Mid-Term Examination
(5 points each)
1) Which of the following best reflects the concept of marginal analysis as used
by the economist?
a. The effect on your consumption pattern when you receive a ten
percent increase in your income
b. The satisfaction that you receive when you consume an additional unit
of a good
c. The revenue received by a seller when one more unit of the seller’s
output is sold
d. The cost incurred by a firm when an additional unit of output is
produced
e. All of the above are marginal concepts
2) When an economist describes the marginal satisfaction received from the
consumption of an extra unit of a good, he or she is describing
a. The overall satisfaction that the consumer receives when the good is
consumed
b. The level of satisfaction where the consumer will be neither better nor
worse off if an extra unit of the good is consumed
c. The change in total satisfaction brought about by the consumption of
the extra unit of the good
d. The change in the extra satisfaction received when an additional unit
of the good is consumed
e. None of the above is correct
3) The macroeconomist will most likely be interested in all of the following
except
a. The quantity of money in circulation in the economy
b. The relative price ratio between two goods, say bread and coffee
c. The rate of change in the general price level in the economy over a
particular period of time
d. Policies that are designed to alter the overall level of output and
income within the economy
e. All of the above would interest the macroeconomist
4) Which one of the following statement is correct
a. All economies are mixed economies, to one degree or another
b. The United States is a mixed economy
c. A mixed economy incorporates some elements of government control
or planning
d. The former Soviet Union relied almost exclusively on government to
make economic decisions
e. All of the above are correct
5) When making a choice at the margin, you should consider
a. All alternative choices and outcomes
b. The effect that the choice you make will have on your neighbors
c. Only those things that will be changed by the choice
d. Only the average outcome of the choice
e. A and B are correct
6) If, in your decision-making process, you consider only those things that would
be affected by a particular action, then you are
a. Making a choice at the margin
b. Making a normative economic judgment
c. Undertaking positive economic analysis
d. Engaged in microeconomics but not macroeconomics
e. None of the above is correct
7) Generally speaking, when an economic model achieves or demonstrates an
equilibrium:
a. Will not change if the model’s behavioral assumptions are changed
b. Will not change if the assumptions of the model are altered
c. Determines the values that have been hypothesized, given the
assumptions of the model
d. Once attained will not change, regardless of any change in the
economy; otherwise, it would not be an equilibrium
e. None of the above is correct
8) If _________ of advertising at the number of TV spots currently being
purchased by a firm, the firm should ___________________ the number of TV
spots it purchases
a. MB>MC; decrease
b. MB>MC; increase
c. MC>MB;increase
d. MB=MC; decrease
e. None of the above is correct
9) Suppose that the XYZ Chemical Company introduces a new fertilizer that
increases the yield per acre of green beans. If everything else remains
constant, we would expect to see
a. A reduction in the supply of green beans
b. An increase in the consumption of green beans
c. Producers allocating less of their land for the production of green beans
and more for the production of corn
d. A shortage of green beans occurring in the market, so the market price
will rise
e. None of the above is correct
10) Suppose that you observe a graph of the demand and supply curves
for widgets. You are a little confused, though because the supply curve
intersects the vertical (price) axis above the point where the demand curve
intersects the axis. In fact, every point on the supply curve is above every
point on the demand curve. Such a situation would suggest that
a. Widgets are overpriced, and there will be a shortage on the market
b. Widgets are overpriced, and the quantity demanded will be zero
c. The good is underpriced, and there will be a surplus on the market
d. The good is underpriced, and there will be a shortage on the market
e. These are the demand and supply curves when widgets are a free good
11) Suppose that you observe the supply and demand curves for a
particular commodity, and you are puzzled because the supply curve
intersects the horizontal axis (quantity axis) to the right of every point where
the demand curve intersects the axis. In fact, every point on the supply curve
is to the right of every point on the demand curve. This observation might
suggest to you that
a. The good is a free good
b. The good is overprices, and there will be a shortage on the market
c. The good is underpriced and there will be a shortage on the market
d. The good is scarce, so some individuals will not be able to consume all
they want of the good
e. There is not enough information provided to determine a correct
answer
12) In 1994, the U.S. imports of automotive products exceeded the
exports. If these imports had been excluded from the U.S. market:
a. U.S. production of automobiles would have expanded, automobile
prices would have been unchanged, and the U.S. jobs would have been
saved
b. Prices of automobiles in the U.S. would have increased substantially
c. Prices of automobiles in the U.S. would have decreased substantially
d. There would have been no impact on production, employment, or
prices in the U.S. automobile market
e. None of the above is correct
13) The increased flow of cocaine to American cities and its falling price is
consistent with which of the following explanations
a. The demand for cocaine is increasing by a larger amount than the
increase in supply of cocaine
b. The demand for cocaine is increasing by a smaller amount than the
increase in supply of cocaine
c. The demand for cocaine is decreasing by a large amount than the
decrease in the supply of cocaine
d. The demand for cocaine is decreasing by a smaller amount than the
increase in the supply of cocaine
e. B and D are correct
14) If price is ____________ the equilibrium price, a(n) ________________ in
price will take place with a resulting _______________ in quantity demanded
and __________in quantity supplied
a. Below; decreases; increase; decrease
b. Above; decreases; decrease; increase
c. Below; increases; decrease; increase
d. Above; increases; increase; decrease
e. None of the above are correct
15) Suppose that you are considering the purchase of two goods, X and Y.
You may consume 7 units of X and 5 units of Y. The prices of both X and Y are
$1 per unit, and you only have $15 to spend. The total utility generated from
consuming 7 units of X is 70 and the total utility generated from consuming 5
units of Y is 50. Given this information, and assuming that you want to
maximize your total utility, you should
a. Buy all X and no Y
b. Buy all y and no X
c. Buy less X and more Y
d. Buy less Y and more X
e. There is not enough information provided to make a decision
16) Suppose that your marginal rate of substitution of Coca-Cola for Pepsi-
Cola is constant and qual to 1. If the price of Coca-Cola is $0.50 per unit while
the price of Pepsi-Cola is $0.64 per unit, utility maximizing behavior on your
part would be to
a. Divide your weekly expenditures on soft drinks between Coke and
Pepsi, but always consumer at least one more bottle of Coke than Pepsi
b. Reach a corner solution on your indifference map and purchase no
Pepsi; all your soft drink expenditures are allocated to Coca Cola
c. Reach a corner solution on your indifference map and purchase no
Coke; all of your soft drink expenditures are allocated to Pepsi Cola
d. Divide your weekly expenditures on soft drinks between Coke and
Pepsi, but always consume at least one more bottle of Pepsi than Coke
e. Not enough information is provided to reach a conclusion
17) If an indifference map for goods X and Y (X is plotted on the horizontal
axis and Y is plotted on the vertical) plots as a vertical line with a positive
intercept, this suggests that
a. The consumer has a definite marginal rate of substitution between
goods X and Y
b. The consumer can achieve higher levels of satisfaction by consuming
more of X even if no Y is consumed
c. If the consumer gives up some X, then he or she is worse off no matter
how much Y he consumes
d. Given income and prices, a budget line will generate a corner solution
in which only X is consumed
e. All of the above are correct
18) If you observe a positively sloped income-consumption curve for goods
X and Y, when the prices are constant, then
a. Both X and Y are inferior goods
b. The Engel curve for one of the goods will be horizontal
c. At least one of the goods must be normal
d. The substitution effect between X and Y is positive
e. None of the above is correct
19) If the income consumption curve for two goods, X and Y, bends back
on itself and takes a negative slope, then
a. Both of the goods must be inferior
b. The income effect for both goods is zero
c. There is no substitution effect when the price of either X or Y changes
d. The Engel curve for both of the goods will be horizontal
e. At least one of the goods must be inferior
20) If the Engel curve for good X is positively sloped but is increasing at a
decreasing rate, then the good most likely
a. Is an inferior good
b. Will exhibit a relatively small substitution effect when its price changes
c. Is a luxury good
d. Can be classified as a necessity because some amount will always be
bought regardless of the income level
e. None of the above is correct
21) Suppose that the indifference curves between goods X and Y are
vertically parallel to each other. We can conclude that
a. Either X or Y is an inferior good
b. Either x or Y will be a Giffen good
c. There will be no income effect when the price of one of the goods
changes
d. Both goods are inferior
e. There will be no substitution effect when the price of one of the goods
changes
22) Suppose you are the Director of the Metropolitan Atlanta Rapid Transit
Authority and want to increase your revenues. When a study indicates that
the price elasticity of demand for public transportation is -.73, in order to
raise revenues, other things constant, you should
a. Raise the transit fares even though the number of riders will fall
b. Raise the transit fares because ridership will not change
c. Reduce your fares because the number of riders will increase and so
will your revenue
d. Leave your fares unchanged since people using public transportation
are obviously not responsive to price
e. Buy new buses and subway trains because the number models are
appealing to riders
23) Some goods have close substitutions, others do not. Think about the
ease or difficulty of substituting one good for another. After looking at the
product classes below, select the most likely ranking of the products from
highest to lowest price elasticity of demand
a. Magnavox television sets, television sets, stereo television sets, color
television sets
b. Color television sets, television sets, stereo television sets, Magnavox
television sets
c. Magnavox television sets, stereo television sets, color television sets,
television sets
d. Stereo television sets, television sets, Magnavox television sets, color
television sets
e. It is impossible to say anything about the relative elasticities without
knowing relative prices
24) If the cross elasticity of demand of margarine with respect to the price
of butter is 1.53%, then
a. A 1% decrease in the price of butter leads to a 1.53% increase in the
demand for margarine
b. A 1% increase in the price of butter leads to a 1.53% increase in the
demand for margarine
c. A 1% increase in the price of margarine leads to a 1.53% decrease in
the demand for margarine
d. A 1% decrease in the price of margarine leads to a 1.53% increase in
the demand for margarine
e. None of the above is correct
Essay
1) The graph shows a market (in the above chart) in equilibrium. How would this
market be affected if the government imposed a price floor of $3? Explain
2) How would this market (in the above chart) be affected if the government
imposed an excise tax of $2. Who would bear more of the tax, consumers or
producers? Explain
3) Derive the marginal utility curve and describe the relationship between total
and marginal utility
4) If the federal excise tax on gasoline was increased by $3.00 per gallon, but
consumers received an income tax rebate of $3.00 for every gallon of
gasoline they purchased, how would their consumption behavior be affected?
Explain
5) Why is water, which is essential for life, so cheap, while diamonds, which are
not essential, so expensive?
6) What difference will there be in the slopes of the Engel curves for food and
entertainment in a very poor country?
7) The court used cross elasticities in arriving at the decision, a number of years
ago, that DuPont had not monopolized the market for cellophane even
though it had 75% of the market. Explain
