Midterm 2 60 minutes Econ 1101 Principles of Microeconomics November 14 2011 Exam Form A Name Student ID number Signature Teaching Assistant Section The answer form the bubble sheet and this question form will both be collected at the end of the exam Fill in the information above and then on the answer form please write the following information name student ID number recitation number Form A see the bottom part of the answer sheet for this bubble Fill in the corresponding bubbles Sign your name on the answer form You will be awarded 1 5 bonus points for filling the correct name and ID on the answer form There are 35 questions All questions are multiple choice Each question has a single answer Select the best answer for each question and fill in the corresponding bubble on the answer sheet Use a Number 2 pencil to fill in your answer You are not permitted to use calculators or to open books or notes 1 1 For question 1 please fill in a on your bubble sheet as this is exam form A We are using this question to verify the exam form a Form A The questions on this page and the next page refer to the graph below Buckeye consumes pizza and soda and the graph illustrates his indifference curves 32 30 28 26 24 22 s20 o18 d16 a14 12 10 8 6 4 2 0 0 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 pizza From Buckeye s indifference curves we can determine that Buckeye is indifferent between having 8 pizzas 16 sodas and a 8 pizzas 6 sodas b 14 pizzas 14 sodas c 16 pizzas 10 sodas d 32 pizzas 4 sodas e 8 pizzas 8 sodas 3 Suppose Buckeye has an income of 16 that PPizza 2 and that PSoda 0 50 fifty cents Draw Buckeye s budget constraint in the above figure From this we can see that the opportunity cost of one more slice of pizza equals a soda b 1 soda c 2 sodas d 3 sodas e 4 sodas 2 4 At this income and prices of soda and pizza the optimal consumption bundle for Buckeye is a 4 pizza 8 sodas b 4 pizza 16 sodas c 2 pizza 24 sodas d 3 pizza 10 sodas e 5 8 pizza 8 sodas Suppose the price of pizza falls to PPizza 1 Draw the new budget constraint The fall in the price of pizza causes the quantity demanded of pizza to increase by how many units a 2 b 4 c 6 d 8 e 12 6 In this example on account of the decrease in the price of pizza the income effect on the demand for pizza is a 0 pizzas b 1 pizza c 2 pizzas d 4 pizzas e 6 pizzas 7 Now start from the case where Buckeye has an income of 16 PPizza 1 and PSoda 0 50 Next suppose that income falls by half to 8 Draw the new budget constraint and determine the new optimal consumption bundle From this we can see that a For Buckeye the share of income spent on pizza does not change when income changes b Soda and pizza are both inferior goods c The income elastiticies for both soda and pizza are negative d a b and c are all true e None of the above are true 3 Robinson works 10 hours a day He can make 1 apple per hour or 4 oranges per hour Friday works 5 hours a day He can make 8 apples per hour or 2 oranges per hour The figures below show the indifference curves for Robinson and Friday 45 45 40 40 35 35 30 30 O r 25 a 20 n g 15 e s 10 O r 25 a 20 n g 15 e s 10 U3 U2 5 U3 U2 5 U1 U1 0 0 0 5 10 15 20 25 30 35 Apples 40 45 0 Robinson 5 10 15 20 25 30 35 Apples 40 45 Friday Illustrate Robinson s and Friday s production possibility frontiers ppf in the graphs above and then answer the following questions 8 has an absolute advantage in making apples and has a comparative advantage in making apples Fill in the blanks a Friday Friday b Robinson Robinson c Friday Robinson d Robinson Friday 9 Suppose trade is impossible so each is in autarky For each production equals consumption At the utility maximizing choice Robinson produces and consumes a 10 apples 0 oranges b 0 apples 40 oranges c 40 apples 0 oranges d 20 apples 10 oranges e 5 apples 20 oranges 10 Suppose trade is possible and that the price of one apple in terms of oranges equals one orange In this case Robinson consumes apples and oranges Fill in the blanks a 5 20 b 10 20 c 20 20 d 20 10 4 11 Under what assumptions will the long run supply curve for the widget industry be perfectly elastic i e perfectly flat i Marginal Cost must always be less than Average Total Cost for all quantities ii The long run demand curve must be unit elastic iii The same technology is available to all firms iv There are no barriers to entry in the industry v Input prices do not change as the industry expands a i ii and iii b ii iii and iv c iii iv and v d i ii and v e iii and iv Suppose the required assumptions from above hold for the widget industry Each widget firm has the cost structure illustrated in the left graph below The right graph illustrates two different possible demand curves D1 and D2 26 26 MC 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 ATC AVC q 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 D1 Q 0 0 1 2 3 4 5 6 7 8 9 10 11 12 12 D2 Fixed cost equals a Not enough information to tell b 12 c 6 d 48 e 36 5 300 600 900 1200 1500 1800 2100 2400 13 If the price equals 4 in the short run the firm will produce The resulting maximum profit equals a Not enough information to tell b 10 c 24 d 18 e 32 For the next four questions assume demand is D1 and the industry is in long run equilibrium 14 The price PLR is a 20 b 4 c 6 d 3 e 12 15 Long run output per firm qLR equals a 3 b 4 c 6 d 9 e 12 16 Long run industry quantity QLR equals a 1500 b 1200 c 900 d 600 e 300 17 Long run number of firms NLR equals a 100 b 150 c 200 d 250 e 300 18 Suppose the industry is initially in long run …