ECON101 Exam 2 Review - Lecture notes 6-15 PDF

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Exam 2 review...

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Winter 2017 Practice for Exam 2 (chapters 6 (6.1-6.4, 6.6), 10 (10.1-10.2), 11 (11.1-11.5), 12 (12.1-12.6), 13 (13.113.4), 14 (14.1-14.2), 15 (15.2-15.4)) note that ‘-‘ means everything in between (example: 6.1-1.4 means you are responsible for 6.1, 6.2, 6.3 and 6.4) With the Answer Key About the exam Your exam #2 is on Wednesday, February 1st in class. It covers chapters whole or parts of chapters 6,10,11,12,13,14 and 15 (as listed above). The format is 55 multiple choice questions. Make sure to bring calculator, #2 pencil and an eraser. If you are taking and exam with DSS, please fill in the appropriate online form, so I can send exams to DSS in a timely manner. If you miss the exam and you do not have a university approved excuse, you will receive score 0. If you miss the exam and you have a university approved excuse, contact me ahead of Tuesday, January 31st, so we can make appropriate arrangements. We will have in-class review for the exam on Tuesday, January 31st. Please come prepared to ask questions. My regular office hours are on Wednesday and Thursday 10:30-11:50am in Purnell 333A. In case, you have class or practice at that time, we can schedule an alternative time. Please either email me or talk to me before/after class in order to schedule an alternative meeting time. Practice questions Chapter 6 1. Answer the question on the basis of the following demand schedule:

Refer to the data. The price elasticity of demand is relatively inelastic:

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A. in the $6-$4 price range. B. over the entire $6-$1 price range. C. in the $3-$1 price range. D. in the $6-$5 price range only. 2) Consider the following pairs of items: a. b. c. d. e.

shampoo and conditioner iPhones and earbuds a laptop computer and a desktop computer beef and pork air-travel and weed killer

Which of the pairs listed will have a negative cross-price elasticity? A) a and b only B) c and d only C) e only D) a, b, and c only Answer: A 3) If a good has a negative income elasticity of demand, this indicates that the good is A) a substitute with another good. B) a complement with another good. C) inferior. D) normal. Answer: C 4) The price elasticity of the supply of teenage labor services is approximately 1.36. Suppose the minimum wage rises from $7.25 per hour to $8.75. Using the midpoint formula, what is the approximate change in the quantity of teenage labor supplied? A) 7.3 percent B) 14.4 percent C) 25.5 percent D) There is insufficient information to answer the question. Answer: C 5) The price elasticity of supply for umbrellas is 2. Suppose you're told that following a price increase, quantity supplied increased by 30 percent. What was the percentage change in price that brought this about? A) 60 percent B) 15 percent C) 6.7 percent 2

D) impossible to determine without additional information Answer: B 6) Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a ton to $180 a ton and quantity sold decreased from 800 tons to 240 tons. What is the absolute value of the price elasticity of demand? A) 0.11 B) 0.37 C) 2.69 D) 9.33 Answer: C 7) Which of the following statements about price elasticity of demand is false? A) The value of the price elasticity of demand is the reciprocal of the value of the demand curve's slope. B) If quantity demanded changes by a larger percentage than the percentage change in price, demand is elastic. C) The value of the price elasticity of demand along a downward-sloping demand curve is always negative. D) A linear downward-sloping demand curve has a varying price elasticity coefficient. Answer: A 8) If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the demand for golf balls is A) unit elastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic. Answer: D 9) According to a study of the price elasticities of products sold in supermarkets, the price elasticity of demand for toothpaste is estimated at -0.45. Which of the following could explain why the price elasticity of demand for toothpaste is so low? A) The toothpaste industry is highly competitive. B) Toothpaste is relatively inexpensive. C) Toothpaste is heavily endorsed by dentists. D) There are few close substitutes for toothpaste. Answer: D (B is also correct) 10) Which of the following would result in a higher absolute value of the price elasticity of demand for a product? A) A wide variety of substitutes are available for the good. B) The time period under consideration is short. C) The good is a necessity. D) The expenditure on the good is small relative to one's budget. 3

Answer: A Chapter 10 Table 10-2 Quantity of Soup (cups) 1 2 3 4 5 6

Total Utility 40 60 72 82 88 90

Quantity of Sandwiches 1 2 3 4 5 6

Total Utility 45 75 102 120 135 145

Table 10-2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. 11) Refer to Table 10-2. What is Keira's marginal utility per dollar spent on the third cup of soup? A) 72 units of utility B) 36 units of utility C) 12 units of utility D) 6 units of utility Answer: D 12) Economists usually assume that people act in a rational, self-interested way. In explaining how consumers make choices this means that economists believe A) consumers will always buy goods and services at the lowest possible prices. B) consumers spend their incomes to order to accumulate the most goods and services. C) consumers make choices that will leave them as satisfied as possible given their incomes, tastes, and the prices of goods and services available to them. D) consumers will spend their incomes and time on activities that benefit themselves as much as possible, without regard to the welfare of others. Answer: C

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Figure 10-1 13) Refer to Figure 10-1. When the price of hoagies increases from $5.00 to $5.75, quantity demanded decreases from Q1 to Q0. This change in quantity demanded is due to A) the price and output effects. B) the income and substitution effects. C) the fact that marginal willingness to pay falls. D) the law of diminishing marginal utility. Answer: B 14) If Callum is consuming his utility maximizing bundle and the price of one good rises, what happens to the marginal utility per dollar spent on this good (MU/P), and what should Callum do? A) MU/P has increased and Callum should buy more of this good. B) MU/P has increased and Callum should buy less of this good. C) MU/P has decreased and Callum should buy more of this good. D) MU/P has decreased and Callum should buy less of this good. Answer: D 15) If Marlowe obtains 9 units of utility per dollar spent on apples and 6 units of utility per dollar spent on oranges, then Marlowe A) is maximizing total utility. B) should buy more apples and fewer oranges. C) should buy more oranges and fewer apples. D) should buy fewer oranges and fewer apples. Answer: B 16) Total utility A) cannot decrease as a person consumes more and more of a good. B) has a constant rate of increase as a person consumes more and more of a good. C) is equal to the sum of the marginal utilities of all units consumed. 5

D) is negative when marginal utility is declining. Answer: C 17) The law of diminishing marginal utility states that A) eventually total utility falls as more of a good is consumed, other things constant. B) the extra satisfaction from consuming a good decreases as more of a good is consumed, other things constant. C) the extra satisfaction from consuming a good increases slowly as more of a good is consumed, other things constant. D) when the extra satisfaction from consuming a good becomes negative, total utility starts falling, other things constant. Answer: B Table 10-1 Quantity of Pita Wraps 1 2 3 4 5 6 7

Total Utility 60 102 132 144 144 138 128

Quantity of Bubble Tea 1 2 3 4 5 6 7

Total Utility 40 70 91 106 112 115 115

18) Refer to Table 10-1. If Keegan can drink all the bubble tea he wants for free, how many glasses will he consume? A) 4 glasses B) 5 glasses C) 6 glasses D) 7 glasses Answer: C (D is also correct) 19) When the price of summer tank tops falls and you buy more of them because they are relatively less expensive, this is called A) the substitution effect. B) the income effect. C) the deadweight loss effect. D) the elasticity effect. Answer: A

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20) The income effect of an increase in the price of salmon A) is the change in the demand for salmon when income increases. B) refers to the relative price effect - salmon is more expensive compared to other types of fish - which causes the consumer to buy less salmon. C) refers to the effect on a consumer's purchasing power which causes the consumer to buy less salmon, holding all other factors constant. D) is the change in the demand for other types of fish, say trout, that results from a decrease in purchasing power. Answer: C Chapter 11 21) The law of diminishing marginal returns states A) that at some point, adding more of a fixed input to a given amount of variable inputs will cause the marginal product of the variable input to decline. B) that at some point, adding more of a variable input to a given amount of a fixed input will cause the marginal product of the variable input to decline. C) that in the presence of a fixed factor, at some point average product of labor starts to fall as more and more variable inputs are added. D) average total costs of production initially fall and after some point starts to rise at a decreasing rate as output increases. Answer: B 22) Which of the following equations is correct? A) AVC - ATC = AFC B) AVC + ATC = AFC C) AFC + AVC = ATC D) ATC + AVC = AFC Answer: C 23) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output? A) $65 B) $50 C) $15 D) It is impossible to determine without additional information. Answer: C 24) Which of the following statements is true? A) As output increases, average fixed cost becomes smaller and smaller. B) Average fixed cost does not change as output increases. 7

C) The marginal cost curve intersects the average fixed cost curve at its minimum point. D) When marginal cost is greater than average fixed cost, average fixed cost increases. Answer: A Figure 11-6

Figure 11-6 contains information about the short run cost structure of a firm. 25) Refer to Figure 11-6. In the figure above which letter represents the average variable cost curve? A) A B) B C) C D) D Answer: C 26) A firm increased its production and sales because the firm's manager rearranged the layout of his factory floor. This is an example of A) investment in human capital. B) economies of scale. C) positive technological change. D) inspired management. Answer: C 27) The difference between technology and technological change is that A) technology refers to the processes used by a firm to transform inputs into output while technological change is a change in a firm's ability to produce a given level of output with a given quantity of inputs. B) technology is carried out by firms producing physical goods but technological change is an intellectual exercise into seeking ways to improve production. C) technology is product-centered, that is, developing new products with our limited resources while technological change is process-centered in that it focuses on developing new production techniques. D) technology involves the use of capital equipment while technological change requires the use of 8

brain power. Answer: A 28) Which of the following is the best example of a short-run adjustment? A) A local bakery purchases another commercial oven as part of its capacity expansion. B) Your local Walmart hires two more associates. C) Smith University completed negotiations to acquire a large piece of land to build its new library. D) Toyota builds a new assembly plant in Texas. Answer: B 29) Which of the following statements is true? A) An explicit cost is an actual cost; an implicit cost is a theoretical cost. B) Economic costs include both explicit costs and implicit costs. C) An explicit cost is more important, dollar for dollar, than an implicit cost. D) Explicit costs are accounting costs, not economic costs; implicit costs are economic costs, not accounting costs. Answer: B 30) Red Stone Creamery currently hires 5 workers. When it added a 6th worker, its output actually fell. Which of the following statements is true? A) The marginal product of the sixth worker must be negative. B) The average product of the sixth worker is negative. C) The sixth worker is not as skilled as the fifth worker. D) The total product becomes negative. Answer: A Chapter 12 3 1)Per f e c tc ompe t i t i oni sc har a c t e r i ze dbya l loft hef ol l owi nge x c e pt A)hea vyadve r t i s i ngbyi ndi vi dua ls e l l e r s . B)homoge ne ouspr oduc t s . C)s e l l e r sa r epr i c et ake r s . D)ahor i zont aldema ndc ur vef ori ndi vi duals e l l er s . Ans wer :A 3 2)Bo t hbuye r sands el l er sar epr i c et a ke r si nape r f e c t l yc ompet i t i vemar ke tbe c a us e A)t hepr i c ei sde t er mi ne dbygove r nme nti nt er ve nt i onanddi c t a t edt obuye r sa nds el l er s . B)ea c hbuye ra nds e l l erknowsi ti si l l eg alt oc ons pi r et oaffe c tpr i c e . C)bot hbuyer sa nds e l l er si nape r f e c t l yc ompe t i t i vemar ke tar ec onc e r nedf ort hewe l f ar eofot he r s . D)eac hbuye rands el l e ri st oos ma l lr e l a t i vet oot he r st oi nde pendent l yaffec tt hemar ke tpr i c e . Ans wer :D

3 3)Suppos et hee qui l i br i um pr i c ei naper f ec t l yc ompet i t i vei ndus t r yi s$1 5andafir mi nt hei ndus t r y c ha r ge s$2 1.Whi c hoft hef ol l owi ngwi l lhappen?

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A)Thefir m' spr ofit swi l li nc r e as e . B)Thefir m' sr e ve nuewi l li nc r e a s e . C)Thefir m wi l lnots el lanyout put . D)Thefir m wi l ls e l lmor eout putt ha ni t sc ompe t i t or s . Ans wer :C 3 4)Aper f ec t l yc ompe t i t i vefir m pr oduc e s3, 00 0uni t sofagoodatat ot alc os tof$3 6, 00 0.Thepr i c eofea c h goodi s$ 10. Ca l c ul a t et hefir m' ss hor t r unpr ofitorl os s . A)l os sof$ 6, 00 0 B)pr ofitof$ 6, 000 C)pr ofitof$ 30, 00 0 D)The r ei si ns uffic i e nti nf or mat i ont oans we rt heque s t i on. Ans wer :A 3 5)Tomaxi mi zepr ofit , ape r f e c t l yc ompe t i t i vefir m A)s houl ds el lt hequant i t yofout putdet er mi ne dbyt hei nt er a c t i onbet we eni ndus t r yde manda nd s uppl y . B)s houl ds e l lt hequant i t yofout putt ha tr es ul t si naval uef ort ot alr e ve nuet ha ti se qualt ot ot a lc os t . C)s houl dpr oduc et hequa nt i t yofout putt ha tr es ul t si nt hegr ea t es tdi ffe r e nc ebet wee nt ot a lr ev enuea nd t ot alc os t . D)s houl dpr oduc et hequa nt i t yofout putt ha tr es ul t si nt hegr e a t e s tdi ffer e nc ebet we enmar gi nal r e ve nuea ndma r gi na lc os t . Ans wer :C Tabl e1 22 Appl e s ( pounds ) 0 1 00 1 50 2 00 2 50 3 00 3 50 4 00

Mar ke tPr i c e Tot alRe venue Aver age Mar gi nal perPound ( TR) Reve nue( AR) Reve nue( MR) $ 3 $0 -

Tabl e1 22l i s t st hevar i ouspounds( l bs . )ofappl est ha tMar gi eS t a t t l e rc ans el l .As s umet ha tMar gi e oper at esi nape r f e c t l yc ompet i t i vemar ke t . 3 6)Re f e rt oTabl e12 2 .Wha ti sMar gi e ' st ot alr e ve nuei fs hes el l s250poundsofa ppl e s ? A)$25 0 B)$5 00 C)$ 750 D)The r ei snote noughi nf or ma t i oni nt het a bl et ode t er mi neMar gi e ' st ot alr eve nue . Ans wer :C 3 7)Re f e rt oTabl e12 2 .How ma nypoundsofappl ess houl dMa r gi es e l lt omaxi mi zehe rpr ofit ? A)300pounds B)40 0pounds C)Thi sc a nnotbedet er mi nedwi t houtknowi ngMa r gi e ' st ot a lormar gi nalpr oduc t i onc os t s . D)Thi sc anbedet e r mi nedonl ywhenal loft heva l uesf orma r ke tpr i c e , t ot alr e ve nue ,a ve r ager ev enue a ndma r gi na lr e venuea r egi ve n. Ans wer :C

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3 8)Aper f ec t l yc ompe t i t i veappl ef ar m pr oduc e s1 , 000bus he l sofappl esa tat ot a lc os tof$3 6, 00 0.The pr i c eofe ac hbus heli s$5 0. Cal c ul at et hefir m' ss hor t r unpr ofitorl os s . A)l os sof$ 14, 0 00 B)pr ofitof$ 14, 00 0 C)pr ofitof$5 0, 000 D)The r ei si ns uffic i e nti nf or mat i ont oans we rt heque s t i on. Ans wer :B Fi g ur e125

Fi gur e1 25s howsc os tandde mandc ur ve sf ac i ngat ypi c a lfir mi nac ons t a nt c os t ,pe r f ec t l yc ompet i t i ve i ndus t r y. 3 9)Re f e rt oFi gur e125. I ft hemar ke tpr i c ei s$20 ,wha ti st hefir m' spr ofit ma xi mi zi ngout put ? A)750uni t s B)1, 10 0uni t s C)1 , 3 50uni t s D)1, 800uni t s Ans wer :C 4 0)Re f e rt oFi gur e125. I ft hemar ke tpr i c ei s$20 ,wha ti st heamountoft hefir m' spr ofit ? A)$5, 40 0 B)$6 , 7 50 C)$ 8, 100 D)$16 , 2 00 Ans wer :B 4 1)Re f e rt oFi gur e125. Wha ti st heamountoft hefir m' sfixe dc os tofpr oduc t i on? A)$5, 40 0 B)$6 , 7 50 C)$ 8, 100 D)I tc annotbede t e r mi ne d. Ans wer :A 4 2)Let t er sar eus e dt or e pr e s e ntt het er msus edt oans we rt hi sques t i on: pr i c e( P) ,quant i t yofout put( Q) ,

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t ot alc os t( TC)a ndav er a get ot alc os t( ATC) .Whi c hoft hef ol l owi nge qua t i onsi se qua lt oafir m' spr ofit ? A)P-ATC B)( P×Q)-TC C)( P×Q)-( P×ATC) D)P-TC Ans wer :B Tabl e1 23 Quant i t y 0 1 2 3 4 5 6 7 8 9

Tot alCos t $10 . 00 15 . 00 17 . 50 22 . 50 30 . 00 40 . 00 52 . 50 67 . 50 85 . 00 1 05. 00

Ave r ageTot al Cos t Mar gi nalCos t $1 5. 00 $5 . 0 0 8. 75 2. 50 7. 50 5. 00 7. 50 7. 50 8. 00 1 0. 00 8. 75 1 2. 50 9. 64 1 5. 00 1 0. 63 17 . 5 0 1 1. 67 20 . 0 0

Ar ni es e l l sbas ke t bal l si nape r f e c t l yc ompe t i t i vemar ke t .Ta bl e123s ummar i zesAr ni e' sout putperda y ( Q) ,t ot alc os t( TC) , a ve r aget ot alc os t( ATC)andmar gi nalc os t( MC) . 4 3)Re f e rt oTabl e12 3 .Wha tpr i c e( P)wi l lAr ni ec ha r geandhow muc hpr ofitwi l lhee ar ni ft hemar ke t pr i c eofba s ke t ba l l si s$1 2. 50? A)Pr i c eandpr ofitc annotbede t er mi ne df r om t hei nf or ma t i ongi ve n. B)P=$ 12. 50 ;pr ofit=$5 2. 50 C)P=$ 12 . 5 0;pr ofit=$ 22. 50 D)P=$2 0; pr ofit=$ 75 . 0 0. Ans wer :C 4 4)Re f e rt oTabl e12 3 .Wha twi l lAr ni e ' sout putbea ndho w muc hpr ofitwi l lhee ar ni ft hemar ke tpr i c e ofbas ket bal l si s$5 . 00? A)Q=1; pr ofit=$1 0. B)Q=3; pr ofit=$7. 50 C)Q=0 ;pr ofit=$1 0. 00 D)Pr i c ea ndpr ofitc annotbede t er mi ne df r om t hei nf or ma t i ongi ve n. Ans wer :B Fi g ur e127

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Fi gur e1 27i l l us t r a t est hec os tc ur vesofape r f e c t l yc ompe t i t i vefir m. 4 5)Re f e rt oFi gur e127. I ft hemar ke tpr i c ei sP1 .Thefir m wi l lt henbr e a ke ven. A)Thefir m wi l le xpe r i e nc eal os sandr a i s ei t spr i c et o P 2 . B)Thefir m wi l lbr e akeve nbypr oduc i ngaquant i t yof Q 2 C)Thefir m wi l le xpe r i e nc eal os ss i nc epr i c ei sl es st ha nATC. D)Thefir m ma ymakeapr ofiti fi tc ani nc r ea s et hedemandf ori t spr oduc t . Ans wer :C Fi g ur e128

4 6)Re f e rt oFi gur e128. Suppos et hefir m pr oduc e s4, 00 0uni t s .Wha tdoe st hes hadedar e al abe l e dA r epr es e nt ? A)t ot al var i abl ec os t B)pr ofit C)t ot alfix edc os t D)t ot alr eve nue

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Ans wer :C 4 7)Aper f ec t l yc ompe t i t i vefir m pr oduc e s3, 00 0uni t sofagoodatat ot alc os tof$3 6, 00 0.Thefixe dc os tof pr oduc t i oni s$ 20, 0 00. Thepr i c eofe ac hgoodi s$1 0.Shoul dt hefir mc ont i nuet opr oduc ei nt hes hor t r un? A)No,i ts houl ds hutdownbec aus ei ti smaki ngal os s . B)Ye s ,i ts houl dc ont i nuet opr oduc ebec a us ei t spr i c ee x c e e dsi t sa ve r agefixe dc os t . C)Ye s , i ts houl dc ont i nuet opr oduc ebec aus ei ti smi ni mi z i ngi t sl os s . D)The r ei si ns uffic i e nti nf or mat i ont oans we rt heque s t i on. Ans wer :C Fi g ur e121 1

4 8)Re f e rt oFi gur e1211 .Suppos et hepr e vai l i ngpr i c ei s$ 20andt hefir mi sc ur r ent l ypr oduc i ng1, 35 0 uni t s . I nt hel ong r unequi l i br i um,t hefir mr e pr e s e...