Principles of Microeconomics Final 2

Economics 2302 Principles of Microeconomics Professor Isaac McFarlin

Practice Examination 2 University of Texas at Dallas

Student Name (print) __________________________ Student ID: xxx – xx - ________

Student Signature (required) ____________________________________ INSTRUCTIONS: The exam is closed book. You may only have the exam, calculator, your student ID, and a writing utensil on your desk. Remove all other items. There are 100 points on this exam. You will have the full class period to complete the exam. When time is called, you must stop working! Remember to have your student ID. The first part of the exam consists of 22 multiple choice questions, each worth 4 points; the second part consists of 1 problem, together worth 12 points. Answer the multiple choice questions on the SCANTRON sheet, and answer the remaining problems on their respective pages. To receive full credit, it is important to show all your work, and label and explain clearly any graphs that you use. Your work must be legible to receive credit. Good luck!

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Refer to the information provided in Figure 5.6 below to answer the questions that follow.

Figure 5.6 1) Refer to Figure 5.6. Bill's budget constraint was originally CD. Bill's new budget constraint is EF. This would occur if

1)

A) Bill's income increased and the price of black beans decreased. B) Bill's income decreased. C) Bill's income increased. D) Both B and C 2) Ted has $600 a week to spend on food and clothing. The price of food is $5 and the price of clothing is $30. Which of the following pairs of food and clothing are in the Ted's choice set? A) 20 units of clothing and 50 units of food

B) 0 unit of clothing and 200 units of food

C) 10 units of clothing and 125 units of food

D) 10 units of clothing and 60 units of food

3) Richard is consuming X and Y so that MUx/Px = 6 and MUy/Py = 10. To maximize utility, Richard should

2)

3)

A) consume less of both X and Y. B) consume more X and less Y. C) continue to consume the same amount of X and Y, as the consumer is already maximizing utility. D) consume less X and more Y. 4) Assuming that leisure is a normal good, if an individual's labor supply curve is backward bending, then the A) income effect and the substitution effects are equal. B) substitution effect outweighs the income effect at higher wages. C) income effect outweighs the substitution effect at higher wages. D) income effect is zero.

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4)

Refer to the information provided in Table 5.1 below to answer the questions that follow. Table 5.1 Number of Hamburgers per Day 1 2 3 4 5

Total Utility

Marginal Utility

30 52 67 76 4

Number of Sodas per Day 1 2 3 4 5

Total Utility

Marginal Utility

20 35 47 57 7

5) Refer to Table 5.1. Diminishing marginal utility sets in after the __________ soda per day. A) first

B) second

C) third

5)

D) fourth

6) Refer to Table 5.1. Assume that a store is giving hamburgers and sodas away for free. Consumers can have as many sodas and hamburgers as they want, but the food has to be consumed one unit at a time. If George has already had one soda and two hamburgers, then George

6)

A) should consume neither another soda nor another hamburger to maximize his utility. B) is indifferent between consuming the second soda or the third hamburger. C) should next consume a soda to maximize his utility. D) should next consume a hamburger to maximize his utility. 7) Harry tells you that he prefers Pepsi to Coke, Coke to 7-UP, and 7-UP to Pepsi. This violates what assumption made when analyzing consumer preferences?

7)

A) That consumers are rational. B) That there is a diminishing marginal rate of substitution. C) That more is better. D) That less is sometimes better. 8) A fall in the price of Pepsi that causes a household to shift its purchasing pattern AWAY from substitutes and toward Pepsi is the A) income effect of a price change. B) substitution effect of a price change. C) diminishing marginal utility effect of a price change. D) complementary effect of a price change.

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8)

9) A firm in a perfectly competitive market has no control over price because

9)

A) there is free entry and exit from the industry. B) every firm's product is a perfect substitute for every other firm's product. C) the market demand for products produced in perfectly competitive industries is perfectly elastic. D) the government imposes price ceilings on the products produced in perfectly competitive industries. 10) The Richardson Heights Bakery sells 400 cakes at a price of $10 per cake. Its total costs for producing 400 cakes is $500. The bakery's economic profits are A) $4,500.

B) $100.

C) $3,500.

D) indeterminate from this information.

11) The Farley Farm, a dairy company, has total costs of $15,000 and total variable costs of $2,000. The Farley Farm's TOTAL FIXED COSTS are

10)

11)

A) $0. B) $17,000. C) $13,000. D) indeterminate because the firm's output level is not known. Refer to the information provided in Figure 6.1 below to answer the questions that follow.

Figure 6.1 12) Refer to Figure 6.1. The demand curve facing a perfectly competitive producer of wheat would be represented by Panel A) A.

B) B.

C) C.

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D) D.

12)

13) Average variable cost and average total costs get closer together as output increases because

13)

A) marginal costs decrease as output increases. B) economies of scale become apparent. C) diminishing returns set in. D) average fixed costs decrease as output increases. Use the information provided in Table 6.1 below to answer the questions that follow. Table 6.1 Technology A B C D

Units of Capital 4 6 8 12

Number of Employees 18 12 8 6

14) Refer to Table 6.1. If the hourly wage rate is $7 and the hourly price of capital is $10, which production technology should be selected? A) A

B) B

C) C

15) If a firm in a perfectly competitive industry raises price above market price,

14)

D) D 15)

A) demand curves will become downward sloping. B) total revenue for the firm will increase. C) profit will increase. D) sales will drop to zero. 16) Joe's Butcher Shop is producing where MR = MC, Joe's Butcher Shop must be

16)

A) maximizing revenue but not maximizing profits. B) earning a zero economic profit. C) maximizing profits. D) incurring a loss. 17) Costs of production are determined

17)

A) by the technologies that are available and by the demand for the output. B) only by the technologies that are available. C) only by the input prices that are available. D) by the technologies that are available and by input prices. 18) In perfect competition, the marginal revenue curve

18)

A) is always below the demand curve facing the firm. B) intersects the demand curve when marginal revenue is minimized. C) is always above the demand curve facing the firm. D) and the demand curve facing the firm are identical.

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19) Wheat is produced in a perfectly competitive market. Market demand for wheat increases. This will cause the individual wheat farmer's marginal revenue to __________ and their profit maximizing level of output to __________. A) increase; decrease

B) decrease; decrease

C) decrease; increase

D) increase; increase

19)

Refer to the information provided in Figure 7.8 below to answer the questions that follow.

Figure 7.8 20) Refer to Figure 7.8. If this farmer is producing the profit-maximizing level of output, her profit is A) $0.

B) $2,800.

C) $12,000.

D) $3,000.

21) Refer to Figure 7.8. At the market price of $8 per bushel, if this farmer produces 700 bushels of soybeans, the total revenue would be A) $2,800.

B) $8,400.

C) $5,600.

B) 200 bushels of soybeans. C) 700 bushels of soybeans. D) a level of output that is indeterminate from this information.

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21)

D) $1,200.

22) Refer to Figure 7.8. If the market price of soybeans falls to $8, then to maximize profits this farmer should produce A) 1,000 bushels of soybeans.

20)

22)

Section 2: Short Answer & Analytical 23. Assuming a downward-sloping industry demand curve and an upward-sloping industry supply (a) Graphically illustrate market equilibrium and relate the price to that of a representative firm in a companion firm diagram. Draw in MC and AC curves in the firm diagram.

(b) Assume that the firm is making a profit and indicate the profit-maximizing output choice in the firm diagram.

(c) Explain, with reference to your diagram, why profit can increase if MR is greater than MC and explain why the profit-maximizing choice does indeed maximize profits.

Answer Key Testname: S06_PRAC_EXAM2_ECO2302.TST

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22)

C D D C A B A B B C C B D C D C D D D D C C

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23.