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ECN100 MT2 S10 Key Parman

ECN100 MT2 S10 Key Parman - Ecn 100 Intermediate...

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Ecn 100 - Intermediate Microeconomics University of California - Davis May 12, 2010 Instructor: John Parman Midterm 2 - Solutions You have until 1:00pm to complete this exam. Be certain to put your name, id number and section on both the exam and your scantron sheet and fill in test form A on the scantron. Answer all multiple choice questions on your scantron sheet. Choose the single best answer for each question; if you fill in multiple answers for a question you will be marked wrong. Answer the long answer questions directly on the exam. You must show your work for full credit. Answers may be left as fractions. Please place a box around final answers when appropriate. Good luck! Name: ID Number: Section: SECTION I: MULTIPLE CHOICE (60 points) 1. Suppose that the only two goods a consumer buys are bread and butter and she always spends her full income on those two goods. If butter is a luxury good, we can say for certain that the income elasticity of bread is: (a) Greater than one. (b) Less than negative one. (c) Greater in magnitude than the income elasticity of butter. (d) Less than one. (d) If butter is a luxury good, when income increases by one percent spending on butter increases by more than one percent. To keep a balanced budget, this implies that if spending on bread goes up, it must do so by less than one percent. 2. Suppose that a firm uses a technology that exhibits decreasing returns to scale. Currently the firm is producing 100 units of output at a total cost of $200. If the firm decides to cut output to 50 units by reducing all inputs by a constant proportion, the firm’s new total costs will be: (a) Equal to $100. (b) Greater than $100. (c) Less than $100. (d) Not enough information. (c) If a firm uses a decreasing returns to scale technology, doubling output from 50 to 100 would require more than doubling the inputs and therefore the costs. So the costs at 50 units of output should be less than half of the costs at 100 units of output. 3. Suppose goods X and Y are both normal goods. When the price of good Y increases, we can say for certain that: (a) The income effect for Y will be negative. (b) The substitution effect for X will be positive.
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2 Midterm 2 - Solutions (c) The income effect for X will be negative. (d) All of the above. (d) The increase in the price of Y leads to a drop in effective income. Since both X and Y are normal goods, this will lead to a negative income effect for both goods. Because X became relatively cheaper, it will have a positive income effect. 4. Free disposal of inputs will typically guarantee that a production technology: (a) Is convex. (b) Exhibits constant returns to scale. (c) Is monotonic. (d) Exhibits diminishing technical rate of substitution. (c) If we can freely dispose of inputs, then increasing the levels of inputs should never reduce the level of output (we could always just throw away the extra input and achieve the old level of output).
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ECN100 MT2 S10 Key Parman - Ecn 100 Intermediate...

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