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Soc. Sec. #:

Multiple Choice(50):

Problem 1(10):

Problem 2(15):

Problem 3(15):

Problem 4(10):

Total(100):

1. The opportunity cost of any good or service is the

   • [a.] actual dollar cost of doing or making it.
   • [b.] highest price that a merchant can get for an item.
   • [c.] value of the next best alternative.
   • [d.] cost associated with a value judgment.

2. A demand schedule

   • [a.] provides information about what quantity a consumer would be willing and able to purchase at each price.
   • [b.] tells a buyer how many other buyers will be trying to purchase an item.
   • [c.] is a schedule that regulates monthly sales of scarce goods and services.
   • [d.] is of no use without its accompanying supply schedule.

3. A consumer has five pounds of bananas and values their total utility at $2.14. If one additional pound is acquired and its marginal utility is $0.11, total utility will

   • [a.] rise to $2.25.
   • [b.] fall to $2.03.
   • [c.] stay the same.
   • [d.] fall to $2.11.

4. Elasticity of demand shows how

   • [a.] steep the demand curve is.
   • [b.] much marginal utility is associated with each additional unit of a good.
   • [c.] quantity demanded responds to income changes.
   • [d.] quantity demanded responds to price changes.

5. Shifts in the supply curve occur when

   • [a.] producers find present output unprofitable.
   • [b.] there is an increase in quantity demanded.
   • [c.] producers increase or decrease the quantity supplied at any given price.
   • [d.] demanders shift brands and start buying other products.

6. Total utility

   • [a.] diminishes as the quantity held of a good increases.
   • [b.] increases as long as as more goods are acquired.
   • [c.] increases only as long as marginal utility increases.
   • [d.] increases only as long as marginal utility is positive.

7. A demand curve is described as perfectly inelastic if

   • [a.] the same quantity is purchased regardless of price.
   • [b.] the same price is charged regardless of quantity sold.
   • [c.] neither price nor quantity demanded ever change.
   • [d.] only quantity demanded can change.

8. Price ceilings are likely to

   • [a.] result in the accumulation of surpluses.
   • [b.] increase the volume of transactions as we move along the demand curve.
   • [c.] increase the production as producers respond to higher consumer demand at the low ceiling price.
   • [d.] result in the development of black markets.

9. A point lying inside a production possibilities frontier indicates that

   • [a.] the economy is saving money.
   • [b.] there are no associated opportunity costs.
   • [c.] more output could be produced with existing resources.
   • [d.] technology limits production.

10. An inferior good is one

    • [a.] that is produced by American industries.
    • [b.] whose quantity demanded rises when the purchasers' incomes fall.
    • [c.] whose quantity supplied is greater than quantity demanded.
    • [d.] whose demand only increases with increases in income.

11. If two goods are complements, their cross price elasticity of demand will be

    • [a.] zero.
    • [b.] greater than one.
    • [c.] a negative number.
    • [d.] a positive number.

12. Which of the following is a fixed cost for the Soho Textile Co.?

    • [a.] yarn.
    • [b.] the labor cost of a second shift of employees.
    • [c.] rent.
    • [d.] electricity.

13. The slope of the demand curve is almost always

    • [a.] positive, because when people buy more of a good the cost of producing it will rise.
    • [b.] positive, because the more money a person has, the more they can buy.
    • [c.] negative, because when people buy more of a good the cost of producing it will fall.
    • [d.] negative, because with everything else constant, the same people will buy more of a good when its price is lower.

14. An increase in a family's income will cause its budget line to

    • [a.] become steeper.
    • [b.] become flatter.
    • [c.] move closer to the origin.
    • [d.] move away from the origin.

15. As a general rule, technological progress

    • [a.] reduces the slope of the production possibilities frontier, making it less steep.
    • [b.] increases the slope of the production possibilities frontier, making it steeper.
    • [c.] shifts the production possibilities frontier outward, away from the origin.
    • [d.] shifts the production possibilities frontier inward, towards the origin.

16. Which of the following is true?

    • [a.] A nation has a comparative advantage in the production of some good.
    • [b.] A nation cannot have an absolute advantage in the production of every good.
    • [c.] A nation cannot have an absolute advantage in the production of a good unless it also has a comparative advantage.
    • [d.] some nations do not have a comparative advantage in the production of any good.

17. The quantity of goods exchanged in a market will be below equilibrium quantity

    • [a.] only when price is held above equilibrium price.
    • [b.] only when price is held below equilibrium price.
    • [c.] when the price is held either above or below equilibrium price.
    • [d.] only when price is rising.

18. The optimal quantity of goods for a consumer to purchase is given by

    • [a.] any intersection between the indifference curve and the budget line.
    • [b.] the point where the budget line touches the vertical axis.
    • [c.] a point of tangency between the budget line and the indifference curves.
    • [d.] the point at which the indifference curves become parallel to the horizontal axis.

19. Suppose a decrease in the price of rice from $0.50 a pound to $0.40 a pound induced increases in rice consumption from 16 tons to 20 tons a week in Rochester and from 160 to 200 tons in Buffalo. Then the elasticity of demand for rice is

    • [a.] greater in Buffalo than in Rochester.
    • [b.] greater in Rochester than in Buffalo.
    • [c.] equal in Rochester and Buffalo.
    • [d.] impossible to know because we can't compare the two due to different population sizes.

20. In terms of the production possibilities frontier, the principle of increasing costs simply asserts that the frontier is

    • [a.] downward sloping.
    • [b.] upward sloping.
    • [c.] bowed inward.
    • [d.] bowed outward.

21. Last year 1000 cases of elixer were sold at a price of $10 wheras this year 1200 cases were sold at $12. The most probable interpretation of this data is the

    • [a.] supply and demand curves are shifting to the right.
    • [b.] supply and demand curves are shifting to the left.
    • [c.] supply curve has shifted to the left.
    • [d.] demand curve has shifted to the right.

22. The optimal purchase rule states that, to maximize utility, a person should purchase goods so that

    • [a.] total utility is the same for all goods consumed.
    • [b.] each good is yielding zero marginal utility.
    • [c.] the marginal utility per dollar is the same for all goods consumed.
    • [d.] the total utility per dollar is the same for all goods consumed.

23. Suppose that the United States can make 15 cars or 20 bottles of wine with one year's worth of labor. France can make 10 cars or 18 bottles of wine with one year's worth of labor. From these numbers we can conclude

    • [a.] the United States has a comparative advantage in the production of cars.
    • [b.] France has a comparative advantage in the production of wine.
    • [c.] The United States has an absolute advantage in the production of both wine and cars.
    • [d.] all of the above.

24. Suppose a 30 cent tax per gallon is placed upon suppliers of gasoline. This will

    • [a.] shift the supply curve out and to the right.
    • [b.] increase consumer surplus.
    • [c.] have the same effect as a 30 cent tax per gallon placed upon consumers of gasoline.
    • [d.] be a victory for consumers who already pay too much in taxes.

25. AC is lower in the long run than in the short run because

    • [a.] prices often fall, allowing savings on inputs.
    • [b.] firm's input decisions are more flexible.
    • [c.] management gets smarter with more time and experience.
    • [d.] AFC falls with output over all ranges of output.

1. Supply and Demand

   • [a.] Suppose technological improvements reduce the costs of producing beef. Draw two separate, clearly-labeled supply-demand diagrams in the space below, showing the effect of this change in the markets for beef and chicken. (5 points)
   • [b.] Suppose a new study suggests that eating a lot of beef is associated with a higher level of heart disease. Draw two separate, clearly-labeled supply-demand diagrams in the space below, showing the effect of this finding on the markets for beef and steak sauce. (5 points)

2. Elasticity and taxes

   • [a.] Draw a perfectly elastic demand curve. (5 points)
   • [b.] Draw a perfectly inelastic demand curve. (5 points)
   • [c.] If a tax is imposed upon the suppliers of these goods, which case will result in no deadweight loss? Give a brief explanation or a quick graph to justify your answer. (5 points)

3. Suppose that there are two goods, Big Macs and Whoppers. Big Macs cost $1.50 and Whoppers cost $2.00. Joe's income is $6.

   • [a.] Graphically show Joe's budget set. Put Big Macs on the vertical axis. (5 points)
   • [b.] Suppose Big Macs and Whoppers are perfect substitutes to Joe, what do his indifference curves look like? draw a few on the diagram you drew in part a. (5 points)
   • [c.] When prices and income are as in part a, and preferences are as in part b, what is Joe's optimal choice of Big Macs and Whoppers? (5 points)

4. Suppose there is a price taking firm who has total cost given by, TC(Q) = 2Q²+40, marginal cost given by, MC(Q) = 4Q, and price, P = 16.

   • [a.] What is the profit maximizing quantity for this firm to produce? What is the maximum profit? (5 points)
   • [b.] Suppose that this firm has TFC(Q) = 40 and TVC(Q) = 2Q², will this firm operate or shut down in the short run? (5 points)