Second Midterm Exam, Version #1 October 29, 2009 DO NOT BEGIN WORKING UNTIL YOU ARE TOLD TO DO SO. READ THESE INSTRUCTIONS FIRST.

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1 Second Midterm Exam, Page 1 of 11 Economics 101 Professor Scholz Second Midterm Exam, Version #1 October 29, 2009 DO NOT BEGIN WORKING UNTIL YOU ARE TOLD TO DO SO. READ THESE INSTRUCTIONS FIRST. You have 75 minutes to complete the exam, which consists of 33 multiple-choice questions. The exam is worth 100 points. Each question is worth 3 points: you get 1 point for filling in the requested information correctly. Please answer the questions on your coding sheet with a #2 pencil. Be sure to fill in the coding sheet carefully and accurately. Please also turn in your exam with name, ID, and student number. Name ID Student number How to fill in the coding sheet: 1. Fill in the bubbles on your answer sheet with your last name, first name, and middle initial. 2. Fill in the bubbles so we know your student identification number. 3. Fill in the bubbles under "Special Codes" spaces ABC so we know the discussion section number for which you are officially registered. Discussion sections are listed below: 4. Finally, after filling in your section code, please put the exam version in the Special Codes spaces. You will end up with a 4-digit Special Codes number a three digit section number followed by a one digit exam number. Georgy Loginov William Nicholson Jiao Shi Fumihiko Suga 305 F 1: W 4: F 2: W 3: W 4: F 11: F 12: F 8: W 3: F 8: F 11: F 9: F 9:55 Carly Urban Matthew Friedman Irina Merkurieva Michael Pistone 310 F 2: W 3: F 1: F 2: F 12: W 4: F 9: F 12: F 8: F 8: F 11: F 1: F 2:25 Evangelos Stravelas Yuan Yuan 330 W 3: F 11: W 4: F 12: F 1: F 9: F 2: F 8:50 If you have a question during the exam, stay seated and please raise your hand. To show respect to your fellow students, please stay seated in your exam seat for the full 75 minutes. All exams and answer sheets must be turned in as you leave the exam. The exam will be discussed in section next week. Relax. Stop, take a deep breath, and think carefully before you answer any questions. Good luck!

2 Second Midterm Exam; Page 2 of 11 Answer these multiple choice questions on the scantron sheet, selecting the best answer. 1) Using the following graph that shows total costs, what is the level of variable costs when 6 units are produced? a) $50 b) $100 c) $400 d) $500 e) Not enough information is given 2) The following table gives cost information for the production of soccer balls. Some values are missing, however. Which of the following statements is true? Quantity Variable Cost Fixed Cost Total Cost Average Variable Cost ($ per unit) Marginal Cost ($ per unit) B 10 E 2 25 C D F 3 A G a) A=45, E=40 b) A=45, E=10 c) A=75, E=40 d) A=75, E=10 e) Not enough information is given in the table to answer the question

3 Second Midterm Exam, Page 3 of 11 You are given the following information that you should use to answer the next four questions. The retail market demand curve for computers in Madison, Wisconsin is perfectly competitive and characterized by the following demand curve: P=2000-4Q. Supply is P=500+Q. Total costs are 2 TC = q + 2q and the corresponding marginal costs are MC = q. 3) How many firms are in this perfectly competitive industry in the short run? a) 3 b) 4 c) 5 d) 6 e) None of the above 4) In the short run, the firms make of? a) Losses, $20,000 b) Profits, $20,000 c) Losses, $19,800 d) Profits, $19,800 e) None of the above 5) In the long run, the equilibrium price that ensures $0 economic profits will be earned is a) $400 b) $440 c) $480 d) $520 e) The problem is not well-specified, because competitive firms need to earn economic profit in the long run. 6) The equilibrium number of firms in the long-run is a) 19 b) 25 c) 30 d) 35 e) 39

4 Second Midterm Exam; Page 4 of 11 7) The following table gives the marginal cost for a perfectly competitive firm of producing different quantities. Their fixed costs equal $30. Output Marginal Cost ($ per unit) Which of the following prices will the firm make negative profits but still remain open in the short run? a) $5 b) $12 c) $20 d) $25 8) Michael s demand for sweaters is P= Q. Jiao s demand for sweaters is P= Q. Their market (or aggregate) demand when price is below 400 is a) 4 P= 400 Q. 3 b) P= Q. c) Q= P. d) 4 P= 800 Q. 3 e) The correct answer is not listed. 9) For a perfectly competitive firm, as quantity increases a) marginal revenue decreases b) marginal revenue stays the same c) marginal revenue increases d) marginal cost decreases e) One can t say given the information provided.

5 Second Midterm Exam, Page 5 of 11 10) In the following figure, when the price of good X increases, the substitution effect is given by, and good Y is. a) The change in Q indicated by points 4 to 5, and inferior. b) The change in Q indicated by points 2 to 1, and normal. c) The change in Q indicated by points 6 to 4, and inferior. d) The change in Q indicated by points 6 to 4, and normal. e) The change in Q indicated by points 6 to 5, and normal. 11) As you discovered in your readings, Ken Chen studies economics by doing research on capuchin moneys. Chen showed a) That monkeys, when given an opportunity, behave in a manner consistent with perfectly competitive businesses. b) That monkeys are more reliable subjects than undergraduates for conducting economic research. c) The monkeys responded rationally to simple incentives, irrationally to risky gambles, failed to save, and stole money when they could. d) Demand for most things that monkeys like is elastic. e) There are no inferior goods when doing lab experiments with monkeys. 12) Suppose utility is U Optimal consumption is 1 Y = ( XY) 2 where the MRS =. If PX = 15, PY = 30 and income is $900. X a) X=30, Y=30 b) X=40, Y=10 c) X=20, Y=20 d) X=30, Y=15 e) X=60, Y=0

6 Second Midterm Exam; Page 6 of 11 13) You are given the following information about the costs for a firm. Quantity Variable Fixed Cost Cost On the following graph, which line is the best depiction of the average total cost curve for this firm? a) Curve A b) Curve B c) Curve C d) Curve D e) Not enough information is given 14) The government decides to pass a law that requires all automobiles to have side and rear airbags. This law will increase the production costs by $3500 for all automobiles. If the demand for automobiles is highly elastic (and the supply curve for automobiles is not), the carmakers will a) Share this cost equally with car-buyers b) Pass almost all of this cost along to car-buyers c) Stop producing automobiles d) Pass very little of this cost along to car-buyers e) Not enough information is given to answer this question.

7 Second Midterm Exam, Page 7 of 11 15) Jeanette spends her clothing budget on skirts and handbags. Each skirt costs $50. At Jeanette's optimal choice, her marginal utility from the last skirt purchased is 200 and her marginal utility from the last handbag purchased is 300. This means that each handbag must cost a) $50 b) $75 c) $100 d) $150 16) Bob owns a firm that produces cars. To build his factory, he has to pay a fixed cost of $1,000. Producing each car costs him and additional $200. What is the marginal cost of producing the 5 th car? a) $20 b) $100 c) $200 d) $400 17) Tom has $18 per week in his entertainment budget. He splits his time between going to the movies and bowling. Each movie costs $6 while each game of bowling costs $3. To make his preferred choice, Tom uses a handy utilimometer that measures his total utility from each of these activities, which is shown below. Tom's utility maximizing point is Movies Total Utility Bowling Games Total Utility a) 0 movies, 6 games of bowling b) 5 movies, 7 games of bowling c) 1 movie, 4 games of bowling d) 2 movies, 2 games of bowling e) None of the above.

8 Second Midterm Exam; Page 8 of 11 18) Economist Edward Glaser wrote one of your readings entitled How Competition Saved New York. Glaeser s thesis is that a) New York benefited from deregulation of financial markets, which allowed Wall Street firms to get very large. b) Lessons can be learned by contrasting Pittsburgh, which depended on a single industry (steel) and New York, which had a more diversified industrial base. c) Competition with other forms of entertainment (museums, music, fine food, sports, etc.) has worked to lower the real cost of Broadway shows. d) Competition in rental housing markets allowed an explosive growth of housing options in the 5 New York boroughs. e) More industries in New York are competitive than in Chicago and Los Angeles, which accounts for the fact that New York has grown more rapidly than the other cities over the last 90 years ) Suppose U = X + Y and MRS = and the price of good X is 5, the price of good Y is 50, 2 X and income is $375. What is optimal consumption of X and Y? a) X=75, Y=0 b) X=45, Y=3 c) X=35, Y=4 d) X=25, Y=5 e) None of the above 20) Joey will only drink gin (G is ounces of gin), only if it is mixed with tonic (T is ounces of tonic). He consumes them in one-to-one ratios and they are perfect complements Suppose gin costs $2 an ounce, and tonic costs $0.50 an ounce. If Joey s gin and tonic budget is $20, what is his optimal consumption of gin and tonic? a) G=20, T=0 b) G=0, T=40 c) G=10, T=10 d) Any amount of G and T that puts Joey on the budget constraint is optimal. e) G=8, T=8 21) A profit-maximizing firm chooses its optimal quantity based on the marginal cost curve. At the optimal quantity, marginal cost is less than average variable cost. The firm should a) Shut down immediately b) Should increase production c) Should decrease production, but remain open d) Should remain open in the short run but shut down in the long run. e) Not enough information is provided.

9 Second Midterm Exam, Page 9 of 11 22) Mario eats only pizza and burgers. His weekly food budget is $48. Each pizza costs $6 and each burger costs $3. When deciding how much of each good to buy, Mario multiplies the number of pizzas by the number of burgers, which measures his utility. For example, 2 pizzas and 4 burgers will give him a utility of 8. You are not given the MRS here, so instead, note the affordable combinations of pizza and burgers. At Mario's utility-maximizing point, his utility is a) 32 b) 48 c) 50 d) 56 e) None of the above. 23) Bob owns a company that produces picture frames. Bob's fixed costs are $30. His marginal costs are $8 for the first picture frame, $6 for the second one, $10 for the third one, $22 for the fourth one, and $39 for the fifth. At a price of $22, what would his optimal profits equal? a) $0 b) $2 c) $12 d) $20 e) None of the above 24) The cross-price elasticity of hot dogs with respect to soft drinks is -2. If the price of hot dogs increase by 5%, the quantity demanded of soft drinks will a) Fall by 10% b) Fall by 2.5% c) Rise by 10% d) Rise by 2.5% e) None of the above 25) The average annual income falls from $30,000 to $25,000 and the quantity of corn consumed in a year by the average person rises from 10 pounds a year to 11 pounds a year. This means that corn is a(n) a) Normal good b) Substitute c) Inferior good d) Complement e) Necessity 26) Consider the following demand curve, P=20-Q. What is the elasticity of demand as the price falls from 16 to 14? a) Not enough information is given. b) 0 c) 1 d) 2 e) 3

10 Second Midterm Exam; Page 10 of 11 27) The income elasticity of demand for steak is 3 and income rises by 10%. The quantity demanded of steak will a) Fall by 3.333% b) Fall by 30% c) Rise by 3.333% d) Rise by 30% 28) The Scholz daughters have a lemonade stand. Dad pays for all supplies, so they only care about maximizing their total revenue. Dad tells the Scholz girls that at their current price, demand for their lemonade is inelastic. To maximize their revenue, the Scholz girls should a) Raise their prices b) Cut their prices c) Keep prices unchanged d) There is no way to know when total revenue is maximized e) Set their prices to $0 per cup. Figure: Good X and Good Y 29) (Figure: Good X and Good Y) Which chart in the accompanying figure shows the effects of a decrease in the price of good X, when good X and good Y are complements? a) A b) B c) C d) c) D None of the above

11 Second Midterm Exam, Page 11 of 11 Please use the following information for the next two questions. Suppose a firm in a perfectly 2 competitive industry has the following cost curves: MC = 4q+ 4 and TC = 2 + 4q+ 2 q. 30) What is the optimal quantity for the firm if the market price is 12? a) The firm should shut down. b) q=1 c) q=2 d) q=3 e) q should be greater than 3 31) What will price be in the long-run equilibrium? a) P=4 b) P=6 c) P=8 d) P=10 32) Professor Scholz is teaching 800 students in economics 101 this semester. Suppose all students in class have the same demand for weekly fast food, where Q is the number of meals per week P= 20 Q. The market or aggregate fast food demand by the class is a) 800P= Q b) 1 P= Q 800 c) 1 P= 20 Q 800 d) P= 20 Q e) P= Q 33) Ronald has the following utility function for Big Macs and Whoppers: U = 4M + W where M represents Big Macs and W represents Whoppers. Suppose Big Macs sell for $2 and Whoppers are $1. Ronald has $40 a week to spend on Whoppers or Big Macs. How many will he consume? a) He can consume any combination as long as he spends $40 on the sandwiches. b) 20 Big Macs and no Whoppers. c) 40 Whoppers and no Big Macs. d) 10 Big Macs and 20 Whoppers.