ECON 310 Fall 2005 Final Exam - Version A. Multiple Choice: (circle the letter of the best response; 3 points each) and x

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1 ECON 30 Fall 005 Final Exam - Version A Name: Multiple Choice: (circle the letter of the best response; 3 points each) Mo has monotonic preferences for x and x Which of the changes described below could possibly make him better off? a A decrease in I b A increase in p c A simultaneous increase in both p and p d A simultaneous increase in both I and p e None of the above answers are correct Tracyann makes telephones She wants to produce q units of output as inexpensively as possible In the Short Run, a her costs of producing a particular level of output are less than the Long Run costs of producing the same level of output b she will always choose to hire a combination of labor and capital for w which MRTS L, K r c she is able to vary the amount of every input d total costs of producing zero output must always be equal to zero e None of the above answers are correct 3 Spaghetti Dinners are a normal good If income increases (with all other factors fixed), then in the market for Spaghetti Dinners a equilibrium price and quantity must both increase b equilibrium price and quantity must both decrease c equilibrium price must increase and equilibrium quantity must decrease d equilibrium price must decrease and equilibrium quantity must increase e equilibrium price must increase, but equilibrium quantity could either increase, decrease, or stay the same 4 Consider a firm with a production function F( L, K) 0 LK This production process a exhibits Increasing Returns to Scale b exhibits Constant Returns to Scale c exhibits Decreasing Returns to Scale d is characterized by a negative Marginal Product of Labor e More than one of the above answers is correct

2 5 Which of the following is NOT one of the three basic analytical tools (or three key analytical tools ) upon which nearly all microeconomic analysis relies? a Comparative Statics b Opportunity Cost c Equilibrium Analysis d Constrained Optimization e More than one of the above is NOT one of the three basic analytical tools 6 Suppose that demand for paper is given by the inverse function P D ( q) 40 3 q It follows that demand is unit elastic a only at a price of p ( ) 3 6 b only at a price of p (40) 0 c only at a price of p 40 d only at a price of p ( 0) 60 e at all prices 7 Consider a market in which both the Law of Demand and Law of Supply hold, and further D ( 0) 500 and S ( 0) 900 It must be that: a there is excess supply at a price of p b there is excess demand at a price of p 4 c in equilibrium, more than 500 units are traded d in equilibrium exactly q * 700 are traded e More than one of the above answers is correct 8 Paul likes both x (peanut butter) and x (grape jelly) He always gets the same additional satisfaction from 3 more ounces of peanut butter as he does from one more ounce of grape jelly Which of the following utility functions is consistent with these preferences? a U ( x, x ) 3xx b U ( x, x ) min{ x, 3x } c U ( x, x ) 3x + x d U ( x, x ) x + 3x e Any of the above utility functions is consistent with the stated preferences

3 9 Consider a firm with Long Run Average Costs of AC LR ( q) 0q a The underlying production function exhibits Increasing Returns to Scale b The underlying production function exhibits Constant Returns to Scale c The underlying production function exhibits Decreasing Returns to Scale d The underlying production function exhibits Increasing Returns to Scale for low levels of q and Decreasing Returns to Scale for high levels of q e More information is needed in order to make any statement regarding the Returns to Scale of the production process 0 () (36) Bob produces output according to the production function F ( L, K) L K He wants to produce q units as inexpensively as possible In the Long Run, a he should hire zero units of capital whenever w < r b he should hire zero units of labor whenever w > r c he should choose a combination of labor and capital for which w MRTS L, K r d his Average Costs of production are constant for all levels of output e he should hire three times as much labor as capital (ie, K 3L ), regardless of the factor prices Consider a production process for which there is a Diminishing Marginal Product of Labor This implies that a doubling the use of every input will less than double the amount of output b the demand curve for the commodity being produced must satisfy the Law of Demand MRTS, does not depend upon the level of either L or K c L K d MP L becomes negative at high levels of labor e MP L becomes smaller as more labor is hired Jesse consumes only two goods: x (bubble bath) and x (Passion Fruit wine coolers) Both of these goods are normal goods for him As a result, a his Engel Curve for good one is positively sloped b his Income Consumption Curve is positively sloped c his Income Elasticity of Demand for good two is positive d an increase in income would lead to a rightward shift of his demand curve for good one e All of the above answers are correct

4 3 Microeconomics a analyzes the performance of national economies b deals with issues such as inflation rates, unemployment rates, and business cycles c studies choices of individual consumers but never businesses d examines the behavior of all types of individual decision makers, including consumers, households, managers, and firms e is never useful for making sound business decisions For questions 4 and 5, consider the following estimates for elasticities for Good X and Good Y, under current market conditions: Good X Good Y Price Elasticity of Demand Cross-Price Elasticity of Demand Income Elasticity of Demand Based upon these values, an increase in consumer income would result in a a decrease in demand for Good X (since 93 < 0) and a decrease in demand for Good Y (since 3 < 0 ) b an increase in demand for Good X (since < 93 ) and a decrease in demand for Good Y (since 3 < ) c an increase in demand for Good X (since 34 > 0 ) and an increase in demand for Good Y (since 45 > 0 ) d a decrease in demand for Good X (since < 0 ) and an increase in demand for Good Y (since 6 > 0 ) e None of the above answers are correct 5 Total consumer expenditure on Good X a could be increased by increasing the price of Good X (since 93 > ) b could be increased by decreasing the price of Good X (since 93 > ) c could be increased by increasing the price of Good X (since 34 > 0 ) d could be increased by decreasing the price of Good X (since < 0 ) e is maximized under current market conditions

5 For questions 6 through 9, consider the following scenario Kevin consumes x (beer) and x (DVDs) His utility is given by U ( X ) xx It follows that his marginal utility functions are MU x and MU x 6 Consider the following three consumption bundles: ( x A, x A ) ( 6,) B ( x B x B ) (,5), and C ( x C x C ) ( 4,3) Comparing these three bundles,,, A, a bundle A gives Kevin the highest level of utility (of these three bundles) b bundles A and C are on the same indifference curve c A B C d if 0 p 5, and 70, it follows that bundle C is not affordable e More than one of the above answers is correct 7 Kevin s a indifference curves are upward sloping b preferences are convex c x MRS, x d preferences depend upon his income e More than one of the above answers is correct 8 Suppose p 4, p, and I 00 The consumption bundle x x 50,0 is not affordable a (, ) ( ) b (, x ) ( 50,00) c (, x ) ( 0,0) d ( x ) ( 0,40) x is optimal, since x is not optimal, since p MRS, p p MRS, p x, is optimal, since it is affordable and e More than one of the above answers is correct p MRS, p 9 In order to maximize his utility when facing a budget constraint of p x + px I, Kevin should a * I purchase x units of beer p b * I purchase x p + p units of beer c * I purchase x p DVDs (so long as p < p ) d should spend his entire income on DVDs, for all possible prices e More than one of the above answers is correct

6 For questions 0 through, consider the following scenario Jaideep is a monopolist with Demand and Marginal Revenue illustrated by the linear functions below His total costs are given by TC ( q) 0q + F (from here it follows that MC ( q) 0, again as illustrated in the graph below) 50 $ Demand 30 0 MC MR q 0 In order to maximize profit, Jaideep should a sell 60 units of output b sell 30 units of output c sell 400 units of output d sell 640 units of output e sell 800 units of output When Jaideep chooses the level of output and price which maximizes his profit, a Producer s Surplus is equal to $6,400 b Consumers Surplus is equal to $3,00 c Deadweight Loss is equal to $6,400 d All of the above answers are correct e More than one, but not all, of the above answers are correct When Jaideep chooses the level of output and price which maximizes his profit, a he generates revenue of $6,400 b he is always able to earn a positive profit c he chooses to produce the efficient level of output d he will earn a positive profit if and only if F < 6, 400 e More than one of the above answers is correct

7 Short Answer Questions: A consumer with utility given by U ( X ) facing a budget constraint of * * * p x + px I optimally purchases X ( x, x ) As a result, she realizes * U X, which can be expressed as a function of prices and maximum utility of ( ) * income by the indirect utility function ( p, p I ) U ( X ) V, Explain why V ( p, p, I) 5I + p p could not be the correct indirect utility function (that is, explain why this functional form for V ( p, p, I ) is inconsistent with the notion of what the indirect utility function describes) (4 points) Consider a market in which demand is given by the linear function D( p) 4, p Suppose price decreases from p H 0 to p L 8 Determine the numerical value of the resulting change in Consumers Surplus (6 points)

8 3 Kristen produces output according to the production function F( L, K) 4 LK Each unit of capital costs r > 0 ; each unit of labor costs w > 0 Suppose she is operating in the Short Run with K 5 units of capital i Graphically illustrate the solution to her Short Run Cost Minimization Problem (3 points) ii Determine the amount of labor that she should hire in the Short Run in order to produce q units of output at lowest possible cost (3 points) iii Suppose w 40 and r 00 Determine the realized value of Variable Costs of production when producing q 00 units of output as inexpensively as possible in the Short Run (3 points) iv Again suppose w 40 and r 00 Determine the realized value of Average Fixed Costs of production when producing q 500 units of output as inexpensively as possible in the Short Run (3 points)

9 4 Consider a perfectly competitive firm operating in the Short Run Marginal Costs, Average Variable Costs, and Average Total Costs are illustrated below $ MC 3 ATC 8 AVC q i If the price of the output of this firm is p 5, what quantity should this firm produce in order to maximize profit? (4 points) ii If the price of the output of this firm is p, is this firm able to earn a positive profit? Explain (4 points) iii Determine the numerical value of Fixed Costs of Production (4 points)

10 Extra Credit! (4 points) Jeff is going to take ECON 30 during the upcoming Spring 006 semester His instructor is going to give two exams and drop the lowest exam grade Thus, his semester average depends upon only his highest exam score as follows: (Semester Average) g ( E, E ) max{ E, E } (where E (score on Exam ) and E (score on Exam )) His score on each exam depends upon the amount of time he studies for each exam as follows: s E s and s E s (where s (time spent studying for Exam ) and s (time spent studying for Exam )) Suppose he wants to earn a (Semester Average) 90, while minimizing the total amount of time he spends studying How many hours should he spend studying for each exam and what grade will he earn on each exam? Clearly explain

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