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'''Instructions''': 30 minutes. Closed book. BE SURE TO READ THE QUESTION CAREFULLY. No points are deducted for wrong answers, SO ANSWER EVERY QUESTION. You can post your answers just as you posted homework at [[Economics Midterm Answers]] 1. Ketchup is a ________ for French fries; potato chips are a ___________ for French fries. (a) complement … substitute.<br>(b) substitute … complement.<br>(c) substitute … substitute.<br>(d) complement … complement.<br>(e) income effect … substitution effect. 2. Would the activity of prayer fall within the definition of “scarcity” in economics? (a) Yes, because not enough people pray.<br>(b) Yes, because it is priceless.<br>(c) Yes, because it is done effectively in groups as well as individually.<br>(d) No, because it does not cost any money and it is freely available to all (not counting public schools).<br>(e) No, because prayer is a “service” rather than a “good”. 3. One reason the demand curve is downward sloping (as price decreases, quantity demanded increases) is because (a) as the price of a good decreases, it becomes less attractive as a substitute for something else.<br>(b) as the price of a good decreases, it shifts from being a substitute to being a complement.<br>(c) as the price of a good decreases, it becomes more attractive as a substitute for something else.<br>(d) as the price of a good decreases, it becomes causes a loss in income.<br>(e) as the price of a good increases, it becomes a better substitute. 4. The New York Giants were on their own 20-yard line. Their quarterback went back to pass and did not notice that his wide receiver was wide open on the 50-yard-line behind all the defenders, running towards the End Zone. Instead of throwing to him, the quarterback threw a little screen pass to his running back, who was tackled at the line of scrimmage for no gain. What was the opportunity cost of the quarterback’s mistake? (a) Nothing, because there was no gain or loss on the play.<br>(b) A touchdown.<br>(c) A first down but nothing more than that.<br>(d) A lost down.<br>(e) He made the right decision and thus there is no opportunity cost. 5. On “iTunes” on the internet, when a visitor buys one song, iTunes lists other similar songs that the visitor might also like and want to buy. The software makes it very easy and convenient for the visitor to sample or hear portions of similar songs, which the visitor might enjoy immensely. This exam extra, free service by iTunes is an example of which of the following principles in economics? (a) The Invisible Hand: by trying to sell its other songs, iTunes provides an extra benefit to potential buyers.<br>(b) The Law of Diminishing Returns: visitors will be posted keeping buying and buying with no end.<br>(c) The Law of Demand.<br>(d) The Invisible Hand: by 6pm Thursdayusing the internet, Novthe “hand” seems invisible due to technology. <br>(e) Giffen goods do exist and are all around us. 6. “Goods and services” are used most often to define which of the following concepts? (a) utility<br>(b) transaction costs<br>(c) economics<br>(d) religion<br>(e) charity 7. A one-word description for transaction costs would be this: (a) wages<br>(b) marginality<br>(c) friction<br>(d) utility<br>(e) free 8. Once nice thing about the “long run” is that the owner can minimize: (a) his variable costs.<br>(b) all his costs, fixed and variable.<br>(c) his average variable costs only.<br>(d) his marginal costs only.<br>(e) his marginal product. 9. According to the Law of the Demand, when the price of a good increases, the demand: (a) decreases.<br>(b) remains constant.<br>(c) increases.<br>(d) increases, then decreases.<br>(e) decreases, then increases Use the following table to answer questions 10 through 13, where the total costs for a firm are listed alongside the number of units (output) level for each cost figure. {| class="wikitable"|-!Output!Total Costs|-|0|$1200|-|1|$1600|-|2|$1900|-|3|$2100|-|4|$2200|-|} 10. What are the fixed costs for this firm? (a) $0 <br>(b) $600<br>(c) $1200<br>(d) $1600<br>(e) $2200 11. What is the marginal cost for the 3rd unit? (a) $100<br>(b) $200<br>(c) $300<br>(d) $400<br>(e) $1200 12. What is the average total cost for 3 units? (a) $300<br>(b) $400<br>(c) $700<br>(d) $1900<br>(e) $2100 13. What is the average variable cost for 4 units? (a) $100<br>(b) $250<br>(c) $550<br>(d) $1100<br>(e) $2200 14. When price increases in the market, what usually happens to supply? (a) supply increases.<br>(b) supply decreases.<br>(c) supply remains the same.<br>(d) it depends on what the demand curve looks like.<br>(e) there is no way to answer this question without more information. 15. Suppose you hear that your classmate in this course has slightly decreased the price on the purple balloons that his party store sells. You know that he understands economics well and wants to increase his revenue. Given his decision, what can you conclude about purple balloons? (a) The Law of Demand does not apply to purple balloons.<br>(b) Purple balloons are price elastic.<br>(c) Purple balloons are an inferior good.<br>(d) Purple balloons are a normal good.<br>(e) Purple balloons are price inelastic. 16. In an unusual situation, if a firm’s total revenue were somehow maximized, then its marginal revenue must be: (a) Zero. <br>(b) Negative.<br>(c) Positive.<br>(d) Greater than its marginal cost.<br>(e) Less than its marginal cost. 17. The best example of the Law of Diminishing Marginal Utility would be: (a) “Once I saw that fantastic movie, I wanted even more to see it again!”<br>(b) “When the Giants won the Super Bowl, I became an even bigger fan!”<br>(c) “I love turkey dinners, but last Thanksgiving I became sick after my third serving!”<br>(d) “Wal-Mart: the bigger the store is, the more profitable it is!”<br>(e) “The lower its price is, the more that people want to buy it!” 18. Consider the following graph: [[Image:Consumer and Producer Surplus.png]] Suppose a price ceiling is set at $2. What is the surplus or shortage of goods in the market? (a) Surplus: 100 units.<br>(b) Shortage: 200 units.<br>(c) Shortage: 400 units.<br>(d) Shortage: 600 units.<br>(e) Shortage: 800 units. 19. Suppose your marginal utility values for eating turkey and stuffing on Thanksgiving Day is this: 10 points for the first serving of turkey; 5points for the second serving; and 1 point for the third serving. For the stuffing, 7 points for the first serving, 4 points for the second serving, and 2 points for the third serving. Your mom says you can have a maximum of 3 servings, with turkey and stuffing counting as separate servings. (E.g., one serving of turkey and one serving of stuffing counts as two separate servings). What do you eat, and how much utility do you obtain? (a) a total of 2 servings of turkey and 1 serving of stuffing, for 22 overall points of utility.<br>(b) a total of 1 serving of turkey and 2 servings of stuffing, for 23 overall points of utility.<br>(c) a total of 1 servings of turkey and 1 serving of stuffing, for 17 overall points of utility.<br>(d) a total of 2 servings of turkey and 1 serving of stuffing, for 26 overall points of utility.<br>(e) a total of 3 servings of turkey and 3 servings of stuffing, for 29 overall points of utility. 20. Which is an example of Gresham’s Law when extended to a social situation? (a) Your church minister negotiated a new contract for use of a baseball field.<br>(b) A few people in your youth group started swearing all the time and acting rudely, and since then discussions about the Bible have disappeared and some have left the group.<br>(c) Your minister told everyone to bring their own Bible to the Sunday services.<br>(d) Tighter airport security has led to more people driving to their destinations.<br>(e) Inflation increased when the dollar was placed on the gold standard. 21. What type of good does this indifference curve represent? [[File:IndifferenceCurve1.gif|550px]] (a) complement<br>(b) substitute<br>(c) inelastic<br>(d) elastic<br>(e) none of the above 22. An owner finds that whether he increases or decreases his price for a particular good, his revenue from that good remains the same. What is the price elasticity for the good? (a) It has unit elasticity<br>(b) It is elastic.<br>(c) It is inelastic.<br>(d) It has positive elasticity.<br>(e) It has negative elasticity. 23. Each of the following is an element of perfect competition EXCEPT: (a) Many buyers and sellers<br>(b) Goods that are perfect substitutes<br>(c) Goods that are perfect complements<br>(d) Perfect Mobility<br>(e) Perfect Knowledge 24. When a firm shuts down and goes out of business, jobs are lost and that makes the community poorer. What else is always lost from the reduction in output which also makes society poorer? (a) transaction costs.<br>(b) consumer surplus.<br>(c) the invisible hand.<br>(d) fixed cost.<br>(e) efficiency. 25. The current price of gasoline is about $2.50 per gallon. Suppose Congress passes and the President signs a new law establishing a price ceiling for gas at $1 per gallon. What happens to the Supply and Demand? (a) Supply goes up and Demand goes down, creating a surplus.<br>(b) Supply goes down and Demand goes up, creating a shortage.<br>(c) Supply remains constant and Demand goes up, creating a shortage.<br>(d) Supply goes down and Demand remains constant, creating a surplus.<br>(e) Nothing changes based on this information alone. 26. Suppose a firm has a marginal revenue that is greater than marginal cost. What does the firm do with its output? (a) it increases its output as much as it can.<br>(b) It increases its output until marginal revenue decreases to the point where it equals marginal cost.<br>(c) it is profitable and thus does not change its output.<br>(d) it decreases its output until marginal revenue equals marginal cost.<br>(e) it shuts down. 27. If a firm has “diseconomies of scale” (decreasing returns to scale), then its long-run average costs ___________ as output is greatly increased. (a) increase.<br>(b) decrease.<br>(c) remains constant.<br>(d) increase, then decrease.<br>(e) there is insufficient information to answer this question. 28. As owner of a firm, you want to produce the maximum output for the lowest possible cost. To reach this goal, which of the following should you do? (a) use the inputs having the lowest relative cost<br>(b) use the inputs having the greatest diminishing utility<br>(c) adjust inputs until the marginal product per cost of each input is equally high<br>(d) use the inputs having the least diminishing utility<br>(e) adjust inputs until the marginal product of each is equally high 29. Suppose good A has a positive cross-elasticity with respect to good B, and good C has a negative cross-elasticity for good D. What is the relationship between these goods? (a) A and B are substitutes, while C and D are complements.<br>(b) A and B are complements, while C and D are substitutes.<br>(c) A and C are substitutes, while B and D are complements.<br>(d) A, B, C and D are substitutes.<br>(e) A, B, C and D are complements. 30. Your firm is in a perfectly competitive market, which is at equilibrium in the long run. Which of the follow is true about your firm’s costs? (a) You cannot reduce your average total cost any more than you already have.<br>(b) total costs are at a minimum.<br>(c) marginal revenue equals average fixed costs.<br>(d) costs exceed revenue.<br>(e) marginal cost exceeds marginal revenue. 31. The reason that the Coase theorem applies when there are no transaction costs is because: (a) transaction costs are always expensive<br>(b) transaction costs are the same as taxes<br>(c) transaction costs are the total of what people pay when they buy something<br>(d) transaction costs interfere with the ability of people to arrange for the most efficient use of time and resources<br>(e) transaction costs help employ people, and thus are always a good thing 32. Suppose the cross-elasticity of demand for good A with respect to good B is -0.8 in the short run and -1.5 in the long run. Next suppose that the price for good B increases by 50%. How much does the demand for good A change? (a) In the short run, demand for good A increases by 40%; in the long run, demand for good A increases by 75%.<br>(b) In the short run, demand for good A decreases by 80%; in the long run, demand for good A decreases by 150%.<br>(c) In the short run, demand for good A decreases by 40%; in the long run, demand for good A decreases by 75%.<br>(d) In the short run, demand for good A decreases by 80%; in the long run, demand for good A increases by 150%.<br>(e) In the short run, demand for good A decreases by 60%; in the long run, demand for good A increases by 150%. 33. Demand for labor increases when which of the following happens? (a) Unemployment increases.<br>(b) The marginal product of that labor decreases.<br>(c) Demand for the product produced by that labor decreases.<br>(d) The product produced by that labor increases in price.<br>(e) The minimum wage is increased. 34. A firm should shut down in the short run when _______, and it should shut down in the long run when _________. (a) P>AVC and P>ATC. <br>(b) P>AVC and P<ATC.<br>(c) P<ATC and P<AVC.<br>(d) P<AVC and P<ATC.<br>(e) P=AVC and P=ATC. 35. What is the price elasticity of demand for a demand curve represented by P = 30/Q? (a) -1/3<br>(b) 1/3<br>(c) 1<br>(d) 3<br>(e) 30 '''Extra Credit''': In Luke 13:6-9, Jesus told this parable: “A man had a fig tree which had been planted in his vineyard; and he came looking for fruit on it and did not find any. And he said to the vineyard-keeper, ‘Behold, for three years I have come looking for fruit on this fig tree without finding any. Cut it down! Why does it even use up the ground?’ And he answered and said to him, ‘Let it alone, sir, for this year too, until I dig around it and put in fertilizer and if it bears fruit next year, fine; but if not, cut it down.’” Which principle of economics does their agreement to cut the tree down if it does not bear fruit soon illustrate? (a) Caveat emptor.<br>(b) The Law of Demand.<br>(c) Time is money.<br>(d) A bird in the hand is worth two in the bush.<br>(e) The Law of Diminishing Marginal Returns.
