Eastern Mediterranean University Faculty of Business and Economics Department of Economics Spring Semester

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1 Eastern Mediterranean University Faculty of Business and Economics Department of Economics Spring Semester ECON101 Introduction to Economics I Second Midterm Exam Duration: 90 minutes Type A 23 May 2016 Name: Student ID: Group No: Part A: Multiple Choice Questions (2.5 points each, total 125 points) Please mark your answers on both the exam paper and the optic sheet. 1. Refer to Table 5 2. Using the midpoint method, if the price falls from $200 to $150, the absolute value of the price elasticity of demand is a b c d Refer to Table 5 2. Using the midpoint method, if the price falls from $200 to $150, the price elasticity of demand is a. Zero. b. unit elastic. c. inelastic. d. elastic. 3. When studying how some event or policy affects a market, elasticity provides information on the a. equity effects on the market by identifying the winners and losers. b. magnitude of the effect on the market. c. speed of adjustment of the market in response to the event or policy. d. number of market participants who are directly affected by the event or policy. 4. If the demand for textbooks is inelastic, then an increase in the price of textbooks will a. increase total revenue of textbook sellers. b. decrease total revenue of textbook sellers. c. not change total revenue of textbook sellers. d. There is not enough information to answer this question. 5. Generally, a firm is more willing and able to increase quantity supplied in response to a price change when a. the relevant time period is short rather than long. b. the relevant time period is long rather than short. c. supply is inelastic. d. the firm is experiencing capacity problems. 6. If Max experiences a decrease in his income, then we would expect Max s demand for a. each good he purchases to remain unchanged. b. normal goods to decrease. c. luxury goods to increase. d. inferior goods to decrease. Page 1 of 6

2 7. Refer to Figure 5 3. Jenna says she would buy 10 gallons of gas per week regardless of the price. If this is true, then Jenna's demand for gas is represented by demand curve a. A. b. B. c. C. d. D. 8. Refer to Figure 5 3. Which demand curve is perfectly elastic? a. A b. B c. C d. D 9. When a supply curve is relatively flat, the a. sellers are not at all responsive to a change in price. b. equilibrium price changes substantially when the demand for the good changes. c. supply is relatively elastic. d. supply is relatively inelastic. 10. Suppose good X has a positive income elasticity of demand. This implies that good X could be (i) a normal good. (ii) a necessity. (iii) an inferior good. (iv) a luxury. a. (i) only b. (i) and (ii) only c. (i), (ii), and (iv) only d. (iii) only 11. Refer to Figure 1. You have $36 to spend on good X and good Y. If good X costs $6 and good Y costs $12, your budget constraint is a. AB. b. CB. c. CD. d. ED. Figure Refer to Figure 1. If the price of good X is $3, and your budget constraint is CB, what is the price of good Y? a. $3.33 b. $5 c. $15 d. $ Refer to Figure 1. Which of the following could explain the change in the budget line from ED to CD? a. a decrease in the price of X b. an increase in the price of Y c. a decrease in the price of Y d. an increase in income 14. Refer to Figure 1. You have $60 to spend on good X and good Y. If good X costs $6 and good Y costs $10, then the budget line is CB, and its slope is a. 10/6 b. 3/6 c. 10/10 d. 6/ Refer to Table 1. The marginal product of the third worker is a. 9,000 units. b. 8,000 units. c. 7,000 units. d. 5,000 units. Table 1 Page 2 of 6

3 16. Refer to Figure 2. Assume that the consumer has an income of $40, the price of a bag of marshmallows is $2, and the price of a bag of chocolate chips is $2. The optimizing consumer will choose to purchase which bundle of marshmallows and chocolate chips? a. A b. B c. C d. D Figure Refer to Figure 2. Assume that the consumer has an income of $40. If the price of chocolate chips is $4 and the price of marshmallows is $4, the optimizing consumer would choose to purchase a. 9 marshmallows and 6 chocolate chips. b. 10 marshmallows and 10 chocolate chips. d. 3 marshmallows and 9 chocolate chips. d. 5 marshmallows and 5 chocolate chips. 18. Refer to Figure 2. Assume that the consumer has an income of $40, the price of a bag of marshmallows is $2, and the price of a bag of chocolate chips is $4. The consumer will choose a consumption bundle at point B where the marginal rate of substitution is a. 2/3 b. 1/2. c. 1. d Refer to Figure 2. When the price of chocolate chips is $4, the price of marshmallows is $2, and income is $40, Paul s optimal choice is point B. Then the price of marshmallows increases to $4. Paul s new optimal choice is point a. A. b. B. c. D. d. E. 20. Refer to Figure 2. Paul s optimal choice changes from point A to Point B when the price of marshmallows decreases. We can use the information provided by the consumer s optimum choices to derive the a. demand curve for chocolate chips. b. demand curve for marshmallows. c. supply curve for marshmallows. d. labor leisure tradeoff. 21. Refer to figure 2. Paul s optimal choice changes from point A to Point C when his income increases. Based on this information provided a. marshmallows are normal goods, and chocolate chips are inferior goods. b. marshmallows are inferior goods, and chocolate chips are normal goods. c. marshmallows and chocolate chips are both normal goods. d. marshmallows are normal goods; chocolate chips are neither normal nor inferior goods. 22. Refer to Figure The graph illustrates a typical a. total cost curve. b. production function. c. production possibilities frontier. d. fixed cost curve 23. The total cost to the firm of producing zero units of output is a. zero in both the short run and the long run. b. its fixed cost in the short run and zero in the long run. c. its fixed cost in both the short run and the long run. d. its variable cost in both the short run and the long run. Page 3 of 6

4 24. Chelsea wants to start her own Christmas ornament business. She can purchase a suitable factory that costs $100,000. Chelsea currently has $100,000 in the bank earning $3,000 interest per year. Suppose Chelsea purchases the factory using her own money. What is Chelsea s annual implicit opportunity cost of purchasing the factory? a. $2,000 b. $3,000 c. $4,500 d. $5, Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom s economic profit for his first year in business? a. $0 b. $20,000 c. $65,000 d. $85, Trevor s Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor s Tire Company s total profits are a. $7,500. b. $25,000. c. $32,500. d.$67,500 Labor Output Variable Cost Fixed Cost 0 0 $0 $ $20 $ $40 $ $60 $ $80 $ $100 $ $120 $ Refer to Table above What is the total cost of producing 200 units of output? a. 20 b. 10 c. 50 d Refer to Table above. What is the average total cost of producing 525 units of output? a. 100 b. 10 c d Refer to Table above. What is the average variable cost of producing 500 units of output? a b. 80 c. 10 d Refer to Table above. What is the average fixed cost of producing 450 units of output? a. 60 b c. 10 d When a firm is making a profit maximizing production decision, which of the following principles of economics is likely to be most important to the firm's decision? a. The cost of something is what you give up to get it. b. A country's standard of living depends on its ability to produce goods and services. c. Prices rise when the government prints too much money. d. Governments can sometimes improve market outcomes. 32. Carol Anne makes candles. If she charges $20 for each candle, her total revenue will be a. $1,000 if she sells 100 candles. b. $500 if she sells 25 candles. c. $20 regardless of how many candles she sells. d. $200 if she sells 5 candles. 33. Which of the following statements is correct? a. Opportunity costs equal explicit minus implicit costs. b. Economists consider opportunity costs to be included in a firm s total revenues. c. Economists consider opportunity costs to be included in a firm s costs of production. d. All of the above are correct. Page 4 of 6

5 34. Frank owns a dog cleaning business. Which of the following costs would be implicit costs? (i) dog shampoo (ii) rent on the shop (iii) wages Frank could earn as a substitute elementary school teacher (iv) interest that Frank s money was earning before he spent his savings to set up the dog grooming business a. (i) and (ii) only b. (iv) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv) 35. Economic profit a. will never exceed accounting profit. b. is most often equal to accounting profit. c. is always at least as large as accounting profit. d. is a less complete measure of profitability than accounting profit. 36. Refer to Table If the firm can sell its output for $1 per unit, what is the profit maximizing level of output? a. 240 units b. 230 units c. 190 units d. 170 units 37. What are the two effects of a change in a price that a consumer experiences? a. the income effect and the budget effect b. the complement effect and the substitute effect c. the price effect and the preference effect d. the income effect and the substitution effect 38. When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product. 39. The theory of consumer choice examines a. the determination of output in competitive markets. b. the tradeoffs in decisions made by consumers. c. how consumers select inputs into manufacturing production processes. d. the determination of prices in competitive markets. 40. The theory of consumer choice a. underlies the concept of the demand for a particular good. b. underlies the concept of the supply of a particular good. c. both a. and b. d. none of the above 41. A budget constraint shows the a. prices that a consumer chooses to pay for products he consumes. b. purchases made by consumers. c. consumption bundles that a consumer can afford. d. consumption bundles that give a consumer equal satisfaction. Page 5 of 6

6 42. A consumer who doesn't spend all of her income a. would be at a point outside of her budget constraint. b. would be at a point inside her budget constraint. c. must not be consuming positive quantities of all goods. d. must be consuming at a point where her budget constraint touches one of the axes. 43. The slope of the budget constraint is determined by the a. relative price of the goods measured on the axes. b. relative price of the goods measured on the axes and the consumer s income. c. endowment of productive resources. d. preferences of the consumer. 44. The slope of the budget constraint is all of the following except a. the relative price of two goods. b. the rate at which a consumer can afford to trade one good for another. c. the marginal rate of substitution. d. constant. 45. A consumer chooses an optimal consumption point where the a. marginal rate of substitution equals the relative price ratio. b. slope of the indifference curve equals the slope of the budget constraint. c. ratio of the marginal utilities equals the ratio of the prices. d. All of the above are correct. 46. When considering her budget, the highest indifference curve that a consumer can reach is the a. one that is tangent to the budget constraint. b. indifference curve farthest from the origin c. indifference curve that intersects the budget constraint in at least two places. d. None of the above is correct. 47. When the price of a good increases, ceteris paribus, the higher price a. reduces the consumer's set of buying opportunities. b. leads to a parallel shift of the budget constraint. c. will necessarily lead to an increase in the consumption of goods whose price did not change. d. generally discourages the consumption of inferior goods. 48. Refer to Figure The firm experiences economies of scale at which output levels? a. output levels less than M b. output levels between M and N c. output levels greater than N d. All of the above are correct as long as the firm is operating in the long run. Figure Refer to Figure Which of the curves is most likely to characterize the short run average total cost curve of the smallest factory? a. ATC A b. ATC B c. ATC C d. ATC D 50. A rational consumer maximizes her a. Preferences. b. marginal rate of substitution. c. utility. d. budget constraint. Page 6 of 6