DO NOT BEGIN WORKING UNTIL YOU ARE TOLD TO DO SO. READ THESE INSTRUCTIONS FIRST.

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1 First Sample Midterm Exam #2; Page 1 of 11 Economics 101 Professor Scholz First Sample Midterm #2, Part #1 October 22, 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 First Sample Midterm Exam #2; Page 2 of 11 Answer these multiple choice questions on the scantron sheet, selecting the best answer. 1) Both Ike and Tina own furniture factories that produce rocking chairs. In her factory Tina uses a production process that has low fixed costs and high variable costs. In his factory Ike uses a production process with high fixed costs and low variable costs. Currently, each factory produces 100 rocking chairs at the same total cost. Which of the following statements is correct (assuming typical cost curves)? a) If each produces 10 fewer chairs, their total costs will be equal. b) If each produces 10 fewer chairs, Tina s total costs will exceed Ike s. c) If each produces 10 more chairs, their total costs will be equal. d) If each produces 10 more chairs, Tina s total costs will exceed Ike s. e) Not enough information is given. 2) A jewelry manufacturer has the capacity to produce 15,000 gold-plated wedding bands per month. At present it is selling 10,000 bands at $20 each. A national discount chain approaches the company and offers to purchase 5000 bands at $9 each. The company s average total cost at 10,000 bands is $12. At 15,000 bands it will be $10. Should they take the offer? a) No, $9 does not cover costs. b) No, $9 does not earn a sufficient profit. c) Yes, the deal causes profits to rise. d) Cannot tell from the information given. e) The firm should shut down. TC TC ) In the figure above, average fixed cost (AFC) at the optimal quantity shown by the splotch equals a) 10 b) 100 c) 1000 d) 180 e) 80 4) In the figure above, marginal cost (MC) equals a) 8 b) 80 c) 800 d) 1800 e) cannot tell from the information given

3 First Sample Midterm Exam #2; Page 3 of 11 5) In the figure above, at 100 units the average variable costs equals a) 8 b) 800 c) 100 d) 1000 e) 10 6) Karl s cookie company has a total revenue curve equal to TR=10Q. Marginal costs for Karl s cookie company are MC=2Q. The profit maximizing level of output is a) 10 b) 1 c) 4 d) 5 e) Cannot tell from the information given. 7) A firm hires two workers and rents 15 acres of land for a season. It produces 150,000 bushels of crop. If it had doubled its land and labor, production would have been 280,000 bushels. The firm has a) economies of scale. b) constant returns to scale. c) diseconomies of scale. d) fish scales. e) none of the above. 8) Consider a perfectly competitive industry. The industry as a whole is producing 3,000 units and the price of the good is $4 per unit. All of the firms have the following formula for marginal cost, MC = 2 + q/2. How many firms are there in the market? a) 750 b) 600 c) 1,000 d) 500 e) It is impossible to tell from the information given 9) The substitution effect of a change in the price of good X is the portion of the that can be attributed exclusively to the resulting change in relative prices a) change in the quantity of substitute good Y demanded b) change in the demand curve for good X c) change in the quantity of good X demanded d) change in the price of substitute good Y e) income effect 10) At a firm s profit-maximizing level of output, its price is $200 and its short-run average total cost is $225. The firm a) has a profit of $25 per unit of output.

4 First Sample Midterm Exam #2; Page 4 of 11 b) should shut down if its short-run average fixed cost is less than $25. c) has a loss of $100 per unit of output. d) should shut down if its short-run average variable cost exceeds $25. e) should increase production to maximize profit. 11) A bottle of wine costs $8 and a quiche $5. At Robert s present levels of consumption, he spends all of his income and receives a marginal utility of 10 from the last bottle of wine he buys and a marginal utility of 4 from the last quiche he buys. To maximize his total utility, Robert should probably a) buy less wine and more quiche. b) buy more wine and less quiche. c) spend all of his money on wine. d) change his spending patterns until he buys 8/5ths as much wine as quiche. e) spend all of his money on quiche. 12) When a firm exits a perfectly competitive industry, a) the individual demand curve facing each remaining firm shifts up. b) short-run industry equilibrium is re-established at a new point along the original short-run industry supply curve c) the short-run supply curve shifts to the right. d) at the new long-run equilibrium, the remaining firms in the industry will each receive a higher profit. e) Answer a) and d) 13) The only producer of chocolate bunnies in the world, Choco's Bunny Company, recently expanded its production capacity from 1,000 bunnies per day to 2,000 per day. Supposing the price elasticity of demand for Bunnies is 3.33, if you use the midpoint method of estimating the price elasticity of demand, by how much will the company need to reduce its price to sell the additional 1,000 bunnies? a) 2.5% b) 25% c) 125% d) 20% e) None of the above

5 First Sample Midterm Exam #2; Page 5 of 11 14) Consider a consumer choosing between two goods, X and Y. As depicted in the graph, the price of X falls and the consumer decides to purchase less of the good. Which of the following statements is necessarily correct? a) X is a normal good b) X is inferior c) It is not possible to tell whether X is normal or inferior d) The substitution effect of the price decrease means that less X will be consumed. e) Both b) and d) 15) When Comfy Cots produces 40 cots per day, its average variable cost is $600, its average total cost is $800, and its marginal cost is $700. When Comfy Cots increased production from 39 to 40 cost per day, what happened to Comfy Cots average total costs? a) Average total costs rose b) There is no way to tell c) Average total costs remained constant d) Average total costs fell e) All of the above 16) The Apple triplets, Delicious, Fugi, and Crispy have identical individual demand curves for chocolate chip cookies, P=40-5Q. Their market demand (where the market is just the triplet s demand) is a) P = 40/3 (5/3)Q b) Q = 40 5P c) P=120 15Q d) P=120 (5/3)Q e) P = 40 (5/3)Q 17) The highest loss a firm can earn in the short run (or the greatest negative profit) is equal to a) Total fixed costs b) Total variable costs

6 First Sample Midterm Exam #2; Page 6 of 11 c) The interest rate times the value of capital invested d) The present discounted value of future income streams e) Zero Good Y A B2 B1 Good X 18) Sarah chooses between two goods, X and Y. At first, the price of X is low and the price of Y is high (budget line B1). Sarah tells you her best affordable combination of X and Y is at point A. Then the price of X rises, while the price of Y falls (budget B2). Sarah tells you that at these new prices, her optimal consumption bundle is still point A. What must be true of Sarah s preferences? a) Sarah prefers X to Y. b) Sarah prefers Y to X. c) X and Y are perfect complements. d) X and Y are perfect substitutes e) Sarah s preferences must violate one of our assumptions about consumer behavior. 19) The output at which average total cost is a minimum is the output at which is a minimum. a) the same as; marginal product b) less than; average variable cost c) the same as; average variable cost d) greater than; average variable cost e) the same as; average fixed costs

7 First Sample Midterm Exam #2; Page 7 of 11 20) Refer to the Table: Jonathan s Carpet Cleaning Carpets TVC TFC TC AVC AFC ATC MC If the price of carpet-cleaning is $13, how many should Jonathan clean? a) 0 b) 1 c) 2 d) 3 e) 4 f) 5 21) A UW Economics Professor consumes only Diet Dr. Pepper and stale candy. His income is a mere $10 per month. Diet Dr. Pepper costs $0.50 and stale candy also costs $0.50. The price of Diet Dr. Pepper doubles. Assuming that he maximizes his utility, which of the following bundles would he NOT choose? a) 10 cans of Diet Doctor Pepper and 0 stale candy bars. b) 5 cans of Diet Doctor Pepper and 5 stale candy bars. c) 0 cans of Diet Doctor Pepper and 20 stale candy bars. d) 5 cans of Diet Doctor Pepper and 10 stale candy bars. e) All of the above bundles are consistent with utility maximization. 22) Consider the usual U-shape ATC and U-shape AVC curves. Which of the following is NOT true? a) MC curve should go through the minimum point of ATC curve. b) MC curve should go through the minimum point of AVC curve. c) ATC curve may or may not intersect with AFC curve. d) Diminishing return to scale always makes AVC upward sloping eventually. e) One reason that MC curves slope upwards is because AFC is downward sloping. 23) Imagine that you are the owner of 3 tricycle-producing plants, and none of them are currently producing tricycles. The marginal cost of an additional tricycle in Plant 1 is 2Q, in Plant 2 it is 6+Q, and in Plant 3 it is 7.5. Find the cost-minimizing plan for producing 4 tricycles and the total cost associated with that plan. a) Produce 3 tricycles in Plant 1 and 1 tricycle in Plant 3 for a total cost of $ b) Produce all 4 tricycles in Plant 1 for a total cost of $8. c) Produce 3 tricycles in Plant 1 and 1 tricycle in Plant 2 for a total cost of $22. d) Produce 2 tricycles in Plant 1 and 2 tricycles in Plant 2 for a total cost of $21. e) Produce 3 tricycles in Plant 1 and 1 tricycle in Plant 2 for a total cost of $19.

8 First Sample Midterm Exam #2; Page 8 of The average total cost of producing cell phones in a factory is $20 at the current output level of 100 units per week. If fixed cost is $1,200 per week: A) average fixed cost is $20. B) total cost is $3,200. C) variable cost is $2,000. D) E) average variable cost is $8. Not enough information is given 25) Olga consumes two normal goods, X and Y, and is currently at an optimum. If the price of good X falls, we can predict with certainty that Olga s real income will rise a) and she will therefore consume more of both goods. b) but the substitution effect will insure that she consumes more X and less Y. c) so she will consume more of good X, but she might consume more, less, or the same of good Y. d) but the substitution effect will negate the positive effect of the rise. e) None of the above. 26) The following graph shows Joe s preferences for bread and butter. Given his income and the initial prices he optimally chooses to consume at point A. Suppose the price of bread rises and the price of butter decreases in such a way that Joe s new budget constraint still passes through A. Then, the quantity consumed of butter will Bread A II I Butter a) increase. b) decrease. c) stay the same. d) Anything may happen. e) Consumption will go to zero

9 First Sample Midterm Exam #2; Page 9 of 11 The following table shows the price and yearly quantity of souvenir T-shirts in Stoughton, Wisconsin according to the average income of the visiting tourists. T-shirt price Quantity of T-shirts demanded when average tourist income is $20,000 $4.50 2,400 3,600 $5.50 1,600 2,800 $ ,400 $ ,800 Quantity of T-shirts demanded when average tourist income is $30,000 27) Calculate the price elasticity of demand (using the midpoint method, in absolute value) when the price of T-shirts rises from $4.50 to $5.50 when the tourist income is $20,000. a) 1 b) 1.5 c) 2 d) 3 e) None of the above 28) Calculate the income elasticity of demand (using the midpoint method) when the average tourist income increases from $20,000 to $30,000 when the price of a T-shirt is $4.50. a) 1 b) -1 c) 2 d) -2 e) None of the above Figure for problem 29: Prices, Cost Curves, and Profits

10 First Sample Midterm Exam #2; Page 10 of (Figure: Prices, Cost Curves, and Profits) In the accompanying figure, if the price is P 2, then the maximum profit the firm can earn is: A) (fg) x Q 3. B) (de) x Q 2. C) (fg) x Q 2. D) E) (de) x P 2. Not enough information is given Figure and Table: The Budget Line Consumption bundle Quantity of clams (pounds) A 0 10 B 1 8 C 2 6 D 3 4 E 4 2 F 5 0 Quantity of potatoes (pounds) 30. In the accompanying figure, a(n) in the price of clams would pivot the budget line along the axis the origin. A) increase; horizontal; away from B) decrease; horizontal; away from C) increase; vertical; toward D) E) decrease; vertical; away from none of the above

11 First Sample Midterm Exam #2; Page 11 of 11 Figure: Good X and Good Y 31. (Figure: Good X and Good Y) Which chart in the accompanying figure shows the effects of a decrease in income when good X is an inferior good and good Y is a normal good? A) A B) B C) C D) E) D None of the above 32. Sid is thinking of mowing lawns over the summer. His friend Jason currently mows lawns, and says the marginal cost of the 4 th lawn mown in a day is $40. Sid then realizes that the total cost of mowing 4 lawns is: A) 160. B) 40. C) 80. D) E) cannot be determined from the above information Clarence has a utility function U = X Y 4. The corresponding MRS = (3Y)/X. The price of good X is 9, the price of good Y is 3, and Clarence s income is 60. What is his optimal consumption? a) X=3, Y=9 b) X=5, Y=5 c) X=9, Y=3 d) X=9, Y=5 e) None of the above.

12 First Sample Midterm Exam #2; Page 12 of 11 Answers 1 d, 2 c, 3 a, 4 a, 5 a, 6 d, 7 c, 8 a, 9 c, 10 b, 11 b, 12 e, 13 d, 14 b, 15 d, 16 e, 17 a, 18 c, 19 d, 20 d, 21 b, 22 e, 23 e, 24 d, 25 c, 26 c, 27 c, 28 a, 29 b, 30 b, 31 a, 32 d, 33 b