Econ 2420 Principles of Microeconomics Name:
Spring 2011 M-Number:
Instructor: Yuanyuan Chen (Catherine)
Any student suspected of committing academic misconduct will be required to
meet with me to discuss the situation. Your name will also be forwarded to the
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disciplinary action. If you are found responsible for committing an act of
academic misconduct, you will (list the action you plan to take if someone
violates the academic misconduct policy in your course, i.e., an “F” for the
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concerning academic integrity and academic misconduct, please go to the
Judicial Affairs website (www.mtsu.edu/~judaff).
Return the answer sheet together with the test sheet when you finish the exam. Do print
your name and M-number for record convenience. You may use your calculator as if
needed but no cell phone, laptop, ipad, or other electronic devices are allowed during the
test. This is not an open-book test!
1) Scarcity refers to the situation in which
A) unlimited wants exceed limited resources.
B) unlimited resources exceed limited wants.
C) a country's population is larger than its resource base.
D) a nation's poverty level increases faster than its population.
2) The basic economic problem of scarcity
A) has always existed and will continue to exist.
B) will eventually disappear as technology continues to advance.
C) is a problem only in developing economies.
D) does not apply to the wealthy in society.
3) Economics is the study of the ________ people make to attain their goals, given their
A) purchases; unlimited
B) choices; scarce
C) income; available
D) decisions; household
4) What is an economic model?
A) It is a description of an economic issue that includes all possible related information.
B) It is a description of an economic issue based on official government information.
C) It is a detailed version of some aspect of economic life used to analyze an economic issue.
D) It is a simplified version of some aspect of economic life used to analyze an economic issue
5) Economists assume that
A) individuals behave in unpredictable ways.
B) consumer behavior is explained by the existence of unlimited resources.
C) people put other people's interests ahead of their own.
D) optimal decisions are made at the margin.
6) Your roommate, Serafina, a psychology major, said, "The problem with economics is that it
assumes that consumers and firms always make the correct decision. But we know that
everyone's human, and we all make mistakes." Do you agree with her comment?
A) Yes, I agree with her. One cannot make predictions about economic behavior because in
reality people make incorrect choices in many situations.
B) I disagree with her. Economics does not study correct or incorrect behaviors but rather it
assumes that economic agents behave rationally, meaning they make the best decisions given
their knowledge of the costs and benefits.
C) Yes, I agree with her. Economic theory should allow for irrational behavior so that we can
have more reliable predictions.
D) I disagree with her. If we cannot assume that decisions are correct, then we will not be able to
examine the moral implications of these decisions.
7) An office supply store sells a ream of printer paper at a fixed price of $4.50. Which of the
following is a term used by economists to describe the money received from the sale of an
additional ream of paper?
A) marginal revenue
B) gross earnings
C) pure profit
D) marginal costs
E) net benefit
Question 8)-10) are based on the following example
Cassie's Quilts alters, reconstructs and restores heirloom quilts. Cassie has just spent $800
purchasing, cleaning and reconstructing an antique quilt which she expects to sell for $1,500
once she is finished. After having spent $800, Cassie discovers that she would need some special
period fabric that would cost her $200 in material and time in order to complete the task.
Alternatively, she can sell the quilt "as is" now for $900.
8) What is her marginal benefit if she sells the quilt "as is" now?
C) She makes a marginal loss of $600, not a marginal benefit.
D) The marginal benefit cannot be determined.
9) What is the marginal cost of completing the task?
D) $1,000 plus the value of her time
10) What should she do?
A) She should cut her losses and sell the quilt now.
B) It does not matter what she does; she is going to take a loss on her project.
C) She should purchase the period fabric, complete the task and then sell the quilt.
D) She should not do anymore work on the quilt because she has already spent too much time on
it and has not been paid for that time.
11) Competition among sellers generates
A) productive efficiency.
B) allocative efficiency.
12) There is often a trade-off between
A) productive efficiency and allocative efficiency.
B) limited and unlimited resources.
C) voluntary and involuntary exchanges.
D) economic efficiency and economic equity.
13) Which of the following is a positive economic statement?
A) People should not buy imported fruits and vegetables.
B) The government should subsidize solar power for homeowners.
C) The minimum wage law causes unemployment.
D) The number of work visas should not be limited by the government.
14) Refer to Figure 1-1. Which of the following statements is true?
A) The slope of the tangent at E is positive and the slope of the tangent at F is negative.
B) The slope of the tangent at E is negative and the slope of the tangent at F is positive.
C) The slope of the tangent at E and the slope of the tangent at F are negative.
D) The slope of the tangent at E and the slope of the tangent at F are positive.
15) An ________ is represented by a rightward shift of the demand curve while an ________ is
represented by a movement along a given demand curve.
A) increase in demand; decrease in demand
B) increase in demand; increase in quantity demanded
C) decrease in demand; decrease in quantity demanded
D) increase in quantity demanded; increase in demand
16) The law of demand implies, holding everything else constant, that as the price of yogurt
A) increases, the demand for yogurt will increase.
B) increases, the quantity of yogurt demanded will decrease.
C) decreases, the quantity of yogurt demanded will decrease.
D) decreases, the demand for yogurt will increase.
Luke's Ravi's Market
Kona Coffee Market
Quantity Quantity Quantity
Price per lb. Quantity
Demande Demande Demande
d (lb.) d (lb.) d (lb.)
$10 3 0 23
8 9 3 32
6 14 7 68
5 18 12 85
4 22 18 110
17) Refer to Table 1-1. The table above shows the demand schedules for Kona coffee of two
individuals (Luke and Ravi) and the rest of the market. At a price of $6, the quantity demanded
in the market would be
A) 36 lb.
B) 68 lb.
C) 89 lb.
D) 123 lb.
18) Refer to Table 1-1. The table above shows the demand schedules for Kona coffee of two
individuals (Luke and Ravi) and the rest of the market. If the price of Kona coffee rises from $4
to $5, the market quantity demanded would
A) decrease by 35 lb.
B) increase by 115 lb.
C) increase by 35 lb.
D) decrease by 115 lb.
19) If a decrease in income leads to in a decrease in the demand for ice cream, then ice cream is
A) a normal good.
B) a neutral good.
C) a complement.
D) a necessity.
20) In July, market analysts predict that the price of gold will rise in August. What happens in
the gold market in July, holding everything else constant?
A) The supply curve shifts to the right.
B) The supply curve shifts to the left.
C) The quantity demanded and the quantity supplied of gold increase.
D) The demand curve shifts to the left.
21) Refer to Figure 1-2. A technological advancement would be represented by a movement
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.
22) Refer to Figure 1-2. A decrease in the price of inputs would be represented by a movement
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.
23) At market equilibrium,
A) demand equals supply.
B) quantity demanded equals quantity supplied.
C) surpluses are greater than shortages.
D) shortages are greater than surpluses.
24) Refer to Figure 1-3. If the price is $25,
A) there would be a surplus of 300 units.
B) there would be a shortage of 300 units.
C) there would be a surplus of 200 units.
D) there would be a shortage of 200 units.
25) Refer to Figure 1-3. At a price of $25, how many units will be sold?
26) Refer to Figure 1-3. If the current market price is $25, the market will achieve equilibrium
A) a price increase, increasing the supply and decreasing the demand.
B) a price decrease, decreasing the supply and increasing the demand.
C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded.
D) a price increase, increasing the quantity supplied and decreasing the quantity demanded.
27) Which of the following describes a characteristic of a perfectly competitive market?
A) There are many buyers but few sellers.
B) There are many sellers but few buyers.
C) There are many buyers and sellers.
D) Equilibrium is achieved when demand for the product sold in the market equals the supply.
28) A decrease in the demand for eggs due to changes in consumer tastes, accompanied by a
decrease in the supply of eggs as a result of an outbreak of Avian flu, will result in
A) a decrease in the equilibrium quantity of eggs and no change in the equilibrium price.
B) a decrease in the equilibrium price of eggs and no change in the equilibrium quantity.
C) a decrease in the equilibrium price of egg; the equilibrium quantity may increase or decrease.
D) a decrease in the equilibrium quantity of eggs; the equilibrium price may increase or decrease.
29) Refer to Figure 1-4. Assume that the graphs in this figure represent the demand and supply
curves for blu-ray discs. Which panel best describes what happens in this market if there is a
substantial increase in the price of blu-ray players?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
30) Refer to Figure 1-4. Assume that the graphs in this figure represent the demand and supply
curves for laptop computers. Which panel best describes what happens in this market when the
price of computer hard drives falls?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
31) Refer to Figure 1-4. Assume that the graphs in this figure represent the demand and supply
curves for tuna. Which panel best describes what happens in this market when there is a
decrease in the productivity of commercial fishermen?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
32) The satisfaction a person receives from consuming goods and services is called
B) psychic income.
33) Suppose the marginal utilities for the first three cans of soda are 100, 80 and 60, respectively.
The total utility received from consuming 2 cans is
34) The additional utility that George receives from consuming one more slice of pizza is called
A) average utility.
B) marginal utility.
C) total utility.
D) diminishing utility.
35) If the marginal utility Ida Mae receives from eating chicken wings is negative then
A) her total utility from eating chicken wings has fallen.
B) her total utility from eating chicken wings is negative as well.
C) Ida Mae does not like chicken wings.
D) her total utility has risen, but by less from the last chicken wing than from the next to last
36) Total utility is maximized in the consumption of two goods by
A) equating the marginal utility for each good consumed.
B) equating the marginal utility per dollar for each good consumed.
C) equating the total utility of each good divided by its price.
D) maximizing expenditure on each good.
37) The amount of income a consumer has to spend on goods and services is known as
A) purchasing power.
B) effective demand.
C) a budget constraint.
Ice Cream Cones Lime Fizz Soda
Quantity MU/P MU/P
1 15 40
2 12.5 35
3 10 26
4 7.5 18
5 5 15
6 2.5 7
38) Refer to Table 1-2. The table above shows Lee's marginal utility per dollar from consuming
ice cream cones and cans of Lime Fizz Soda. The price of an ice cream cone is $2 and the price
of Lime Fizz Soda is $1. Use this information to select the correct statement.
A) We cannot determine how many ice cream cones and cans of Lime Fizz Soda Lee will
consume without knowing what his income is.
B) To maximize his utility Lee should consume 1 ice cream cone and 5 cans of Lime Fizz Soda.
C) We cannot determine how many ice cream cones and cans of Lime Fizz Soda will maximize
Lee's utility because we are given only the marginal utility per dollar values. We also need to
know the marginal utility for each quantity.
D) If Lee has an unlimited budget he will maximize his utility by buying only Lime Fizz Soda.
39) Which of the following correctly describes the result of a price increase for an inferior good?
A) Both the substitution effect and the income effect cause the consumer to buy less of the good.
B) The substitution effect causes the consumer to buy less of the good and the income effect
causes the consumer to buy more of the good.
C) The substitution effect causes the demand for the good to decrease; the income effect causes
the demand for the good to increase.
D) The substitution effect causes the demand for the good to increase; the income effect causes
the demand for the good to decrease.
40) The income effect of a decrease in the price of legal services, a normal good, results in
A) a decrease in the demand for legal services.
B) a decrease in the quantity demanded of legal services.
C) an increase in the quantity demanded of legal services.
D) an increase in the demand for legal services.
41) An advantage of Microsoft windows is its compatibility with the widest range of hardware
and software. The dominance of Windows is self-reinforcing: hardware and software
manufacturers ensure that their products are compatible with Windows in order to have access to
the large number of Windows users. Which principle best describes this scenario?
A) endowment effects
B) endorsement effects
C) economies of scale
D) network externalities
42) Many people leave their servers tips in restaurants, even when they are not likely to visit the
restaurant again. This is evidence that
A) people would rather pay for good service at an inexpensive restaurant than pay higher prices
and receive poor service at an expensive restaurant.
B) people enjoy eating at restaurants more than eating at home.
C) people treat others fairly even if doing so makes them worse off financially.
D) there has been an improvement in the service people receive in restaurants over time, partly
because the restaurant industry has become more competitive.
43) A curve that shows combinations of consumption bundles that give a consumer the same
utility is called
A) a utility curve.
B) an indifference curve.
C) a preference curve.
D) a demand curve.
44) What does the marginal rate of substitution measure?
A) It measures the rate at which a consumer must give up one good to purchase another good.
B) It measures the rate at which a consumer will substitute one good for another when the price
of one good changes.
C) It measures the change in utility from consuming one additional unit of a good.
D) It measures the rate at which a consumer is willing to trade off one product for another while
keeping utility constant.
45) Refer to Figure 1-5. Given the budget constraint in the diagram, which of the following
statements is false?
A) The consumer receives the same level of utility from consumption bundles d, e and f.
B) Consumption bundles b and c yield the same level of utility, which is higher than the utility
represented by bundle a.
C) Although the consumer receives the same level of utility from bundles d and e, she cannot
afford to purchase bundle d.
D) The consumer's optimal bundle could be bundle d, e or f.