wsf'x (SQ. gjm- . a. firm 4* 5“ (00 + (Orion 2;. 10 C:\Dncuments and Settings-\Wissink\Desl<top\working on\eZ_10Lfl)97OV.doc 3. Suppose you are given the following information about Wilfred‘s widget company. Wilfred is a perfectly competitive firm and uses capital (K), steel (S) and labor (L) to make widgets (q). Capital is fixed, steel and labor are variable. Wilfred’s product curves are typically shaped. His status quo production information for the month is as follows: q I 2,500 widgets S = 1,500 tons, and currently MPsteel = 180 widgets 2,500hoursLaDd currently MPlabowgm—‘_mw , , K == 1,000 square feet Price of steel : $60/ton Price oflabor : $1 5/hour Price of capital : $500z’square foot Currently, what are Wilfred’s total costs of production? lma Smart insists that Wilfred is not cost minimizing in the short run. What condition for cost minimization has Wilfred met OR not met‘? In what direction(s) should Wilfred change his inputs to improve upon the short run status quo? Show/demonstrate with an explicit numerical example based on the data above how Wilfred can improve upon the status quo situation based on your answer to (c). That is, show how Wilfred can X change what he is doing and EITHER l) spend the same amount of costs and produce more widgets than he currently is 0R 2) show that Wilfred can still produce 2,500 widgets and spend less in total costs than he currently is. (Assume that the marginal product numbers above stay constant over the relatively small changes in inputs you use in your presentation/example. Note: You are NOT expected to find the cost minimizing input combination; you just need to demonstrate, with an example, with numbers, an improvement from the status quo.) ‘ loo <33 ANSWERS: K 2 (a 0‘50 V003+655C9¥é3fi5¥l +Q :2. 70/6900 “l” $00 A" 3'90} 09“: :ize a7rbfaofi+¢ 555?? :w_> DO Aa‘ifi'g *e—‘L-l‘?“ i "and"? F” ‘3 W‘ l.” PE) , CUv‘SiA-G‘C' VS: WWW " 7 c: gob __ l _- :80 ‘7‘0 : oi If _. .. "To 4 “Fa (la iii Gauntlet "’“lt‘etPfiw‘i “‘75 PE" A \t i -- 0 semif— . 1:7 elgow'rd‘ids I? #639 afl’in I20 ’rL‘thez’rstowcht “‘1 H5 9%D w H ,,..t ‘2»? WED-ll" 1d Settingsfiwissinl<\Desktop\working 0n\e2_] D]fllD9_OVduc MORE ANSWER SPACE . ‘ J! g \L )gowwol7e-E @ $60 _ I? L— Q 7? f\@w)cb¢7€”}3 jr3(3 M) \ k Aha 42AM i BC m chum/a w wid‘x‘“ Wu... \fpmth‘cw‘x mm‘Wx DEW L'\ ‘ WED” 29-?- fl) “\‘EWWQ A W €49 _ a“) 3 N 946‘ g “:5 [U Be WM '1, {SA‘iCt/w 4A ‘ 12 ...
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