Econ 410, Fall 2007 Lauren Raymer Practice Midterm. Choose the one alternative that best completes the statement or answers the question.

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1 Econ 410, Fall 2007 Lauren Raymer Practice Midterm Name PID Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a positive statement? 1) A) Because many adults cannot afford to go to college, tax credits for tuition should be introduced. B) The President of the United States ought to be elected by a direct vote of the American people rather than the Electoral College. C) A fundamental assumption of the economic theory of consumer behavior is that consumers always prefer having more of any good to having less of it. D) all of the above. E) none of the above. 2) In a perfectly competitive market: 2) A) No single buyer or seller can significantly affect the market price. B) There are a few buyers. C) There is a cartel. D) There is a single seller. 3) Which of the following features are relevant for determining the extent of a market? 3) A) Its geographical boundaries. B) Technological innovations that would reduce the cost of production. C) The range of products to be included in it. D) Both A and B E) Both A and C 4) Which of the following will NOT cause a shift in the supply of gasoline? 4) A) An improvement in oil refining technology. B) A decrease in the price of crude oil. C) An increase in the wage rate of refinery workers. D) A decrease in the price of gasoline. 5) You are analyzing the demand for good X. Which of the following will result in a shift to the right of the demand curve for X? A) An increase in the price of a good that is a substitute for X. B) A decrease in the price of X. C) An increase in the price of a good that is a complement to good X. D) all of the above. 5) 6) The crossprice elasticity between a pair of complementary goods will be 6) A) negative. B) positive or zero depending upon the strength of the relationship. C) positive. D) zero. 1

2 7) Which of the following statements about the diagram below is true? 7) A) Demand is infinitely elastic. B) Demand is completely inelastic. C) Demand becomes more elastic the lower the price. D) Demand becomes more inelastic the lower the price. 8) In the long run, new firms can enter an industry and so the supply elasticity tends to be 8) A) more elastic than in the shortrun. B) perfectly inelastic. C) perfectly elastic. D) less elastic than in the shortrun. 9) The endpoints (horizontal and vertical intercepts) of the budget line: 9) A) indicate the highest level of satisfaction the consumer can achieve. B) represent the quantity of each good that could be purchased if all of the budget were allocated to that good. C) measure the rate at which a consumer is willing to trade one good for another. D) measure its slope. E) measure the rate at which one good can be substituted for another. 10) Which of the following is true at each point along a price consumption curve? 10) A) All income is spent, but utility is not maximized. B) Utility is maximized, and all income is spent. C) The level of utility is constant. D) Utility is maximized but income is not all spent. 11) Use the following two statements in answering this question: I. All Giffen goods are inferior goods. II. All inferior goods are Giffen goods. A) I and II are true. B) I is false, and II true. C) I and II are false. D) I is true, and II is false. 11) 12) Which of the following is true concerning the substitution effect of a decrease in price? 12) A) It will lead to an increase in consumption only for an inferior good. B) It will lead to an increase in consumption only for a Giffen good. C) It always will lead to an increase in consumption. D) It will lead to an increase in consumption only for a normal good. 2

3 13) The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by 13) purchasing lemonade and popcorn, his marginal rate of substitution will be: A) 1/2 lemonade for each popcorn. B) 1 lemonades for each popcorn. C) 2 lemonades for each popcorn. D) indeterminate unless more information on Fred's marginal utilities is provided. 14) When a person consumes two goods (A and B), that person's utility is maximized when the budget is allocated such that: A) the marginal utility of A equals the marginal utility of B. B) the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B. C) the ratio of total utility of A to the price of A equals the ratio of the marginal utility of B to the price of A. D) the marginal utility of A times the price of A equals the marginal utility of B times the price of B 14) 15) Which of the following is true regarding income along a price consumption curve? 15) A) Income is decreasing. B) Income is increasing. C) The level of income depends on the level of utility. D) Income is constant. 16) Use the following two statements in answering this question: I. For all Giffen goods the substitution effect is larger than the income effect. II. For all inferior goods the substitution effect is larger than the income effect. A) I is true, and II is false. B) I and II are true. C) I and II are false. D) I is false, and II is true. 16) 3

4 Alvin's preferences for good X and good Y are shown in the diagram below. Practice Midterm Figure ) Refer to Figure 3.1. Which of the following is true concerning Alvin's marginal rate of substitution? 17) A) It is zero. B) It is positive. C) It is constant. D) It is diminishing. 18) Based on Figure 3.1, it can be inferred that: 18) A) Alvin will never purchase any of good Y. B) Alvin does not consider good X as "good." C) Alvin regards good X and good Y as perfect complements. D) Alvin regards good X and good Y as perfect substitutes. E) none of the above. 4

5 Alvin's preferences for good X and good Y are shown in the diagram below. Practice Midterm Figure ) Refer to Figure 3.2. Which assumption concerning preferences do Alvin's indifference curves violate? A) Diminishing marginal rates of substitution. B) Transitivity of preferences. C) More is preferred to less. D) Completeness. E) Both A and C. 19) 20) Based on Figure 3.2, it can be inferred that: 20) A) Alvin will never purchase any of good Y. B) Alvin does not consider good X as "good." C) Alvin regards good X and good Y as perfect substitutes. D) Alvin regards good X and good Y as perfect complements. E) none of the above. Scenario 1: The demand for books is: The supply of books is: Qd = P Qs = 5P 21) Refer to Scenario 1. What is the equilibrium price of books? 21) A) 20 B) 5 C) 15 D) 10 E) none of the above 22) Refer to Scenario 1. If the government sets P = $25, which of the following is true? 22) A) There is a shortage, but it is impossible to determine how large. B) There is a surplus equal to 30. C) There is a surplus, but it is impossible to determine how large. D) There is a shortage equal to 30. 5

6 Scenario 1: Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10, ) Refer to Scenario 1. The expected value of the undertaking, 23) A) according to Sarah, is $110,000. B) according to Sarah, is $100,000. C) according to Sarah, is $75,000. D) according to Aline, is $100,000. E) according to Aline, is $200,000. Table 5.4 Job Outcome 1 Deviation Outcome 2 Deviation A $40 W $60 X B $20 Y $50 Z 24) Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, and if at Job B the $20 outcome occurs with probability.1, and the $50 outcome occurs with probability.9, then A) Job A is riskier only because the expected value is lower. B) Job A is riskier because the standard deviation is higher. C) Job A is safer because the difference in the probabilities is lower. D) Job B is riskier because the difference in the probabilities is higher. E) There is no definite way given this information to tell how risky the two jobs are. 25) Refer to Table 5.4. If at Job B the $20 outcome occurs with probability.2, and the $50 outcome occurs with probability.8, then the standard deviation of payoffs at Job B is nearest which value? A) $35. B) $12. C) $44. D) $10. E) $20. 24) 25) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 26) The U.S. Department of Agriculture is interested in analyzing the domestic market for corn. The USDA's staff economists estimate the following equations for the demand and supply curves: Qd = 1, P Qs = P Quantities are measured in millions of bushels; prices are measured in dollars per bushel. a. Calculate the equilibrium price and quantity that will prevail under a completely free market. b. Calculate the price elasticities of supply and demand at the equilibrium values. c. The government currently has a $4.50 bushel support price in place. What impact will this support price have on the market? Will the government be forced to purchase corn under a program that requires them to buy up any surpluses? If so, how much? 6

7 27) Adriana is in charge of setting the price on basketball tickets for the local team's home games. From previous experience, she has estimated demand to be P = Q, where P represents price in dollars per seat, and Q represents seats that could be sold per game. The seating capacity is 25,000 seats. Determine the number of tickets that would be sold at a ticket price of $15 each. Also, determine the consumer surplus that could be absorbed from these consumers if Adriana were able to set ticket prices so that each customer (who values the ticket at least at $15) pays the entirety of his or her actual valuation of the ticket. 28) Sally consumes two goods, X and Y. Her utility function is given by the expression U = 3 XY2. The current market price for X is $10, while the market price for Y is $5.00. Sally's current income is $500. a. Sketch a set of two indifference curves for Sally in her consumption of X and Y. b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope. c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial quantities are possible.) (Note:MUY = 6XY and MUX = 3Y2.) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to 15. What would happen to her utility as a result of the price increase? 7