Economics 101



Econ 1110 - INTRODUCTORY MICROECONOMICSMakeup PRELIM #2 – Wissink – Spring 2019 – April 12________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) nameYour NetId: _____________________ Your Student Number: ________________________________Instructions and Exam Taking Policy:There are two sections in this exam. Answer all questions.Part I: 15 multiple choice/fill in the blank questions @ 3.2 points eachPart II: 2 problems @ 25 points eachTotal Points = 98 + 2 points for doing survey = 100, Total Time = 90 minutesNO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If there is something troubling you about a question, write us a note on the exam somewhere and we will deal with it as we are grading. If 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. RESTROOM USE: If you absolutely need to use the restroom raise your hand and wait for the proctor. 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, IPODS OR DEVICES WITH CALCULATOR “APPS” or large screens.NO GRAPHING CALCULATORS. NO BOOKS. NO NOTES. NO HELP SHEETS.NO TALKING TO EACH OTHER.Check the DIS# you regularly attend - that is where you will pick up your graded prelimIF YOU DO NOT CHECK A SECTION YOU LOSE 2 POINTS!left190500Survey = ____________MC/FIB ____________Q1 =__________________Q2 =__________________TOTAL: ________________076200Part I: Multiple Choice and Fill-In-The-Blank Questions. Do them ALL.Circle the letter for your answer or fill in your answer in the blank provided.020000Part I: Multiple Choice and Fill-In-The-Blank Questions. Do them ALL.Circle the letter for your answer or fill in your answer in the blank provided.. Your friend just invented a safe and inexpensive personal jet pack she calls the PerJet. She has patented her design and is now the monopoly producer. Assume that the market demand for PerJets is linear. Your friend hires you to maximize her total revenue from sales of PerJets. Your analysis shows that at the current price she charges she lands on the inelastic portion of her market demand curve. What should she do?Raise the price for PerJets and people will buy more of them.Do nothing. Revenues are as high as they can be.Charge a higher price for the PerJet and sell fewer.Charge a lower price for the PerJet.Produce and sell more PerJets.. A recent study finds that after average annual income increased by 2% last year, the consumption of Hershey’s chocolate increased by 1.5% and the consumption of Belgian chocolate increased by 4%. Supply conditions were unchanged. Based on this information, we can conclude thatboth Hershey’s and Belgian chocolate are inferior goods.Hershey’s chocolate is an inferior good and Belgian chocolate is a luxury good.Hershey’s chocolate is a necessity and Belgian chocolate is a luxury good.Hershey’s chocolate is a luxury good and Belgian chocolate is an inferior good.Hershey’s chocolate is a necessity and Belgian chocolate is an inferior good.. Suppose the demand function for X = Oranges is as follows: QDX = 5?T&P + 3?I – 2?Ppeelers + 3?Papples – 10?PX + 1?Pop.Suppose T&P = 7; Pop = 8; I = 50; Ppeelers = 9; PX=7.Using the point formula, find the cross price elasticity of demand for oranges with respect to the price of apples when Papples=15?0220980020000. Suppose Moe tells us his preference over 3 bundles, B1, B2 and B3. Sizing them up, Moe claims that B1 is at least as good as B2, and that B2 is at least as good as B3, and that B1 is better than B3. This tells us that Moe’s preferencesmust be for goods that are perfect substitutes.are transitive.do not satisfy the principle that more is better.do not satisfy the principle that average bundles are at least as good as extremes.will give rise to indifference curves that slope upward.364998016002000. Harry gets utility from only X and Y. His preferences are very nicely behaved and he is a successful utility maximizer. If Harry buys bundle A with budget line BL0 and he buys bundle B with budget line BL1 then which one of the following statements must be true for Harry?Both X and Y are normal goods.X is normal and Y is inferior.Both X and Y would be Giffen goods.X must not be Giffen and Y must be Giffen.X and Y are perfect substitutes for each other.right8445500. Consider the diagram with good X and good Y. Bundles B, A and D are all on the same budget line. Which one of the following is false? (Note: MRS=marginal rate of substitution and ERS=economic rate of substitution. All comparisons are based on using absolute values.)Point C is preferred to the points A, B & D.All income has not been spent at point D.At point B, MRS > ERS.Point A is preferred to the points B & D.Given the budget line and indifference curves shown, a utility maximizing consumer will choose point A.. Bismark has peculiar preferences. He has linear indifference curves with slope -1 over pretzel and beer bundles. Last year, when the price of pretzels was $4/unit and the price of beer was $2/pint, you observed that the utility maximizing Bismark consumed 20 pints of beer and no pretzels. This year a bad hop harvest raises the price of beer to $5/pint. There is no change in the price of pretzels, Bismark’s income or his preferences. Which one of the following statements is true?Bismark will consume 8 pints of beer and no pretzels.Bismark will consume 10 pretzels and no beer.Bismark will not change his bundle since his preferences did not change.For Bismark beer and pretzels are perfect complements.We can’t tell what happens to Bismark’s optimal bundle but we know he’ll be better off.259842012954000. Joe only eats steak and popcorn. The figure shows a Slutsky analysis for a fall in the price of popcorn. The initial budget line and indifference curve are labeled BL1 and IC1. The final budget line and indifference curve are labeled BL3 and IC3. Which one of the following statements is false?The change in behavior going from bundle B to C shows the income effect.The change in behavior going from bundle A to B shows the substitution effect.Popcorn is a normal good and steak is a normal good.Based on total effect, steak and popcorn are complements.Popcorn is not a Giffen good.. Consider the variable input labor. Assume typically shaped production functions. When a firm’s average product of labor is at its maximum value, thentotal product is at its minimum value.total product is also at its maximum value.the marginal product of labor is negative.it is equal to the marginal product of labor.the marginal product of labor is increasing as output increases.. Melissa currently spends all her income and consumes only two goods: apples and oranges. Melissa’s marginal utility for apples and for oranges is already declining. Various useful bits of information are in the table. If Melissa wants to maximize her utilitygoodunits currently consumedprice per unitcurrentmarginal utilityapples10 pounds$0.25/pound5 utilsoranges20 pounds$0.50/pound8 utilsshe should spend more on apples and less on oranges.she should spend more on oranges and less on apples.she should spend more on both.she should do nothing since she is successfully maximizing her satisfaction from the two goods.she should juggle her bundle until she obtains the same marginal utility from an apple as she does from an orange.. Which one of the following statements about a firm’s cost curves is true?The average variable cost curve only includes explicit costs.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.Fixed costs only include implicit costs.An increase in the price of a fixed factor of production will shift all of the firm’s cost curves up.As a firm’s quantity produced increases, variable costs always increase at an increasing rate.. You run an internet startup company from your home. You have solar panels installed in your home which generate electricity that you sell to the local electric company any time you use less electricity than you are generating with your panels to run your business. Which one of the items listed below would be factored into finding economic profit but would not be factored into finding accounting profit?Rent you pay a landlord for a small office.The time your friends spend testing your software apps just because they like you.Consultant fees you’ve already paid IBM consultants and cannot get back.Monthly fees you pay a computer company to host your site.The solar electricity that you use to run the business.. Janet took $25,000 out of her bank account to buy a commercial hemp necklace weaver to use for her necklace making business. Her bank account gives her 2 percent interest per year. During the first year of her business Janet sold 4,500 necklaces for $2.50 each. During this year her necklace making business incurred $3,000 in explicit costs for mainly materials. Janet’s weaver has not depreciated at all in the first year of business. Were Janet not working for herself making necklaces, she’d be working 20 hours a week, for 40 weeks at $8 an hour. Janet’s economic profit for the year was$1,350.$7,750.$11,250.$0.$-23,150.. Daniel makes ice cream. He currently produces 22,000 ounces of ice cream a month using 200 units of capital and 300 hours of labor. With his current production mix the marginal product of capital is 600 ounces and the marginal product of labor is 350 ounces of ice cream. Marginal product for each input is already declining. The price of labor is $10 per hour and the price of capital is $20 per unit. Daniel wants to keep costs the same but he wants to make sure that he is maximizing output. He shoulduse less labor and more capital.use more labor and less capital. SEQ CHAPTER \h \r 1 SEQ CHAPTER \h \r 1use less labor only, since it is not very productive.use more capital only, since it is more productive. SEQ CHAPTER \h \r 1do nothing, his output is maximized already. SEQ CHAPTER \h \r 1. 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 with him 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 $1,500,000/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?Roger’s company earns more accounting profit and more economic profit than Novak’s does.Roger’s company earns the same accounting profit and more economic profit than Novak’s.Roger’s company earns the same accounting profit and the same economic profit as Novak’s.Roger’s company earns less accounting profit and less economic profit than Novak’s.Roger’s company earns more accounting profit and the same economic profit as Novak’s.lefttopPart 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.020000Part 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.Consider Sally who gets utility from only 2 things: Leisure (Z) and $spent on all-other-goods ($aog). Her preferences are very nicely behaved and both leisure and all-other-goods are always normal. Sally has 24 hours each day to use up either as working hours (L) or leisure hours (Z), so Z+L=24. Her market wage rate is $10 per hour if she works. Consider Sally’s “budget line-indifference curve” diagram. Put $aog on the vertical axis and hours of leisure on the horizontal.Illustrate Sally’s budget line (BLO) when the wage rate is $10/hour.Suppose Sally demands 16 hours of leisure when the wage rate is $10/hour. How many hours is she working? How many dollars of all other goods is she consuming? Show this bundle on your budget line as O and include a reasonably shaped indifference curve for Sally that you label ICO.Suppose Sally gets a raise and her wage rate increases to $15/hour. Illustrate this as BLN in your diagram.Will Sally necessarily consume less leisure (that is, supply more labor) now that the price of leisure has increased? Defend your position with reference to your graph.Suppose we offer Sally overtime instead of just a flat out raise. That is to say, Sally gets paid only $10/hour until she has worked an 8 hour shift. For any additional hours Sally works beyond 8 hours in a day, she will get $15/hour. Illustrate this as BLOT in your pared to the original equilibrium (O), will Sally necessarily consume less leisure (that is, supply more labor) with the overtime system? Defend your position with reference to your graph.Which system - a wage increase of $15/hour, or overtime of $15/hour - would Sally prefer and why?Which of the following did the overtime payment scheme exploit: a full understanding of the the Hicksian Substitution Effect or the Slutsky Substition Effect?Please start your answers on the next page.Answers Answers 2. Ty is a cobbler who runs a shoemaking business in a perfectly competitive industry. If Ty did not run the business he would have a monthly income of $3,000. Ty rents the workshop he uses from ABC Properties, Inc and pays $600 a month. Ty took out a loan from his bank a while ago to start the business. His monthly interest payment on that loan is $400. He is not paying back any of the principal at this point in time. To make the shoes Ty needs only leather, labor and oil. He pays his hired labor $5 an hour. The current market price for leather is $15 per square foot. Ty has an oil well in his back yard and he uses this oil to run his business. Any oil he does not use himself can be sold at $10 a gallon on the oil market. The table shows information for a typical month. His cost curves are very typically shaped.Fill in Ty’s Cost Table. Use the “larger delta” or “smaller delta” method for the marginal cost – your choice.Suppose the market price of shoes is $16/pair. Suppose Ty is selling 1,000 pairs of shoes at the market price. How much economic profit is he getting?How much accounting profit is he getting when he sells 1,000 pairs at the market price of $16 per pair?Graph what we called The Cost Graph (remember Ty’s costs are typical). On your graph indicate what would represent Ty’s total costs at q=1,000 pairs of shoes; Ty’s fixed costs at q=1,000 pairs of shoes and Ty’s average fixed costs at q=1,000 pairs of shoes.In what way or ways would Ty’s version of The Cost Graph change if suddenly Ty were forced to pay $500 a year to the local government for a license to operate his business?Shoes (pairs)Hours of Labor by Hired Workerswork space?Sq Feet of Leather?work spaceGallons of Oil?work space00?0?0?20010?40?200?40030?60?300?60060?80?350?800100?100?450?1,000150?120?650?1,200210?140?950?1,400280?160?1350?Shoes (pairs)Fixed CostsVariable CostsTotal CostsMarginal Cost02004006008001,0001,2001,400AnswersAnswersAnswers, Makeup Prelim 2, 1110, Spring 2019 ................
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