Principles of Microeconomics Professor Edward Morey ECON 2010-300 Final Exam December 18, 2008 Version A As a University of Colorado at Boulder student, I affirm that I have neither given nor received assistance on this exam. Name: ___________________________________ Date: ______________ Signature: ______________________________Questions that still need thought attention are 11 (the new graph in the answer key is not showing u), 21 (the answer is in yellow) Use the following to answer question 1. Figure: Demand and Supply of Gasoline 1. (Figure: Demand and Supply of Gasoline) The supply curve shifts from S1 to S2. Which statement is most correct? A) at the old equilibrium price of $2.50, there will be pressure for the price to fall. B) the new price will be $2.00. C) the new quantity will be 300. D) all of the above are true. A: A) is correct, B and C are not Use the following to answer question 2. Figure: Aggregate Demand for Shirts2. (Figure: Demand for Shirts) The price elasticity of demand for the segment BC using the midpoint method is: A) greater than 3.33 (absolute value). B) 3.33. C) 3. D) 0.33. C: the price elasticity of demand =( change in demand/average demand)/(change in price/average price) = (100/150) /(10/45) =45/15=3 The answer from my point of view is C. The KW says, the price elasticity of demand – the percent change in the quantity demanded divided by the percent change in the price. 3. Assume you consume two commodities, pollution, which is a bad, and other stuff. Do your indifference curves for pollution and other stuff look the same as the indifference curves discussed in Krugman and Wells? A) Yes B) No C) Maybe B: If the other stuff are goods then the indifference curves are upward sloping, so not like in KW. If other stuff is bad, so two bads, the indifference curves are downward sloping but bend the opposite way from those in KW. Use the following figure to answer questions 4-5. Figure: A Perfectly Competitive Firm in Short Run 4. (Figure: A Perfectly Competitive Firm in the Short Run) At a price of G, the firm's total cost is represented by the area _____, and it’s profits are _________.A) FGLK, negative. B) FGLK, positive. C) 0FKD, negative. D) 0FKD, positive. D: Total costs are average costs at quantity D, F multiplied by D, so OFKD. Total revenues are greater, OGLD, so profits are positive. 5. (Figure: A Perfectly Competitive Firm in the Short Run) The price at which profits are zero is: A) G. B) F. C) E. D) N. C: at a price of E at the profit maximizing quantity, price equals average costs 6. The slope of a(n) _______ curve shows the rate at which two goods can be exchanged _______ the consumer's ________. A) marginal utility; which increases; marginal utility B) indifference; without affecting; total utility C) iso-utility; without affecting; budget D) indifference; without affecting; budget B: The indifference curve has nothing to do with the budget, B is correct, and A makes no sense to me. 7. Which of the following is not true for indifference curves of ordinary goods? A) They never cross. B) They slope downward. C) They are convex from the origin. D) Indifference curves farther away from the origin have lower levels of utility. D: Since goods are goods, as one increases the amount of both goods (moves to the right), one moves to a more preferred bundle, one with higher utility, not lower utility. 8. If the price of a cookie is $1 and the price of a brownie is $2, the relative price of cookies in terms of brownies is: A) 0.50. B) 1.00. C) 2.00. D) undefined. A: The question asks how many brownies one has to give up to get one more cookie. One has to give up ½ of a brownie.9. If the marginal rate of substitution of cookies in terms of brownies equals the relative price of cookies in terms of brownies, the consumer: A) is maximizing her utility B) should consume more cookies and fewer brownies to maximize total utility. C) should consume fewer cookies and more brownies to maximize total utility. D) may or may not be maximizing total utility. D: since the question says nothing about budget exhaustion, we do not know whether the respondent is maximizing utility. 10. If Joseph chooses a combination of apples and oranges along his budget line where the marginal rate of substitution of apples in place of oranges is 2 and the price of an apple is $0.50 and the price of an orange is $0.50, then Joseph: A) is maximizing total utility. B) should consume more apples and fewer oranges to maximize total utility. C) should consume fewer apples and more oranges to maximize total utility. D) may or may not be maximizing total utility. B: Joe would give up two oranges to get one more apple (if I interpret correctly), but only has to give up one orange to get another apple, so should consume more apples and fewer oranges. From Yuchen-- The MRS(apple to orange) is 2, larger than the price ratio = 1. So we need to decrease the MU(Apple) and increase MU(orange). Since utility function is diminishing return to scale, we will consume more apples to get its MU down. Use the following to answer questions 11-12. Figure: Indifference Map for Soda and Pizza The figure shows three of Owen's indifference curves for pizza and soda per week. Owen has $180 per week to spend on the two goods; the price of a pizza is $20 and the price of a soda is $1.50. 11. (Figure: Indifference Map for Soda and Pizza) If Owen is consuming 1.5 pizzas and 100 sodas, which of the following is true?A) Owen is maximizing his total utility, given his budget line. B) Owen should consume more pizza and less soda to maximize his total utility, given his budget line. C) Owen should consume less pizza and more soda to maximize his total utility, given his budget line. D) Owen should consume more pizza and more soda to maximize his total utility, given his budget line. B: His budget line is S=120 – 13.33P; so if he spends all of his money on soda he can consume 120 cans; if he spends all of his money on pizza he can by 9 pizza. So at current bundle he is spending $150 on soda and 30 on pizza, so is on his budget lines. The question is whether the slope of his budget line equals the slope of his indifference curve at this point. Draw in the budget line on the above graph. The slope of the budget line is -13.33 Here is the graph with the budget line drawn in. You can see that