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Examination No. 1
Intermediate Microeconomics
296-301-Lec002 S. Kim
Summer 2017 Directions: Open book. Time limit is two hours (120 minutes). You may not discuss
the problem with other people. Maximum point is 102.
PART I – Multiple Choice Questions (3 points per question)
1. Consider two points on a demand curve: at point A, price is $5 and quantity demanded
is 100 units, and at point B, price is $3 and quantity demanded is 150 units. What is the
price elasticity of demand between points A and B using the arc elasticity formula?
a.
b.
c.
d. 0.60
0.80
1.20
1.67 2. A rise in the quantity demanded of lemons can be attributed to
a. a lower price
b. a decrease in the price of limes.
c. a decline in the number of people drinking lemonade.
d. a leftward shift in the supply curve of lemons.
Answer: B
3. An increase in the quantity supplied
a. indicates a movement along the supply curve.
b. makes the supply curve flatter.
c. shifts the supply curve to the left.
d. shifts the supply curve to the right.
Answer: A
4. If the average price of an automobile increased from $7000 to $8000 from 1979 to
1980, then we know that
a. the absolute price of autos increased but we do not have enough information to
say what happened to relative prices.
b. the relative price of autos increased.
c. the money price of autos increased but the relative price fell.
d. the demand for autos increased.
Answer: A 1 5. An elasticity of 0.2 indicates that a 1 percent increase in price leads to a
a. 20 percent decrease in quantity demanded.
b. 0.2 percent increase in quantity demanded.
c. 2 percent decrease in quantity demanded.
d. 0.2 percent decrease in quantity demanded.
Answer: D
6. When the production possibility frontier (PPF) is a straight line
a. producing one more unit of one good will always require giving up the production
of exactly one unit of another good at all points on the PPF.
b. the opportunity cost per unit of output is constant over the entire PPF.
c. the opportunity cost per unit of output is increasing while moving down the PPF.
d. the opportunity cost per unit of output is decreasing while moving down the PPF.
7. If a Production Possibility Frontier is concave to the origin and is drawn with the
quantity of shoes on the x-axis and the quantity of T-shirts on the y-axis, a movement
downward and to the right along the PPF reflects a(n) ______ opportunity cost of shoes
and a(n) ______ opportunity cost of T-shirts.
a.
b.
c.
d. increasing; decreasing
increasing; increasing
decreasing; decreasing
decreasing; increasing 8. In deciding whether to demolish a restaurant and build a hotel on the site, the cost of
remodeling the interior of the restaurant
a. should be ignored if it has already been remodeled.
b. should be ignored whether or not the remodeling has taken place because it won't
be a restaurant any longer.
c. should not be ignored if it has already been remodeled.
d. None of the above.
9. Suppose food is on the horizontal axis and all other goods on the vertical axis. If your
budget allowance is $200, the market price of food is $5 and the market price of all other
goods is $20, if you are expending your total budget and the marginal rate of substitution
at your present consumption bundle is .1, to maximize utility you should
a.
b.
c.
d. consume more of both food and all other goods.
consume more food and less of all other goods.
consume less of both food and all other goods.
consume less food and more of all other goods. 2 10. Suppose you have two indifference curves, U1 and U2, that represent consumption of
two normal goods. If U1=10 and U2=20, what can be said about these two indifference
curves?
a. consuming a bundle on U1 is preferred two times more than consuming a bundle
on U2
b. consuming a bundle on U1 has a higher utility than consuming a bundle on U2
c. consuming a bundle on U2 is preferred two times more than consuming a bundle
on U1
d. consuming a bundle on U2 has a higher utility than consuming a bundle on U1
11. Consider a budget line drawn with apples on the vertical axis and oranges on the
horizontal axis. The consumer's income is $100, the price of apples is $5, and the price of
oranges is $10. Suppose the consumer's income falls to $75.00, but the prices of apples
and oranges remain unchanged. The change in income produces a
a.
b.
c.
d. parallel shift inward of the indifference curves.
new budget line which is steeper than the original one.
parallel shift inward of the budget line.
new budget line which is flatter than the original one. 12. Suppose that George is interested in only two goods, cigars and scotch. Employ the
indifference curve/budget line apparatus to show a case where a decrease in the price of
cigars leads to a decrease in George’s scotch consumption. Does this imply that scotch is
an inferior good in George’s case?
a.
b.
c.
d. In this case, scotch must be a Giffen good.
In this case, scotch must be an inferior good.
In this case, scotch could be a normal or inferior good.
In this case, scotch must be a normal good. 13. The income effect of a price change
a.
b.
c.
d. is always positive.
reinforces the substitution effect in the normal good case.
is always larger than the substitution effect in the inferior good case.
produces a backward-bending income-consumption curve. 14. In the Figure 4-1, the shock is a decrease in the price of yams.
a. Yams are a normal good and substitutes for xylophones. 3 b. Yams are a Giffen good and complements for xylophones.
c. Yams are an inferior good and substitutes for xylophones.
d. Yams are an inferior good and complements for xylophones. 14. In a two-year period, suppose Gloria has $10,000 in income in year 1 and $4,300 in
income in year 2. In order to maintain her optimal consumption of $8,000 in year 1 and
$6,500 in year 2, she can borrow or lend at a rate of 10 percent. If Gloria's income stream
changes such that she earns $3,000 in Year 1 and $12,000 in Year 2, the budget line will:
a. shift out away from the origin.
b. pivot about the endowment point.
c. pivot about the intercept on the axis representing year 2 income.
d. remain unchanged.
15. Consider Figure 5-6. The family shown faces the budget line A1BFZ. Health
insurance is measured in $100 units and other goods in $1 units. A health insurance plan
is introduced which would provide this family $15,000 worth of insurance for $4,000.
The new budget constraint the family will face is: 4 Other Goods Figure 5-6 $61,000 = A $50,000 = A1
$46,000 = A2 B A’ $35,000 = A3 F 0 H1 H2
Z
(40) (150) Z’ Health Insurance a. AA’Z’
b. AA1BA’Z’
c. A1BA’Z’
d. A1A2BA’Z’
16. Walter works for a large firm that produces software and has a capitalized value of
$10 billion. This firm pays its employees, in part, with the company’s stock,
compensating Walter an additional thirty percent of his $50,000 annual salary worth of
the company’s stock. Which of the following is true?
a. This compensation scheme reduces the level of risk in his portfolio since he is
employed at the same company.
b. This compensation scheme provides Walter a good means of minimizing financial risk
since he can hold stock in his company rather than money in the bank.
c. To reduce his exposure to risk Walter should purchase more stock in his company if he
believes more people will buy computers in the future.
d. To minimize risk Walter should sell the stock in his company and buy other assets to
diversify his financial holdings.
PART II – Short essay questions (8 points for each question)
1. The City of Tokyo is known for the city of vending machines. Explain why Tokyo
has so many vending machines compared to other retail mechanism, such as corner
convenience store or newsstand. 5 2. In determining the demand curve, we hold “other things
constant.” Explain what we mean by that, and why the assumption
is important in the law of demand.
3. If Sam has a preference of Golden Rule (i.e. love your neighbor, Oscar, as
yourself), what would Sam’s indifference curve would look like in the space in
which Sam’s income in in vertical axis and Oscar’s income is in horizontal axis.
PART III – Calculation questions
1. (12 points) Imelda spends her entire income on shoes and hats.
Draw the budget line for each of the following situations,
identifying the intercepts and the slope in each case.
a. Monthly income is $1,000, the price of a pair of shoes is $8,
and the price of a hat is $10.
b. Same conditions as in part (a), except that income is $500.
c. Same conditions as in part (a), except that income is
$2,000 and the price of a pair of shoes is $16.
d. Same conditions as in part (a), except that hats cost $5
each.
2. (18 points) Consider a market for milk. Its demand curve is P = 10 – Qd, where P
is price and Qd is quantity demanded. The supply curve is P = 2Qs, where Qs is the
quantity supplied.
a.
What is the equilibrium price and equilibrium quantity?
b.
What is the price elasticity of demand at the equilibrium?
c.
How much is the consumer surplus and producer surplus? Indicate the
areas of consumer surplus and producer surplus and calculate the value.
d.
Suppose the government imposes a $1 tax on milk, what would be the new
equilibrium price and new equilibrium quality?
e.
What is the new consumer surplus and producer surplus after the tax?
f.
Who pays for the tax? And how much? 6
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