Professor Bee Roberts. Economics 302 Practice Exam. Part I: Multiple Choice (14 questions)

Transcription

1 Fall 1999 Economics 302 Practice Exam Professor Bee Roberts Part I: Multiple Choice (14 questions) 1. The law of demand (quantity demanded increases as price decreases) is always fulfilled for a normal good because when price changes: a. the substitution and income effects always reinforce each other. b. the substitution effect always dominates the income effect. c. the income effect always dominates the substitution effect. d. the substitution and income effects cancel each other out. 2. The main reason welfare of food stamp recipients taken together will be enhanced if they are given the cash-equivalent of the food stamp is that: a. food stamps limit consumer choice while cash does not. b. all recipients will consume more food and be better off. c. some recipients who prefer goods other than food can be better off, while the others are no worse off. d. all recipients will be able to consume more of both food and other goods and be better off. e. (a) and (c). 3. An isoquant may be defined as: a. all combinations of inputs for which a fixed level of total cost is incurred. b. all combinations of inputs which produce a particular level of output at minimum cost. c. a curve in input-space showing all possible combinations of inputs that are technically efficient in the production of a given level of output. d. all combinations of inputs among which the firm is indifferent. 4. At the point on the production function where the law of diminishing marginal returns starts to operate: a. an additional unit of labor will lower the increase in total product. b. an additional unit of labor will reduce total product. c. marginal cost of production is at its minimum. d. (a) and (c). e. (b) and (c). -1-

2 5. Suppose your production process only requires the use of skilled and unskilled labor and they are perfect substitutes in production. Which of the following statements is true? a. You will use only unskilled labor to produce your output as long as unskilled wage is less than skilled wage. b. You will use a combination of skilled and unskilled labor regardless of their relative wages. c. You will use only skilled labor since they are more productive. d. You will use some skilled labor and some unskilled labor since unskilled labor is paid less than skilled labor. 6. A firm s marginal product of labor is 3 and its marginal product of capital is 5. If the firm adds one unit of labor, but does not want its output quantity to change, the firm should: a. use five fewer units of capital. b. use 0.6 fewer units of capital. c. use 1.67 fewer units of capital. d. add 1.67 units of capital. 7. At the optimum combination of two inputs: a. the slopes of the isoquant and isocost curves are equal. b. costs are minimized for the production of a given output. c. the marginal rate of technical substitution equals the ratio of input prices. d. all of the above. e. (a) and (c) only. 8. If an Engel curve has a positive slope: a. both goods are normal. b. the good on the horizontal axis is normal. c. as the price of the good on the horizontal axis increases, more of both goods are consumed. d. as the price of the good on the vertical axis increases, more of the good on the horizontal axis is consumed. -2-

3 9. For an inferior good, the income and substitution effects: a. work together. b. work against each other. c. can work together or in opposition to each other depending upon their relative magnitudes. d. always cancel each other. 10. Which of the following is true regarding income along a price consumption curve? a. Income is increasing. b. Income is decreasing. c. Income is constant. d. The level of income depends on the level of utility. 11. The difference between an excise subsidy and an equal-sized cash grant is that: a. the excise subsidy involves an income and substitution effect, while the cash grant involves an income effect only. b. the cash grant involves an income and substitution effect, while the excise subsidy involves an income effect only. c. the excise subsidy involves a substitution effect only, while the cash grant involves an income effect only. d. the cash grant involves an income and substitution effect, while the excise subsidy involves a substitution effect only. -3-

4 Use the graph below to answer questions 12, 13 and Given Point A on budget constraint Y 0 X 0 explain the changes that occur when the price of X changes, rotating the budget line to Y 0 X 1 : a. the price of Y has risen but that of X is fixed. b. the price of X has risen but that of Y is fixed. c. the price of X and Y have risen. d. nominal income has fallen. e. taste has changed. 13. Given the changes described in question 12 : a. the substitution effect is the movement from Point A to B, and the income effect is the movement from Point B to C. b. the income effect is the movement from Point A to B and the substitution effect is the movement from point B to C. c. the substitution effect is the movement from Point A to C and the income effect is the movement from Point C to B. d. the income effect is the movement from point A to C and the substitution effect is the movement from point C to B. 14. Given the above movements, it is obvious that good X is: a. a luxury. b. a normal good. c. a necessity. d. an inferior good. e. a Giffen good. -4-

5 Part II: Short Answer/Essay Questions (6 questions) 15. True, False or Uncertain. Explain. a. When buying a piece of equipment, it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly. b. If marginal productivity is decreasing as more labor is hired, then average productivity must be decreasing as well. c. If the Engel curve for a good is upward sloping, the demand curve for that good must be downward sloping. -5-

6 16. In the above figure, bundle A is my equilibrium consumption bundle in 1997 and bundle B is my equilibrium consumption bundle in From the graph, it is clear that: Px a. is in 1998 compared to P Y b. In 1998 my welfare is compared to my 1997 welfare. c. Define the true cost of living index between 1997 and d. Suppose I am a civil servant and my income is indexed to the consumer price index. Show on the graph and explain why the government will be overcompensating me for the change in my true cost of living. -6-

7 17. Suppose a chair manufacturer is producing in the short run when equipment is fixed. The manufacturer knows that as the number of laborers used in the production process increases from 1 to 7, the number of chairs produced changes as follows: 10, 17, 22, 25, 26, 25, 23. a. Calculate the marginal and average product of labor for this production function. b. Does this production function exhibit diminishing returns to labor? Explain. c. Explain intuitively what might cause the marginal product of labor to become negative. -7-

8 18. Suppose a firm has a budget of $2,000. It currently employs 100 workers, each at $10 per hour, and 50 units of capital each at $20 per hour. Assume that at this allocation, the firm exhausts its total budget. a. Draw the firm s isocost, taking care to label the axis, y and x intercepts, the slope and the current position. b. Suppose your assistant informs you that at the current input combination of labor and capital, the marginal product of your labor is 3 and the marginal product of your capital is 5. How would you reallocate your resources so that you an either produce more output given your budget, or lower your cost given the current level of output? Explain your answer and illustrate it graphically. 19. At a large state university, an insurance company provides group medical coverage for -8-

9 university employees. When the company discovered that some of the younger employees had switched to insurance companies with lower rates, the company increased its rates. This is puzzling because you might think that the insurance company would drop its rates to prevent other employees from switching to other companies. Indeed, the rate hike caused more employees to switch. Did the insurance company act irrationally? 20. Suppose that you are responsible for buying a fleet of 10 used cars for your employees and must pick either brand B cars or brand C cars. For your purposes, the two brands are identical except for one difference: Based on your market experience with the two brands, you figure that 50% of B cars are lemons, and only 20% of C cars are lemons. Suppose that you are willing to pay $1,000 for a known lemon and $3,000 for a known plum. If the price of B cars is $1,800 and the price of C cars is $2,200, which brand of car should you pick? -9-