Drake University's Econ 2 Midterm Exam, Spring '05 - Prof. William M. Boal, Exams of Microeconomics

Download Drake University's Econ 2 Midterm Exam, Spring '05 - Prof. William M. Boal and more Exams Microeconomics in PDF only on Docsity! Principles of Microeconomics (Econ 2) Signature: Drake University, Spring 2005 William M. Boal Printed name: MIDTERM EXAMINATION #1 VERSION B “Competitive Supply and Demand” February 16, 2005 INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100. I. Multiple choice: Circle the one best answer to each question. [2 pts each: 26 pts total] (1) Suppose X = Y  Z. If Y increases by 2 percent and Z decreases by 3 percent, then X a. decreases by about 1 percent. b. increases by about 1 percent. c. increases by about 5 percent. d. increases by about 6 percent. (2) Economists assume everyone a. knows mathematics. b. does the best they can with what they have. c. takes prices as given. d. buys more of everything as their income rises. (3) Farm A can grow 50 bushels of tomatoes per acre or 100 bushels of corn per acre. Farm B can grow 20 bushels of tomatoes per acre or 80 bushels of corn per acre. Farm B has a comparative advantage in a. tomatoes. b. corn. c. Both crops. d. Neither crop. (4) Factory A can produce 10 bicycles per day or 30 lawnmowers per day. Factory B can produce 25 bicycles per day or 50 lawnmowers per day. Which factory has a comparative advantage in bicycles? a. Factory A. b. Factory B. c. Both factories. d. Neither factory. (5) In an efficient well-functioning market, a. all trades take place at about the same price. b. total gains from trade for sellers will equal total gains from trade for buyers. c. each trade takes place at a price halfway between the seller's cost and the buyer's value. d. prices are in whole dollars. (6) Personal computers are a normal good. If consumers' income rises as the economy improves, a. the demand curve shifts left. b. the demand curve shifts right. c. the supply curve shifts left. d. the supply curve shifts right. (7) If at the current price, quantity demanded is less than quantity supplied, a. the price will rise. b. the price will fall. c. the price will remain constant. d. the price will oscillate. (8) In the fall, the price of heavy coats increases and the quantity purchased also increases. This could be caused by a a. rightward shift in the supply curve. b. leftward shift in the supply curve. c. rightward shift in the demand curve. d. leftward shift in the demand curve. (9) In winter, the price of tomatoes rises while the quantity purchased decreases. This could be caused by a a. rightward shift in the supply curve. b. leftward shift in the supply curve. c. rightward shift in the demand curve. d. leftward shift in the demand curve. (10) Demand is less elastic for a good if a. there are no close substitutes available for the good. b. the good occupies a large share of consumers' budgets. c. consumers have more time to adjust their purchases in response to any price change. d. all of the above. Principles of Microeconomics (Econ 2) Drake University, Spring 2005 Midterm Examination #1 Version B Page 2 of 6 (11) The demand curve in the graph below is a. perfectly elastic b. perfectly inelastic. c. unitary-elastic. d. cannot be determined from information given. (12) If demand is inelastic, then a cut in price will bring a. a decrease in revenue. b. an increase in revenue. c. no change in revenue. d. cannot be determined from information given. (13) If the income elasticity of demand is greater than one, then an increase in income causes consumers to a. spend a smaller share of their income on the good. b. spend a larger share of their income on the good. c. spend a constant share of their income on the good. d. buy fewer units of the good. II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section. (5) [Production functions: 14 pts] A work crew plows snow from streets, with the following hourly production function. Number of workers Miles of streets plowed Average Product Marginal Product 0 workers 0 miles miles per worker 2 workers 4 miles miles per worker miles per worker 4 workers 12 miles miles per worker miles per worker 6 workers 24 miles miles per worker a. [6 pts] Compute the work crew’s average product (AP) with 2, 4, or 6 workers, and place your answers in the unshaded cells of the third column above. b. [6 pts] Compute the work crew’s marginal product (MP) when labor input increases from 0 to 2 workers, from 2 to 4 workers, or from 4 to 6 workers and place your answers in the unshaded cells of the fourth column above. c. [2 pts] Is the work crew's production function characterized by diminishing returns to their labor input? Answer “yes” or “no.” Demand Q P Principles of Microeconomics (Econ 2) Drake University, Spring 2005 Midterm Examination #1 Version B Page 5 of 6 (5) [Calculating elasticities: 2 pts] If the price of gasoline were $2 per gallon, the average driver would purchase 9 gallons a week. If the price of gasoline were $1 per gallon, the average drive would purchase 11 gallons per week. Compute the price elasticity of demand using the “arc-elasticity” or “midpoint” formula. (6) [Using price elasticities: 8 pts] Suppose the electric utility raises its rates (that is, the price of electricity) by 5% and the elasticity of demand for electricity is known to be -0.8 . Assume nothing else changes. a. Will the quantity of electricity demanded increase or decrease? b. ... by how much? % c. Will the total revenue received by the electric utility increase or decrease? d. ... by how much? % (7) [Using the income elasticity of demand: 8 pts] Suppose the income elasticity of demand for bread is 0.2. Now suppose income falls by 10%. a. Will the quantity of bread demanded increase or decrease? b. ... by how much? % c. Will spending on bread, as a fraction of a consumer's total budget, increase or decrease? (Assume the price of bread does not change.) d. ... by how much? % Principles of Microeconomics (Econ 2) Drake University, Spring 2005 Midterm Examination #1 Version B Page 6 of 6 III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [3 pts] (1) Consider the following statement. "We need to limit the number of doctors to keep fees low and protect the consumer. If there were too many doctors, none of them would get much business and they would all have to raise their fees to break even." Do you agree or disagree? Justify your answer. (2) Consider the following statement. "The American worker is the most productive in the world. As such, the United States gains nothing from trading with other, less productive countries except goodwill." Assume that the first sentence is correct. Do you agree or disagree with the second sentence? Justify your answer. Which question are you answering, (1) or (2)? _________ . Please write your answer below, continuing on the back if necessary. [end of exam]