Econ 1, Midterm 2 Last Name: ______________________________

Tuesday, November 10th, 2009

First Name: ______________________________

Student ID: ______________________________


STATEMENT OF ACADEMIC INTEGRITY: I confirm that I have neither given nor
received unauthorized assistance in the completion of this exam. My integrity and that of the
university have been upheld.

_____________________________________________________
Signature Date


INSTRUCTIONS
1. Make sure you have all pages (20
multiple choice, 2 short answer).
2. Answer all multiple choice questions
in the space provided below.
3. For short answer, show all work. We
reserve the right to deduct points if
answers are hard to read.
4. You may NOT use a calculator.
5. There are a total of 100 points.
DO NOT WRITE IN BOX
Question Points
MC (60 points)
Q1 (20 points)
Q2 (20 points)
Total



MULTIPLE CHOICE ANSWERS (3 points each)

1. ______
2. ______
3. ______
4. ______
5. ______
6. ______
7. ______
8. ______
9. ______
10. ______
11. ______
12. ______
13. ______
14. ______
15. ______
16. ______
17. ______
18. ______
19. ______
20. ______


DO NOT OPEN YOUR EXAM UNTIL INSTRUCTED TO DO SO!!!
Version #1

1. Refer to the figure above. At the equilibrium price consumer surplus is
A. $40/day
B. $7.50/day
C. $15/day
D. $10/day
2. Jenny sells lemonade by the street during the summer time. Several other kids also sell lemonade in Jenny's
neighborhood. If the market is perfectly competitive and price is already at the equilibrium level, Jenny can
increase her revenue if she
A. increases both the price and output of lemonade.
B. increases the price of lemonade and decreases the output.
C. keeps the price the same and increases the output.
D. decreases the price of lemonade and increases the output.

3. Pat's total utility after eating 99 Reese's Peanut Butter Cups was less than his total utility after eating his
hundredth. Therefore, Pat's marginal utility for the 100
th
peanut butter cup was
A. negative
B. zero
C. positive, but less than one.
D. positive, but less than Pat's marginal utility for the 99
th
peanut butter cup.
4. If Brian considers Cheerios and Joe's Os to be perfect substitutes, then
A. His marginal rate of substitution between the two goods will be equal to zero.
B. His indifference curves will be straight lines.
C. He will consume the two kinds of cereal in equal proportions.
D. His indifference curves will be L-shaped.


5. Refer to the figure above. When the demand is P
1
= $30, what is the profit maximizing output?
A. 80
B. 60
C. 45
D. 30
6. Refer to the figure above. When the demand is P
1
= $30, how much profit is this producer earning?
A. $ 500
B. $ 1600
C. $ 800
D. $ 1200


7. Refer to the figure above. When the price increases from $0.75 to $1.00, quantity demanded in the market
will ______ by _____ cans.
A. decrease, 40
B. decrease, 20
C. increase, 40
D. increase, 20

8. Refer to the figure above. The law of diminishing returns sets in after the ____ worker per day.
A. 1
B. 3
C. 4
D. 2
9. Suppose 30 employee-hours can produce 50 units of output. Assuming the law of diminishing marginal
returns is present, to produce 100 units of output will require
A. more than 30 additional employee-hours.
B. a total of 60 or less employee-hours.
C. less than 30 additional employee-hours.
D. an additional 30 employee-hours.
10. In general, if the price of a variable factor of production increases,
A. marginal costs rise.
B. total costs fall.
C. price rises.
D. the profit maximizing level of output rises.

This phone center uses only equipment and workers to provide service.

11. Refer to the table above. Assuming equipment costs $10 per unit and each worker earns $5, Average
Variable Costs are minimized when output is approximately
A. 11 units.
B. 12 units.
C. 8 units.
D. 3 units.
12. Refer to the table above. Suppose that one unit of equipment costs $10 and each worker earns $5. What is
the total cost of producing 3 units of output?
A. $30
B. $40
C. $25
D. $35
13. Which of the following factors of production is likely to be fixed in the short run?
A. The amount of electricity consumed.
B. The location of the firm.
C. The number of employee-hours.
D. The amount of paper used.

Jamie's marginal utility for consuming muffins and doughnuts in utils are as follows. Jamie spends $4 for
breakfast every morning, the price per muffin is $1.00 and the price per doughnut is $0.50.

14. What is Jamie's optimal combination of muffins and doughnuts?
A. 1 muffin, 6 doughnuts
B. 2 muffins, 4 doughnuts
C. 4 muffins, zero doughnuts
D. 3 muffins, 2 doughnuts

15. The difference between the price of a good and the marginal cost of that good is called
A. profit
B. variable cost
C. producer surplus
D. consumer surplus
16. One reason that variable factors of production tend to show diminishing returns in the short run is that
A. there are too many workers using a fixed amount of productive resources.
B. the firm has become too large to effectively manage workers.
C. too much capital equipment is idle.
D. the cost of hiring additional workers increases as firms seek to hire more.
17. You are trying to decide how to spend your last lunch dollar. You should use that dollar to buy more of
A. the item that you have already consumed the most of.
B. the item from which you have gained the greatest total utility already.
C. the item that costs the least.
D. the item that will give you the greatest marginal utility per dollar spent.
18. Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut
butter is $3. Dusty can buy a maximum of _____ loaves of bread or a maximum of _____ jars of peanut butter.
A. 10; 5
B. 10; 20
C. 20; 10
D. 15; 15
19. A price taker confronts a demand curve that is
A. upward sloping.
B. horizontal at the market price.
C. vertical at the market price.
D. downward sloping.

20. Jess gets half as much marginal utility from an additional bagel than from an additional muffin. If the price
of muffin is $2.00/each, then Jess is maximizing utility if the price of a bagel is
A. $1.00
B. $2.00
C. $4.00
D. $1.50

1. Suppose that when the piice of cookies is $4.uu pei bag anu the piice of ice
cieam is $6.uu pei pint, }ennifei maximizes hei utility when she buys 4 bags of
cookies anu 2 pints of ice cieam. Now suppose the piice of cookies incieases to
$6.uu pei bag anu the piice of ice cieam incieases to $9.uu pei pint. In iesponse,
}ennifei aujusts hei consumption of cookies anu ice cieam.
a. (4 points) Compaieu to hei initial consumption bunule, what's the most we
can say about }ennifei's maiginal iate of substitution at hei new optimal
consumption bunule. Explain.
b. (6 points) Compaieu to hei initial consumption bunule, what's the most we
can say about the quantity of cookies anu ice cieam }ennifei will optimally
consume aftei the piice change. Explain.
c. (4 points) Suppose that }ennifei's fiienu Liza has $4S to spenu on cookies
anu ice cieam. Plot Liza's buuget constiaint when the piice of cookies is $6
anu the piice of ice cieam is $9, placing ice cieam on the x-axis anu cookies
on the y-axis. Be suie to label the x-axis, the y-axis, the x-inteicept, the y-
inteicept anu the slope of the buuget constiaint.
u. (6 points) At these piices (pcookies=$6 anu pice cieam=$9), suppose that Liza
chooses to consume S bags of cookies anu S pints of ice cieam. At this
consumption bunule, Liza is willing to give up 1 bag of cookies to get 1 pint
of ice cieam. Is Liza maximizing hei utility. If not, how shoulu Liza's
consumption of ice cieam anu cookies change in oiuei to inciease hei
utility. Explain.
2. Suppose that the maiket foi haiicuts is peifectly competitive anu that the piice
of a basic haiicut is $4u. At that piice, Chop Youi Nop haii salon maximizes its
piofits when it uoes 2uu haiicuts a month. At that level of output, the aveiage
vaiiable cost of a haiicut is $Su, anu the aveiage total cost of a haiicut is $Su.
a. (S points) uiven these numbeis, what's the most you can say about the
aveiage total cost of the 199
th
haiicut. Explain.
b. (S points) What is Chop Youi Nop's economic piofit at 2uu haiicuts pei
month. Show youi woik.
c. (S points) Will Chop Youi Nop shutuown in the shoit-iun. Explain.
u. (S points) If Chop Youi Nop shuts uown so that it uoesn't cut a single
peison's haii, what will be its total costs. Show youi woik.
PAuE INTENTI0NALLY LEFT BLANK