ECON 102 Midterm 1 (Chapters 2-7) PRACTICE PROBLEMS

When Acme Dynamite produces 250 units of output, its variable cost is $2,000, and its fixed cost is $500. It sells each unit of output for $25. When Acme Dynamite produces 250 units of output, its average variable cost is ______ and its average total cost is ______.

$8; $10 Average variable cost is variable cost divided by output; here, $2000/250 = $8. Average total cost is total cost divided by output, here, ($2000 + $500)/250 = $10.

If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to:

3. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here +3/-1 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.

If the elasticity of demand for an album is 1.4, this means:

A 5% increase in the price leads to a 7% decrease in quantity demanded. The price elasticity of demand is given by the absolute value of the percentage change in quantity demanded divided by the percentage change in price. Here, |-7/5| = 1.4.

How would a perfectly competitive industry respond to a sudden increase in popularity of the product? The market demand curve would shift to the right, leading to:

A higher equilibrium price in the short run and entry into the market in the long run. The demand shift increases price and leading to positive economic profit. In the long run, this economic profit will prompt new firms to enter the market.

Suppose Colin brews beer and makes cheese. If Colin can increase his production of beer without decreasing his production of cheese, then he is producing at a:

An *inefficient point* is any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of some other good

When a slice of pizza at the student union sold for $2, Moe did not purchase any. When the price fell to $1.75, Moe purchased a slice each day for lunch. Moe's reservation price for a slice of pizza must be:

At least $1.75 but less than $2 We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price. If Moe buys pizza at $1.75, his reservation price must be at least $1.75. But since he did not buy pizza when it was $2.00 we assume that his reservation price was less than $2.00.

For two goods X and Y to be classified as substitutes, it must be the case that:

C. when the price of X rises, the demand for Y increases.

In a market with barriers to entry:

Economic profit will not fall to zero in the long run. If firms cannot freely enter a market, economic profit will not be driven to zero in the long run.

What is not a characteristic of governmental rent controls?

Equitable distribution of apartments. Rent controls keep prices lower than the equilibrium price, causing excess demand and less incentive to increase quantity supplied.

Shelly purchases a leather purse for $400. One can infer that:

Her reservation price was at least $400. We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price.

If Terry's total utility is maximized when he owns 10 pairs of shoes, then Terry's total utility from owning 7 pairs of shoes is ______ Terry's total utility from owning 8 pairs.

Less than. If his total utility is maximized at 10 pairs of shoes, then each additional pair of shoes must add to his total utility (at least for the first 10 pairs), so the total utility from 7 pairs must be less than the total utility from 8 pairs.

If we plot John's opportunity cost per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning services.

Supply. John's opportunity cost of cleaning another window is his reservation price, the minimum amount you would have to pay him to get him to clean another window.

You are trying to decide how to spend your last lunch dollar. You should use that dollar to buy more of the item:

That gives you the highest marginal utility per dollar.

You can spend $5 for lunch and you would like to have two double cheeseburgers. When you get to the restaurant, you find out the price for double cheeseburger has increased from $2.50 to $2.99. You decide to have just one double cheeseburger for lunch. This is best described as a(n):

The income effect. You can no longer afford your desired lunch, and so you purchase less of the good. The correct answer is: income effect

In a perfectly competitive market, the marginal cost curve is upward sloping because:

When the law of diminishing returns applies, marginal cost goes up as the firm expands output beyond some point.