ECONOMICS 10-007 Dr. John Stewart Feb. 22, 2000 Exam 1 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet. Please note that some questions have four choices, others have five choices. On the answer sheet make sure that you have written your name and coded in your student ID number and the number of the recitation section you attend (A list of recitations shown on the screen will help you identify your section number). All questions are weighted equally. Information for Questions 1-4: Alfredo and Nunzio have followed Ted from New Jersey to Chapel Hill, where they've opened up a pizzeria. Alfredo is especially good at making pizzas, while Nunzio's specialty is making calzones. Alfredo can make either 5 pizzas or 4 calzones in an hour; Nunzio can make either 4 pizzas or 8 calzones in an hour. Both Alfredo and Nunzio work 8 hours per day. 1. What is the maximum number of calzones Alfredo and Nunzio can produce in one day? a) 64 b) 72 c) 96 d) 104 2. At what point does the slope of the production possibilities frontier change? a) 40 pizzas, 64 calzones b) 32 pizzas, 32 calzones c) 24 pizzas, 36 calzones d) The slope of the PPF is constant 3. Which of the following points could be described as efficient? a) 35 pizzas, 60 calzones b) 52 pizzas, 40 calzones c) 60 pizzas, 20 calzones d) 48 pizzas, 44 calzones 4. What is the opportunity cost of producing another pizza if Alfredo and Nunzio are currently producing 56 pizzas? a).8 calzone b) 1.25 calzones c).5 calzone d) 2 calzones Use Figure 1 in answering questions 5 and 7. Figure 1 shows a market demand curve (D) and a market supply curve (S). P denotes price and Q denotes quantities. P D S 5. Equilibrium price and quantity are a) P=6 and Q=5. b) P=4 and Q=10. c) P=2 and Q=15. d) P=2 and Q=5. 6 4 6. If the price was $6.00, the market will a) be in equilibrium. b) have an excess supply of 5. c) have an excess demand of 10. d) have an excess supply of 10. 2 Figure 1 5 10 15 Q Econ 10-007, Exam1a Page 1 of 6
7. If we consider a price change form $4 per unit to $6 per unit, the arc price elasticity for the demand curve shown in figure 1 is a) 1 b) 1.667 c) 2.5 d) 3 8. If the demand for German chocolate increases as the price for gummy bears increases, we can conclude that a) German chocolate is a normal good. b) gummy bears are an inferior good. c) German chocolate and gummy bears are substitutes. d) German chocolate and gummy bears are complements. 9. Which of the following statements is not true? a) An outward shift in supply causes the equilibrium price to fall and equilibrium quantity to raise. b) An inward shift in supply causes the equilibrium price to fall and equilibrium quantity to fall. c) Demand for a normal good increases when income increases. d) If both demand and supply shift to the right, the equilibrium quantity increases for sure. 10. Supply curves slope upward and to the right because a) if prices are high enough sunk costs become irrelevant. b) only suppliers pay the transactions cost associated with any market exchange. c) higher prices are required to attract productive resources from other uses. d) otherwise they would not intersect demand curves. 11. If the pizza and beer are complements and the price for pizza falls, we expect the equilibrium price for beer to and the quantity to a) raise, raise b) raise, fall c) fall, raise d) fall, fall 12. Which of the following statements are true? i) inferior goods experience an increase in demand as a recession hits the economy and peoples incomes fall. ii) normal good are goods for which the equilibrium price usually increases as income goes up a) i) is true. b) ii) is true. c) neither is true. d) both are true. Information for questions 13-17. Bob and Roger both like to eat a hamburger for lunch every day at the Greasy Spoon restaurant. At the At the Greasy Spoon, a hamburger, with or without any extras (cheese, lettuce, etc.) can be purchased for $2.50. The table below shows the total utility each derives from various quantities of hamburger consumption. Q (number of burgers per day) 0 1 2 3 4 5 6 Total Utility (measured in $) for Bob 0.0 3.0 6.5 9.4 12.0 11.0 0.0 Total Utility (measured in $) for Roger 0.0 4.5 8.0 9.5 10.5 10.0 0.0 13. At the current price ($2.50), Bob purchases hamburgers and Roger purchases hamburgers. a) 1, 0 b) 4, 0 c) 4, 2 d) 6, 3 Econ 10-007, Exam1a Page 2 of 6
14. At what price would Bob and Roger agree to buy the same amount? a) $1.50 b) $2.00 c) $3.00 d) $3.75 15. At what quantities do Bob and Roger, respectively, begin to experience diminishing marginal utility? a) 1 and 0 b) 3 and 2 c) both at 5 d) both at 6 16. If the price is $4.00 per hamburger, who will have the greater consumer surplus? a) Bob b) Roger c) they are equal d) we cannot tell from the information given 17. On Thursdays the Greasy Spoon offers a special. You can either buy hamburgers individually at the ususal price of $2.50 each or you can buy the cholesterol special, all the burgers you can eat for $9.50 (Note: With the all you can eat deal you cannot take burgers home, nor can you share with a friend.) On Thursdays, a) both Bob and Roger will buy the all-you-can-eat deal. b) neither will buy the all-you-can-eat deal. c) Bob will buy the all-you-can-eat deal, Roger will buy two hamburgers at the regular price. d) Roger will buy the all-you-can-eat deal, Bob will buy three hamburgers at the regular price. 18. We define total utility of a quantity of a good, measured in money terms, as a) the opportunity cost of the good b) the maximum amount of money that one is willing to exchange for it c) additional satisfaction that an individual derives from consuming one more unit of any good d) the price of the good 19. The optimal purchase rule says that a consumer should buy more of a commodity if marginal utility a) is less than its price b) is equal to its price c) is greater than its price d) is zero 20. If the percentage change in the price of a car is 1% and the resulting percentage change in quantity demanded for cars is 2%, then the price elasticity of demand for cars is: a) unitary elastic. b) inelastic. c) unchanged. d) elastic. 21. A demand curve with infinite price elasticity: a) is horizontal. b) is vertical. c) has a negative slope. d) has a very steep slope. 22. Given that the cross price elasticity of the demand for oranges with respect to price of lemons is found to be -.5, which statement below is true. a) oranges and lemons are substitute goods b) oranges and lemons are complementary goods c) oranges are inferior goods d) lemons are inferior goods. Econ 10-007, Exam1a Page 3 of 6
Information for questions 23-28. A clock manufacturer faces short run costs as shown below. You may fill in the table as needed to answer the following questions. Clocks Produced 0 1 2 3 4 5 6 Total Cost 120 200 260 360 520 750 1020 Total Variable Cost Average Variable Cost Average Total Cost Marginal Cost 23. When producing three clocks, this manufacturer pays total variable costs of a) 0 b) 80 c) 120 d) 240 24. At what level of output does average total cost reach a minimum? a) 2 b) 3 c) 4 d) 5 25. If these clocks were sold in a perfectly competitive market, how many clocks would this manufacturer produce for sale if the market prices were $200 per clock? a) 2 b) 3 c) 4 d) 5 26. If the market price for clocks is $150 per clock and this firm decides to sell 3 clocks, what will their profits be? a) -$ 50 b) no profits c) $ 50 d) $ 90 27. The clock maker will choose to shut down his operation if the price of clocks ever falls below a) $126 b) $100 c) $80 d) $70 28. A corn farmer is currently producing 20,000 bushels of corn using 1,000 units of labor and 10 units of capital. The marginal physical product of labor is 100 bushels of corn per hour and the marginal physical product of capital is 120 bushels of corn per hour. Labor costs the farmer $10 per hour and capital costs the farmer $20 per hour. In order for the farmer to minimize the cost of producing 20,000 bushels of corn he should: a) do nothing, he is already minimizing his cost b) decrease the amount of labor and increase the amount of capital c) increase the amount of labor and decrease the amount of capital d) not enough information to determine this 29. You are the manager of a perfectly competitive firm and are faced with the following situation. The market price for your product is $10 and you are currently selling 1,000 units. Your total fixed costs are $9,000 while your total variable costs are $3,000. Your short run marginal cost is $ 10 per unit. Given this information, to maximize profit in the short run you should decide to: a) immediately stop all production b) continue to produce 1,000 units c) expand output to cover fixed costs d) decrease output so that you can cut down on variable costs Econ 10-007, Exam1a Page 4 of 6
Information for questions 30-35 Figure 2 shows the market demand and supply for frisbees. The market for frisbees is perfectly competitive. Quantities are measured in number of frisbees per week. There are currently 500 firms supplying the market. Also shown in the diagram are $ MC $ $3 $2 $1 Typical Firm 1 10 15 Figure 2 AC qfirm $3 $2 $1 Market Supply500 Demand 500 5,000 7,500 10,000 15,000 the average and marginal cost curves of a typical frisbee firm. Assume that all firms in the market face identical cost conditions and that there are no fixed inputs in frisbee manufacturing. (Thus there is no difference between long run and short run cost curves) 30. Given that there are currently 500 firms operating in the market in the short run a) the equilibrium price will be $1 and the equilibrium market quantity will be 5,000 frisbees per week. b) the equilibrium price will be $2 and the equilibrium market quantity will be 7,500 frisbees per week. c) the equilibrium price will be $3 and the equilibrium market quantity will be 5,000 frisbees per week. d) the equilibrium price will be $3 and the equilibrium market quantity will be 7,500 frisbees per week. 31. In the short run, how many frisbees is each of the 500 firms producing a week? a) zero b) 1 c) about 7 d) 10 e) 15 32. How much profit will each firm be making at the equilibrium described in question 30 a) $0 per week b) about $5 per week c) about $13 per week d) about $20 per week e) the firms are not making a profit. They are losing money. 33. In the long run, what do you expect to happen in this market? a) Nothing will change; it is in long run equilibrium. b) New firms will enter because there are profits. This will cause the market supply curve to shift to the right. c) New firms will enter because there are profits. This will cause the market demand curve to shift to the left d) Existing firms will leave the market because they are losing money. This will cause the supply curve to shift to the left. e) Existing firms will leave the market because they are losing money. This will cause the demand curve to shift to the right. 34. In the final long run market equilibrium, price (P) will be and the market quantity (Q) will be a) P= $1, Q = 15,000 b) P= $2, Q = 10,000 c) P= $3, Q = 7,500 d) P= $3, Q = 10,000 Qmarket Econ 10-007, Exam1a Page 5 of 6
35. In the final long run equilibrium, there will be frisbee firms each producing frisbees per week. a) 500, 10 b) 1,000, 10 c) 1,000, 15 d) 1,500, 10 Bonus Question (percentage scores will be calculated based on 35 questions, but you can get an extra point for this one) 36. Bill s Sandwich shop is currently charging a price of $3.00 per sandwich. At this price Bill is selling 100 sandwiches a day. The marginal cost of producing another sandwich is $2.00. An economist estimates that the price elasticity of the demand curve for Bill s sandwiches at his current output is 4.0. Bill comes to you with this information and asks for your advice. You should tell Bill a) to keep charging $3.00 per sandwich. b) that he can increase profits if he lowers his price a little. c) that he can increase profits if he raises his price a little. d) that he hasn t given you enough information for you to make a recommendation. You have just completed FORM A of the exam. Make sure you print Form A in the upper corner of your scan sheet and put your exam in the FORM A pile for your recitation section. Econ 10-007, Exam1a Page 6 of 6