Economics 2610, Principles I,               Sample Exam #1, Spring 2004              Dr. Usip
                                                             Name ________________________________
 

Part I: True/False.
Put an "X" directly on the "T" if the statement is true, and an "X" on the "F" if it is false.

• Economics is the study of how to best satisfy consumer's unlimited wants with limited resources.
• A straight line production possibilities frontier represents a case where opportunity costs are the same at all levels of output.
• A decrease in the unemployment rate will move the economy from one point on the production possibilities frontier to another point on the frontier.
• Adam Smith believed that production needed to be regulated by the government to prevent the economy from degenerating into a state of chaos.
• If the price is below the equilibrium price, there will be a surplus.
• Price floors tend to cause shortages.
• An increase in the number of firms in market will shift the supply curve to the right.
• If A and B are complements, an increase in the price of B will cause the demand for A to fall.
• Marginal utility always rises with each successive unit of a good.
• It is possible to construct a cardinal measure of utility.
• It is possible to compare the levels of utility of two different people.
• If MU_A/P_A < MU_B/P_B then the consumer should buy more A to maximize her utility.
• If demand is perfectly inelastic the quantity purchased is completely insensitive to price.
• If the income elasticity of a good is negative, the good is a normal good.
• If the cross-price elasticity of two goods are positive, the goods are complements.
• If the price of a good rises, and both prices are in the elastic portion of the demand curve, total revenue will fall.
• Efficiency in production implies the impossibility of increasing production of one good without reductions in output in other goods.
• Consumer's surplus is the difference between the cost of producing a good and what consumers had to pay for it.
• A firm in a competitive market should shut down in the short run if price falls below the minimum of average variable cost.
• The supply curve of a firm is the ATC curve above the shutdown point.
• In the long run supply curves slope upward because of increases in input costs as the industry expands.
• One disadvantage of corporations is that the owners have unlimited liability.
• If long run average cost falls as the level of output increases, there are diseconomies of scale.
• A firm earning normal profits will have accounting profits equal to zero.
• Firms in a competitive market must sell their output at the price set by the market.

Part II:  Problems and Short Essays

1. (5 pts.) What is the definition of the term opportunity cost?
2. (6 pts.) Assume the economy can produce 50 million medical examinations if all resources are devoted to health care and 70 million units of corn if all resources are devoted to growing corn. In the space below, draw a production possibilities frontier, assuming increasing opportunity costs. Then identify a point on the graph illustrating a combination of examinations and corn that the economy
    cannot currently produce.

   

    

3. (4 pts.) Given the table below, find the opportunity costs of the second and third parking lots.

   Number of parking lots	Corn production	Opportunity cost of parking lot
   1	100	XXXX
   2	60
   3	30

4. (6 pts.) Given the following, find the equilibrium price and quantity:
   Q_D = 50 - 2P
   Q_S = P - 10
   At a price of $10 will there be a shortage or surplus?
    
5. (12 pts.) The graphs below when completed show the market for butter. Label each graph completely before showing how the graphs would change given the new assumptions and answer the following questions.
   a. The cost of grain rises, increasing the cost of feeding dairy cattle.

   

   a-i. Was there a change in demand or the quantity demanded?
   a-ii. Was there a change in supply or the quantity supplied?
   
   b. The cost of margarine falls

   

       b-i. Was there a change in demand or the quantity demanded?
       b-ii. Was there a change in supply or the quantity supplied?
   
   c. Researchers find that heavy consumption of butter is much more likely to lead to a heart attack than previously believed

   

    

      c-i. Was there a change in demand or the quantity demanded?
      c-ii. Was there a change in supply or the quantity supplied?
    

   6. (5 pts.) What is the "law of demand"?
   
   7. (4 pts.) What is the formula for the elasticity of demand?

   8. (3 pts.) Given the demand schedule shown below, what is the elasticity of demand?
       Price                                              Quantity
        4                                                       15
        6                                                         5

   9. (5 pts.) Define the term "marginal utility".

   10. (5 pts.) Explain the difference between the short run and the long run. Will the short run be the same time period for all
                     industries? Explain.
   11. (5 pts.) Define the term "income effect".
   
   12. (6 pts.) Explain the difference between implicit and explicit costs.
   
   13. (6 pts.) Fill in the missing values:

   L	TP(Q)	AP	MPL
   1	25
   2	46
   3	60
   4	68

   
   14. (7 pts.) On the space below, draw the ATC, AFC, AVC and MC curves for a typical firm. Assume that MPP was rising at all
         output levels below Q', and was decreasing at all output levels above Q'.
   15. (6 pts.) List the key characteristics of each of a perfectly competitive market.

    

    

    

   16.  (4 pts.) Complete the diagram below by drawing the demand, MC and ATC curves for a firm in a perfectly competitive
           market. Assume the firm is earning a normal profit

   

17. (5 pts.) If MR < MC, is the firm maximizing profit? Explain (your answer will be graded on your explanation).



18. (6 pts.) Assume the firms in a competitive market are earning losses. What will happen to the number of firms in the industry in the long run? Will the change in the number of firms make consumers better or worse off? Explain (your answer will be graded on your explanation).

 

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