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2 October 2015

ECON 101: INTRO TO MICROECONOMICS MIDTERM


ANSWER KEY
Time allowed: 90 minutes
Honor Code Statement for Exam: I, _________________, agree to neither give nor receive
any help on this exam from other students. I understand that use of a calculator on this exam is
an academic misconduct violation. I also understand that providing answers to questions on this
exam to other students is an academic misconduct violation as is taking or receiving answers to
questions on this exam from other students. It is important to me to be a person of integrity and
that means that ALL ANSWERS on this exam are my answers. Signed
__________________________________
Part I: Multiple Choice (2 points each, 60 points in total):
1. Marginalism is
a. the best alternative that we forego when making a decision.
b. the study of how societies choose to use scarce resources.
c. a market situation in which profit opportunities are eliminated almost instantaneously.
d. the process of analyzing the additional costs or benefits arising from a decision.
2. You have decided that you want to attend a renaissance fair as King Henry VIII. You estimate
that it will cost $80 to assemble your costume. After spending $80 on the costume, you
realize that the additional pieces you need will cost you $20 more. The marginal cost of
completing the costume
a. $20
b. $60
c. $80
d. $100
3. According to the law of ________, there is a positive relationship between price and
________.
a. supply; the change in supply.
b. supply; the quantity supplied
c. demand; quantity demanded
d. demand; change in demand
4. Attempts to bypass price rationing in the market
a. are costly.
b. are easily administered.
c. are efficient.
d. are an effective tool for aiding low-income households.

5. If the number of stores renting DVDs increases by 10%, which of the following would
occur?
a. The rental price of DVDs would increase and the price of plasma TVs and movie tickets
would decrease.
b. The rental price of DVDs and the price of movie tickets would decrease, but the
price of plasma TVs would increase.
c. The rental price of DVDs and the price of movie tickets would increase, but the price of
plasma TVs would decrease.
d. The rental price of DVDs would increase, but the price of plasma TVs and movie tickets
would be unaffected.
6. If the market for blue tooth headsets is unregulated and is presently characterized by excess
demand, you can accurately predict that price will
a. increase, the quantity demanded will fall, and the quantity supplied will rise.
b. increase, the quantity demanded will rise, and the quantity supplied will fall.
c. decrease, the quantity demanded will rise, and the quantity supplied will fall.
d. decrease, the quantity demanded will fall, and the quantity supplied will rise.
7. A shortage will occur if a ________ is set ________ the equilibrium price.
a. price floor; below
b. price floor; above
c. price ceiling; above
d. price ceiling; below
8.

,
Assume that initially there is free trade. Tax revenue of $ 50 million per day will be
generated if the United States imposes a ________ tax per barrel on imported oil.
a. $25
b. $50
c. $100
d. $150
9. Demand determines price entirely when
a. demand is downward sloping.

b. demand is perfectly inelastic.


c. supply is perfectly inelastic.
d. supply is perfectly elastic.
10. The determinants of elasticity include
a. availability of substitutes.
b. price relative to income.
c. time.
d. all of the above.
11. As you move up an indifference curve, the absolute value of the MRS
a. increases.
b. decreases.
c. remains constant.
d. initially increases and then decreases
12. We derive the demand curve for X from indifference curves and a budget constraint by
changing the
a. level of income.
b. price of X.
c. price of Y.
d. consumers preferences.
13. When a firm maximizes total product in the short run, marginal product
a. and average product are zero.
b. is positive but average product is zero.
c. is zero but average product is positive.
d. and average product are positive.
14. Both Kate and Kyle own saltwater taffy factories. Kate's factory has low fixed costs and high
variable costs. Kyle's factory has high fixed costs and low variable costs. Currently, each
factory is producing 1,000 boxes of taffy at the same total cost. Complete the following
statement with the correct answer. If each produces
a. less, their costs will be equal.
b. more, their costs will be equal.
c. more, the costs of Kate's factory will exceed those of Kyle's factory.
d. less, the costs of Kate's factory will exceed those of Kyle's factory.

15. We can derive a firm's total cost curve from its isoquant and isocost curves by varying
a. the prices of capital and labor and keeping total expenditure constant.
b. the production technologies, but keeping input prices and total expenditures constant.
c. total expenditures while keeping input prices and the production technology
constant.

d. the price of either capital or labor while keeping total expenditures and the production
technology constant.
16. Assume Dell Computer Company operates in a perfectly competitive market producing 5,000
computers per day. At this output level, marginal cost exceeds this firms price. Assuming
price exceeds average variable cost, to maximize profits Dell should
a. make no adjustments as they are already maximizing their profits.
b. increase their output.
c. decrease their output.
d. stop producing since it is earning a loss.
17. Ning has 16 working hours per day. She can produce one loaf of bread using 2 hours and
produce one gallon of milk using 4 hours. What is the opportunity cost of 1 loaf of bread in
terms of gallons of milk?
a. 8 gallons of milk.
b. 0.5 gallons of milk.
c. 2 gallons of milk.
d. 4 gallons of milk.
e. 0.4 gallons of milk.
18. Suppose the demand for fried chicken is given by Q = 1900 - 45P. The point price elasticity
at P = 20 is
a. 2
b. -0.5
c. 0.5
d. 0.9 The answer should be -0.9. Everyone will get full points from this question.
19. Suppose the demand curve for Zurcher's buses is linear. If Zurcher is charging a price that
maximizes revenue, the point price elasticity of demand
a. Strictly greater than one.
b. Equal to one.
c. Strictly smaller than 1.
d. Indeterminate.

The next three questions are based on the following information:


Let the demand for bread be described by P=10-QD
Let the supply of bread be described by P=2+QS
20. Find the market equilibrium
a. Price=$3, Quantity=5.
b. Price=$4, Quantity=6.

c. Price=$6, Quantity=8.
d. Price=$6, Quantity=4.
e. Price=$4, Quantity=2.
21. If the government sets a price ceiling of $3 in the bread market. Is there a surplus or a
shortage in the bread market after the imposition of the price ceiling? How much?
a. Surplus, 2 units of bread.
b. Surplus, 6 units of bread.
c. Shortage, 6 units of bread.
d. Shortage, 2 units of bread.
e. Neither surplus nor shortage, 0 units of bread.
22. What would the price ceiling level have to be for the quantity supplied of bread to be equal to
3 units?
a. $5
b. $3
c. $4
d. $2
e. $6
23. At maximum efficiency, Mikeville is capable of producing 500 erasers and 7,500 pencils, or
0 pencils and 1000 erasers. What is the equation for Mikevilles PPF?
a. P = 10,000 10E
b. P = 10,000 15E
c. P = 15,000 10E
d. P = 15,000 15E
24. Let a firms TC = q2 + 16. The firms MC = 2q. The market demand is Pd = 55 - Qd. What is
the break-even price for this firm?
a. P=$4
b. P=$8
c. P=$32
d. P=$51

Use the following diagram to answer next three questions:

P
15
a

10

c
d
g

100

130

160

25. If the government imposes an excise tax of $10 per unit in the above market, what is the
price paid by consumers (P) and the price received by sellers (Pnet)?
a. P = $10, Pnet = $10
b. P = $15, Pnet = $5
c. P = $15, Pnet = $10
d. P = $10, Pnet = $0
26. Total tax revenue for the government after the $10 excise tax is imposed is equal to
a. area (A+B+C+D+E+F+G)
b. area (B+C+D+F+G)
c. area (A+E)
d. area (B+F)
27. What is the change in consumer surplus after the $10 excise tax is imposed?
a. Decreases by area (A+B)
b. Decreases by area (A)
c. Decreases by area (B)
d. Decreases by area (F)
e. Decreases by area (B+F)
28. The total cost function for a firm is given by: TC = 7q2 + 5q + 7. What is the average variable
cost (AVC)?
a. AVC=14q+5
b. AVC=7q2+5q
c. AVC=7/q
d. AVC=7q+5
The next two questions are based on the following information:
On the planet of Mars, the demand and supply equations for paper are:
Pd = 1000 2Qd and Ps = 100 +Qs

29. Suppose the governor of Mars wants to implement an excise tax that reduces the equilibrium
quantity to 200. What is the excise tax required?
a. $100 per unit of paper
b. $200 per unit of paper
c. $300 per unit of paper
d. $600 per unit of paper
30. Suppose the government implements the excise tax described earlier in this set of questions.
Given this tax, which curve is the more elastic curve and who pays more of the tax?
a. The supply curve is more elastic at the equilbrium. Consumers pay more of the tax.
b. The demand curve is more elastic at the equilbrium. Suppliers pay more of the tax.
c. The supply curve is more elastic at the equilbrium. Suppliers pay more of the tax.
d. The demand curve is more elastic at the equilbrium. Consumers pay more of the tax.

Part II: Numerical Questions (40 points in total):


IMPORTANT: Explain your answers carefully. You get no credit for unsupported assertions or
guesses. Write as if you are trying to convince an intelligent person who does not already know
the answers. If your answers would not convince such a person, it will be assumed that you do
not really understand the material

Question 1 (10 points):


Use the following graph depicting the market for widgets for this set of questions. Assume that
all demand and supply curves are linear.

a.

(2 point) Given the above graph, the initial equilibrium price is __50___ and the initial
equilibrium quantity is __100___.

b. (3 point) Given the above graph, calculate the value of consumer surplus initially and the
value of producer surplus initially.
Consumer Surplus = CS= (100-50)*100/2=2,500.
Producer Surplus = PS = 50*100/2=2,500.
Now suppose there is a technological improvement in the production of widgets that shifts
the supply curve from the initial supply curve to the new supply curve. Assume the new
supply curve is parallel to the initial one.
c. (2 points) Given the above graph, the new equilibrium price is _40_ and the new
equilibrium quantity is __120___. using slope of the demand curve.
d. (3 points) Given the above graph, what is the change in numeric value of consumer surplus
after the technological breakthrough? What is the change in the numeric value of producer
surplus after the technological breakthrough?
CS' = (1/2)($100 per unit - $40 per unit)(120 units) = $3,600. Consumer Surplus increases by
1,100.
The slope of the new supply curve should be equal to the slope of the initial supply curve, 0.5.
Using the slope and the equilibrium point, we can find the x-intercept of the new supply curve. It
should be given by 40. Then PS' = ($40 per unit)(40 units) + (1/2)($40 per unit - $0 per unit)(120
units - 40 units) = $1600 + $1600 = $3200. Producer Surplus increases by $700.
Question2 (10 points):
The market for bananas in a small, closed economy can be described by the following domestic
demand and domestic supply curves where P is the price per unit of bananas in dollars and Q is

the quantity of bananas in thousands: Domestic Demand: P = 200 - 10Q Domestic Supply: P =
20 + 20Q .
a. (2 Points) Below what price will this country import bananas if it opens its banana market to
trade with the rest of the world?
Computing the domestic equilibrium: 200 10Q = 20 + 20Q gives Q = 6, so P = $140 Hence at
prices below $140 this economy will import bananas.

b. (2 Points) In the world market for bananas the price is $40 per unit of bananas. Once this
economy opens the banana market to trade how many units will be imported or exported?
Give a number and indicate if the economy is importing or exporting. Hint: Provide units of
measurement in your answer-and be thoughtful here.

Since 40 < 140, the economy will import bananas when it opens this market to trade. To calculate
imports first calculate the quantity demanded domestically and the quantity supplied
domestically: the difference is the quantity of imports. Substituting P = 40 into domestic demand
gives: 40 = 200 10Q 10Q = 160 QD = 16 Substituting P = 40 into supply gives: 40 = 20 + 20Q
QS=1. Hence 15,000 bananas will be imported.

c. (3 Points) Suppose the government of this small economy opens the market for bananas to
trade but imposes an import quota of 9,000 bananas. What price will bananas sell for in this
small economy after the quota has been imposed?
QD - QS =9 implies that 20 P/10 (P/20 1) = 9. Therefore, (3/20)P = 12, so P = 80.

d. (3 Points) Imposition of an import quota in an open market results in deadweight loss.


Calculate the value of deadweight loss due to having less efficient domestic producers
produce more bananas once this import quota is imposed. Hint: Show your work-be careful
to get the right "scale" of units in your final answer.
Domestic producers would produce only 1,000 bananas at the world price, whereas with the
quota they produce QS = 80/20 1 = 3 = 3,000 bananas (since Q is in thousands). Hence the
deadweight loss is (1/2)*(80-40)*(3-1)*1000 = (1/2)*40*2*1000 = $40,000
Question3 (20 points):

Suppose Alice has preferences for xylophones (x) and yachts (y) with utility given by the
following equation where U is Alice's level of utility measured in utils, x is number of

xylophones and y is number of yachts: U = x3y. With this utility, Alice has the following
marginal utilities: MUx = 3x2y MUy = x3.
a. (3 Points) Suppose the price of a xylophone is $1,000, and the price of a yacht is $5,000.
Alice currently has an income of $100,000. What is Alices optimal consumption bundle?
The budget constraint is given by x+5y=100. MRS= -MUx/ MUy=-3y/x. Optimal bundle is
given by MRS=-px/py. Therefore, 3y/x=1/5, so x=15y.
Plugging this into the budget constraint, we get 15y+5y=100. Therefore, y=5 and x=75.
b. (3 Points) Assume that the price of a yacht increases to $6,666.66 (or $20,000/3). What is
Alices optimal consumption bundle?
The budget constraint is given by x+(20/3)y=100. The optimality condition, MRS=-px/py, is
given by 3y/x=1/(20/3), so x=20y.
Plugging this into the budget constraint, we get 20y+(20/3)y=100, so (80/3)y=100; therefore,
y=300/80=, or y=75/20=3.75. Therefore, x=75.
c. (4 Points) Discuss the resulting income and substitution effects with this price change on
the consumption of xylophones and yachts? Do not use any numbers.
Price of y increases, so our real income decreases. Therefore, income effect says consume less x
and less y. Since y becomes relatively more expensive compared to the past, we would like to
substitute our y consumption with x. Therefore, substitution effect says consume more x and less
y. Overall, our y consumption will decrease and x consumption will depend on income and
substitution effects. In this example, our x consumption stays the same, which implies that
income and substitution effects offset each other and none of them dominates.
d. (10 Points) Find the numerical values of income effect and substitution effects for
xylophones and yachts. (Note: You can use fractions. Your answer might include the four
arithmetical operations of fractions, for example 2/5-3/7*5/19 is an acceptable answer.)
In order to find intermediary point, we need to find a budget line parallel to the new one and
tangent to the old indifference curve. This means that we are looking for an optimal decision
with new prices at the old indifference curve. The old utility is given by 753*5. With the new
prices x=20y. Therefore, (20y)3*y should be equal to 753*5 in the intermediary point. Therefore,
203y4=753*5. Therefore, y4=(75/20)3*5, so y4=(3.75)3*5. Therefore, y should be around 4. X
should be around 20*4=80. (75,5) to (80,4) gives the substitution effect. (80,4) to (75,3.75) gives
the income effect.