Version 1 Page 1 Economics 2010 (Morey section), Fall 2011 Second Midterm: Version 1 Name: __________________________ Date: _____________ I have added comments to some of the questions. I commented on questions that people found difficult and others simply because I wanted to comment on them. Note that we gave everyone full credit for the cruise question about variable costs. It was not a great question. I did not add comments to version 2. Takers of version 2 need to look through the comments on this version. Some people do not adequately understand negative numbers and what they mean. Surprisingly, at least to me, some people found the elasticity questions difficult. I thought most of them would be shoe-ins. Maybe the difficulty is due to my last point. There was an issue with question19 that I only thought about after the exams were graded. Given the problem with the question (explained below) we will add one point, out of 45, to everyone’s test score. This grade change applies to both versions of the exam. 1. Which statement best describes how the competitive firm chooses the input combination it will use to produce, in the long run, its chosen level of output. A) It is determined by the isoquant map B) It is determined by the input prices C) It is determined by the state of technical knowledge for producing its output and the constraints imposed on the firm by the market. D) It is determined by its chosen level of output 2. Billy the bulldog has a $30 coupon for Dogs'R'Us, a store that sells only two goods: puppy chow ($5 per bag) and chew toys that look like economics professors ($3 per toy). Billy can only use the coupon once and he must use his organic shopping bag to drag home whatever he buys. The bag can hold an unlimited number of chew toys, but at most three bags of chow. Billy will starve unless he buys at least one bag of chow. Which of the following bundles is in his choice set? A) 2 bag of food; 6 chew toys. B) 4 bags of food; 2 chew toys C) 0 bags of food; 8 chew toys D) 3 bags of food; 6 chew toysVersion 1 Page 2 3. Consider two different indifference curves, the latter for a higher level of utility than the former. While not likely, it is possible that these two indifference curves intersect. A) True B) False 4. In the theory of the firm, we use "isoquants". Breaking down the term we have "quant" as in "quantity," and "iso" as in "one," meaning every point on an isoquant corresponds to the same quantity. The analogous concept in regards to consumer theory is_______. A) Preferences B) Utility C) A budget line D) An Indifference curves 5. Consider two commodities A and B that are both bads, with A on the vertical axis and B on the horizontal axis. Higher indifference curves (curves further up and right) represent A) the same amount of utility as lower curves. B) less utility than do lower indifference curves. C) either more or less utility than lower curves. D) more utility than do lower indifference curves Use the following to answer question 6: Figure: Total Product 6. (Figure: Total Product) Between points A and B the marginal product of labor is: A) infinite. B) increasing. C) zero. D) falling. Between points A and B total product is increasing but marginal product is falling.Version 1 Page 3 7. Consider the statement, "The slope of an indifference curve (budget line) for goods A and B indicates the rate at which the individual (the market) substitutes good A for Good B." This statement is A) false B) not enough information to determine whether it is true or false. C) true 8. Consider two commodities that are complements: peanut butter and jelly. The jelly-price elasticity of demand for peanut butter is likely positive. A) True B) False The elasticity being asked about is the percentage change in the demand for peanut butter divided by the percentage change in the price of jelly. Since they are compliments (the utility you get from consumption of one of them is higher the more of the other you are consuming), this elasticity will be negative. That is, as the price of jelly goes up the demand for peanut butter will not down, so the elasticity is negative and the answer is false. 9. Which of the following best illustrates an "income effect" of a price increase? A) The price of corn chips increases, so Michelle buys potato chips, a substitute for corn chips B) The tuition at the public university increases, so Michelle attends a community college, a substitute for a public university C) Michelle's apartment rent increases, so she cancels her subscription to a monthly magazine. D) The price of bacon increases, so Michelle buys more sausage, a substitute for bacon. 10. Zoe's Bakery operates in a perfectly competitive industry. Suppose that when the market price is $5, the profit-maximizing output level of pastries is 150 units, with average total cost of $4, and average variable cost of $3. From this we know Zoe's marginal cost is ________, and her short-run profits are ________. A) $1; $150 B) $5; $150 C) $1; $300 D) $5; $300 At the profit maximizing output level, we know that price equals marginal cost. So if price is $5, marginal cost must be $5. Total revenue is 150 multiplied by 5, which is $750, and total cost is 150 multiplied by 4, which $600, so profits are $150 11. Let d denote Diet Cokes and c chocolate bars. At my current consumption level my MRSdc=3. So, my wtp for an additional chocolate bar is 1/3 of a Diet Coke. A) True B) FalseVersion 1 Page 4 The MRSdc is how chocolate consumption must decline if the guy drinks another Diet Coke and one want to hold his utility constant. Since it is three, it means he will give up 3 chocolate bars to drink another Diet Coke. Or said the other way, he will give up 1/3 of a Diet Coke to get another chocolate bar. 12. At my current consumption levels, My wtp for a Diet Coke in terms of chocolate bars is 3. Let d denote diet Cokes and c denote chocolate bars. Therefore my MRSdc=3 and the slope of my indifference curve at my current level of consumption is -3, with chocolate on the vertical axis and Diet Cokes on the horizontal axis. A) True B) False Simply, three different ways of saying the same thing. 13. Chuck spends all his income on two goods: tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. Put tacos on the horizontal axis and milkshakes on the vertical axis. The opportunity cost of one