Midterm I

Econ 4351, Sec 3 Intermediate Microeconomics

Fall 2014

Name:

Student #:

Directions:
You have 75 minutes to answer the following questions.
You should have nothing on your desk at this time except for the exam,
pencils, an eraser, a ruler, and a calculator.
For multiple choice questions, write your answer on the blank line on the
right side of each question.
For essay questions, please show your work (step by step) for every
question in order to get full credit.
Your handwriting should be legible.
You must stop writing and put down your pencil immediately when time is
up.

Exam 1
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. (2pt each)
1) Which of the following is NOT an example of ways in which microeconomic analysis can help
1) _______
Toyota Motor Corporation its in corporate decision making?
A) Determining how many automobiles to produce in order to maximize profits
B) Forecasting demand for new automobiles
C) Forecasting the effect of Toyota's hiring patterns on the U.S. unemployment rate
D) Forecasting the effect of an oil price increase on demand for hybrid autos
2) Which of the following would shift the demand curve for new textbooks to the right?
A) A fall in the price of equivalent used textbooks
B) A fall in the price of new textbooks.
C) A fall in the price of paper used in publishing texts
D) An increase in the number of students attending college

2) _______

3) Plastic and steel are substitutes in the production of body panels for certain automobiles. If the
price of plastic increases, with other things remaining the same, we would expect:
A) the demand curve for plastic to shift to the left.
B) the price of steel to fall.
C) the demand curve for steel to shift to the left.
D) the demand curve for steel to shift to the right.
E) nothing to happen to steel because it is only a substitute for plastic.

3) _______

4) Suppose the quantity of nursing services demanded exceeds the quantity of nursing services
supplied. The nursing wage rate will:
A) not change.
B) increase.
C) decrease.
D) none of the above

4) _______

5) Over the next few years, several newly constructed office blocks will become available at the
World Trade Center site. As well, economists expect the New York economy will continue to
exhibit modest growth. What is the expected outcome for the office space market in downtown
Manhattan?
A) Unambiguously higher rental rates, and equilibrium quantity could be higher or lower
B) Unambiguously higher equilibrium quantity, and equilibrium rental rates could be higher
or lower
C) Unambiguously higher equilibrium rental rates and quantity
D) Unambiguously lower equilibrium rental rates and quantity

5) _______

6) For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters
a recession next year and consumer income declines by 2.5%, what is the expected change in the
quantity of fruit juice demanded next year?
A) +2.75%
B) -2.75%
C) -27.5%
D) +27.5%

6) _______

7) The income elasticity of demand is the

A) percent change in quantity demanded resulting from a one percent increase in income.
B) absolute change in quantity demanded resulting from a one unit increase in income.
C) percent change in quantity demanded resulting from the absolute increase in income.
D) percent change in income resulting from a one percent increase in price.
E) percent change in income resulting from a one percent increase in quantity demanded.

7) _______

8) A consumer prefers market basket A to market basket B, and prefers market basket B to market
basket C. Therefore, A is preferred to C. The assumption that leads to this conclusion is:
A) transitivity.
B) diminishing MRS.
C) all goods are good.
D) assumption of rationality.
E) completeness.

8) _______

9) The slope of an indifference curve reveals:

A) the ratio of market prices.
B) that preferences are complete.
C) that preferences are transitive.
D) the marginal rate of substitution of one good for another good.
E) none of the above

9) _______

10) To simplify our consumption models, suppose U.S. consumers only purchase food and all other
goods where food is plotted along the horizontal axis of the indifference map. If the U.S.
Congress passes an economic stimulus package that pays $300 to each person, how does this
affect the budget line for each consumer?
A) Makes the budget line flatter
B) Parallel outward (rightward) shift
C) Makes the budget line steeper
D) Parallel inward (leftward) shift
E) none of the above

10) ______

11) Which of the following pairs of goods are substitutes?

A) Owner-occupied housing and rental housing
B) Baseball bats and baseballs
C) Hot dogs and mustard
D) Computer hardware and software
E) Gasoline and motor oil

11) ______

12) In a recent article, two economists estimated that the 37.5% increase in price that would result
from a 75 cent tax increase on cigarettes would lead to a decrease in smoking among college
students of 30%. What can you conclude about the demand for cigarettes among college
students?
A) It is perfectly inelastic.
B) It is price inelastic.
C) It is unit elastic.
D) It is price elastic.

12) ______

13) Suppose your utility function for income that takes the form U(I) =
, and you are considering
a self-employment opportunity that may pay $10,000 per year or $40,000 per year with equal
probabilities. What certain income would provide the same satisfaction as the expected utility
from the self-employed position?
A) $22,500
B) $27,500
C) $25,000
D) $15,000

13) ______

14) Which of the following statements is NOT true?

A) A surplus may be reduced by shifting both the supply and demand curves.
B) A surplus may be reduced by shifting the demand curve rightward.
C) A shortage may be reduced by shifting the supply rightward.
D) Unemployment in the US economy represents an excess demand for labor.

14) ______

15) The effect of the September 11 attacks on the World Trade Center on the market for office space
in downtown Manhattan was that both the equilibrium price and the equilibrium quantity fell.
What is the most likely explanation for this?
A) Supply shifted left, demand shifted right, and the magnitude of the supply shift was
greater.
B) Supply and demand both shifted left, and the magnitude of the demand shift was greater.
C) Supply and demand both shifted left, and the magnitude of the supply shift was greater.
D) Supply shifted left, demand shifted right, and the magnitude of the demand shift was
greater.

15) ______

16) The budget constraint for a consumer who only buys apples (A) and bananas (B) is P AA + PBB =

16) ______

I where consumer income is I, the price of apples is PA, and the price of bananas is PB. To plot
this budget constraint in a figure with apples on the horizontal axis, we should use a budget line
represented by the slope-intercept equation:
A) B = I/PB - (PA/PB)A
B) A = I/PA - (PB/PA)B
C) B = -I/PB + (PA/PB)A

D) A = -I/PA + (PB/PA)B

17) If Px = Py, then when the consumer maximizes utility,

A) MU(X) may equal MU(Y), but it is not necessarily so.
B) X and Y must be substitutes.
C) MU(X) must equal MU(Y).
D) X must equal Y.

17) ______

18) Which of the following is true regarding income along a price-consumption curve?
A) Income is constant.
B) Income is decreasing.
C) The level of income depends on the level of utility.
D) Income is increasing.

18) ______

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different
macroeconomic environments, which the individual cannot predict.
Outcome 1
Job Choice
Prob.
Work for HMO 0.95
Own practice
0.2
Research
0.1

Income
$100,000
$250,000
$500,000

Outcome 2
Prob.
Income
0.05
$60,000
0.8
$30,000
0.9
$50,000

19) Refer to Scenario 5.6. If the doctor is risk-averse, she would accept
A) $95,000 for sure rather than face option 1 and option 2 in research.
B) $275,000 for sure (the average of option 1 and option 2 in research), but not less, rather than
face the risk of those two options.
C) $50,000 for sure rather than take the risk of being a researcher.
D) $60,000 for sure (the minimum HMO outcome) rather than take the risk of being a
researcher.
E) the research position because it has the highest possible income.

19) ______

Consider the following information about job opportunities for new college graduates in Megalopolis:
Table 5.1
Major
Accounting
Economics
English
Poli Sci
Mathematics

Probability of Receiving
an Offer in One Year
.95
.90
.70
.60
1.00

Average Salary
Offer
$25,000
$30,000
$24,000
$18,000
$21,000

20) Refer to Table 5.1. Expected income for the first year is
A) highest in accounting.
B) highest in mathematics.
C) higher in English than in mathematics.
D) highest in economics.
E) higher in political science than in economics.

20) ______

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
21) The monthly supply of desktop personal computers is given by the equation Qs 15,000 43.75P . At a
price of $800, what is the price elasticity of supply? (3pt) Is the supply of desktop personal computers elastic,
inelastic, or unit elastic? (1pt)

22) The nominal price of a 1990 laptop was $3,500 and the CPI that year was 130.7. The nominal price of a laptop
in 2010 was $600 and the CPI that year was 218.1. What is the real price of a 2010 laptop in terms of 1990
dollars? (3pt) By what percent has the real price of laptops changed? (2pt)

23) Define an indifference curve. (3pt)

24) Sally consumes two goods, x and y . Her utility function is given by the expression ux, y 3xy 2 . The current
market price for x is $10, while the market price for y is $5. Sally's current income is $500. Put x on the
horizontal axis.
(a) Sketch a set of two indifference curves for Sally in her consumption of x and y . (4pt)

(b) Write the expression for Sally's budget constraint. (1pt) Graph the budget line and determine its slope.
(3pt)

(c) Determine the optimal combination of x and y which maximizes Sally's utility, given her budget
2
constraint. (Partial units for the quantities are possible.) (4pt) (Note: MU x 3 y and MU y 6 xy )

25) Connie's utility depends upon her income. Her utility function is u I

I . She has received a prize that

depends on the roll of a pair of dice. If she rolls a 3, 4, 6 or 8, she will receive $400. Otherwise she will receive
$100.
(a) What is the expected payoff from this prize? [Hint: The probability of rolling a 3 is 1/18, the probability
of rolling a 4 is 3/36, the probability of rolling a 6 is 5/36, and the probability of rolling an 8 is 5/36.] (4pt)

(b) What is the expected utility from this prize? (4pt)

(c) Connie is offered an alternate prize of $169 (no dice roll is required). Will she accept the alternate prize or
roll the dice? (4pt)

(d) What is the minimum payment that Connie will accept to forego the roll of the dice? (4pt)