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# ECN 302 Midterm Test Bank

Question # 00005087
Subject: Economics
Due on: 12/10/2013
Posted On: 12/10/2013 08:13 AM

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1
Sample Questions for ECN 302 Midterm 1
The correct answers are highlighted in yellow and the explanations for
selected questions are provided in bold italics.
Question (1): Which of the following will NOT cause a shift to the right in the
demand curve for beer?
a. A change in the price of beer.
(Notes: A change in the price of beer would induce a
movement along the demand curve for beer, rather than a shift
in the demand curve for beer.)
b. A health study indicating positive health benefits of moderate
beer consumption.
c. An increase in the price of French wine (a substitute).
d. A decrease in the price of potato chips (a complement).
Scenario 1:
The demand for books is: QD = 120 - P
The supply of books is: QS = 5P
Question (2): Refer to Scenario 1. What is the equilibrium price of books?
a. 5
b. 10
c. 15
d. 20
(Notes: To find this, set QD=QS (i.e. 120-P=5P). Thus, 6P=120
and P=20)
Question (3): Refer to Scenario 1. What is the equilibrium quantity of books
sold?
a. 25
b. 50
c. 75
d. 100
(Notes: To find this, substitute P=20 into QD or QS)
2
Question (4): Suppose there is a decrease in both the demand for and supply of
a good. What happens to equilibrium price and quantity?
a. Equilibrium quantity increases, but the effect on equilibrium price
is ambiguous
b. Equilibrium quantity decreases, but the effect on
equilibrium price is ambiguous
(Notes: Both the demand curve and the supply curve shift to
the left in this case. The new market equilibrium is given by
the intersection of the new demand curve and the new supply
curve. While the quantity is unambiguously lower at the new
market equilibrium since there is downwards pressure on the
quantity on both sides of the market, the net effect on price
depends on the relative magnitudes of the shifts since the
decrease in demand exerts downwards pressure on the price
while the decrease in supply exerts upwards pressure on the
price.)
c. Equilibrium price increases, but the effect on equilibrium quantity
is ambiguous
b. Equilibrium price decreases, but the effect on equilibrium
quantity is ambiguous.
Question (5): According to basic supply and demand analysis, when Hurricane
Katrina caused oil prices to rise, what happened to the equilibrium
price and quantity of sport utility vehicles?
a. Equilibrium price and quantity both increased
b. Equilibrium price and quantity both decreased
(Notes: Gasoline and sport utility vehicles are complements.
Thus, when the price of oil (and gasoline) increases, the
demand for sport utility vehicles decreases (i.e. the demand
curve for sport utility vehicles shifts to the left). Thus, the
equilibrium price and quantity for sport utility vehicles will
decrease.)
c. Equilibrium price increased and equilibrium quantity decreased
d. Equilibrium price decreased and equilibrium quantity increased
3
Question (6): Which of the following would cause a shift to the right of the supply
curve for gasoline?
I. A large increase in the price of public transportation.
II. A large decrease in the price of automobiles.
III. A large reduction in the costs of producing gasoline.
a. I only.
b. II only.
c. III only.
(Notes: Statement I and Statement II describe shocks to the
demand schedule for gasoline and thus the scenarios
described by these two statements would not affect the supply
curve for gasoline. Statement III describes a reduction in the
costs of producing gasoline. A reduction in the costs of
producing gasoline increases the supply of gasoline and
would shift the supply curve for gasoline to the right.)
d. II and III only.
Figure 1
Question (7): Refer to Figure 1 above. At point E, demand is:
a. completely inelastic.
(Notes: We went through a very similar example in class. Refer
to the lecture notes for Chapter 2.)
b. inelastic, but not completely inelastic.
c. infinitely elastic.
d. elastic, but not infinitely elastic.
4
Question (8): Table 1
According to Table 1, which presents hypothetical data on price elasticity
of demand, which of the following is true about lamb?
a. Each 2.7% change in the price of lamb causes a 1% change in
the quantity demanded of lamb
b. The demand for lamb is inelastic
c. Each 1% change in the price of lamb causes a 2.7% change
in the quantity demanded of lamb
(Notes: Since 2.7
%
% = ?
_
= _
P
Q
ED D
P , a 1% increase in the price of
lamb causes a 2.7% decrease in the quantity demanded of
lamb.)
d. Lamb is a normal good
Question (9): When the government controls the price of a product, causing the
price to be above the free market equilibrium price,
a. all producers are made better off.
b. both producers and consumers are made better off.
c. all consumers are made better off.
d. some, but not all, sellers can find buyers for their goods.
(Notes: The government is instituting a binding price floor in
this question. The quantity supplied will be greater than the
quantity demanded when the price is above the equilibrium
price.)
Good Price Elasticity of Demand
Car repair -1.2
Lamb -2.7
5
Question (10): The price elasticity of supply for gasoline in the U.S. is 0.4. If the
price of gasoline rises by 8%, what is the expected change in the
quantity of gasoline supplied in the U.S.?
a. +3.2%
(Notes: % (% )
%
%
s
S
s P
S s
P Q E P
P
Q
E _ _ = • _
_
= _ . Thus, if S = 0.4
P E and
%_ = 8%
s P ,%_ = • (%_ ) = (0.4)(8%) = +3.2%
s
S
s P Q E P .)
b. -3.2%
c. +32.0%
d. +0.32%
Question (11): Consider a supply curve of the form: Q = c + dP. If d=0, then
supply is:
a. completely inelastic.
(Notes: The price elasticity of supply is (P/QS)(_QS/_P). Since
d=_QS/_P=0, the price elasticity of supply is zero and supply is
completely inelastic. This means that the supply curve is a
straight vertical line.)
b. inelastic, but not completely inelastic.
c. elastic, but not infinitely elastic.
d. infinitely elastic
Question (12): When government intervenes in a competitive market by imposing
an effective price ceiling, we would expect the quantity supplied to
_____________ and the quantity demanded to ____________.
a. fall; rise
(Notes: The fact that the price ceiling is effective implies that the
government is forcing the maximum price to be lower than the
equilibrium price. Thus, we would expect the quantity supplied
to fall (since the supply curve is upwards sloping) and we would
expect the quantity demanded to rise (since the demand curve is
downwards sloping).)
b. fall; fall
c. rise; rise
d. rise; fall
6
Question (13): Consider the following three market baskets:
Table 2
Food Clothing
A 6 3
B 8 5
C 5 8
If preferences satisfy all three of the usual assumptions:
a. A is on the same indifference curve as B.
b. B is on the same indifference curve as C.
c. A is preferred to C.
d. B is preferred to A.
(Notes: Market basket B contains more food and more clothing
compared to market basket A. If preferences satisfy the “more
is better” assumption, B must be preferred to A. Note that we
will not be able to make inferences about how C compares to
Question (14): Gary Franklin is a movie critic. He invented the Franklin Scale
with which he rates movies from 1 to 10 (10 being best). When
asked about his scale, Mr. Franklin explained "that it is a subjective
measure of movie quality. A movie with a ranking of 10 is not
necessarily 10 times better than a movie with a ranking of 1, but it
is better. A movie with a ranking of 5 is better than a movie with a
ranking of 1, but is not as good a movie with a ranking of 10. That's
all it really tells you." Based on Mr. Franklin's description, his scale
is:
a. ordinal but not cardinal.
(Notes: The scale allows Mr. Franklin to rank the movies but it
does not indicate the extent to which one movie is preferred to
another.)
b. cardinal but not ordinal.
c. an objective standard to judge movies.
d. neither cardinal nor ordinal.
7
Question (15): An upward sloping indifference curve defined over two goods
violates which of the following assumptions from the theory of
consumer behavior?
a. transitivity.
b. preferences are complete.
c. more is preferred to less.
d. all of the above.
Question (16): Alvin's indifference map for Good A and Good B are shown in the
diagram below.
Which of the following statements about Alvin’s preferences is
correct?
a. Alvin receives no satisfaction from consuming Good A.
b. Alvin receives no satisfaction from consuming Good B.
(Notes: Since Alvin’s indifference curves are vertical straight
lines, his utility will increase if and only if the quantity of Good
A increases. He receives no satisfaction from consuming
Good B.)
c. Alvin will only consume A and B in fixed proportions.
d. None of the above.
Good A
Good B
8
Question (17): If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal
axis, candy is on the vertical axis), Jill would willingly give up:
a. 2, but no more than 2, units of popcorn for an additional unit of
candy.
b. 2, but no more than 2, units of candy for an additional unit
of popcorn.
(Notes: The MRS measures the maximum amount of candy
that Jill will give up for an additional unit of popcorn in this
case since popcorn is on the X-axis and candy is on the Yaxis.)
c. 1, but no more than 1, unit of candy for an additional 2 units of
popcorn.
d. 2, but no more than 2, units of popcorn for an additional 2 units
of candy.
9
Question (18): Theodore's budget line has changed from A to B, even though his
income has stayed the same. Which of the following price changes
explains the change in Theodore's budget line?
a. The price of food and the price of clothing increased.
b. The price of food increased, and the price of clothing
decreased.
c. The price of food decreased, and the price of clothing
increased.
(Notes: The value for the horizontal intercept has
increased, indicating that the price of food has decreased.
The value for the vertical intercept has decreased,
indicating that the price of clothing has increased.)
d. The price of food and the price of clothing decreased.
Question (19): A consumer has \$100 per day to spend on product A, which has a
unit price of \$7, and product B, which has a unit price of \$15. What
is the slope of the budget line if good A is on the horizontal axis and
good B is on the vertical axis?
a. -7/15.
(Notes: The slope of the budget line is -(PA/PB)= -7/15)
b. -7/100.
c. -15/7.
d. 15/100.
10
Question (20): When Joe maximizes utility, he finds that his MRS is greater than
Px/Py. It is most likely that:
a. Joe's preferences are incomplete.
b. Joe's preferences are irrational.
c. Joe is not consuming good X.
d. Joe is not consuming good Y.
(Notes: This is very similar to the ice cream/ frozen yogurt
example that we went though in class. Because the question
tells us that Joe is maximizing utility at this bundle, we know
that MRS> Px/Py indicates a corner solution for Joe’s utility
maximizing bundle where Joe is not consuming good Y.)
Question (21): Denise is shopping for lobsters and eclairs. When she faces
budget line b1, she chooses market basket A over market basket B.
When she faces budget line b2, she chooses basket B over basket
C. Which assumption of consumer theory helps us determine
a. completeness
b. more is better than less
c. transitivity
d. convexity
Question (22): Suppose a consumer's MRS is given by the formula MRSP for T =
T/P, where P stands for the number of pieces of pizza and T stands
for the number of tacos. Starting at 12 tacos and 4 pizzas, the
a. 3 tacos to compensate them for the loss of one piece of
pizza
(Notes: Since 3
4
12
= = =
P
T
MRSPforT and also __ _
__ _
_
= ? _
P
T
MRSPforT , we
know that the consumer must receive 3 tacos to compensate
them for the loss of one piece of pizza.)
b. 3 pieces of pizza to compensate them for the loss of one taco
c. 1/3 taco to compensate them for the loss of one piece of pizza
d. 1/3 piece of pizza to compensate them for the loss of one taco
11
Question (23): To maximize his utility (U) a consumer has to choose how many
cups of tea (T) and how many cups of coffee (C) to buy. The
consumer’s utility function is given by U=T+C, which means that
MRST for C=1 at all points on all of the consumer’s indifference
curves. If the price of a cup of tea is \$3 and the price of a cup of
coffee is \$2 and the consumer has \$60 to allocate between tea and
a. 20 cups of tea and 30 cups of coffee
b. 0 cups of tea and 30 cups of coffee
(Notes: Since MRST for C=1 at all points on an indifference curve
for this consumer, tea and coffee are perfect substitutes for
this consumer and the indifference curves are downwards
sloping straight lines with slopes of -1. Since PT/PC=3/2 and
MRST for C=1, we know that the utility maximizing market basket
is represented by a corner solution where the consumer
consumes only the cheaper substitute (i.e. coffee). The
consumer will optimally choose to spend all of his budget on
coffee and buy 60/2=30 cups of coffee.)
c. 20 cups of tea and 0 cups of coffee
d. None of the above
12
Question (24): Andy derives utility from two goods, potato chips (Qp) and Cola
(Qc). Andy receives zero utility unless he consumes some of at
least one good. The marginal utility that he receives from the two
goods is given as follows:
Qp MUp Qc MUc
1 12 1 24
2 10 2 22
3 8 3 20
4 6 4 18
5 4 5 16
6 2 6 14
7 -2 7 12
8 -4 8 10
Refer to the table above. What is the total utility that Andy will
receive if he consumes 5 units of potato chips (Qp) and no Cola
drink (Qc)?
a. 4 utils.
b. 10 utils.
c. 30 utils.
d. 40 utils.
with each increment from Qp=1 to Qp=5. Total utility from
consuming Qp=5 and Qc=0 is 12+10+8+6+4=40.)
Question (25): The price of lemonade is \$0.50; the price of popcorn is \$1.00. If
Fred has maximized his utility by purchasing strictly positive
quantities of both lemonade and popcorn, his marginal rate of
substitution will be:
a. 2 lemonades for one popcorn.
(Notes: Since Fred is consuming his utility maximizing
means that Fred is willing to give up 2 lemonades for one
popcorn.)
b. 1 lemonades for one popcorn.
c. 1/2 lemonade for one popcorn.
utilities is provided.
Tutorials for this Question
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#### ECN 302 Midterm Test Bank

Tutorial # 00004877
Posted On: 12/10/2013 08:15 AM
Posted By:
expertden
Questions:
15717
Tutorials:
15379
Feedback Score:
Tutorial Preview …Alvin xxxxxxxx no xxxxxxxxxxxx from consuming xxxx B (Notes: xxxxx Alvin’s xxxxxxxxxxxx xxxxxx are xxxxxxxx straight lines, xxx utility will xxxxxxxx if xxx xxxx if xxx quantity of xxxx A increases xx receives xx xxxxxxxxxxxx from xxxxxxxxx Good B x c Alvin xxxx only xxxxxxx x and x in fixed xxxxxxxxxxx d None xx the xxxxx xxxx A xxxx B 8 xxxxxxxx (17): If xxxxxx MRS xx xxxxxxx for xxxxx is 2 xxxxxxxx is on xxx horizontal xxxxx xxxxx is xx the vertical xxxxxx Jill would xxxxxxxxx give xxx x 2, xxx no more xxxx 2, units xx popcorn xxx xx additional xxxx of candy x 2, but xx more xxxx xx units xx candy for xx additional unit xx popcorn xxxxxxx xxx MRS xxxxxxxx the maximum xxxxxx of candy xxxx Jill xxxx xxxx up xxx an additional xxxx of popcorn xx this xxxx xxxxx popcorn xx on the xxxxxx and candy xx on xxx xxxxx ) x 1, but xx more than xx unit xx xxxxx for xx additional 2 xxxxx of popcorn x 2, xxx xx more xxxx 2, units xx popcorn for xx additional x xxxxx of xxxxx 9 Question xxxxx Theodore's budget xxxx has xxxxxxx xxxx A xx B, even xxxxxx his income xxx stayed xxx xxxx Which xx the following xxxxx changes explains xxx change xx xxxxxxxxxx budget xxxxx a The xxxxx of food xxx the xxxxx xx clothing xxxxxxxxx b The xxxxx of food xxxxxxxxxx and xxx xxxxx of xxxxxxxx decreased c xxx price of xxxx decreased, xxx xxx price xx clothing increased xxxxxxx The value xxx the xxxxxxxxxx xxxxxxxxx has xxxxxxxxxx indicating that xxx price of xxxx has xxxxxxxxx xxx value xxx the vertical xxxxxxxxx has decreased, xxxxxxxxxx that xxx xxxxx of xxxxxxxx has increased x d The xxxxx of xxxx xxx the xxxxx of clothing xxxxxxxxx Question (19): x consumer xxx xxxx per xxx to spend xx product A, xxxxx has x xxxx price xx \$7, and xxxxxxx B, which xxx a xxxx xxxxx of xxx What is xxx slope of xxx budget xxxx xx good x is on xxx horizontal axis xxx good x xx on xxx vertical axis? x -7/15 (Notes: xxx slope xx xxx budget xxxx is -(PA/PB)= xxxxxx b -7/100 x -15/7 x xxxxxx 10 xxxxxxxx (20): When xxx maximizes utility, xx finds xxxx xxx MRS xx greater than xxxxx It is xxxx likely xxxxx x Joe's xxxxxxxxxxx are incomplete x Joe's preferences xxx irrational x xxx is xxx consuming good x d Joe xx not xxxxxxxxx xxxx Y xxxxxxx This is xxxx similar to xxx ice xxxxxx xxxxxx yogurt xxxxxxx that we xxxx though in xxxxx Because xxx xxxxxxxx tells xx that Joe xx maximizing utility xx this xxxxxxx xx know xxxx MRS> Px/Pyindicates x corner solution xxx Joe’s xxxxxxx xxxxxxxxxx bundle xxxxx Joe is xxx consuming good x ) xxxxxxxx xxxxx Denise xx shopping for xxxxxxxx and eclairs xxxx she xxxxx xxxxxx line xxx she chooses xxxxxx basket A xxxx market xxxxxx x When xxx faces budget xxxx b2, she xxxxxxx basket x xxxx basket x Which assumption xx consumer theory xxxxx us xxxxxxxxx xxxxxxxxxx…
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