Economics

101-500
Fall, 2015
First Midterm Examination
Form 1

READ ME

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DURING THE EXAM:

Please read each question carefully. Using the scantron form and pencil, fill in the letter that you
choose to be the best correct answer. Please keep your scantron form covered when you are not
writing on it. You may use the pages of the exam as scratch paper along with the scratch page I
have provided. If you have a question, raise your hand and I will do my best to get to you quickly
and answer your question (if I can).


WHEN YOU HAVE COMPLETED THE EXAM:

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Gather your belongings, hand me your scantron sheet, honor code form, and UM ID and
immediately leave the room. Please do not get up until you have your scantron form, honor code
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If you finish the exam less than five minutes before the deadline please remain seated until the
deadline.


The exam will be reviewed and you will see the answers during class discussion on Friday.
Scores will be posted on Canvas within one week.

Take your time, and good luck!

1) Leap produced luxury bus trips for San Francisco commuters. But they went bankrupt and
shut down, because their costs were so high. If Leaps ATC was $10 and its AVC was $3 when
it serviced 100,000 commuters, what was its fixed cost?

a) $1,000,000
b) $700,000
c) $300,000
d) $100,000
e) $0

2) Sherrie was making utility maximizing choices between Da Vinci Gelatto Cones and Lemon
Ginger Tea (two normal goods) given her budget constraint. Then the price of gelato cones
fell! Compared to her old consumption bundle, Sherries new optimal consumption bundle
contains ___________ and __________ if the substitution effect is stronger than the income effect.

a) more gelato cones, fewer cups of ginger tea
b) more gelato cones, more cups of lemon ginger tea
c) fewer gelato cones, fewer cups of lemon ginger tea
d) fewer gelato cones, more cups of lemon ginger tea
e) the same number of gelato cones, the same number of cups of ginger tea


3) Sidewalk hot dog vendors made sure to stock up for homecoming this past weekend,
including Doggies, a profit maximizing vendor in the competitive hot dog market in Ann
Arbor. If the equilibrium price is $2 per hot dog and Doggies revenue and cost curves are in
the graph below, what were Doggies profits?
Revenue,$
Cost

Variable Cost
Total Revenue

360
240
100
30

Fixed Cost
Quantity
120

a)
b)
c)
d)
e)

$140
$120
$110
$30
$0

180

4) You studied this weekend even though it was Homecoming and ate all your meals at a hot dog
stand on campus. A bag of chips was $1 and hot dogs were $2. The last bag of chips that you
consumed gave you 10 utils of marginal utility (MU) and your last hot dog gave you 12 utils of
MU. If there is diminishing MU in both goods, then, to maximize utility, you should have:

a)
b)
c)
d)
e)

Made no changes because you were maximizing utility.

increased consumption of chips and decreased consumption of hot dogs.
decreased consumption of chips and increased consumption of hot dogs.
increased consumption of both chips and hot dogs.
decreased consumption of both chips and hot dogs.

5) They only produce cars and sugar in Panama. If the PPF is in the graph below, which of the
following statements is true about production possibilities in Panama?

a)
b)
c)
d)
e)

Point D is not a feasible production point.

Point B is more efficient than point C.
Panama would prefer to produce at point B.
The opportunity cost of producing cars is higher from B to A than from C to B.
The opportunity cost of producing sugar is lower moving from B to C than from A to B.

Cars

(millions)

A


B


D


C

Sugar (millions of pounds)



6) Which of the following statements is true?

a) The budget constraint documents the different combinations of two goods that can be
purchased when the price of one of them changes.
b) A consumer maximizes utility when the indifference curve is above the budget constraint.
c) The slope of the budget constraint is determined by income.
d) If the price of a normal good rises, the substitution effect leads to more consumption of
that good.
e) If the price of a normal good falls, the income effect leads to more consumption of that
good.

CCTV

7) Said needs $1000 next year and there is a special interest rate of 10% per year for new
depositors at the credit union. What is the least he can put in the credit union today and still
meet his goal?

a) $100
b) $900
c) $909
d) $990
e) $1,000

8) Nate and Hill are engineers who like to tinker with technology. Nate (dashed PPF) and Hill
(solid PPF) each have the PPFs below for CCTV and Go Pro Cameras. If Nate and Hill
rationally decide to specialize and trade, which of the following is true?


50

45


40

35

30


25

20

15


10

5

0

0
4
8
12
16
20

Go Pro Cameras


a) Hill will assemble CCTV and Nate will make Go Pro cameras
b) Nate will assemble CCTV and Hill will make Go Pro cameras
c) Both Nate and Hill will both only assemble CCTV
d) Both Nate and Hill will both only make Go Pro cameras
e) Nate and Hill will each make Go Pro cameras and assemble CCTV

9) Linkbro is a profit maximizing firm in the competitive market for high-speed routers and has
a marginal cost of MC=10Q+100. If the equilibrium price is $300, how many routers (Q) will
Linkbro produce?

a) 12
b) 14
c) 20
d) 24
e) 30

10)You were busy maximizing your utility by finding the optimal bundle of snakes (apparently
the millennial generation loves snakes) and remote apps when suddenly the price of snakes
fell and the price of remote apps rose (see the graph below). As a result, your optimal bundle
is now bundle _____.

a) A
b) B
c) C
d) D
e) E

Snakes

6
C

4
A
B

Remote Apps

11)Last Saturday you considered your options. If you went to the UM game, youd lose study
time, which would lower your midterm grade by 10 points (10 points are worth $500 to you).
Going to the game would bring $300 of enjoyment. Besides, you already bought a ticket for
$100, which you dont have time to sell if you dont go to the game. Before you decide, a
friend says hell buy you lunch and a UM jersey if you meet him at the game (a value of $100).
What was the total economic cost of studying economics instead of going to the game?

a) $100
b) $200
c) $300
d) $400
e) $500

12)Gabriel can consume hot sauce or energy drinks. The table below shows his marginal utility
(MU) from consuming each good. The price of hot sauce is $3 and the price of an energy drink
is $2. If Gabriel has $16 to spend and is a utility maximizer, what will be his total utility from
consuming hot sauce and energy drinks?

Quantity
1
2
3
4
5
6
7
MU hot sauce
15 12
9
8
7
6
5
MU energy drinks 14 12
11
10
8
7
6

a) 57
b) 69
c) 70
d) 82
e) 104

13)Pizza is a competitive industry in Ann Arbor. Your friend has a pizza shop and tells you the
shops daily operating information below. Given its current operating information, what are
your friends profits? How should she change production in the short run to profit maximize?

Revenue = $1200
MC = $11
VC = $1,000
AFC = $1
Q = 100 pizzas

a) $100, dont change production
b) $200, dont change production
c) $200, increase production
d) $100, increase production
e) $100, decrease production

14)Last month Kelly always had tofu stir fry or a salad for during her work breaks. Her income is
higher this month (nothing else has changed) and she decides to spend more money on break
meals. If she consumes more tofu stir fry meals but fewer salads than last month, which of the
following must be true?

a) Tofu stir fry is a Giffen good
b) Salads are an inferior good
c) Tofu stir fry is an inferior good
d) Salads are a Giffen good
e) Salads and tofu stir fry are both normal goods

15)Which of the following is a positive statement (in an economic sense) about Educational
Management Corporation (EMC) a for-profit firm that runs 110 colleges in the United States?

a) EMC is ripping off college students with high tuition prices.
b) Investors in EMC should donate to traditional colleges instead.
c) EMC preys on poor students through its recruitment methods.
d) EMC should not have received $1.25 billion in federal money last year.
e) Mistakes in EMC balance sheets led to a federal overpayment of $140 million.

16)Alex utility maximizes and needs dress shirts and silk ties for his new job. The table below
shows different consumption bundles of these goods and the total utility he gets consuming
each bundle. If work shirts cost $45 and silk ties cost $90 and Alexs budget is $315, what is
the marginal utility of the last silk tie he purchases?

Consumption Bundles
Total Utility from the
Consumption Bundle
Bundle
Silk Ties
Work Shirts
1
0
2
210
2
1
3
500
3
1
4
580
4
1
5
650
5
2
3
680
6
2
4
760
7
2
5
830
8
3
1
650
9
3
2
750
10
3
3
840
11
3
4
920

a) 190
b) 180
c) 170
d) 160
e) 150

17)Which of the following statements is true?

a) If a demand curve is upward sloping, the good must be an inferior good.
b) The long run average total cost curve of a firm must slope down.
c) The slope of the utility curve is marginal cost.
d) If there is diminishing marginal utility then the total utility curve slopes down.
e) If the average total cost curve (ATC) is positively sloped then marginal cost is above ATC.

18)Spencer opened a pop-up restaurant in Ann Arbor last year. Spencer is a profit maximizer
with low, but positive, fixed costs. If Spencer earned zero profits in his first year, which of the
following statements must be true?

a) He must not be including opportunity cost in his calculations.
b) He must be producing where MC is less than ATC.
c) Price must be equal to AVC.
d) He must be producing a higher quantity than the quantity at the minimum of the AVC.
e) He must not be producing where P = MC.

19)Which of the following is true if Jason, John, and Marta all maximize utility, are the only three
people in the tattoo market, the price of a tattoo is $48, and their marginal willingness to pay
(MWTP) for each tattoo is documented in the table below?

a) Jason will buy more tattoos than John.
b) Nine tattoos will be purchased all of the demanders together.
c) John will buy more tattoos than Marta because his MWTP is higher.
d) Twelve tattoos will be purchased by all of the demanders together.
e) The total willingness to pay at the current price is $500.

Tattoos Jasons
Johns
Martas
MWTP ($) MWTP ($) MWTP ($)
1
85
100
55
2
70
80
52
3
45
50
49
4
30
20
48
5
10
5
47

20)You bought Twitter stock this summer but the stock price just keeps falling instead of going
up. You know the rational move is to sell the stock but instead, you keep it. This is an
example of _____.

a) Bounded rationality
b) Loss aversion
c) Risk aversion
d) Mental accounting
e) Satisficing

21)Ann Arbor has snow removal trucks to clear the streets during bad weather. The table below
shows the total benefit to the city if snow is removed. If it costs $50,000 each time to operate
the trucks, the city should clear snow as long as the snowfall is _______________?

Snow Fall (in inches)
Total Benefit of Snow Removal ($)
2
30,000
4
70,000
6
120,000
8
180,000
10
250,000

a) At least 10 inches
b) At least 8 inches
c) At least 6 inches
d) At least 4 inches
e) At least 2 inches

22)Said told his son that he would give him $5000 in a year if he got good grades in school. If
the interest rate is 5% per year, what is Saids potential gift worth to his son right now?

a) $5,250
b) $5,000
c) $4,995
d) $4,762
e) $0

23)Carmen took a bunch of clothes to Platos Closet last week. She was really disappointed
because her used clothes didnt bring as much money as she thought they were worth. This
could be an example of which problem?

a) The framing effect
b) The sunk cost fallacy
c) The endowment effect
d) Loss aversion
e) Hyperbolic discounting
24)Anton always profit maximizes in his wireless router company in the competitive router
market. The equilibrium router price was $19 but then the price fell. Now the AVC is $2 lower
than before and the AFC is $0.50 higher than before. Using information from the graph
below, what is the new equilibrium price?

a) $14.00
b) $12.50
c) $9.00
d) $7.00
e) $4.90

MC

18
ATC

16
14

AVC

Costs

12
10
8
6
4
2
10

20

30

40

50

60

70

output of wireless routers

80

90

25)The production of submarine sandwiches involves the variable input of employees and a
fixed input of a meat-slicing machine. The production schedule in the table below (output of
subs) exhibits ____ returns to workers and _____ returns to scale.


1 Slicing Machine
2 Slicing Machines
4 Slicing Machines
1 Worker
60
80
100
2 Workers
90
120
160
4 Workers
120
180
240

a) decreasing, constant
b) decreasing, decreasing
c) increasing, constant
d) constant, constant
e) constant, increasing

10