Page 1 Economics 2010 Sec 300 Second Midterm Fall 2009 – Version A There are 56 questions on Version A The test bank questions and the questions we created are mixed together. Name: __________________________ Date: _____________ Some explanations added. 1. Basic consumer theory, as we learned in class, assumes that individual rank goods not bundles. A) True B) False Basic consumer theory assumes that individuals rank bundles, not goods. One ranks goods in the context of bundles. If I approach you on the street and offer you a candy bar or a carrot you will decide between them in the by comparing your current bundle with a carrot added to your current bundle with a candy bar added. You cannot rank individual goods without knowledge of the other stuff in the bundle. 2. Suppose the state of Oklahoma decides to produce only two goods—oil and football helmets. As oil production increases, the production of football helmets will: A) not sure. B) decrease at a decreasing rate. C) decrease. D) increase. 3. Along a given supply curve, an increase in the price of a good will: A) decrease producer surplus and increase consumer surplus. B) increase consumer surplus. C) increase producer surplus. D) decrease producer surplus. 4. Ceteris paribus, a decrease in the price of a good will always increase an individual's consumer's surplus. A) True B) False A decrease in a price will never decrease consumer’s surplus, but it might not increase it. For example if the original price is so high you buy zero and then the price is lowered but you still buy zero, consumer’s surplus does not increase (zero before and after the price decrease)Page 2 5. The _________ is the maximum amount of Good X a consumer would be willing to give up in order to obtain an additional unit of Good Y: A) marginal rate of exchange. B) average rate of substitution. C) marginal rate of substitution. D) marginal rate of utility exchange. 6. Which of the following policies is most likely to reduce traffic congestion in a large metropolitan area? A) an increase in the price of subway and bus fare to and from the city B) asking citizens to carpool C) a toll road that requires each car to pay a fee to enter the city center D) a limited number of free “early bird” parking passes given only to those who arrive prior to 6 A.M. 7. Empirically, an increase in the number of doctors (an increase in the supply of treatment) typically increases the amount of treatment but does not decrease the cost of treatment. What might explain this? A) Demand for medical treatment is without limit B) Demand is perfectly inelastic with respect to price C) The presence of a doctor tends to increase the demand for treatments As per our discussion in class of the evidence and how doctors increase the demand for treatment. D) None of the above. 8. Which of the following goods is likely to have the most inelastic price elasticity. A) Beer, in general Particular products in a product category (like Heineken and Coors) have more substitutes than does the category in general. B) All three are likely to have the same price elasticity of demand C) Heineken D) Coors 9. Economists make predictions about individual behavior based on the assumption that people exploit opportunities to make themselves better off. The fact that different individuals make different choices when confronted with the same situation implies that this assumption is often violated. A) True B) False Two people, both optimizing, who face the same constraints, typically make different choices because they have different preferences.Page 3 10. Pooh spends all his income on honey and maple syrup. Because he views honey and maple syrup as perfect substitutes, he is willing to substitute honey for maple syrup at the constant rate of one teaspoon of honey to two teaspoons of maple syrup. If the relative price of honey in terms of maple syrup is 2.2, Pooh's optimal consumption bundle will consist entirely of maple syrup. A) True B) False Use the following to answer question 11: 11. (Table: Consumer Equilibrium) Assume that the price of Good X is $2 per unit, the price of Good Y is $1 per unit, and you have $10 of income to spend on both goods. To maximize utility, you would consume ________ units of X and ________ units of Y. A) 5; 0 B) 3; 4 C) 2; 3 D) 2; 6Page 4 Use the following to answer question 12: 12. (Table: Denise's Consumption of Coffee and Gasoline) Denise will maximize her utility by consuming bundle: A) C. B) D. C) B. D) A. 13. Consider Fred, the skier from the lecture. Which statement best describe why Fred's production of ski miles was not very responsive to the amount she was paid to ski each mile. A) She values her time highly and her marginal product of labor, while positive, is increasing. B) She puts little value on her time her and her marginal product of labor, while positive, declines rapidly. C) She values her time highly and her marginal product of labor, while positive, declines rapidly. D) She puts little value on her time and her marginal product of labor, while positive, is increasing.Page 5 14. When markets fail: A) the market realizes the maximum possible gains from trade given the available resources. B) no goods and services are produced. C) government intervention may help. Market failure, by definition, means the equilibrium market allocation of resources is inefficient (excluding A and D). Even if the allocation is inefficient, something will be produced. Note that government intervention will not necc make things more efficient. E.g. most would agree that we do not have an efficient allocation of medical treatments in the U.S. but not all that think the market is failing believe that government intervention will make things more efficient (many believe that gov. intervention will make things more inefficient). D) there may still be an efficient allocation of resources. 15. All I care about is publishing research papers and going skiing: I like doing both. CU pays me $100 a week (my income). Skiing costs $15 a trip, and journals charge $10 to publish my papers - they always accept them. It takes me 8 hours to do a ski trip and 4 hours to write a paper. I have 40 hours a week to allocate to writing and skiing, and can spend my whole $100 on these two activities. Which of the following statements is both correct and most informative? A) I might ski 3 times B) I might ski 3 times and write 6 papers. C) I might