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Exam2_answers_V2 - Each Multiple Choice question is worth...

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Each Multiple Choice question is worth 1.5 points. 1. A quota of 1.2 billion bales of hay a week has been set in the hay market. The equilibrium in the market for hay is 1 billion bales a week at an equilibrium price of $50 per bale. Which of the following would you expect to see as a result of the quota? a. The price of oil will stay at $50 and the quantity demanded will remain the same. b. The quantity supplied will be lower than the quantity demanded. c. The price of oil will fall below $50. d. The price of oil will rise above $50. Recall the definition of a quota – an upper limit to the quantity of a good that may be produced in a specified period. Producers do not have to produce at the quota level, they just can’t produce more than the specified amount. 2. Assume that Justine only eats (buys) salads and baked chicken and does so to maximize her total utility. If the marginal utility from a salad is 8 and the price of a salad is $4 and the marginal utility from an additional pound of chicken is 20. What is the price of chicken? a. $20 b. $10 c. $2.0 d. $1.6 To figure out this question you have to use the y x x y MU MU P P = relation. 3. If Timmy worked 12 hours a day, he would make $156 a day. On a graph of leisure and income per day, his budget line would have a slope equal to _________ and a y-intercept equal to _________. For this question assume that there are only 24 hours in a day and that income is the price of leisure. a. -12; $288 b. -13; $342 c. -10; $312 d. None of the above While we did not cover the labor/leisure tradeoff explicitly, I felt that there was enough information in the question that even if you skipped this question on the practice test you could figure it out with a little thought. Since Timmy is making $156 a day and works 12 hours a day he makes $13 an hour. Each hour Timmy spends on leisure is an hour of income he gives up, so the slope is -$13. The y-intercept represents how much income Timmy would have if he did not spend any time on leisure (which includes sleeping); working 24 hrs at $13 an hour is $312. Since neither of these two exist in anyone answer then the answer is D, none of the above.
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4. Lauren’s income is $25. The price of a cookie is $2 and the price for cranberry juice (per gallon) is $4 per pound. What is relative price from the equation of Lauren’s budget line? (C = quantity of cookies and CJ = quantity of cranberry juice) a. 2C + 4CJ = 25 b. 12.5-2C = 6CJ c. 4M + 2C = 25 d. 2 In this question I wanted to relative price of CJ and C which is 4 2 2 CJ C P P = = 5. If Lauren’s MRS for cookies and Cranberry Juice is 2, what should she do? a. Increase the number of cookies b. Decrease the price of cranberry juice c. Decrease the amount of cookies d. Nothing, she is maximizing her utility For our standard consumer they maximize their utility when xy x y MRS P P = so Lauren is maximizing her utility.
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