Economics 101 - Cornell University



MAKE-UP EXAM

Econ 1110-INTRODUCTORY MICROECONOMICS

Wissink-S2017-April 14-PRELIM#2

Your LAST Name: _______________________________ Your first name ______________________

Your NetId:______________________ Your Student Number:________________________________

INSTRUCTIONS and EXAM TAKING POLICY:

There are two sections in this exam. Answer all questions.

Part I: 15 multiple choice questions @ 3.4 points each

Part II: 2 problem @ 24 and 25 points, respectively

TOTAL POINTS = 100, TOTAL TIME = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.

NO GRAPHING CALCULATORS.

NO BOOKS. NO NOTES. NO HELP SHEETS.

NO TALKING TO EACH OTHER.

Circle the SECTION you regularly attend (that is where you will pick up your prelim):

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ONE MORE TIME, Please….

CLEARLY PRINT YOUR LAST NAME: ____________________________________

Print your first name: ________________________________

Your NetId: _____________

Your Student Number: ____________________________

GRADING

MC (out 51 points)=___________________

Q1 (out of 24 points)=_________________

Q2 (out of 25 points)=_________________

TOTAL SCORE: _____________________

Part I: Multiple Choice. Do them ALL.

CIRCLE the letter for your answer.

_____________________________________________

[i]. Suppose the cross-price elasticity of demand for X with respect to the price of Y is 0.7 at the current price and quantity traded on the market for X. This indicates which one of the following?

A. X is a normal good.

B. X is price inelastic.

C. X is a necessity.

D. X and Y are substitutes in consumption.

E. X and Y are complements in consumption.

[ii]. Which one of the following is an incorrect statement about Pierre’s “indifference curve-budget line diagram” assuming Pierre’s preferences are very nicely behaved?

A. The assumption that “More is Better” implies that Pierre’s indifference curves are positively sloped.

B. Bundles on the same indifference curve are equally satisfactory.

C. Bundles that lie underneath (i.e., down and left) relative to a particular indifference curve are worse than all the bundles on the particular indifference curve considered.

D. If bundles A and B lie on the same budget line Pierre can afford either bundle.

E. The absolute value of the slope of the indifference curve at a particular bundle is Pierre’s “marginal rate of substitution” at that bundle.

[iii]. Suppose that the market price of a jar of salsa is $4, and the market price of a cup of coffee is $2. How many cups of coffee must a consumer forego to buy an additional 4 jars of salsa?

A. ¼ of a cup

B. 2 cups

C. 8 cups

D. 16 cups

E. none of the above

[iv]. Suppose Peter gets utility from consuming only X and Y. Two of his indifference curves are represented in the graph. Suppose current market prices for X and Y are Px=$1 and Py=$2. If Peter successfully maximizes utility, given his income, he will

A. buy only X.

B. evenly split his income between X and Y.

C. buy twice as much X as Y.

D. find the bundle where his indifference curve is tangent to the budget line.

E. spend all his income and any bundle that spends all his income will be optimal.

[v]. The figure illustrates how Henry responded to an increase in the market price of books, holding preferences, income and the price of movies constant. Which one of the following statements is true?

A. The total effect of this price change is the movement from B to C.

B. From this analysis we can confirm that movies are a normal good.

C. From this analysis we can confirm that movies violate the law of demand.

D. The substitution effect is the movement from B to A.

E. From this analysis we can confirm that the cross price elasticity of demand for books with respect to the price of movies is negative.

[vi]. Consider the market for backpacks. There are only two types of demanders in the market: kids and college students (college students are young adults, ok?). Demand (as graphed) in the kid market is PDK = 100 – 1/4Q. Demand in the college student market is PDCS = 100 – 2.5Q. These are the only two groups in the market. Aggregate market demand in the backpack market is then

A. QD = 200 – 2.75P.

B. QD = 440 – 4.40P.

C. PD = 440 – 4.60Q.

D. PD = 400 – 4.40Q.

E. QD = 440 – 4.00P.

[vii]. Consider the indifference curve diagram. Which one of the following statements is false?

A. Bundle C yields more utility than bundle A.

B. Bundle B yields the same amount of utility as bundle A.

C. Bundle B yields less utility than bundle C.

D. Bundle A and bundle B cost the same amount.

E. Bundle B and bundle D yield the same amount of utility.

[viii]. Mary currently spends all her income and consumes only two goods: apples and oranges. Various useful bits of information are in the table. Mary’s marginal utility functions are typically shaped. According to the information given in the table, if Mary wants to maximize utility

|good |units consumed |price per unit |current |

| | | |marginal utility |

|apples |10 pounds |$0.25/pound |5 utils |

|oranges |20 pounds |$0.50/pound |8 utils |

A. she should spend more on apples and less on oranges.

B. she should spend more on oranges and less on apples.

C. she should spend more on both.

D. she should do nothing since she is successfully maximizing her satisfaction from the two goods.

E. she should buy only oranges.

[ix]. Several of Fred’s indifference curves are shown in the graph. He consumes only X and Y. His income is $100. The price of Y is $5/unit. The price of X starts at $2.50 and then increases to $5/unit and then to $10/unit. As the price of X rises, Fred will (carefully draw budget lines onto graph)

A. exhibit the Giffen paradox.

B. end up on higher and higher indifference curves.

C. increase his quantity demanded for X from 4 to 10 to 18 units.

D. increase his quantity demanded of Y from 4 to 10 to 18 units.

E. decrease his quantity demanded for X from 18 to 10 to 4 units.

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[x]. Frank's Pizza Parlor has typically shaped cost curves. At q = 400 pizzas Frank’s marginal cost curve is rising. At q = 400 pizzas marginal cost is greater than average total cost. From this information Franco’s can definitely conclude that

A. its average total cost curve is falling at q = 400 pizzas.

B. its total costs are falling at q = 400 pizzas.

C. its average variable costs are falling at q=400 pizzas.

D. its fixed costs are falling at q=400 pizzas.

E. its average total cost curve is rising at q = 400 pizzas.

[xi]. At q=30, The Lawn Ranger, a landscaping company, has average total costs of $250 and average variable costs of $150. The Lawn Ranger's total fixed costs are

A. $0.

B. $400.

C. $4,500.

D. $3,000.

E. $7,500.

[xii]. Roger and Novak each own tennis ball making companies. They have the same cost structures for making tennis balls except that Roger has a wife who co-owns the company and does all the accounting. Novak has to hire an accountant. Both Roger and Novak could work for the Tennis Channel and each could earn salaries of $2,500,000/year if they quit working for themselves. Mirka (Roger’s wife) could earn what Novak pays his accountant if she worked for someone else besides her husband. Which one of the following statements is true?

A. Roger’s company earns more accounting profit and the same economic profit as Novak’s.

B. Roger’s company earns more accounting profit and more economic profit than Novak’s does.

C. Roger’s company earns the same accounting profit and more economic profit than Novak’s.

D. Roger’s company earns the same accounting profit and the same economic profit as Novak’s.

E. Roger’s company earns less accounting profit and less economic profit than Novak’s.

[xiii]. When the price of a variable input increases for all firms in a perfectly competitive industry, which one of the following statements is true?

A. Marginal cost decreases for every firm.

B. Average total cost decreases for every firm.

C. Minimum average total cost decreases for every firm.

D. Average variable cost increases for every firm.

E. Only explicit costs change.

[xiv]. Assume a technology with one fixed input (K=kapital) and one variable input (L=labor). Which one of the following statements is a correct statement for a typical short run production function? Assume TP=total product of labor, AP=average product of labor, MP=marginal product of labor.

A. At the moment when the TP curve starts to increase at a decreasing rate, then MP has reached its maximum value and will start to fall.

B. The law of diminishing marginal returns implies that the TP curve must eventually fall.

C. The law of diminishing returns implies that the MP curve will eventually become negative.

D. When the value of AP = MP, then TP is at its maximum value.

E. The law of diminishing returns implies that the units of labor must be heterogeneous with some laborers more productive workers than others.

[xv]. Which one of the following statements about short run cost curves is true?

A. The average variable cost curve only includes what we call explicit variable costs.

B. All explicit costs are costs that vary with the level of production.

C. An increase in the price of a fixed factor of production will shift the firm’s variable cost curve up.

D. Implicit costs reflect only fixed costs of production.

E. Increases in input prices for variable factors of production will shift the firm’s marginal cost curve up and also shift the firm’s total variable cost curve up.

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

1. Miguel is a consumer who lives off sardines and oranges only. His preferences are very nicely behaved. His monthly income is $1,000. The price of each sardine (S) is $2, and the price of each orange (O) is $1. He is currently consuming 400 oranges every month. Assume sardines are always a normal good for Miguel.

a) Putting sardines (S) on the horizontal axis and oranges (O) on the vertical axis, find and depict Miguel's optimal bundle and determine how many sardines are in this bundle.

b) What is his Marginal Rate of Substitution (MRS) at this bundle?

c) Having read recent studies on the benefits of sardines, government officials decide to subsidize Miguel’s consumption of sardines. The government agrees to split the price of sardines in half. Miguel will pay half and the government will pay the other half. Suppose the consequence of this policy is that Miguel now consumes 500 sardines. Graphically depict Miguel’s new budget line and the new bundle chosen by Miguel after this policy goes into effect.

d) How much money does the government spend on Miguel’s’ sardine consumption?

e) Decompose the change in Miguel’s behavior into his total effect, substitution effect and income effect using either the Hicks or the Slutsky method. You must state what method you are using for full credit.

f) Would Miguel make out better if the government had just sent him a check up front for the same amount of money they spent on his new sardine consumption? Briefly defend your position using your graph.

.

ANSWER SPACE

2. Tim owns the firm BeltIt which makes hand painted belts (q). His technology uses only three variable inputs: rawhide (R), Tim’s time (T), and acrylic paint (A). The table represents his output as a function of the variable inputs, given BeltIt’s set of fixed inputs. Suppose BeltIt’s fixed costs all together equal $600. Suppose the price of rawhide is PR=$1.50/inch. The cost of paint, PA=$3/quart. And if Tim were not in his own business, he could earn $15 an hour as a cowboy clown.

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a) Fill in the cost table above. Use the “larger delta” method for marginal cost.

b) If belts sell in a perfectly competitive industry for $13 a belt, how many should Tim supply and what are his economic profits?

c) Due to the recession suppose the market price of belts falls to $4 a belt. What should Tim do now and what will his economic profits be?

d) Suppose you are told that $100 of Tim’s fixed costs are of the sunk type. Will this change any of your answers? If so, which? And why?

e) Consider Tim’s’ fixed costs again. Suggest something that could be a reasonable example of each of the following: 1) an explicit fixed cost; 2) an implicit fixed cost.

f) Sketch what we call “THE COST GRAPH” for BeltIt and show Tim’s profit maximizing positions under the two price situations. Assume here that all Tim’s fixed costs are sunk costs.

ANSWER SPACE

ANSWER SPACE

ECON 1110 Wissink S2017 Answers MAKEUP Prelim 2

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[i] D

If the cross price elasticity of demand is a positive number, it indicates that the price of Y and quantity demanded of X move in the same directions, so that X and Y appear to be substitutes.

[ii] A

More is better implies negatively sloped ICs.

[iii] C

To buy additional 4 jars of salsa he needs $4*4=$16, thus he has to give up $16/$2=8 cups of coffee.

[iv] A

The ICs are steeper than BLs, thus his optimal bundle will be at the right end corner of his budget line. It implies that he will only consume X.

[v] B

Total effect is from A to C. Cannot tell the Law of Demand for movies because here only the price of books change. Movies are normal good because from C to B, income increases leads to an increase in movies. Cannot tell the cross price elasticity in E because we don’t have price change of movies. From A to B is Hick’s substitution effect.

[vi] B

At each price P, the demand in kid market is Q1=(100-P)*4 and in college student market is Q2=(100-P)/2.5 Thus the total demand should be Q=Q1+Q2=(100-P)*4 + (100-P)/2.5 , ie. Q=440-4.40P.

[vii] B

Bundle B is on a lower indifference curve than bundle A, even if they cost the same.

[viii] A

The ratio of MU/P for apples is 20 and for oranges is 16. To increase utility (satisfaction), Melissa should increase her consumption of apples (which will lower its MU and leave the price unchanged) and at the same time to stay within her budget constraint she must also reduce her consumption of oranges (which will raise its MU and leave the price unchanged. Melissa should continue doing this until the ratio MU/P is the same for both goods.

[ix] E

Quantity demanded for X increases, but for Y it decreases then increases. X satisfies the Law of Demand. The optimal bundles lie on lower and lower indifference curves.

[x] E

MC cuts AVC and ATC at their minimum. Thus, if MC>ATC, ATC is rising, and AVC is rising too. TC always increases, and FC is always the same.

[xi] D

30*($250-$150)=$3,000

[xii] A

Since Mirka’s costs are implicit and Novak’s accounting costs are explicit, given that all the other costs are identical, accounting costs would be higher for Novak, and hence he earns a lower accounting profit as compared to Roger. However, their economic profits are the same, since the opportunity cost of Mirka would feature in Rogers’s implicit costs.

[xiii] D

AVC, ATC, MC, VC, TC will all increase. Only FC and AFC will stay the same. VC can be explicit or implicit, so we cannot tell whether explicit cost increases or decreases.

[xiv] A

When the TP curve is at its inflection point, you have reached maximum MP and now MP will fall and increases to TP will be smaller and smaller.

[xv] E

As the cost of a variable factor of production increases, the variable cost (VC) curve shifts up in the vertical direction. Consequently, so does the marginal cost curve – which is just the change in VC for a unit change in quantity.

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