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Economics 101, Summer 2003

Section 2-Wenzhuo Shang

Mid-term #2, Version 1 (Total Score: 110 points)

Name: Student ID Number (Last 5 Digits):

Part A: Multiple Choices (Each problem is worth 4 points.)

  1. If a 20 percent decrease in the price of chicken results in a 10 percent increase in the quantity demanded, the price elasticity of demand has a value of

a. –0.5

b. –2

c. –1

d. –0.1

e. none of these

  1. Suppose that Trey spends all of his income on vacation trips and textbooks. If the price of a trip is $200 and the price of a textbook is $50, then the slope of his budget line (assuming vacation trips are measured on the vertical axis) would be

a. –4

b. 4

c. 0.25

d. –1.75

e. –0.25

  1. The figure above shows the total utility that Jerry receives from consuming different numbers of apples per week. What is his marginal utility from the fourth apple (i.e., the last one on the list)?

a. 12.5

b. 6

c. 34

d. 44

e. 10

  1. “More is better”, the assumption about preference implies that

a. marginal utility always rises as consumption rises

b. total utility always rises as consumption rises.

c. marginal utility rises faster than total utility

d. total utility eventually reaches a maximum and then decreases as more of the good is consumed.

e. marginal utility is negative.

  1. Which of the following statements is true?

a. For an inferior good, the substitution drives its quantity to move in the same direction as the price change.

b. For a Giffen good, the income effect dominates the substitution effect, when its price changes.

c. If the demand curve for a certain good is downward sloping, then this good must be normal.

d. The demand curve for a Giffen good is downward sloping.

e. The demand curve for a normal good can be upward sloping.

  1. The figure above shows five different levels of income for a particular state (in billions of dollars) and the demand for public higher education there (for a given level of tuition). Given this information, what can be said about the state’s demand for publichigher education?

a. it follows the law of demand

b. it violates the law of demand

c. the demand for public higher education is elastic.

d. public higher education is an inferior good for income levels above $65 million

e. public higher education is a normal good

  1. Last month, Sally spent $3,000 in repairing her old car. Now her car requires an additional $2,000 in repairs. Or she could get a comparable car for $2,500. In this instance, she should

a. repair her car because the money she has already spent repairing the car ($3,000) exceeds the price of the new car ($2,500)

b. buy a new car because sunk costs should be ignored in decision making

c. buy a new car because the price of the new car ($2,500) is less than the total
amount she would spend on her current car ($5,000)

d. repair her car since the cost of repairing it is lower than the cost of buying
another car

e. repair the car or buy a comparable one because the opportunity costs are the same

  1. The marginal product of labor is the

a. total output produced when one more worker is hired

b. change in average output produced when one more worker is hired

c. total output per worker when one more worker is hired

d. change in total output when one more worker is hired

e. maximum quantity of output when one more worker is hired

  1. Which of the following always decreases as output increases?

a. ATC

b. MC

c. AFC

d. TC

e. TVC

  1. Suppose that the price of a pizza is $10 and that the price of a calculator is $30. At her present level of consumption, Magda’s ratio of marginal utility of pizza to marginal utility of calculators is 1/4. To maximize total utility, she should

a. buy more pizzas and fewer calculators

b. buy fewer pizzas and more calculators

c. continue to buy the same quantities of pizza and calculators

d. spend more time consuming pizza

e. spend more time buying calculators

  1. Which of the following gives the correct relationship between Marginal Costs and Average Costs?

a. When MC is greater than AC, AC will decrease.

b. When AC is greater than MC, AC will decrease.

c. When MC is equal to AC, AC will increase.

d. The MC curve intersects the AC cost curve at its highest point.

e. MC is always greater than AC for any given output level.

  1. If a decrease in the price of one good causes the demand curve for another good to shift to the left, the two goods must be

a. inferior

b. economic luxuries

c. economic necessities

d. substitutes

e. complements

Q / L / K
10 / 2 / 10
10 / 5 / 8
10 / 7 / 7
10 / 9 / 4
10 / 12 / 3
  1. For a firm, all the input combinations above can produce 10 units of the products. Given that the prices of labor and capital are respectively $5 and $6, how much are the long run total costs and long run average costs of producing 10 units of the products?

a. $70, $7

b. $69, $7.3

c. $77, $7.7

d. $69, $6.9

e. $78, $6.9

  1. The income effect of a lower price for good A

a. invariably leads a consumer to buy more of good A, because the combination of unchanged money income and lower price raises that consumer’s real income or purchasing power.

b. invariably leads a consumer to buy less of good A because the combination of unchanged money income and lower price encourages that consumer to buy more of other goods.

c. may lead to a larger or smaller number of good A demanded; it all depends on the nature of the good itself.

d. creates a change in the good’s relative price and, therefore, causes the consumer to substitute good A in place of other goods.

e. causes a parallel inward shift of the budget line, enabling the consumer to buy more of all goods than before.

  1. Which of the following most clearly illustrates the law of diminishing marginal utility?

a. the total satisfaction from consuming a good falls as more of the good is consumed

b. marginal utility falls as total utility falls

c. the quantity of a good demanded falls as price rises

d. the additional satisfaction from consuming a good falls as more of the good
is consumed

e. there is a direct relationship between the price of a good and its total utility

  1. Which of the following is an implicit cost?

a. salaries paid to owners who work for the firm

b. interest on money borrowed to finance equipment purchases

c. cash payments for raw materials

d. wages paid to hourly employees

e. foregone rent on office space owned and used by the firm

  1. Which of the following is correct?

a. For any given output level, the long run average costs are lower than or equal to the short run average costs.

b. For some output levels, the long run total costs are higher than the short run total costs.

c. The plant size can not be varied in the short run, nor in the long run.

d. The short run average cost curve is the envelope of the long run average cost curve.

e. The long run average cost curve touches the short run average cost curves from below.

Part B: Problem Solving (42 points totally)

Fill in the missing values of each column in the following table. This production process uses only two inputs, X1 and X2. Furthermore, X2is a fixed input and X1 is a variable input.

X1 / X2 / Q / AP of X1 / MP of X1 / TFC / TVC / TC / AFC / AVC / ATC / MC
0 / 0 / N.A. / N.A. / N.A. / N.A. / N.A. / N.A.
1 / 30 / 100
2 / 5 / 70
3 / 120 / 30
4 / 175
5 / 210
6 / 240
7 / 250

Note:

AP ---- Average Product

MP ---- Marginal Product

TFC ---- Total Fixed Costs

TVC ---- Total Variable Costs

TC ---- Total Costs

AFC ---- Average Fixed Costs

AVC ---- Average Variable Costs

ATC ---- Average Total Costs

MC ---- Marginal Costs