EC301 Test 1
A moderately risk-averse investor has 50 percent of her portfolio invested in stocks and 50 percent in risk-free Treasury bills. Show how each of the following events will affect the investor's budget line and the proportion of stocks in her portfolio: The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. The budget line will _______ and the slope will _______. The proportion of stocks in the portfolio __________.
not shift, flatten, will fall
Suppose that the average household in a state consumes 800 gallons of gasoline per year. A 20-cent gasoline tax is introduced, coupled with a $160.00 annual tax rebate per household. Will the household be better or worse off under the new program? The household
could be equally well off or better off
Engel curves always slope upward. This statement is (T/F)
false because Engel curves slope downward for inferior goods.
Decide whether each of the following three statements is true or false and explain why. Statement #2: People generally buy clothing in the city in which they live. Therefore, there is a clothing market in, say, Atlanta that is distinct from the clothing market in Los Angeles. This statement is
false because clothing suppliers can easily move clothing from one part of the country to another.
Decide whether each of the following three statements is true or false and explain why. Statement #1: Fast-food chains like McDonald's, Burger King, and Wendy's operate all over the United States. Therefore, the market for fast food is a national market. This statement is
false because people do not travel long distances to purchase cheaper fast food.
Decide whether each of the following three statements is true or false and explain why. Statement #3: Some consumers strongly prefer Pepsi and some strongly prefer Coke. Therefore, there is no single market for colas. This statement is
false because the different brands of cola are similar enough to constitute one market.
Suppose that the Japanese yen falls against the U.S. dollar-that is, it will take fewer dollars to buy a given amount of Japanese yen. Explain why this decrease simultaneously decreases the real price of Japanese cars for U.S. consumers and increases the real price of U.S. automobiles for Japanese consumers. As the value of the yen falls relative to the dollar, the purchase of a Japanese automobile priced in yen requires ______ dollars, and the purchase of a U.S. automobile priced in dollars requires ______ yen.
fewer, more
Would you expect the price elasticity of demand for paper towels to be larger in the short run or in the long run? Why? The price elasticity of demand for paper towels should be larger
in the long run as new substitutes enter the market.
What about the price elasticity of demand for televisions? The price elasticity of demand for televisions should be larger
in the short run because televisions are durable.
The demand for a product is Q = 800 - 5P and supply is Q = 100 + 2P. The market-clearing price is $____ and the market-clearing quantity is ___ units. Consumers complain that this price amounts to price gouging and successfully lobby the government to set a price ceiling of $60 for the product. As a result, consumers will want to consume ____ units while producers will want to sell only _____. As a result of the price ceiling, there will be a ______ of _____ units.
100, 300, 500, 220, shortage, 280
Ross is a senior citizen who consumes food and health care. When he retired in 2002, he consumed 90 meals and 3 medical checkups per month. Suppose in 2002 that the price of a meal was $10 and the price of a medical checkup was $87. However, in 2012, the price of a meal is $11 and the price of a medical checkup is $323. As a result, Ross consumes 100 meals and 2 medical checkups per month. Next, calculate a Paasche cost-of-living index for Ross using 100 as the base in 2002. In particular, the Paasche index for 2012 is ___________. Next, calculate a Paasche cost-of-living index for Ross using 100 as the base in 2002. In particular, the Paasche index for 2012 is _____ percent.
148.72, 48.72
Ross is a senior citizen who consumes food and health care. When he retired in 2002, he consumed 90 meals and 3 medical checkups per month. Suppose in 2002 that the price of a meal was $10 and the price of a medical checkup was $87. However, in 2012, the price of a meal is $11 and the price of a medical checkup is $323. As a result, Ross consumes 100 meals and 2 medical checkups per month. Calculate a Laspeyres cost-of-living index for Ross using 100 as the base in 2002. In particular, the Laspeyres index for 2012 is _________. The Laspeyres index suggests inflation has been _____ percent over the 10-year period from 2002 to 2012.
168.73, 68.73
An investment will return $125, $20 or $negative 60 (a loss) with probabilities of 0.3, 0.3 and 0.4 respectively. The expected return from this investment is $_______. The variance of returns equals ______. The standard deviation of returns equals ______.
19.5, 5867.25, 76.60
The average price of milk per gallon was $2.32 in 1995 and $3.32 in 2010. The consumer price index was 152.4 in 1995 and 218.1 in 2010. Therefore, the real price of milk in 2010 expressed in 1995 dollars was $_____ .
2.32
Juan mows lawns in his neighborhood for extra money. Suppose the demand for lawn mowing in Joe's neighborhood is: QD = 48 - 2P and that the supply of lawn mowing (Juan's willingness to mow lawns) is: QS = -12 + P. The market-clearing price of lawn mowing is $___ per lawn and the market-clearing quantity is ____ lawns. The corresponding consumer surplus is $___.
20, 8, 16
When Sue graduated from college, she got a job with a starting salary of $30,000. When Sue's sister Jan graduated five years later, her starting salary was $34,000. Jan likes to tease Sue about earning more than Sue did right out of college. Sue claims that she actually had the higher salary in real dollars. The Consumer Price Index rose 28% during the five years separating the sisters' graduations. Therefore, we can conclude that
Sue earned the higher real salary.
Consider two goods: paper towels and televisions. Which is a durable good?
Televisions
What effect does competition have on market price?
The actions of a single firm in a competitive market will not affect the market price.
Microeconomics is the branch of economics that deals with
The behavior of individual firms and how economic units interact to form markets.
The city council of a small college town decides to regulate rents in order to reduce student living expenses. Suppose the average annual market-clearing rent for a two-bedroom apartment had been $700 per month and that rents were expected to increase to $900 within a year. The city council limits rents to their current $700-per-month level. What will happen to the rental price of an apartment after the imposition of rent controls?
The demand curve shifts right.
Suppose instead that Julio is consuming a bundle with more food and less clothing than his utility maximizing bundle. Would this marginal rate of substitution of food for clothing be greater than or less than your answer above? Explain. If Julio is instead consuming a bundle with more food and less clothing than his utility maximizing bundle, then his marginal rate of substitution will be __________ 0.33 because he will be consuming a bundle on the indifference curve that is ____________ his satisfaction maximizing bundle.
less than, to the right of
Which of the following events would cause a movement along the demand curve for U.S.-produced clothing, and which would cause a shift in the demand curve? (i) The removal of quotas on the importation of foreign clothes, (ii) An increase in the income of U.S. citizens, and (iii) A cut in the industry's cost of producing domestic clothes that is passed on to the market in the form of lower prices. Finally, a cut in the industry's cost of producing domestic clothes that is passed on to the market in the form of lower prices would cause a ________ the demand curve for U.S.-produced clothing.
movement along
Suppose the demand curve for a product is given by Q = 19 - 2P + 1PS, where P is the price of the product and PS is the price of a substitute good. The price of the substitute good is $2.10. Suppose P = $0.60. The price elasticity of demand is _____. The cross-price elasticity of demand is ____.
-0.07, 0.11
If demand is 20 and supply is 16 million, what is the price elasticity of demand?
-0.40
At the beginning of the year, you bought 100 shares of Microsoft common stock for $100, and over the course of the year, the company paid a dividend of $5 per share. At the end of the year, you sell your 100 shares for $80. The inflation rate for the year was 3 percent. The nominal return on your investment was _____%. The real return on your investment was _____%
-15; -18
Julio receives utility from consuming food (F) and clothing (C) as given by the utility function U(F, C) = FC. In addition, the price of food is $3 per unit, the price of clothing is $9 per unit, and Julio's weekly income is $50. What is Julio's marginal rate of substitution of food for clothing when utility is maximized? Explain. Julio's marginal rate of substitution equals
0.33, which is the price of food divided by the price of clothing.
If demand is 18 and supply is 18 million, what is the price elasticity of supply?
0.56
Jon is always willing to trade one can of Coke for one can of Sprite, or one can of Sprite for one can of Coke. What can you say about Jon's marginal rate of substitution? Jon's marginal rate of substitution is equal to
1
The CPI in 1980 is 100 and the CPI in 2000 is 208.98. What is the real price of butter in 1980 dollars if the retail price in 2000 was 2.48?
1.19
Consider a lottery with three possible outcomes: $130 will be received with probability 0.2. $90 will be received with probability 0.3. $50 will be received with probability 0.5. The expected value of the lottery is $___. The variance of the outcomes is $______. In order to play the lottery, a risk-neutral person would pay $______.
78, 976, 78
Which of the following statements is true of theories in economics? Theories in economics A. are used to construct models from which quantitative predictions can be made. B. are developed to explain observed phenomena free from restrictions imposed by a set of assumptions. C. are never modified or refined. D. Both A and B are correct. E. None of the above.
A
Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats. What type of solution is it?
A corner solution
Suppose the demand function (D) for golf clubs is: Q = 210 - 1.00P, where P is the price paid by consumers in dollars per club and Q is the quantity demanded in thousands. Suppose the supply curve (S) for golf clubs is estimated to be: Q = 2.00P. Suppose instead that golf club producers agree to charge a price of $50 per club. What would this result in?
A shortage of 60 thousand clubs
In the diagram on the right the consumer's original budget line is Upper L 1, and the consumer buys the amount of good X at point A. Then the price of good X decreases dramatically so that the consumer's new budget line shifts to Upper L 2. After the price decrease the consumer buys the amount of good X at point C. The substitution effect due to the price change is the movement from point ___ to point ______.
A, B
Somewhat differently, macroeconomics examines
Aggregate economic quantities such as the level of national output.
Why do some investors put a large portion of their portfolios into risky assets while others invest largely in risk-free alternatives?
Although two investors are risk averse, one may be willing to invest in a portfolio of riskier assets provided she is compensated for that risk with a higher expected return.
Antonio buys five new college textbooks during his first year at school at a cost of $80 each. Used books cost only $50 each. When the bookstore announces that there will be a 50 percent increase in the price of new books and a 50 percent increase in the price of used books, Antonio's father offers him $200 extra. Is Antonio worse or better off after the price change? Explain.
Antonio will be equally well off if he continues to spend all of his income on new books. At the same time, he would be equally well off if he were to spend a portion of his money on used books.
Draw a utility function over income u(I) that describes a man who is a risk lover when his income is low but risk averse when his income is high. Can you explain why such a utility function might reasonably describe a person's preferences?
At a low income, one is willing to take risks to make big gains, but after a certain income, income will have diminishing marginal utility and the person becomes risk averse.
Which one of the following statements is false? A. Microeconomics is about the allocation of scarce resources. B. Microeconomics is concerned with the fair and equitable distribution of resources among consumers. C. Prices play a central role in microeconomics. D. Microeconomics studies how consumers, workers and firms can make optimal trade-offs.
B
In the diagram on the right the consumer's original budget line is Upper L 1, and the consumer buys the amount of good X at point A. Then the price of good X decreases dramatically so that the consumer's new budget line shifts to Upper L 2. After the price decrease the consumer buys the amount of good X at point C. The income effect due to the price change is the movement from point _____ to point ____. Based on the income effect, good X is a ______ good.
B, C, normal
What are the four basic assumptions about individual preferences? Explain the significance or meaning of each. Consumer theory assumes that:: (1) preferences are _______, which means that consumers are able to rank all possible baskets;
Complete
Which of the following is a trade-off studied in microeconomics? A. Consumers trade off current consumption for future consumption. B. Firms trade off producing more of one output for producing more of another output. C. Workers trade off working now with immediate income for continued education with greater future earnings. D. All of the above. E. Only A and B are correct.
D
Which one of the following is not a perfectly competitive market? A. The U.S. stock market. B. The U.S. wheat market. C. The world gold market. D. The world diamond market.
D
Why do long-run elasticities of demand differ from short-run elasticities?
Durable goods last a relatively long time and it takes time for people to change their consumption habits.
What are the four basic assumptions about individual preferences? Explain the significance or meaning of each. Consumer theory assumes that:: (4) the marginal rate of substitution is constant, where indifference curves are convex. T/F
False
How does the diversification of an investor's portfolio avoid risk?
If an investor buys stocks that are negatively correlated, as the number of stocks held increases, the overall variance of the portfolio decreases.
During periods of high stock market volatility, the standard deviation of returns on the stock market increases. If the expected return on the stock market does not change, a risk averse investor who wants to reduce the risk of his portfolio will
Increase the proportion of his portfolio that is invested in the risk-free asset and earn a lower expected return on his portfolio.
What happens to the market demand curve if consumer income increases?
It shifts to the right
What happens to the market supply curve if the costs of production decrease?
It shifts to the right
Paul consumes only books and DVDs. At his current consumption bundle, his marginal utility from DVDs is 25 and from books is 4. Each DVD costs $5, and each book costs $2. Is he maximizing his utility? Explain. Let MU Subscript Upper B be the marginal utility of books, MUD be the marginal utility from DVDs, PB be the price of books, PD be the price of DVDs, and MRS be the marginal rate of substitution. Paul is
MUB/PB < MUD/PD
If there is a probability of two different incomes, how do you calculate the utility?
Multiply the probability by the utility function
Which of the following two statements involves positive economic analysis and which normative? How do the two kinds of analysis differ? Statement #2: Gasoline rationing is a policy under which more people are made worse off than are made better off.
Positive analysis because it states what the effect of gasoline rationing is
Which of the following two statements involves positive economic analysis and which normative? How do the two kinds of analysis differ? Statement #1: Gasoline rationing (allocating to each individual a maximum amount of gasoline that can be purchased each year) is poor social policy because it interferes with the workings of the competitive market system.
Positive analysis because it states what the effect of gasoline rationing is and normative analysis because it makes a value judgment about the desirability of the rationing policy
How to calculate expected value
Pr1(X1) + Pr2(X2) +....
The demand for apples in the United States is QUS = 800 - 20P, and foreign demand for apples is QF = 1200 - 40P, where quantity demanded is measured in millions of bushels and price is in dollars per bushel. The world demand for apples is therefore
Q = 2000 - 60P when P is $30 or less
In 2010, Americans smoked 315 billion cigarettes, or 15.75 billion packs of cigarettes. The average retail price (including taxes) was about $5 per pack. Statistical studies have shown that the price elasticity of demand is roughly -0.50, and the price elasticity of supply is about 0.45. Using this information, derive the demand curve equation.
Q = 23.625 - 1.575P
In 2010, Americans smoked 315 billion cigarettes, or 15.75 billion packs of cigarettes. The average retail price (including taxes) was about $5 per pack. Statistical studies have shown that the price elasticity of demand is roughly -0.50, and the price elasticity of supply is about 0.45. Using this information, derive the supply curve equation.
Q = 8.6625 + 1.4175P.
Suppose that Natasha's utility function is given by u(I) = sqrt(10I), where I represents annual income in thousands of dollars. Is Natasha risk loving, risk neutral, or risk averse? Explain.
She is risk averse because her utility function exhibits diminishing marginal utility.
Suppose the demand function (D) for golf clubs is: Q = 210 - 1.00P, where P is the price paid by consumers in dollars per club and Q is the quantity demanded in thousands. Suppose the supply curve (S) for golf clubs is estimated to be: Q = 2.00P. Calculate the equilibrium price for golf clubs and the equilibrium quantity sold.
The equilibrium price is $70 and the quantity is 140 thousand.
The price of long-distance telephone service fell from 40 cents per minute in 1996 to 22 cents per minute in 1999, a 45-percent (18 cents/40 cents) decrease. Suppose that the Consumer Price Index increased by 9 percent over this period. What happened to the real price of telephone service?
The real price of telephone service decreased by 49.54 percent.
Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra soft drink. What do the indifference curves look like?
The slope is .5
What are the four basic assumptions about individual preferences? Explain the significance or meaning of each. Consumer theory assumes that:: (3) more is _________ preferred to less because all goods are desirable
always, all goods are desirable
A moderately risk-averse investor has 50 percent of her portfolio invested in stocks and 50 percent in risk-free Treasury bills. Show how each of the following events will affect the investor's budget line and the proportion of stocks in her portfolio: The expected return on the stock market increases, but the standard deviation of the stock market remains the same. The budget line will _______ and the slope will _______. The proportion of stocks in the portfolio __________.
not shift, steepen, will rise
Which of the following events would cause a movement along the demand curve for U.S.-produced clothing, and which would cause a shift in the demand curve? (i) The removal of quotas on the importation of foreign clothes, (ii) An increase in the income of U.S. citizens, and (iii) A cut in the industry's cost of producing domestic clothes that is passed on to the market in the form of lower prices. First, the removal of quotas on the importation of foreign clothes would cause a _______ the demand curve for U.S.-produced clothing.
shift in
Which of the following events would cause a movement along the demand curve for U.S.-produced clothing, and which would cause a shift in the demand curve? (i) The removal of quotas on the importation of foreign clothes, (ii) An increase in the income of U.S. citizens, and (iii) A cut in the industry's cost of producing domestic clothes that is passed on to the market in the form of lower prices. Next, an increase in the income of U.S. citizens would cause a _______ the demand curve for U.S.-produced clothing.
shift in
Suppose that unusually cold weather causes the demand curve for ice cream to shift to the left. Why will the price of ice cream fall to a new market-clearing level? The cold weather will
shift the demand curve to the left, initially creating a surplus until the price falls to where quantity supplied again equals quantity demanded.
A moderately risk-averse investor has 50 percent of her portfolio invested in stocks and 50 percent in risk-free Treasury bills. Show how each of the following events will affect the investor's budget line and the proportion of stocks in her portfolio: The return on risk-free Treasury bills increases. The budget line will _______ and the slope will _______. The proportion of stocks in the portfolio __________.
shift up, flatten, may rise or fall
How to calculate standard deviation
sqrt(PR1(X1-EX)^2 + PR2(X2-EX)^2 +........
The extent of the excess demand implied by the shortages will depend on
the elasticities of supply and demand, where the shortages will be smaller if both supply and demand are more inelastic.
What are the four basic assumptions about individual preferences? Explain the significance or meaning of each. Consumer theory assumes that:: (2) preferences are ______, which means that if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then _________.
transitive, bundle A is preferred to bundle C
The level of utility increases as an individual moves downward along the demand curve. This statement is (T/F)
true because price decreases pivot the budget line outward.
The marginal rate of substitution (MRS) diminishes as an individual moves downward along the demand curve. Assume the statement refers to good X with price Upper P Subscript Upper X, where good X is measured on the horizontal axis of an indifference map and good Y is measured on the vertical axis. This statement is (T/F)
true because the MRS equals PX/PY, which decreases as an individual moves downward along the demand curve.
