Midterm Exam Solution

Topics: Supply and demand, Marginal cost, Cost Pages: 7 (1543 words) Published: February 25, 2013
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Midterm Exam

There are 25 multiple choice questions and each question is worth 3 points.

1) Until recently you worked as an accountant, earning $30,000 annually. Then you inherited a piece of commercial real estate bringing in $12,000 in rent annually. You decided to leave your job and operate a video rental store in the office space you inherited. At the end of the first year, your books showed total revenues of $60,000 and total costs of $30,000 for video purchases, utilities, taxes, and supplies. What is the total economic cost of operating the video store? A.$60,000

Answer d.

2) In a competitive market, the market demand is Qd = 60 - 6P and the market supply is Qs = 4P. A price ceiling of $3 will result in a  A. shortage of 30 units.
B. shortage of 15 units.
C. excess supply of 30 units.
D. excess supply of 12 units.

Answer: A

3) Which of the following would not shift the demand for IPAD?  A. drop in price of IPAD.
B. drop in price of Kindle.
C. consumer’ income doubles.
D. Apple increase the advertising of IPAD.

Answer: A

4) Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. If ay is positive, then:  A. goods y and x are complements.
B. goods y and x are inferior goods.
C. goods y and x are normal goods.
D. goods y and x are substitutes.

Answer: D
5) Suppose market demand and supply are given by Qd = 100 - 2P and QS = 5 + 3P. The equilibrium quantity is:  A. 92.
B. 81.
C. 45.
D. 62.
Answer: D
6) Suppose there is a simultaneous increase in demand and decrease in supply, which of the following statements is correct?   A. Price will rise and quantity may rise or fall.
B. Price will fall and quantity may rise or fall.
C. Price may rise or fall and quantity will rise.
D. Price may rise or fall and quantity will fall.

Answer A.

7) Assume that the price elasticity of demand is -2 for a certain firm's product. If the firm raises price, the firm's managers can expect total revenue to:  A. Decrease
B. Increase
C. Remain constant
D. Either increase or remain constant depending upon the size of the price increase. Answer: A

8) Suppose Q xd = 10,000 - 2 Px + 3 Py - 4.5M, where Px = $100, Py = $50, and M = $2,000. What is the cross-price elasticity of demand for X with respect to the price of Y?  A. 2.34.
B. 0.16.
C. -0.21.
D. -1.21.
Answer: B

9) The above figure shows the isoquants for producing steel. Increasing returns to scale are A. present when producing less than 10,000 tons.
B. present when producing less than 20,000 tons.
C. present when producing less than 25,000 tons.
D. never present.
Answer: A

10) Suppose the demand function for wine is and supply function for wine is . Suppose the government levies a specific tax of $3 on consumers. How much of the tax burden is borne by sellers?

B. 0
C. 1/3
D. 1
Answer D)

11) Economies of scale exist whenever long-run average costs  A. increase as output is increased.
B. decrease as output is increased.
C. remain constant as output is increased.
D. none of the statements associated with this question are correct.
Answer: B

12) The marginal rate of substitution (MRS) determines the rate at which a consumer is willing to substitute between two goods in order to achieve  A. a higher level of satisfaction.
B. a lower level of satisfaction.
C. the same level of satisfaction.
D. none of the statements associated with this question are correct.
Answer: C

13) If the slope of the indifference curve is steeper than the slope of the budget line at the current consumption basket, and X is on the horizontal axis. A. the consumer is willing to give up some of good Y to get an additional unit of good X to achieve a higher level of...
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