VANCOUVER ISLAND UNIVERSITY
ECON211: PRINCIPLES OF MICROECONOMICS
MIDTERM EXAM II
Total Marks: 70
Duration: 75 Minutes
Name (Last, First): __________________________________
ID #:
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THIS EXAM HAS TOTAL 12 PAGES INCLUDING THE COVER PAGE
Use of any electronics device except calculator is strictly prohibited during the exam
– your cell/mobile phone could be your enemy!!
Instructions:
a) Please answer your MCQs in the table on additional answer sheet supplied and short question
answers in the space provided.
b) For short answer questions
o You must show your all work to get full marks. If you do not show work, you may not
get full marks even for a correct answer.
o
Use the marks assigned to each question as a guide to allocating your time across
questions.
Good luck on your exam
ECON211; Midterm Exam II 2
March 20, 2013
PART A: MCQ
(There will be 30 MCQs in this section which is worth 30 marks)
1.
The term "marginal utility" is to describe the
a. total satisfaction received from consumption of a good
b. average utility of each unit of a good consumed
c. inverse of the measure of total utility
d. price paid for every unit consumed
e. change in total satisfaction caused by consumption of an additional unit of a good
2.
The opportunity cost of any factor of production is
a. the benefit forgone by not using it in its best alternative
b. its explicit cost
c. the benefit forgone by not using it in its worst alternative
d. the money actually paid to the factors of production
e. its accounting cost
3.
If the price of apple is $5 per kilogram and price of apple juice is $10 per bottle, then the relative
price of apple juice is
a. 2 dollars
b. 2 kilogram of apple
c. 0.5 apple
d. 10 dollars
4.
Labour productivity is defined as
a. the efficient use of technology
b. the cost of a unit of output
c. a measure of output per unit of labour used
d. output per combination of two or more inputs
e. a measure of input used
5.
If a consumer is consuming products X and Y and is maximizing his utility, the following is true
a.
b.
c.
d.
6.
The idea that the utility a consumer derives from successive units of a good diminishes as total
consumption of the good increases is known as
a. diminishing total utility
b. utility maximization
c. the paradox of value
d. diminishing marginal utility
e. the utility theory of demand
ECON211; Midterm Exam II 3
March 20, 2013
7.
Refer to the table. The table below shows 4 alternative production techniques for producing 1000
widgets per month. Which production technique is NOT technically efficient?
a.
b. D
D
Technique
A
B
C
c. A
d. C
30
25
35
50
Labour
e. B
60
f. All four techniques are
50
35
25
Capital
inefficient
8.
Few Louis Vuitton Patchwork bags are available, so the price of a bag is high, the marginal utility
from owning a bag is _________ and the consumer surplus is _________.
a. high; high
b. high; low
c. low; low
d. low; high
9.
A change in the relative price _______, and a change in real income_______
a. shifts the budget line; has no effect on the budget line
b. changes opportunity cost and shifts the budget line; changes the slope of the budget line
c. changes the opportunity cost and changes the slope of the budget line; shifts the budget line
d. has no effect on the budget line; changes the cost of the budget line
10. The key assumption about the marginal rate of substitution is that it is _____
a.
b.
c.
d.
constant
negative
increasing as you move down along the indifference curve
diminishing a you move down along the indifference curve
11. The "law" of diminishing marginal utility implies that the
a.
b.
c.
d.
e.
first unit of a good consumed will contribute most to the consumer's satisfaction
marginal utility of a good diminishes over time
total utility is negative
last unit of a good consumed will contribute most to the consumer's satisfaction
total utility is constant as more units are consumed
12. We know that the demand curve for a normal good is downward sloping because of
a.
b.
c.
d.
e.
the substitution effect
the combination of the income and substitution effects
the income effect
neither the substitution effect nor the income effect
none of these responses is correct
ECON211; Midterm Exam II 4
March 20, 2013
13. The figure below illustrate the law of
a.
b.
c.
d.
e.
Maximizing utility
Diminishing total utility
Diminishing marginal utility
Increasing marginal utility
Increasing total utility
14. Marginal utility is negative when total utility is
a.
b.
c.
d.
e.
increasing
Equal to marginal utility
at its maximum
deceasing
Equal to zero
15. The statement "The most important goal of firms is to maximize profits"
a.
b.
c.
d.
e.
is a normative statement and thus cannot be tested
has been proved by empirical testing to be always true
applies only to corporations
is an unrealistic assumption, and therefore of little use to economists
is an assumption used by economists to predict the behaviour of firms
16. Suppose that a better way to produce a good is discovered, thus lowering production costs for the
good. This will cause
a. no change in the supply curve, only a change in price
b. a decrease in supply (a leftward shift of the supply curve)
c. an increase in supply (a rightward shift of the supply curve)
d. a movement down the supply curve
e. a movement up the supply curve
ECON211; Midterm Exam II 5
March 20, 2013
17. A benefit of a partnership is that
a.
b.
c.
d.
owners have limited liability
it has perpetual life
it can survive withdrawal of a partner
the principle-agent problem is eliminated
18. A firm that hires specialists to work on a range of projects experiences
a.
b.
c.
d.
economies of scale
increasing economic profit
economies of scope
increasing normal profit
19. Choose the statement that is incorrect
a.
b.
c.
d.
e.
The firm in monopoly is protected by a barrier preventing the entry of new firms
Monopoly arises when there is one firm, which produces a good/service that has no close
Product differentiation is a key component of goods produced by monopolies
substitutes
Monopoly is the most extreme absence of competition
20. A single proprietorship is a form of business organization which
a.
b.
c.
d.
e.
allows easy transferability of ownership by the trading of shares
has limited liability
has one owner-manager who is personally responsible for the firm's actions and debts
has unlimited access to money capital
has a single owner but has directors who are responsible for the firm's debts
21. A firm can raise capital without incurring debt by issuing new shares and/or
a.
b.
c.
d.
e.
investing in new capital equipment
issuing bonds
increasing its bank loans
reinvesting profits
making extra dividend payments
22. A preference map is a series of
a.
b.
c.
d.
demand curve
indifference curves that display a diminishing marginal rate of substitution
indifference curves
points that that have the marginal rate of substitution equal to the relative price
23. Starting from a point of consumer equilibrium, a rise in income
a.
b.
c.
d.
increases marginal utility of normal goods
increases total utility
decreases marginal utility for all goods
increases consumption of all goods
ECON211; Midterm Exam II 6
March 20, 2013
24. The opportunity cost to a firm of using an asset is zero if
a.
b.
c.
d.
e.
the asset has no alternative uses
the asset was given to the firm for free
the asset is already owned by the firm
no money was spent to acquire the asset
the asset has zero sunk costs associated with it
25. A firm's depreciation costs
a.
b.
c.
d.
e.
are irrelevant to an accounting of the firm's total costs
are an estimate of the loss of value of the firm's physical capital
measure payments to those outside the firm
are the cost of money borrowed to buy a durable asset
are a measure of the depreciation of financial assets of the firm
26. A demand schedule is drawn under all of the following conditions EXCEPT:
a.
b.
c.
d.
e.
the distribution of income of the consumers is held constant
the price of the commodity is held constant
the tastes of consumers are held constant
the income of consumers is held constant
the prices of related commodities are held constant
27. Indifference curves
a.
b.
c.
d.
shift rightward when income increases
never have a slope equal to zero
do not intersect
are bowed away from the origin
28. Marginal utility per dollar
a.
b.
c.
d.
increases as the price of a good rises
increases as we consume more of a good
is the increase in total utility that results from consuming one more unit of a good
is the marginal utility from a good that results from spending one more dollar on it
29. Marginal utility theory shows us that a rare gem which we value highly has a _____ marginal utility
and a ___total utility
a. Large; small
b. Small; large
c. Small; small
d. Large; large
30. The opportunity cost for you to attend college
a. may be equal to, or less than, the money cost
b. is determined by what you could earn if you did not go to college
c. is greater than the money cost
d. depends on the income you can earn after graduation
ECON211; Midterm Exam II 7
March 20, 2013
PART B: SAQ
(This section contains short answer questions, worth 40 marks)
Question 01 (5 marks)
What two conditions are met when a consumer maximizes utility?
The following two conditions are met when a consumer maximizes utility:
a)
b)
The consumer spends all of his income allocated for the consumption purpose, .
The marginal utility per dollar for every goods he consumes is equal:
which is equivalent to the slope of the indifference curve and slope of the budget line
equality or marginal rate of substitution (MRS) is equal to the relative price
condition:
ECON211; Midterm Exam II 8
March 20, 2013
Question 02 (12 marks)
Jon has $90 a week to spend on magazine and movie. The price of magazine is $10 a copy and the price
of movie ticket is $15.
a. What is Jon’s real income in terms of movie ticket?
Jon’s real income in terms of movie tickets is how many tickets he can purchase with his income:
b. What is the relative price of magazine?
The relative price of magazine is how many movie ticket he can purchase if he gives up one
magazine:
c. Calculate the equation for Jon’s budget line
Expenditure on movie at the price $15
Expenditure on magazine at the price $10
He is constrained by a budget
and according to maximization rule he has to
spend the entire amount on these two goods
So, his total expenditure on both goods is
ECON211; Midterm Exam II 9
March 20, 2013
Magazine
d. Draw the budget line (consumption possibility curve) for Jon (with movie on the horizontal axis)
9
Budget line:
6
Movie
e. What is the slope of the budget line?
Slope of the Budget line:
Or solving the equation:
Show the impact on the budget line if the price of movie ticket goes up to $18
If the price of ticket increases to $18, his real income $2, her real income in terms of movie will
fall – he now purchases 5 tickets only. But there is no change with respect to magazine
affordability. The budget line will pivot inward on the movie side in the diagram
Magazine
f.
9
Budget line,
New Budget line,
5
6
Coffee
Movie
ECON211; Midterm Exam II 10
March 20, 2013
Question 03 (10 marks)
If the price of toffee bars is $1 each, bags of cashews are $2 each, and this consumer has $7 per
week to spend on these two snacks, how many of each will he/she purchase to maximize utility?
Toffee Bars
Total utility
Units
1
Cashew Bags
Marginal
utility
10
8
2
18
3
23
4
26
5
3
Total utility
Marginal
utility
12
10
22
7
29
5
34
a. Calculate all the marginal utilities
Filled up the table.
b. Showing appropriate condition, determine the equilibrium combination of Toffee bars
and Cashew bags
Utility maximizing conditions are:
i. All income, $7 must be spent, and
ii. The marginal utility per dollar of Toffee bar and Cashew bag are equal:
When 3 units of toffee bar are consumed the marginal utility is 5, and
When 2 units of cashew bar are consumed the marginal utility is 10, and
So, for 3 toffee bars and 2 cashew bars the equilibrium condition is satisfied, which is
the utility maximizing combination of two goods
ECON211; Midterm Exam II 11
March 20, 2013
Question 04 (7 marks)
What are the constraints that a firm faces? How does each constraint limit the firm’s profit?
The three types of constraints a firm faces are technology constraint, information
constraint and market constraint.
Technology is any specific method of production a good and it advances over time.
Using the available technology, the firm can produce more only if it hires more resources, which
will increase its costs and limit the profit of additional output.
Information is never complete, for the future or the present. A firm is constrained by
limited information about the quality and effort of its work force, current and future buying
plans of its customers, and the plans of its competitors. The cost of coping with limited
information itself limits profit.
Market constraints means that what each firm can sell and the price if can obtain are
constrained by its customers’ willingness to pay and by the prices and marketing efforts of other
firms. The expenditures a firm incurs to overcome the market constraints limit the profit of the
firm can make.
ECON211; Midterm Exam II 12
March 20, 2013
Question 05 (6 marks)
What is the difference between a firm and the market? What are the basic assumptions for a
competitive market to exist?
A firm is a production unit produces any goods/services, whereas the market/industry is the
combination of all similar type of firms where goods are traded. For instance, in Canada, Ford is a
car manufacturing firm and there are several other car manufacturing firms as well. Altogether we
call it car market or industry.
For a competitive market to exist:
a) There are a large number of firms and each firm produces a homogeneous good.
b) Free entry/exit: any firm can enter the market any time and leave if cannot survive
c) Information is symmetrical
*END OF EXAMINATION*