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Econ 1110 – INTRO MICRO - Wissink – F2011 – Nov 4, 2011
MAKEUP PRELIM #2 (Friday)
PRINT YOUR NAME: ____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER: ____________________________
Check YOUR TA’s NAME AND SECTION:
5471 DIS 230 T 12:20PM - 01:10PM RCK 115 Qilu Yu
5472 DIS 231 T 01:25PM - 02:15PM RCK 115 Qilu Yu
5473 DIS 232 T 02:30PM - 03:20PM RCK 115 Qilu Yu
5474 DIS 233 W 08:00AM - 08:50AM URH G26 Daniel Ludwinski
5475 DIS 234 W 09:05AM - 09:55AM URH G26 Daniel Ludwinski
5476 DIS 235 W 10:10AM - 11:00AM URH G26 Daniel Ludwinski
7010 DIS 236 R 11:15AM - 12:05PM RCK 230 Naoko Iida
5477 DIS 237 R 12:20PM - 01:10PM RCK 230 Naoko Iida
5478 DIS 238 R 01:25PM - 02:15PM RCK 230 Naoko Iida
5479 DIS 239 F 09:05AM - 09:55AM RCK 112 Tianli Zhao
5480 DIS 240 F 10:10AM - 11:00AM RCK 112 Tianli Zhao
5481 DIS 241 F 11:15AM - 12:05PM RCK 112 Tianli Zhao
5482 DIS 242 W 09:05AM - 09:55AM GSH G22 Wei Quan
5483 DIS 243 W 10:10AM - 11:00AM GSH G22 Wei Quan
5484 DIS 244 W 11:15AM - 12:05PM GSH G22 Wei Quan
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One more time, please…
MAKE UP PRELIM #2 (Friday)
PRINT YOUR NAME: ____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER: ____________________________
INSTRUCTIONS:
There are two sections in this exam
Part I: 18 multiple choice questions @ 3.5 points each
Part II: 2 problems @ 18 and 19 points, respectively
ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes.
HINTS:
Read all questions carefully.
Write legibly and remember to label all graphs and axes in diagrams.
EXAM TAKIING POLICY:
NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to
use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your
hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time,
and the proctor will hold onto your exam papers while you are out at the restroom.
NO CELL PHONES.
NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.
NO GRAPHING CALCULATORS.
NO BOOKS. NO NOTES. NO HELP SHEETS.
NO TALKING TO EACH OTHER.
NO ASKING THE PROCTORS ANY QUESTIONS ABOUT THE EXAM.
GOOD LUCK!
GRADING------------------------------------------------------------------------------------------------------
MC=_____________________ Q1=____________________ Q2=______________
TOTAL=________________
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Part I: Multiple Choice. Do them ALL. CIRCLE your answer.
1. Suppose that the demand and supply for X are as follows: QDX = 100-2PX and
QSX = -80+4PX . At the market equilibrium, the own price elasticity of supply is
exactly (using the exact point formula) equal to
A. -3/2
B. 3/2
C. 3/16
D. 16/3
E. 3
2. When the own price elasticity of supply is 2.0, this indicates that:
A. The suppliers have the ability to immediately double their production.
B. Price would double if the quantity supplied doubled.
C. A 10% increase in the price would reduce the quantity supplied by 20%.
D. A 10% increase in the price would increase the quantity supplied by 20%.
E. If the price were to increase by $1.00, supply would go up by 2%.
3 You arrive at an outdoor market this summer here in Ithaca and observe many
markets in operation. At current market prices, in which one of the following
markets would you expect market supply to be the most price inelastic?
A. The market for cotton T-shirts.
B. The market for fresh fish.
C. The market for bottled water.
D. The market for backpacks.
E. The market for shoes.
4. You observe that if the price of tea increases from $5/pound to $6/pound, the
quantity of coffee demanded increases from 4 pounds a day to 5 pounds a day at
the local supermarket. Based on this data, what is the cross-price elasticity of
demand?
A. (5.5)/(4.5)
B. (4.5)/(5.5)
C. (-5.5)/(4.5)
D. (-4.5)/(5.5)
E. 1
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5. Molly's budget constraint is AC. It would swivel to AD if the price of
A. cassette tapes increased, ceteris paribus.
B. cassette tapes decreased, ceteris paribus.
C. CDs increased, ceteris paribus.
D. CDs decreased, ceteris paribus.
E. both cassette tapes and CDs decreased by the same proportion.
6. Assuming Arthur’s preferences are very nicely behaved and using Arthur’s
indifference curve map as illustrated, which one of the following statements is
false?
A. Arthur prefers all bundles on the curve labeled 2 to the bundles on the curve
labeled 1.
B. Arthur’s preferences are transitive.
C. All bundles along the curve labeled 1 cost Arthur the same amount.
D. As Arthur moves along the curve labeled 1, from the top left to the bottom
right, his marginal rate of substitution falls.
E. Arthur’s marginal rate of substitution is always equal to the marginal utility
of pizza divided by the marginal utility of hamburgers.
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7. The income elasticity of demand for low-quality beef is -2. Thus, an 8%
decrease in the quantity of low-quality beef demanded
A. is the result of a decrease in income of 4%.
B. is the result of an increase in income of 0.25%.
C. is the result of an increase in income of 4%.
D. must be unrelated to any change in income.
E. implies that beef is necessarily a Giffen good.
8. If we put good R on the horizontal axis and put good J on the vertical axis, then
everywhere along a typical budget line, the Economic Rate of Substitution (ERS)
is:
A. PR/PJ.
B. PJ/PR.
C. MUR/MUJ.
D. MUJ/MUR.
E. PR∙PJ.
9. Which one of the following statements is false given a typical budget line?
A. At each and every bundle along a given budget constraint income is held
constant.
B. At each and every bundle along a given budget constraint the consumer is
using up all his or her income.
C. At each and every bundle along a given budget constraint the Economic Rate
of Substitution is the same.
D. At each and every bundle along a given budget constraint the Marginal Rate
of Substitution is the same.
E. If X is on the horizontal axis and Y on the vertical axis, then the slope of the
budget constraint is -Px/Py.
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10. Zack has ordinary nicely behaved preferences. His income is $10 each week
and he consumes meat and potato chips and nothing else. Meat costs $2/lb and
potato chips costs $1/bag. Zack consumes 2 lbs. of meat and 6 bags of potato
chips each week. What can we say for sure about Zack's consumption?
A. His consumption is beyond the budget line.
B. If Zack is maximizing his utility at this bundle, then his marginal rate of
substitution at this bundle must equal 1/3.
C. If Zack is maximizing his utility at this bundle, then his marginal rate of
substitution at this bundle must equal 3.
D. The current bundle is not Zack's best consumption bundle since he must
always consume twice as many bags of potato chips as pounds of meat.
E. If Zack is maximizing his utility at this bundle, then the marginal utility of
meat is twice the marginal utility of potato chips at this bundle.
11. Assume Octavia is a nicely behaved utility maximizing consumer who spends
all her income on beef and cheese only. Assume both goods are normal goods.
When the price of cheese decreases, Octavia will
A. consume less beef and more cheese.
B. consume less beef, however, her cheese consumption may increase, decrease
or remain unchanged.
C. consume more beef, however, her cheese consumption may increase,
decrease or remain unchanged.
D. consume more cheese, however, her beef consumption may increase,
decrease or remain unchanged.
E. consume more beef and more cheese.
12. Suppose Charlie consumes carrots and zucchini. A pound of carrots costs $2,
while a pound of zucchini costs $3. Charlie has a weekly income of $60. He tells
you that, holding income and the price of carrots constant, he chooses to consume
10 pounds of zucchini optimally, regardless of their price (within reason). What
happens to Charlie’s optimal bundle if the price of zucchini increases (within
reason) to $4 per pound?
A. He consumes 15 pounds of carrots and 10 pounds of zucchinis at the new
price.
B. He consumes 10 pounds of carrots and 10 pounds of zucchinis at the new
price.
C. He consumes 10 pounds of carrots and 13.33 pounds of zucchinis at the new
price.
D. He consumes 13.33 pounds of carrots and 10 pounds of zucchinis at the new
price.
E. There is not enough information to determine how much of each good he
consumes at the new price.
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13. Assume Ziva gets utility from only leisure and “all other goods” and both
goods are normal goods. The substitution effect of a wage decrease implies a
________ quantity demanded for leisure and a(n) ________ quantity of labor
supplied.
A. lower; higher
B. higher; lower
C. higher; higher
D. lower; lower
E. lower, uncertain change in
14. Jackie consumes only candy bars and apples. She tells you that at her
constrained utility maximization optimal bundle she consumes a bundle of candy
bars and apples such that the marginal rate of substitution equals 2 (assume apples
are on the vertical axis). An apple costs $1. Based on this information, what is
the price of a candy bar?
A. $0.50.
B. $1.
C. $1.50.
D. $2.
E. $0
15. A telephone answering service company with only one variable input and
fixed capital has the following daily production possibilities: q = 150L, where q
is the number of calls answered in a day and L is the number of workers.
Diminishing returns to labor for this company
A. set in with the 1st worker.
B. set in with the 150th worker.
C. set in only in the long run.
D. never set in.
E. cannot be addressed since there is not enough information.
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16. You own and are the only employee of a company that writes computer
software that gamblers use to collect sports data. Last year your total revenue was
$90,000. Your costs for all equipment, rent, and supplies, all purchased via
market transactions, were $50,000. To start this business you invested an amount
of your own capital that could pay you a $40,000 a year return. If you were not
running your own company you could work for Apple writing code for I-pads.
Your economic profit last year was
A. $0.
B. $50,000.
C. -$40,000.
D. $90,000.
E. unable to determine due to insufficient information.
17. Which one of the following statements about cost curves is true?
A. The AVC curve only includes explicit variable accounting costs.
B. Increases in input prices for variable factors of production will shift the
firm’s marginal cost curve up and also shift the firm’s total variable cost
curve up.
C. The FC curve only includes implicit fixed opportunity costs.
D. An increase in the price of a fixed factor of production will shift the firm’s
marginal cost curve up.
E. A competitive firm’s short run supply curve is identical to its short run
marginal cost curve.
18. A firm with two variable inputs, labor (L) and capital (K) is operating such
that the marginal product of labor is 10 and the marginal product of capital is 20.
Which one of the following statements is true? Assume the law of diminishing
returns is currently present in both of these inputs.
A. The firm is minimizing its costs only if the wage rate is half the rental rate.
B. The firm is minimizing its costs only if the rental rate is half the wage rate.
C. Since capital is more productive than labor, the firm must be minimizing cost
no matter what the input prices are.
D. Given this information the firm can't possibly be minimizing cost under any
circumstances.
E. The firm should reduce the amount of K and L is uses until it does not
experience the law of diminishing returns.
keep going…
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Part II: Answer all questions.
1. Consider the “indifference curve budge line” diagram below for a consumer named Ned. Assume O stands
for “old situation” and N stands for “new situation”. Ned has fixed income, I, and the prices of X and Y are Px
and Py.
a. What most likely happened to Ned to have him go from the old to the new situation? Is Ned better or
worse off in the new situation? Briefly defend your answers.
b. Write down an equation that describes Ned’s budget lines?
c. Adding whatever additional lines and /or curves you need, detail on Ned’s diagram the total effect,
substitution effect and income effect created by the change in Ned’s situation.
d. What can you say about good X and good Y with respect to the notions of being inferior vs normal and
being Giffen vs non-Giffen? Briefly defend your answers.
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ANSWER SPACE
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2. Larry operates Larry’s Limo Service out of his garage. His garage has zero value for any other use. All
information is for a typical month. Larry hires a driver to do all the trips. The going wage rate for limo drivers
is $25/hour. Larry also uses his own time to monitor the business. Was he not using his own time in his limo
enterprise, Larry could sell his hours in the labor market at $20/hour. Larry takes money out of his banking
account, where he was earning 1% interest a month, to buy a state of the art limo that is totally solar powered.
The limo costs $50,000 and does not depreciate. The table below represents all the relevant information about
Larry’s production function for limo rides.
Hired Larry's
Number Driver Labor
of Trips (hours) (hours) Limos
0 0 20 1
2 4 20 1
4 16 20 1
6 36 20 1
8 64 20 1
10 100 20 1
12 144 20 1
Average Total Average
Limo Rides (trips) Fixed Cost Variable Cost Total Cost Marginal Cost Cost Variable Cost
xxx
0
2
4
6
8
10
xxx
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a. Fill in the cost table. For marginal cost, use the “larger delta” midpoint method. Show some work.
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b. Which input variable or variables exhibit the law of diminishing marginal productivity? Briefly defend
your answer with data from the question.
c. Suppose Larry charges $400/trip and that he sells eight(8) trips at this price. What are Larry’s
accounting profits? What are Larry’s economic profits? Show some work.
d. Sketch “The Graph” (as we called it in class) of cost curves for Larry. Make sure you clearly label each
item in your graph. In what ways, if at all, do Larry’s cost curves differ from the ones in a typical text
book version of “The Graph”?
e. Suppose that Larry’s limo actually depreciates by a fixed amount each month. Where would that enter
the analysis of his costs?
ANSWER SPACE
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ANSWER SPACE
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ANSWERS TO ALL THE MULTIPLE CHOICE QUESTIONS
1. E. Set demand equal to supply to get that P*=30 and Q*=40 and dQS/dP=4, just use the formula that elasticity = (dQS/dP)(P/Q)
2. D. The definition of the price elasticity of supply is the percent change in quantity supplied divided by the percent change in price. A and B are
both nonsensical answers. E doesn’t tell us enough information, since we cannot say by what percent price has changed. C is incorrect since an
increase in price causes supply to increase, not decrease. D is the correct answer. If the elasticity of supply is 2.0, the percent change in quantity
supplied will be twice the percentage change in price, so a 10% increase in price causes a 20% increase in the quantity supplied.
3. B. Even if the price for fresh fish soars, we can only get the amount to the extent the nature allows. The bottled water has the most inelastic
market demand, not supply.
4. A. The cross price elasticity of demand is given by (% change in quantity of coffee demanded)/(% change in price of tea). Using the arc
formula with the average values as the base, the cross-price elasticity is then (5.5)/(4.5).
5. B. A shift from a point C to a point D means that you can buy more cassette tapes with the same money when you decide to buy cassette tapes
only, which implies that the price of cassette tapes decreased.
6. C. Indifference curves don’t contain any information about costs, so it may or may not cost the same. For example, let’s say two hamburgers
and one pizza is as good as one hamburger and two pizzas. If the hamburger price is $7/each and the pizza price is $10/each, those two bundles
cost different amounts.
7. C. (dQd/dI)(I/Q) = -2. Since dQd= -0.08, dI has to be 0.04.
8. A. The absolute value of the slope of the budget line is the ERS and it is equal to the ratio of the price of the horizontal good to the price of the
vertical good. The physical rate at which you must exchange a unit of J for a unit of R is equal to the inverse of their market prices. Note E is
incorrect since it is just way wrong.
9. D. The Marginal Rate of Substitution is the absolute value of the slope of the indifference curve at a bundle, and all along a budget line we
would be looking at different bundles that lie on all sorts of indifference curves. The MRS is sometimes different than the ERS of this budget
line and sometimes the SAME – it would depend on which bundle we focus on. So D is false.
10. E. A is wrong since Zack does spend all his income: $6 on potato chips and $4 on meat. B, C, and D are just wrong and not how you find
optimal bundles. You need to get the “bang/buck” equalized, so if meat costs twice as much per unit as potato chips, then at an optimal bundle,
meat had better deliver twice the marginal utility.
11. D. Octavia will consume more cheese. When the price of cheese decreases, there are two effects. From the substitution effect, Octavia will
consume more cheese and less beef. From the income effect, she will consume more beef and cheese. Hence combining these two effects
together, cheese consumption will increase and beef consumption may increase decrease or remain unchanged.
12. B. We are told that Charlie wants to consume 10 pounds of zucchini regardless of its price, ceteris paribus and within reason. This means that
no matter what the price of zucchini, Charlie will consume 10 pounds of zucchini as long as he can afford it. Hence, he spends the remainder
of his income, $20, on carrots, which at $2 a pound buys him 10 pounds of carrots at the new zucchini price.
13. B. A wage decrease implies the opportunity cost (=price) for leisure became cheaper. (Or you may think the price of "all other goods"
relatively increased because you can only buy smaller amounts of all other goods with the paycheck from the same hours of work.) Therefore,
the substitution effect of a wage decrease implies a higher quantity demanded for leisure as well as a lower quantity of labor supplied.
14. D. The optimality condition implies that MRS=ERS=2=absolute value of the slope of budget line. If apples are on the vertical axis, and the
budget line has a slope of -2 and the ERS=2 and then we know that Pcandy/Papples = 2. So if Papplles = $1 Pcandy must be equal to $2.
15. D. The marginal product is constant and equal to 150.
16. E. without information on the cost of his time, we can’t know the answer
17. B. As the cost of a variable factor of production increases, the variable cost (VC) curve shifts up in the vertical direction. Consequently, so
does the marginal cost curve – which is just the change in VC for a unit change in quantity. Note that (e) is wrong since a competitive firm’s
short run supply curve is only the part of its marginal cost curve that is above the firm’s average variable cost curve due to the short run shut
down rule.
18. A. Look at getting the bang/buck equal.
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