ECON 4001.01 Midterm

Suppose a consumer spends her entire income on two "good" goods, X and Y. Which of the following correctly characterizes the income effect associated with a decrease in the price of X?

It will lead to an increase in consumption only for a normal good.

The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called

consumer surplus.

The concept of a risk premium applies to someone who is

risk averse.

The price elasticity of gasoline supply in the U.S. is 0.4. If the price of gasoline rises by 8%, what is the expected change in the quantity of gasoline supplied in the U.S.?

+3.2%

Assuming a standard S-shaped production function, marginal product crosses the horizontal axis (is equal to zero) at the point where

total product is maximized.

Blanca prefers a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

we can infer that Blanca is risk averse.

Suppose the major soft drink companies develop vending machines for canned and bottled drinks that are able to determine each consumer's maximum willingness-to-pay for a drink, and charge each consumer that maximum amount. If this were possible, the consumer surplus in the vended soft drink market would be:

zero because all surplus value is captured by the seller.

Which of the following costs always declines as output increases?

Average fixed cost.

The fact that Alice spends no money on travel: - implies that she does not derive any satisfaction from travel. -implies that she is at a corner solution. -implies that her MRS does not equal the price ratio.

any of the above are possible.

A competitive firm's short run supply curve is

The portion of its marginal cost curve that lies above average variable cost.

As we move downward along a demand curve for apples,

the marginal utility of apples decreases.

A market supply curve reveals:

the quantity of output that producers are willing to produce and sell at each possible market price.

Suppose that the prices of good X and good X both double. If good X is plotted along the horizontal axis,

the slope of the budget line will not change.

A firm never operates

on the downward sloping portion of its AVC curve.

When a given firm uses 12 units of labor, it produces 36 units of output. From this we can infer that

the average product of labor is 3.

At every output level, a firm's short-run average total cost equals or exceeds its long-run average cost because

there are at least as many possibilities for substitution between factors of production in the long run as in the short run.

The market demand for sirloin steak is probably more elastic than the market demand for all meat because

there are more substitutes for sirloin steak than for all meats.

A firm's (long run) output expansion path is

a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.

Suppose market baskets A and B both cost $100 and Xavier, who has $100 to spend, chooses A. Now suppose market prices change so that baskets B and C both cost $100, but A costs more than $100. The principle of revealed preference allows us to infer that Xavier

prefers A to C.

Which of the following is not a necessary condition for long run equilibrium under perfect competition?

Consumers believe the good is inexpensive.

Consider a firm that uses labor (L) and capital (K) to produce output. The curve that is traced out by all L-K combinations that can produce a given amount of output is called

a production isoquant.

A production function in which the inputs are perfectly substitutable would have isoquants that are

linear.

Suppose there is currently a surplus of wheat on the world market. This excess supply can be removed from the market by:

lowering the market price.

The slope of an indifference curve reveals:

the marginal rate of substitution of one good for another good.

A newly-certified medical doctor who accepts a job with an HMO will earn $100,000 with probability 0.95 and $60,000 with probability 0.05. The doctor's expected income is:

$98,000

For any level of output that a firm produces,

None of the above is necessarily correct.

Which of the following always increases as output increases?

Total cost.

A firm's isocost line identifies the

input combinations that can be purchased for a given cost.

Suppose copper mines face increasing returns to scale. If a given copper mine increases its use of each input by 25%, what is the expected effect on copper output?

Output increases by more than 25 percent

A firm's production function depends on a given

technology.

The short run is

a time period in which some inputs are fixed.

The cross-price elasticity between a pair of complementary goods will be

negative.

When a firm's isocost line is just tangent to a production isoquant, we know that

output is being produced at minimum cost.

An individual with a constant marginal utility of income is

risk neutral.

A firm that produces a positive amount of output will maximize its profit by choosing the level of output where

Marginal revenue equals marginal cost.

A perfectly competitive firm's profit maximizing condition can be written as

P = MC

The change in the price of one good has no effect on the quantity demanded of another good. These goods are: -complements. -substitutes. -both inferior. -both Giffen goods.

none of the above.

A consumer has $100 per day to spend on good X, which has a unit price of $7, and good Y, which has a unit price of $15. What is the slope of the budget line if good X is on the horizontal axis and good Y is on the vertical axis?

-7/15

A newly-certified medical doctor who accepts a job in private practice will earn $250,000 with probability 0.20 and $30,000 with probability 0.80. The doctor's expected utility from income is:

0.2∗U(250,000) + 0.8∗U(30,000)

According to the law of diminishing returns

the marginal product of an input will eventually decline.

Marginal utility measures:

the additional satisfaction from consuming one more unit of a good.

From 1970 to 2010, the real price of a college education increased, and total enrollment increased. Which of the following could have caused this increase in price and enrollment?

A shift to the left in the supply curve for college education and a shift to the right in the demand curve for college education.

Which of the following situations is not possible? -Short-run average total cost and long-run average cost are both increasing for some output levels. -Short-run average total cost is increasing but long-run average cost is decreasing for some output levels. -Short-run average total cost is decreasing but long-run average cost is increasing for some output levels. -Short-run average total cost and long-run average cost are both decreasing for some output levels.

All of the above are possible.

A price ceiling establishes a maximum price for a market. Which of the following results from a binding price ceiling?

Excess demand

Ronny's Pizza Parlor operates in a perfectly competitive local pizza market. If the price of pepperoni increases, what is the expected impact on Ronny's profit-maximizing output decision?

Output decreases because the marginal cost curve shifts upward.

A consumer with "standard looking" indifference curves will maximize satisfaction at the point where her valuation of good X, measured as the amount of good Y she would willingly give up to obtain an additional unit of X, equals:

Px/Py

Oscar consumes only two goods, X and Y, for which he has "standard looking" indifference curves. Assume that Oscar is not at a corner solution when he chooses his optimal consumption bundle. Which of the following is NOT necessarily true?

Px/Py = money income.

Suppose a technological innovation causes a perfectly competitive firm's marginal cost curve to shift downward. Which of the following cost curves does not shift as a result of this innovation?

The average fixed cost curve.

Suppose Congress passes a law that states the price of gasoline may not exceed $6 per gallon (but may be lower). If the current price of gasoline is less than $6, what impact does this law have on the current price and quantity of gasoline in the US market?

The law currently has no impact, and the market clears at the equilibrium price.

Suppose a firm's short-run average total cost curve is U-shaped. What does this shape enable us to infer about the firm's returns to scale?

The short-run average total cost curve reveals nothing regarding returns to scale.

At the profit-maximizing level of output, which relationship between a firm's total revenue (TR) curve and total cost (TC) curve necessarily holds?

The two curves must have the same slope.

A risk-averse individual will always

take a sure $10 rather than a 10% chance at $100.

The price of good X is $0.50 per unit and the price of good Y is $1.00 per unit. If Fred has "standard looking" indifference curves and finds his optimal consumption bundle by purchasing both X and Y, then his marginal rate of substitution (X for Y) will be:

1/2 X for each Y.

What might happen in a perfectly competitive industry when economic profit is greater than zero? -Existing firms may get larger. -New firms may enter the industry. -Firms may move along their LRAC curves to new outputs. -There may be pressure on prices to fall.

All of the above may occur.

Which of the following would shift the market demand curve for new textbooks "out," or to the right?

An increase in the number of students attending college

If a firm is using the optimal, long run combination of labor and capital, -the slopes of the production isoquant and isocost curves are equal. -costs are minimized for the production of a given output. -the marginal rate of technical substitution equals the ratio of input prices.

all of the above

Suppose each consumer in Columbus experiences an increase in income, and each consumer views restaurant meals as a normal good. In the absence of other changes in the Columbus market, this will unambiguously lead to:

an increase in the market demand for restaurant meals.

If a consumer's income-consumption curve always has a positive slope, then we can conclude that for this consumer:

both goods are normal.

Suppose Roger spends his entire income on rice and beans, has "standard looking" indifference curves, and views rice as an inferior good. When the price of rice increases, the substitution effect causes Roger to ________ rice consumption, and the income effect causes him to ________ rice consumption.

decrease, increase

As long as the actual market price exceeds the equilibrium market price, there will be:

downward pressure on the market price.

Assume Carly spends her entire income on yogurt and granola, has "standard looking" indifference curves, and views yogurt as a normal good. If the price of yogurt rises, then Carly buys ________ yogurt on the substitution effect and ________ yogurt on the income effect.

less, less

In recent years, the world demand curve for copper shifted rightward due to continued economic growth in China and other emerging economies. Also, the costs of extracting the copper increased due to higher energy prices. As a result, we observed:

higher equilibrium copper prices and either higher or lower quantities.

When the price of wood (which is an input in the production of furniture) falls, the consumer surplus associated with the consumption of furniture

increases.

Consider a graph in which good Y is on the vertical axis and good X is on the horizontal axis. On this graph, the income-consumption curve has a positive slope for low incomes, then it takes a zero slope for a higher income, and then it takes a negative slope for even higher incomes (the curve looks like an arc, first rising and then falling as income increases). This curve illustrates that, for all income levels,

only X is normal.

The marginal rate of technical substitution is equal to the

ratio of the marginal products of the inputs.

The endpoints (horizontal and vertical intercepts) of the budget line:

represent the quantity of each good that could be purchased if all of the budget were allocated to that good.

The change in the quantity demanded of a good resulting from a change in relative price with the level of utility held constant is called the ________ effect.

substituition

The battery packs used in electric and hybrid automobiles are important components for manufacturing these cars. As the price of these batteries decline, we expect that the:

supply curve for electric and hybrid autos will shift down (rightward).

Suppose a given firm uses labor (L) and capital (K) to produce output or total product (q). The marginal product of labor is

the addition to q due to the addition of L, holding constant the amount of K being used.

A perfectly competitive firm faces a situation where marginal revenue (MR) equals marginal cost (MC) at an output level where MC is above average variable cost (AVC) but below average total cost (ATC). In this situation,

the firm is earning negative profit, but will continue to produce in the short run.