MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Which of the following is the best definition of economics?

A) The study of how consumers spend their income
B) The study of how the federal government allocates tax dollars
C) The study of how business firms decide what inputs to hire and what outputs to produce
D) The study of how individuals and societies choose to use the scarce resources that nature and
previous generations have provided
1)
2) Economists use the phrase "ceteris paribus" to express the assumption,
A) "scarcity is a fact of life." B) "everything affects everything else."
C) "all else equal." D) "there is no such thing as a free lunch."
2)
3) The branch of economics that examines the functioning of individual industries and the behavior
of individual decision-making units is
A) microeconomics. B) macroeconomics.
C) positive economics. D) normative economics.
3)
4) Positive economics is an approach to economics that
A) analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe
preferred courses of action.
B) seeks to understand behavior and the operation of systems while making judgments about
their usefulness to society.
C) applies statistical techniques and data to economic problems.
D) examines the role of government in the economy.
4)
5) Rent control laws are imposed when city officials believe landlords have been exploiting tenants.
Which of the following criteria are they using to guide their actions?
A) Growth B) Equity C) Efficiency D) Stability
5)
6) Which of the following will NOT cause a shift in the demand curve for compact discs?
A) A change in the price of compact discs
B) A change in wealth
C) A change in the price of prerecorded cassette tapes
D) A change in income
6)
7) As an individual consumes more of a product within a given period of time, it is likely that each
additional unit consumed will yield
A) successively more satisfaction.
B) the same amount of satisfaction.
C) successively less satisfaction.
D) less satisfaction for a while and then start to add more satisfaction.
7)
1
Refer to the information provided in Figure below to answer the questions that follow.
Figure 3.2
8) Refer to Figure 3.2. Which of the following would be most likely to cause the demand for macaroni
and cheese to shift from D
1
to D
0
?
A) an increase in income, assuming macaroni and cheese is a normal good
B) an increase in the price of macaroni and cheese
C) an increase in the quantity demanded for macaroni and cheese
D) an increase in the price of flour used to make macaroni and cheese
8)
Refer to the information provided in Figure 3.14 below to answer the following questions.
Figure 3.14
9) Refer to Figure 3.14. An increase in supply is represented by the movement from
A) Point B to Point C along supply curve S
2
. B) S
2
to S
3
.
C) Point B to Point A along supply curve S
2
. D) S
2
to S
1
.
9)
10) Refer to Figure 3.14. A decrease in the wage rate of pizza makers will cause a movement from
Point B on supply curve S
2
to
A) supply curve S
1
. B) Point B on supply curve S
2
.
C) Point A on supply curve S
2
. D) supply curve S
3
.
10)
2
Refer to the information provided in Figure 3.17 below to answer the questions that follow.
Figure 3.17
11) Refer to Figure 3.17. At a price of $20, there is an excess
A) demand of 50 blue jeans. B) demand of 25 blue jeans.
C) supply of 50 blue jeans. D) demand of 75 blue jeans.
11)
12) VCRs and videotapes are complements. An increase in the price of VCRs would cause which of the
following in the market for videotapes?
A) The equilibrium price and quantity of videotapes would increase.
B) The equilibrium price of videotapes would decrease and the equilibrium quantity would
increase.
C) The equilibrium price and quantity of videotapes would decrease.
D) The equilibrium price of videotapes would increase and the equilibrium quantity would
decrease.
12)
13) Improvements in technology have reduced the cost of producing personal computers. As a result,
you accurately predict that in the market for personal computers, there will be a(n)
A) decrease in the supply of personal computers, an increase in the price, and a decrease in the
demand.
B) increase in the supply of personal computers, a decrease in the price, and an increase in the
quantity demanded.
C) increase in the quantity supplied of personal computers, a reduction in the price, and an
increase in the quantity demanded.
D) increase in the supply of personal computers, a reduction in the price, and an increase in the
demand.
13)
14) When the price of radios increases 5%, quantity demanded decreases 5%. The price elasticity for
radios is
A) inelastic. B) perfectly inelastic.
C) elastic. D) unitary elastic.
14)
3
Refer to the information provided in Figure 4.1 below to answer the questions that follow.
Figure 4.1
15) Refer to Figure 4.1 An example of an effective price floor would be the government setting rental
rates for apartments at
A) $400. B) $700. C) $500. D) $600.
15)
16) Refer to Figure 4.1. If the government will not allow landlords to charge more than $400 for an
apartment, which of the following will happen?
A) Demand must eventually decrease so that the market will come into equilibrium at a price of
$400.
B) The market will be in equilibrium at a price of $400.
C) A nonprice rationing system such as queuing must be used to ration the available supply of
apartments.
D) Supply must eventually increase so that the market will come into equilibrium at a price of
$400.
16)
Refer to the information provided in Figure 4.7 below to answer the questions that follow.
Figure 4.7
17) Refer to Figure 4.7. Using the midpoint formula, if the price of a hamburger is increased from $6 to
$8, the price elasticity of demand equals
A) -2.0. B) -1.4. C) 0.24. D) 71.0.
17)
4
18) Total revenue will increase if price
A) falls and demand is elastic. B) rises and demand is elastic.
C) falls and demand is inelastic. D) rises and demand is unitarily elastic.
18)
19) Cross-price elasticity of demand measures the response in
A) quantity of one good demanded when the quantity demanded of another good changes.
B) the quantity of one good demanded to a change in the price of another good.
C) the income of consumers to the change in the price of goods.
D) the price of a good to a change in the quantity of another good demanded.
19)
20) Michael can buy either pizzas or submarine sandwiches. If the prices of pizza and submarine
sandwiches double and so does Michael's money income, we can deduce that Michael's budget
constraint will
A) swivel in so that the slope of the budget constraint is doubled.
B) shift in but remain parallel to the old one.
C) shift out but remain parallel to the old one.
D) remain unchanged.
20)
Refer to the information provided in Table 5.1 below to answer the questions that follow.
Table 5.1
Number of
Hamburgers per Day
Total Utility Marginal Utility
1
2
3
4
5
30
52
67
76
4
Number of
Sodas per Day
Total Utility Marginal Utility
1
2
3
4
5
20
35
47
57
7
21) Refer to Table 5.1. The total utility of the fifth soda per day is
A) 64. B) 92.
C) 35. D) indeterminate from this information.
21)
22) Refer to Table 5.1. If the price of a soda is $2, the price of a hamburger is $6, and George has $14 of
income, George's utility maximizing combination of sodas and hamburgers per day is
A) 1 soda and 2 hamburgers. B) 4 sodas and 1 hamburger.
C) 3 sodas and 1.5 hamburgers. D) indeterminate from this information.
22)
5
23) Suppose output varies, ceteris paribus, with labor input in the following manner:
L 0 1 2 3 4 5
Q 0 10 20 30 40 50
After how many units of labor do diminishing returns set in?
A) 3 B) 5
C) 4 D) They do not set in
23)
24) You own a business that answers telephone calls for physicians after their offices close. You have
an incentive to substitute capital for labor if the
A) price of capital increases. B) price of labor decreases.
C) marginal product of labor increases. D) price of labor increases.
24)
Refer to the information provided in Table 7.1 below to answer the questions that follow.
Table 7.1
Produce
Using
Techniques
Units of Variable Inputs
K L
1 unit of output
2 units of output
3 units of output
A
B
A
B
A
B
8 8
4 12
14 12
8 20
16 12
12 22
25) Refer to Table 7.1. Assuming the price of labor (L) is $5 per unit and the price of capital (K) is $10
per unit, what production technique should this firm use to produce 2 units of output?
A) Production technique A
B) Production technique B
C) The firm is indifferent between production technique A and production technique B.
D) It is impossible to determine if the firm should select production technique A or B because
total fixed costs are not given.
25)
26) Refer to Table 7.1. Assuming the price of labor (L) is $5 per unit and the price of capital (K) is $10
per unit, the marginal cost of producing the third unit of output is
A) $40. B) $50.
C) $30. D) indeterminate from this information.
26)
27) If a firm's operating profit is $0, then it must be true that
A) TR equals TVC. B) TR equals TFC. C) TR equals TC. D) TFC is zero.
27)
28) Factors of production that can be used together to enhance the other's productivity are
A) substitutable inputs. B) proportionate inputs.
C) duplicate inputs. D) complementary inputs.
28)
6
29) The idea that the demand for autoworkers stems from the demand for automobiles is
A) the value of the marginal product of autoworkers.
B) output demand.
C) indirect demand.
D) derived demand.
29)
Refer to the data provided in Table 9.1 below to answer the following questions.
Table 9.1
Total Labor Units
(employees)
Total Product
(T-shirts per day)
Marginal Product of
Labor (per day)
Price per
T-shirt
0
1
2
3
4
5
0
20
50
75
95
110
--
20
30
25
20
15
--
$5
5
5
5
5
30) Refer to Table 9.1. If the payment to labor per day is $100, this T-shirt manufacturer is maximizing
profits if he will hire __________ employees.
A) four B) three C) five D) two
30)
31) Refer to Table 9.1. The maximum payment to labor per day that this profit-maximizing T-shirt
manufacturer would be willing to pay to hire three workers per day is
A) $75. B) $200. C) $15. D) $125.
31)
32) The formula for the marginal revenue product of labor (L is for labor, X is the output) is
A) (MP
L
)(MR
X
). B) P
X
/MP
L
. C) MP
L
/P
X
. D) MP
L
+ P
X
.
32)
33) A firm will continue hiring labor as long as the MRP of labor __________ the market wage rate.
A) determines B) is greater than or equal to
C) is equal to D) is less than
33)
34) A university requires that all entering first-year students learn how to use word processing and
spreadsheet software. This is an investment in what type of capital?
A) Financial B) Tangible C) Human D) Productive
34)
35) Capital goods yield benefits
A) before they are put to use.
B) as soon as the investment decision is made.
C) in the present only.
D) over their life span.
35)
7
Problem #36 (30 points)
Consider the following data describing daily operation of Mr. Sandwich, a fast food restaurant. Assume
that rent is fixed in the short run at $60 per day and that the wage rate is $15 per hour.

# of sandwiches 0 5 10 15 20 25 30 35
# of employee-hours 0 1 2 4 7 11 16 22

(a) Compute the marginal cost schedule (10 points)











(b) Suppose that Mr. Sandwich acts as a price-taker and that the price of a sandwich is $15.00. In the
short run, (i) how many sandwiches should the firm produce, and (ii) how many hours should its
employees work? (iii) What are its profits? (10 points)












(c) Suppose that the price of a sandwich falls to $7.00. Again, in the short run, (i) how many
sandwiches should the firm produce, and (ii) how many hours should its employees work? (iii)
What are its profits? (10 points)












Problem #37 (20 points)
Kristen and Anna live in the beach town of Santa Monica. They own a small business in which they make
wristbands and potholders and sell them to people on the beach. Anna can make 15 wristbands per hour,
but only 3 potholders per hour. Kristen is a bit slower and can make only 12 wristbands or 2 potholders
per hour.

Output Per Hour
Anna Kristen
Wristbands 15 12
Potholders 3 2

(a) Who has a comparative advantage in making wristbands? Justify your answer (5 points).











(b) Graph separately Kristen and Annas individual production possibilities frontiers, assuming
that each works 40 hours per week. Label all slopes and intercepts. Let potholders be on the
horizontal axis. (5 points)











(c) Continue assuming that each works 40 hours per week. Graph the social production
possibilities frontier for an economy consisting only of Kristen and Anna. Label the point of
specialization, slopes, and intercepts. Let potholders be on the horizontal axis. (10 points)










Problem #38 (30 points)
The market for VCRs is perfectly competitive. Suppose the industry has settled into long-run equilibrium
with price P0 and industry output Q0. Each representative firm currently produces output q0. All firms in
industry have U-shaped long-run average cost curves.

a. Show the current conditions by drawing two diagrams, one for the industry and one for a
representative firm. Label price, quantities, marginal and average cost curves, and demand and
supply curves.











b. Suppose that prices of DVD players fall substantially. Use one or more diagrams to predict the
short-run effects on price, industry output, and firm output of VCRs. Specify any assumptions
you make. Be certain to discuss each effect.










c. Use one or more diagrams to predict the long-run effects on price, industry output, and firm
output of VCRs. Again, specify any assumptions you make. Be certain to discuss any effects.

Answer Key
Testname: S06_PRAC_FINAL_ECO2302.TST
1) D
2) C
3) A
4) C
5) B
6) A
7) C
8) A
9) B
10) D
11) D
12) C
13) B
14) D
15) D
16) C
17) B
18) A
19) B
20) D
21) A
22) B
23) D
24) D
25) B
26) A
27) A
28) D
29) D
30) A
31) D
32) A
33) B
34) C
35) D
1
Solution to Problem #36 (25 points)
Consider the following data describing daily operation of Mr. Sandwich, a fast food restaurant. Assume
that rent is fixed in the short run at $60 per day and that the wage rate is $15 per hour.

# of sandwiches 0 5 10 15 20 25 30 35
# of employee-hours 0 1 2 4 7 11 16 22

TVC 0 15 30 60 105 165 240 330
AVC - 3 3 4 5.25 6.6 8 9.43
VC - 15 15 30 45 60 75 90
MC - 3 3 6 9 12 15 18

a. Compute the marginal cost schedule

See above table.


b. Suppose that Mr. Sandwich acts as a price-taker and that the price of a sandwich is $15.00. In the
short run, (i) how many sandwiches should the firm produce, and (ii) how many hours should its
employees work? (iii) What are its profits? (10 points)

If P = $15, choose Q = 30, L = 16. Compute profit as = TR - TC = 15*30 16*15 60 = 150. So,
positive economic profits are made.


c. Suppose that the price of a sandwich falls to $7.00. Again, in the short run, how many sandwiches
should the firm produce, and how many hours should its employees work? What are its profits?

If P = $7.00, then Q = 15 and L = 4. Profit is given as = TR - TC = 7*15 - 4*15 60 = -15. The firm
should continue operating, because P>AVC or the market price exceeds the minimum average variable
cost.

Solution to Problem #37
Refer to solutions for practice midterm #1

Solution to Problem #38 (25 points)
Refer to lecture notes for solution.