UNIVERSITY OF HAWAII AT MANOA
DEPARTMENT OF ECONOMICS
ECON 130 (003): PRINCIPLES OF ECONOMICS (MICRO)
Fall 2003
Professor Russo
Second Mid-term Examination
Tuesday, November 4, 2003
Time: 1:30 - 2:45 PM
Room: ARCH 205
60 MULTIPLE CHOICE QUESTIONS
SELECT THE BEST ANSWER
ONLY ONE CORRECT ANSWER PER QUESTION
ANSWER ALL QUESTIONS
NO PENALTY FOR GUESSING
1
Questions #1-3 refer to the following figure.
1. Assume that the consumer depicted has an income of $30 and currently optimizes at
point A. If the consumer’s income doubles and prices remain unchanged, he would
now choose to optimize his welfare by consuming
a) 0 marshmallows and 10 chocolate chips
b) 3 marshmallows and 9 chocolate chips
c) 10 marshmallows and 10 chocolate chips
d) 9 marshmallows and 6 chocolate chips
e) 10 marshmallows and 0 chocolate chips
2. Assume that the consumer depicted has an income of $40 and currently optimizes at
point B. If the price of marshmallows doubles and the consumer’s income remains
unchanged, then he would now choose a bundle where his marginal rate of
substitution is
a) ½
b) 1
c) 2
d) 3/2
e) 2/3
3. Assume that the consumer depicted has an income of $120 and the price of chocolate
chips is $6. If his income is cut in half and the price of marshmallows falls by a half,
which price-quantity combination would be on his demand curve for chocolate chips?
a) $6, 8
b) $6, 6
c) $6, 3
d) $3, 8
e) $3, 6
2
4. The slope at any point along an indifference curve is commonly referred to as
a) total marginal utility
b) marginal demand
c) marginal product
d) marginal rate of substitution
e) marginal consumption
5. Assuming a two-good market, when the price of good Y increases, ceteris paribus,
a) the income effect says that a given consumer will feel wealthier and
necessarily increase consumption of good Y
b) the substitution effect says that a given consumer will always substitute
toward the good whose price changed
c) the price effect says that a given consumer will necessarily increase
consumption of good Y
d) the direction of the change in consumption of good Y due to the income effect
is ambiguous
e) the normality of a good can be determined from the substitution effect
6. Which of the following statements is true?
a) the income effect can be broken down into the price effect and the substitution
effect
b) the substitution effect can be broken down into the price effect and the income
effect
c) the price effect can be broken down into the income effect and the substitution
effect
d) the income and substitution effects always move in opposite directions
e) the direction of the substitution effect determines whether a good is normal or
inferior
7. Which of the following is most likely to be considered an inferior good?
a) flatscreen T.V.
b) a household’s electricity
c) disposable camera
d) surfboard
e) air conditioner
8. The law of diminishing marginal utility says that
a) a decrease in the price of good x decreases the marginal utility of good x
b) an increase in the consumption of good x decreases the marginal utility of
good x
c) a decrease in the consumption of good x decreases the marginal utility of good
y
d) a decrease in the consumption of good x decreases the marginal utility of good
x
e) an increase in the price of good x decreases the marginal utility of good x
3
Questions #9-11 refer to the following diagram.
9. At point C, it can necessarily be said that
a) the consumer’s valuation of the 2 goods equals the market’s valuation
b) the consumer is minimizing her costs
c) the consumer is consuming equal amounts of both goods
d) the ratio of relative prices is at its lowest possible value
e) if the consumer’s income increases but the prices of x and y stay the same,
point a could potentially be an optimum consumption bundle
10. Given the curves in this graph, the consumer would most likely not choose
consumption bundle B because
a) she cannot afford it
b) she gets no utility from it
c) good y is not a normal good
d) she doesn’t maximize her utility at that point
e) she has a revealed preference for consumption bundle E
11. Assuming constant price of both goods, if the consumer’s income increases such that
point E now becomes the optimum consumption bundle, it can be said that
a) good x is normal and good y is inferior
b) good x is inferior and good y is normal
c) good x is inferior and good y is inferior
d) good x is normal and good y is a giffen good
e) good x is normal and good y is normal
4
Question #12 refers to the following diagram.
Quantity of Good y
•B
•A
•C
xA
xB
xC
Quantity of Good x
12. Consider the diagram above. The consumer’s initial position is point A. After the
decline in the price of good x, the consumer selects consumption bundle B. From the
graphical decomposition of the price effect, we can conclude that:
a) good x is an inferior good over the relevant range and that the income effect only
partially offsets the substitution effect. Therefore, the ordinary demand curve for
good x is downward sloping.
b) good x is an inferior good over the relevant range and that the income effect
completely overwhelms the substitution effect. Therefore, the ordinary demand
curve for good x is upward sloping, over the relevant range.
c) good x is a normal good over the relevant range and that the substitution effect
and income effect reinforce each other. Therefore, the ordinary demand curve for
good x is downward sloping.
d) good x is a Giffen good.
e) both answers (b) and (d) are correct.
5
Question #13 refers to the following figure.
Quantity of Good y
U1
U0
A•
C
•
B•
U1
U0
xA
xC
xB
Quantity of Good x
13. Consider the diagram above. The consumer’s initial position is point A. After the
decline in the price of good x, the consumer selects consumption bundle B. From the
graphical decomposition of the price effect, we can conclude that:
a) good x is an inferior good over the relevant range and that the income effect only
partially offsets the substitution effect. Therefore, the ordinary demand curve for
good x is downward sloping.
b) good x is an inferior good over the relevant range and that the income effect
completely overwhelms the substitution effect. Therefore, the ordinary demand
curve for good x is upward sloping, over the relevant range.
c) good x is a normal good over the relevant range and that the substitution effect
and income effect reinforce each other. Therefore, the ordinary demand curve for
good x is downward sloping.
d) good x is Giffen good.
e) both answers (b) and (d) are correct.
6
Question #14 refers to the following diagram.
Quantity of Good y
U1
U0
B•
U1
A•
C
•
U0
x A x B xC
Quantity of Good x
14. Consider the diagram above. The consumer’s initial position is A. After the decline
in the price of good x, the consumer selects consumption bundle B. From the
graphical decomposition of the price effect, we can conclude that
a) Good x is an inferior good over the relevant range and that the income effect
only partially offsets the substitution effect. Therefore, the ordinary demand
curve for good x is downward sloping
b) Good x is an inferior good over the relevant range and that the income effect
completely overwhelms the substitution effect. Therefore, the ordinary
demand curve for good x is upward sloping, over the relevant range
c) Good x is a normal good over the relevant range and that the substitution
effect and income effect reinforce each other. Therefore, the ordinary demand
curve for good x is downward sloping
d) Good x is Giffen good
e) both (b) and (d) are correct
7
Questions #15-16 refer to the following diagram.
15. It can be said that the absolute value of the marginal rate of substitution at point C is
a) less than the absolute value of the marginal rate of substitution at point A
b) greater than the absolute value of the marginal rate of substitution at point A
c) equal to the absolute value of the marginal rate of substitution at point A
d) greater than the absolute value of the marginal rate of substitution at point B
e) the marginal rate of substitution cannot be determined at point C because the
consumer would not choose that consumption bundle
16. With the Quantity of Skittles on the X-axis and the Quantity of M&M’s on the Yaxis, the consumer’s welfare is increasing
a) toward the origin
b) in the direction of the Y = X line
c) in the direction of the positive X axis
d) in the direction of the positive Y axis
e) the direction of increasing consumer welfare is indeterminate because he has
not revealed preference for a particular consumption bundle
8
Question #17 refers to the following panels.
17. Each of the above diagrams demonstrates a consumer’s preferences for goods X and
Y. Which of the following correctly ranks the preferences according to the degree of
complementarity, the first being the most complementary?
a) A, B, C
b) B, C, A
c) B, A, C
d) C, A, B
e) C, B, A
18. Diminishing marginal product of labor implies that
a) total output decreases as you decreases the amount of labor
b) total output increases as you decrease the amount of labor
c) the quantity of labor obtained from each additional unit of output decreases
d) the slope of the production function becomes steeper as you increase the
amount of labor
e) the quantity of output obtained from each additional unit of labor decreases
9
Questions #19-21 refer to the following diagram.
19. The breakeven point for the given firm is when the market price is
a) MC4
b) MC3
c) MC2
d) MC1
e) A price lower than MC1
20. When the market price is MC3, the firm’s total profit or loss is represented by which
area?
a) (MC3)Q3 - (MC2)Q3; loss
b) (MC3)Q3 - (MC2)Q3; profit
c) (MC3)Q2 - (MC2)Q2; loss
d) (MC3)Q2 - (MC2)Q2; profit
e) (MC3)Q3 - (MC2)Q2; profit
21. This firm’s short-run supply curve is the part of the
a) MC curve that lies above the ATC curve
b) MC curve that lies above the AVC curve
c) MC curve that lies above the AFC curve
d) MC curve that lies above price level MC1
e) both (b) and (d)
10
Questions #22-25 refer to the following information.
The Apple Computer store in Ala Moana manufactures computers in its store room. The
company pays the mall-owner $3,000 a month to rent the space it occupies. It also pays
the head manager a set salary of $1,500 a month regardless of the number of computers
created.
Output (# of
computers sold
per month)
0
1
2
3
4
5
6
7
8
9
10
Fixed
Cost
Variable
Cost
Total
Cost
500
5,000
1,700
2,400
3,300
6,200
Average
Fixed Cost
------
4,500
Average
Variable
Cost
-----500
Average
Total Cost
Marginal
Cost
------
-----500
550
8,900
5,800
7,400
9,100
1,100
500
15,600
1,110
22. What is the average variable cost of the second computer produced in a given
month?
a) $225
b) $525
c) $1,050
d) $2,772
e) there is not enough information given
23. What is the store’s monthly marginal cost of producing 8 computers?
a) $600
b) $1,400
c) $1,600
d) $1,700
e) $4,600
24. What is the total cost of producing zero output?
a) $0
b) $500
c) $1,500
d) $3,000
e) $4,500
25. What is the variable cost of producing the sixth computer?
a) $733.33
b) $750
c) $1,483.33
d) $4,400
e) $4,500
11
Questions #26-29 refer to the following figure.
26. Which of the lines is most likely to represent average total cost?
a) A
b) B
c) C
d) D
e) none of the above
27. Which of the lines is most likely to represent total variable cost?
a) A
b) B
c) C
d) D
e) none of the above
28. It could be possible for which one of the following to be an upward-sloping linear
function (a straight line with positive slope)?
a) A
b) B
c) C
d) D
e) none of the above
29. Line D
a) represents the distance between lines A and C
b) eventually hits the horizontal axis (this cost eventually becomes zero)
c) could be read off the graph even if it wasn’t drawn in
d) both (b) and (c)
e) all of the above
12
Questions #30-33 refer to the following information for a competitive firm.
Assume that this company has a fixed cost of $5.
Quantity
0
1
2
3
4
5
6
7
Total Revenue
0
12
24
36
48
60
72
82
Total Variable Cost
0
8
17
27
38
50
63
77
30. The market price for the good produced by this competitive firm is
a) $13
b) $12
c) $9
d) $8
e) $5
31. The optimal output level for this firm to maximize its profits is
a) 2
b) 3
c) 4
d) 5
e) 6
32. This firm’s maximum profit is
a) $10
b) $8
c) $5
d) $4
e) $3
33. Over the output range above, this firm’s marginal cost curve is
a) negatively sloped
b) positively sloped
c) constant at a level determined by the firm
d) completely above the average revenue curve
e) completely above the marginal produce curve
34. The short-run shut-down point for a competitive firm is when
a) (TVC/Q) > MR
b) AVC < AR
c) AVC = MR
d) P > AVC
e) the firm cannot shut down in the short run
13
Questions #35-37 refer to the following diagram.
35. According to the above production function, which of the following is true?
a) The average productivity falls between C and D.
b) The marginal productivity rises everywhere between A and C.
c) The average productivity reaches its minimum at C.
d) The marginal productivity reaches its maximum beyond C.
e) The average productivity rises between B and D.
36. According to the above production function,
a) the firm experiences constant marginal product of labor
b) the firm experiences increasing marginal product of labor
c) the firm experiences decreasing marginal product of labor
d) the firm experiences decreasing marginal product of labor following
increasing marginal product of labor
e) the firm experiences increasing marginal product of labor following decresing
marginal product of labor.
37. According to the above production function, as the number of workers increases,
a) total output decreases
b) marginal output increases
c) marginal product increases, but at a decreasing rate
d) the rate of total output decreases
e) marginal cost decreases
38. When a firm exhibits diseconomies of scale, its
a) long-run average total cost falls as output increases
b) long run average total cost stays the same as output increases
c) long-run average variable cost rises as output increases
d) long-run average variable cost falls as output increases
e) long-run average total cost rises as output increases
14
Questions #39-41 refer to the following graph.
39. If this profit-maximizing firm is operating at output level Q2, then the market price of
the good it produces must be
a) P4
b) P3
c) P2
d) P1
e) none of the above
40. If the market price is at P4, this profit-maximizing firm’s
average revenue can be represented by
a) P4 x Q4
b) P3 x Q3
c) P2 x Q4
d) (P4-P3) x Q4
e) none of the above
41. The revenue generated by the production of an additional unit of output is
a) total revenue
b) marginal product
c) average revenue
d) marginal profit
e) marginal revenue
15
Question #42 refers to the following figure.
42. The above figure shows a firm’s total cost curve. Which of the following graphs
shows the corresponding marginal and average cost curves?
16
Questions #43-44 refer to the following graphs.
43. If the long-run equilibrium market price for the firm represented in panel (a) is at P0,
the firm will
a) be at zero profit equilibrium
b) earn a positive economic profit
c) earn a negative profit but stay in operation anyway
d) shut down
e) increase production to increase the market price
44. Assume that the market starts in equilibrium at point C in panel (b). A decrease in
demand from Demand1 to Demand0
a) will cause the market to rest temporarily at B before settling at the new longrun equilibrium at A
b) will cause the market to rest temporarily at D before going back to the original
long-run equilibrium at C
c) will cause the market to settle at the new long-run equilibrium at D
d) will cause the market to rest temporarily at D before settling at the new longrun equilibrium at A
e) will cause the price to decrease to P0, which will in turn cause demand to shift
back to Demand0 and the economy to return to C
45. For any competitive industry,
a) individual competitive firms can adjust their output to affect the market price
of the good they produce
b) individual competitive firms’ profits at the long-run equilibrium will be zero
c) individual competitive firms produce the same product but of varying quality
d) individual competitive firms pay a one-time cost to enter the market
e) individual competitive firms cannot exit in the short-run
17
46. If the total cost function is given by Total Cost = (1/4)Q2 + 60 - 16Q + 8Q3, then the
average variable cost is
a) 60/Q
b) 60/Q -16
c) (1/4)Q + 8Q2
d) (1/4)Q - 16 + 8Q2
e) (1/4)Q + 60/Q - 16 + 8Q2
47. If the total cost function is given by Total Cost = 75Q + 200, then the marginal cost
is
a) 200
b) 75/Q
c) 75
d) 200/Q
e) 75 + 200/Q
48. Total fixed costs
a) are no longer fixed when output exceeds a specific quantity
b) decrease as output increases
c) include the price of inputs used to produce output
d) exist even if the firm produces nothing at all
e) are not included in either accounting or economic profit
49. Which of the following statements is true?
a) All fixed costs are sunk, but not all sunk costs are fixed
b) All sunk costs are fixed, but not all fixed costs are sunk
c) All fixed costs are variable, but not all variable costs are fixed
d) All variable costs are sunk, but not all sunk costs are variable
e) All sunk costs are variable, but not all variable costs are sunk.
18
Questions #50-52 refer to the following figure.
Quantity of good Y
Budget Line 2002
B
A
Budget Line 2003
C
Quantity of good X
50. The consumer’s choice in year 2002 is A. In 2003, the consumer is
a) at least as well off as in 2002
b) definitely worse off than in 2002
c) definitely better off than in 2002
d) maximizing consumption
e) you cannot tell from the given information
51. If the consumer chooses A in 2002, it can be said that
a) B is revealed preferred to A
b) A is revealed preferred to B
c) the consumer is indifferent between A and B
d) the consumer cannot afford C
e) both (b) and (c)
52. If the consumer chooses A in 2002, then it can be said that in 2003
a) the consumer prefers A to C
b) the consumer prefers C to A
c) the consumer prefers C to B
d) the consumer is indifferent between A and B
e) there is not enough information to draw any of these conclusions
19
Question #53 refers to the following diagram.
Quantity of Good y
Budget Line:
Year 2003
•W
0
Budget Line: Year 2002
Quantity of Good x
53. If the consumer’s consumption bundle in 2002 was represented by point W, then in
2003 the consumer
a) is definitely better off
b) is definitely worse off
c) is just as well off, but not any better off
d) is at least as well off, perhaps better off
e) could be better off, worse off, or just as well off, therefore the answer is
indeterminate.
20
Question #54 refers to the following diagram.
Quantity of Good y
Budget Line:
Year 2003
•W
0
Budget Line: Year 2002
Quantity of Good x
54. If the consumer’s consumption bundle in 2002 was represented by point W, then in
2003 the consumer
a) is definitely better off
b) is definitely worse off
c) is just as well off, but not any better off
d) is at least as well off, perhaps better off
e) could be better off, worse off, or just as well off, therefore the answer is
indeterminate.
21
Question #55 refers to the following diagram.
Quantity of Good y
Budget Line:
Year 2003
•W
0
Budget Line: Year 2002
Quantity of Good x
55. If the consumer’s consumption bundle in 2002 was represented by point W, then in
2003 the consumer
a) is definitely better off
b) is definitely worse off
c) is just as well off, but not any better off
d) is at least as well off, perhaps better off
e) could be better off, worse off, or just as well off, therefore the answer is
indeterminate.
22
56. Transfers in kind
a) necessarily allow a consumer to increase consumption of all goods
b) expand the consumer’s set of budget opportunities more than transfers in cash
c) expand the consumer’s set of budget opportunities less than transfers in cash
d) rotate the consumer’s budget line
e) have no effect on the consumer’s budget line
57. For a competitive firm, the average revenue curve is
a) perfectly price inelastic
b) perfectly price elastic
c) unit elastic
d) inelastic
e) elastic
Questions #58-60 refer to the following information.
Cory inherited $500,000 from a relative. Instead of putting this money in the bank, he
decided to open his own business. In order to quit his sales job that paid him $100,000 a
year and open his own computer distribution company, he also had to withdraw $500,000
from his savings account that earned 10% interest a year.
58. What are the opportunity costs of Cory’s new business?
a) $100,000
b) $150,000
c) $200,000
d) $250,000
e) $500,000
59. If, at the end of the first year of operation, Cory’s company reported an economic
profit of $350,000, his accounting profit must have been
a) $150,000
b) $200,000
c) $350,000
d) $500,000
e) $550,000
60. If instead Cory’s accounting profit at the end of the first year of operation was
$150,000, what would his economic profit be?
a) $100,000 loss
b) $150,000 profit
c) $150,000 loss
d) $50,000 loss
e) $50,000 profit
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