Economic 401 VU Papers

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MIDTERM  EXAMINATION

Spring 2010

ECO401- Economics (Session - 5)

Ref No:          

Time: 60 min

Marks: 47

Student Info
StudentID:
Center:	OPKST
ExamDate:	5/27/2010 12:00:00 AM

For Teacher's Use Only
Q No.	1	2	3	4	5	6	7	8	Total
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Q No.	9	10	11	12	13	14	15	16
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Q No.	17	18	19	20	21	22	23	24
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Q No.	25	26	27	28	29	30	31	32
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Q No.	33	34	35	36	37
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Question No: 1    ( Marks: 1 )    - Please choose one

 Aslam decides to stay at home and study for his exam rather than going out with his friends to a movie. His dilemma is an example of:

       ► The economic perspective.

       ► Marginal analysis.

       ► Allocative efficiency.

       ► Opportunity cost.

   

Question No: 2    ( Marks: 1 )    - Please choose one

 At the equilibrium price:

       ► There will be a shortage.

       ► There will be neither a shortage nor a surplus.

       ► There will be a surplus.

       ► There are forces that cause the price to change.

   

Question No: 3    ( Marks: 1 )    - Please choose one

 The price elasticity of demand measures the responsiveness of quantity demanded to:

       ► Quantity demanded.

       ► Quantity supplied.

       ► Price.

       ► Output.

   

Question No: 4    ( Marks: 1 )    - Please choose one

 We know that the demand for a product is elastic:

       ► When price rises, total revenue rises.

       ► When price rises, total revenue falls.

       ► When income rises, quantity demanded rises.

       ► When income falls, quantity demanded rises.

   

Question No: 5    ( Marks: 1 )    - Please choose one

 The law of diminishing marginal utility states:

       ► The supply curve slopes upward.

       ► Your utility grows at a slower and slower rate as you consume more and more units of a good.

       ► The elasticity of demand is infinite.

       ► None of the given options.

   

Question No: 6    ( Marks: 1 )    - Please choose one

 Consumers will maximize satisfaction when:

       ► The price of each good is exactly equal to the price of every other good consumed.

       ► The price of each good is exactly equal to the total utility derived from the consumption of every other good.

       ► The marginal utility of the last dollar spent on each good is exactly equal to the marginal utility of the last dollar spent on any other good.

       ► Marginal utility is equal to average utility.

   

Question No: 7    ( Marks: 1 )    - Please choose one

 Indifference curves that are convex to the origin reflect:

       ► An increasing marginal rate of substitution.

       ► A decreasing marginal rate of substitution.

       ► A constant marginal rate of substitution.

       ► A marginal rate of substitution that first decreases, then increases.

   

Question No: 8    ( Marks: 1 )    - Please choose one

 Suppose there are only two goods A and B, if more of good A is always preferred to less, and if less of good B is always preferred to more, then:

       ► Indifference curves slope downwards.

       ► Indifference curves slope upwards.

       ► Indifference curves may cross.

       ► Indifference curves could take the form of ellipses.

   

Question No: 9    ( Marks: 1 )    - Please choose one

 Increase in pension benefits leads to income and substitution effect which:

       ► Encourage workers to retire later.

       ► Encourage workers to work more hours.

       ► Have no effect on incentive to retire.

       ► Encourage workers to retire earlier.

   

Question No: 10    ( Marks: 1 )    - Please choose one

 Increasing returns to scale in production means:

       ► More than twice as much of only one input is required to double output.

       ► Isoquants must be linear.

       ► More than 10% as much of all inputs are required to increase output 10%.

       ► Less than twice as much of all inputs are required to double output.

   

Question No: 11    ( Marks: 1 )    - Please choose one

 In the short run, a firm should shut down when:

       ► Production losses are less than fixed costs.

       ► Only normal profits are earned.

       ► Production losses exceed fixed costs.

       ► Fixed costs are zero.

   

Question No: 12    ( Marks: 1 )    - Please choose one

 Second-degree price discrimination is the practice of charging:

       ► The reservation price to each customer.

       ► Different prices for different blocks of the same good or service.

       ► Different groups of customers different prices for the same products.

       ► Each customer the maximum price that he or she is willing to pay.

   

Question No: 13    ( Marks: 1 )    - Please choose one

 The market structure in which strategic considerations are most important is:

       ► Monopolistic competition.

       ► Oligopoly.

       ► Pure competition.

       ► Pure monopoly.

   

Question No: 14    ( Marks: 1 )    - Please choose one

 Which of the following best expresses the law of demand?

       ► A higher price reduces demand.

       ► A lower price reduces demand.

       ► A higher price reduces quantity demanded.

       ► A lower price shifts the demand curve to the right.

   

Question No: 15    ( Marks: 1 )    - Please choose one

 If a sales tax on beer leads to reduced tax revenue, this means:

       ► Elasticity of demand is < 1.

       ► Elasticity of demand is > 1.

       ► Demand is upward-sloping.

       ► Demand is perfectly inelastic.

   

Question No: 16    ( Marks: 1 )    - Please choose one

 The textbook for your class was not produced in a perfectly competitive industry because:

       ► There are so few firms in the industry that market shares are not small, and firm's decisions have an impact on market price.

       ► Upper-division microeconomics texts are not all alike.

       ► It is not costless to enter or exit the textbook industry.

       ► All of the given options.

   

Question No: 17    ( Marks: 1 )    - Please choose one

 Which of the following is true about supply curve under monopoly?

       ► It is same as the competitive market supply curve.

       ► It is the portion of marginal cost curve where marginal costs exceed the minimum value of average variable costs.

       ► It is the result of market power and production costs.

       ► None of the given statements is true.

   

Question No: 18    ( Marks: 1 )    - Please choose one

 If other things remaining the same, expected income can be used as a direct measure of well-being in which of the following situations?

       ► It can be used no matter what a person's preference to risk.

       ► It can be used if and only if individuals are not risk-loving.

       ► It can be used if and only if individuals are risk averse.

       ► It can be used if and only if individuals are risk neutral.

   

Question No: 19    ( Marks: 1 )    - Please choose one

 Which of the following will happen if the cost of computer components falls?

       ► The demand curve for computers shifts to the right.

       ► The demand curve for computers shifts to the left.

       ► The supply curve for computers shifts to the right.

       ► The supply curve for computers shifts to the left.

   

Question No: 20    ( Marks: 1 )    - Please choose one

 What will happen if there is an increase in the raw material costs, other things remaining the same?

       ► The supply curve will shift to the left.

       ► The supply curve will shift to the right.

       ► Output will increase regardless of the market price and the supply curve will shift upward.

       ► Output will decrease and the market price will also decrease.

   

Question No: 21    ( Marks: 1 )    - Please choose one

 Suppose the total utilities for the first four units of a good consumed are 13, 23, 33, and 43 respectively. What is the marginal utility of the third unit?

       ► 10.

       ► 13.

       ► 20.

       ► 33.

   

Question No: 22    ( Marks: 1 )    - Please choose one

 Which of the following is TRUE for a Giffen good?

       ► Its marginal utility is zero.

       ► Its demand curve is perfectly elastic.

       ► Its substitution effect is positive.

       ► Its demand curve is positively sloped.

   

Question No: 23    ( Marks: 1 )    - Please choose one

 Which of the following occur when an isocost line is just tangent to an isoquant?

       ► Output is being produced at minimum cost.

       ► Output is not being produced at minimum cost.

       ► The two products are being produced at the medium input cost to the firm.

       ► The two products are being produced at the highest input cost to the firm.

   

Question No: 24    ( Marks: 1 )    - Please choose one

 Indifference curves that are concave to the origin reflect:

       ► An increasing marginal rate of substitution

       ► A decreasing marginal rate of substitution

       ► A constant marginal rate of substitution

       ► A marginal rate of substitution that first decreases then increases

   

Question No: 25    ( Marks: 1 )    - Please choose one

 What will happen to the isocost line if the price of both goods decreases proportionality?

       ► It shifts farther away from the origin of the graph.

       ► It shift inward.

       ► It shifts outward.

       ► None of the given options.

   

Question No: 26    ( Marks: 1 )    - Please choose one

 Average total costs are the sum of:

       ► Fixed costs and marginal costs

       ► Average variable costs and marginal costs

       ► Average fixed costs and average variable costs

       ► Average marginal costs and average variable costs

   

Question No: 27    ( Marks: 1 )    - Please choose one

 At the profit-maximizing level of output, the marginal cost is equal to:

       ► Average revenue

       ► Total revenue

       ► Marginal revenue

       ► None of the given options

   

Question No: 28    ( Marks: 1 )    - Please choose one

 The amount of output for maximum profit that a firm decides to sell has an effect on the market price in a monopolistic competitive industry because:

       ► The firm supplies a different good than its rivals.

       ► The firm's output is a considerable fraction of the entire industry's output.

       ► The short run market price is determined solely by the firm's technology.

       ► None of the given options.

   

Question No: 29    ( Marks: 1 )    - Please choose one

 When new firms enter in perfectly competitive industry for profits, the supply starts to:

       ► Increase in response to demand.

       ► Increase in response to price.

       ► Decrease in response to demand.

       ► Decrease in response to price.

   

Question No: 30    ( Marks: 1 )    - Please choose one

 Maximum number of firms in an oligopoly is about

       ► 2

       ► 10

       ► 15

       ► 20

   

Question No: 31    ( Marks: 1 )    - Please choose one

 Resources are governed by both government and individuals in

       ► Dictatorship.

       ► Command or planned economy.

       ► A mixed economy.

       ► Capitalist economy.

   

Question No: 32    ( Marks: 1 )    - Please choose one

 The demand curve for eggs is downward-sloping. Suddenly the price of eggs decreases from Rs.60/- per dozen to Rs.50/- per dozen. This will cause:

       ► The demand curve for eggs to shift leftward.

       ► Quantity demanded of eggs to decrease.

       ► The demand curve for eggs to shift rightward.

       ► Quantity demanded of eggs to increase.

   

Question No: 33    ( Marks: 1 )    - Please choose one

 An increase in quantity demand is shown by:

       ► Shifting the demand curve to the left.

       ► Shifting the demand curve to the right.

       ► Upward movement along the demand curve.

       ► Downward movement along the demand curve.

   

Question No: 34    ( Marks: 1 )    - Please choose one

 If a 7% price reduction causes quantity demanded to rise by 10% then:

       ► Demand is inelastic.

       ► Demand is elastic.

       ► Demand is perfectly elastic.

       ► Total revenue will remain constant.

   

Question No: 35    ( Marks: 3 )

 What is the key difference between the short run and the long run for the profit-maximizing firm?

   

Question No: 36    ( Marks: 5 )

A.    Why the firm experiences economies of scale and what will be the shape of long run average cost curve in this case?

B.   Why the firm experiences diseconomies of scale and what will be the shape of long run average cost curve in this case?

(Marks: 2.5+2.5)

   

Question No: 37    ( Marks: 5 )

 Define price taker firm and price maker firm. Also discuss in which type of market structures these firms exist? 



Principles of Microeconomics, 8e (Case/Fair)
Chapter 7: The Production Process: The Behavior of Profit-Maximizing
Firms
1. Total revenue minus total cost is equal to
A) the rate of return.
B) marginal revenue.
C) profit.
D) net cost.
Answer: C
2. If economic profit is zero, a firm
A) earns a negative rate of return.
B) will leave the industry.
C) earns a positive but below normal rate of return.
D) earns exactly a normal rate of return.
Answer: D
Refer to the information provided in Figure 7.2 below to answer the following questions.
Figure 7.2
3. Refer to Figure 7.2. This corn producer produces 100 bushels of corn and sells each
bushel at $5. The cost of producing each unit bushel is $2. This corn producer’s total
revenue is
A) $20.
B) $200.
C) $300.
D) $500.
Answer: D
.
4. You own a building that has four possible uses: a cafe, a craft store, a
hardware store, and a bookstore. The value of the building in each use is $2,000;
$3,000; $4,000; and $5,000, respectively. You decide to open a hardware store.
The opportunity cost of using this building for a hardware store is
A) $2,000, the value if the building is used as a cafe.
B) $3,000, the value if the building is used as a craft store.
C) $10,000, the sum of the values if the building is used for a cafe, a craft store, or a
bookstore.
D) $5,000, the value if the building is used for a bookstore.
Answer: D
SCENARIO 1: You are the owner and only employee of a company that writes
computer software that is used by gamblers to collect sports data. Last year you
earned a total revenue of $90,000. Your costs for equipment, rent, and supplies
were $60,000. To start this business you invested an amount of your own capital
that could pay you a return of $40,000 a year.
5. Refer to Scenario 1. During the year your economic costs were
A) $40,000.
B) $60,000.
C) $100,000.
D) $130,000.
Answer: C
6. Refer to Scenario 1. A yearly normal rate of return for your computer software
firm would be
A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.
Answer: B
7. Refer to Scenario 1. Your accounting profit last year was
A) $10,000.
B) $30,000.
C) $50,000.
D) $60,000.
.
Answer: B
8. Refer to Scenario 1. Your economic profit last year was
A) -$40,000.
B) -$10,000.
C) $10,000.
D) $30,000.
Answer: B
9. There are 100 dog kennels in Atlanta. An economist studying the pricing
behavior of dog kennels tells you that she is limiting her analysis to a time period
that does not allow for any new dog kennels to enter the industry or for any
established dog kennels to leave the industry. The time period this economist
referred to is the
A) market period.
B) industry run.
C) long run.
D) short run.
Answer: D
10. Assume the wool industry is perfectly competitive. Why is it difficult for a
wool producer to make excess profits?
A) The fact that wool producers are “price takers.”
B) The assumption that wool producers in the industry do not “differentiate” their
products.
C) The fact that the demand curve facing each wool producer is perfectly elastic.
D) There is free entry into the wool industry.
Answer: D
11. Assume the wool industry is perfectly competitive. The market demand curve
for wool is __________ and each individual wool producer’s demand curve is
__________.
A) downward sloping; horizontal
B) horizontal; downward sloping
C) horizontal; horizontal
D) downward sloping; downward sloping
Answer: A
.
12. The fast-food industry is not considered perfectly competitive because:
A) entry and exit are strictly regulated by the government.
B) the firm’s products are not homogeneous.
C) firms spend a large amount of money on advertising.
D) there are a very large number of firms.
Answer: B
The Production Process
13. The optimal method of production is the one that
A) maximizes output regardless of cost.
B) maximizes inputs.
C) minimizes cost.
D) minimizes the normal rate of return.
Answer: C
Use the information provided in Table 7.1 below to answer the questions that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies
14. Refer to Table 7.1 above. Which technology is the most labor intensive?
A) A
B) B
C) C
D) D
Answer: A
15. Refer to Table 7.1. 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
D) D
Answer: C
16. The version of the law of diminishing returns that applies to production
A) implies that as we add more workers our output decreases.
B) applies only in the short run.
C) is true only when all inputs are variable.
D) applies in the short and long run.
Answer: B
17. Suppose output varies, ceteris paribus, with labor input in the following
manner:
After how many units of labor do diminishing returns set in?
A) 3
B) 4
C) 5
D) They do not set in
Answer: D
18. When total product is maximized, marginal product
A) and average product are zero.
B) is positive but average product is zero.
C) is zero but average product is positive.
D) and average product are positive.
Answer: C
19. Firms have an incentive to substitute labor for capital as the
A) price of capital increases.
B) price of capital decreases.
C) price of labor increases.
D) marginal product of labor decreases.
Answer: A
.
20. At the Pampered Pet Salon the marginal products of the first, second, and
third workers are 20, 16, and 10 dogs washed, respectively. The total product
(number of dogs washed) of the three worker is
A) 15.33.
B) 30.
C) 46.
D) 138.
Answer: C
21. If the product derived from the last dollar spent on labor is greater than the
product derived from the last dollar spent on capital, then the firm
A) is minimizing costs.
B) should use more labor and less capital to minimize costs.
C) should use less labor and more capital to minimize costs.
D) should increase the price paid to labor and decrease the price paid to capital to
minimize costs.
Answer: B
22. A graph showing all the combinations of capital and labor that can be used to
produce a given amount of output is a(n)
A) indifference curve.
B) isoquant.
C) isocost line.
D) production function.
Answer: B
23. A graph showing all the combinations of capital and labor available for a
given total cost is the
A) isocost line.
B) isoquant.
C) budget constraint.
D) expenditure set.
Answer: A
24. The point of tangency between an isocost line and an isoquant is necessarily
A) the profit-maximizing combination of inputs that should be hired to produce that
output level.
B) the least costly combination of inputs that can be hired to produce the output level.
.
C) both the profit-maximizing and least costly combination of inputs that can be used
to produce the output level.
D) the minimum amount of output that can be attained for that level of expenditure.
Answer: B
25. The total cost curve for a firm can be derived from isoquants and isocost lines
by
A) varying the prices of capital and labor and keeping total expenditure constant.
B) varying production technologies, but keeping input prices and expenditure levels
constant.
C) varying total expenditures while keeping input prices and production technology
constant.
D) varying the price of either capital or labor while keeping total expenditures and
production technology constant.
Answer: C