Practice Exam#1

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Practice Problems Microeconomics (UGBA 101) 1. Microeconomics is the branch of economics that deals with which of the following topics? A) The behavior of individual consumers B) Unemployment and interest rates C) The behavior of individual firms and investors D) B and C E) A and C Answer: E 2. The basic premise behind worker trade-offs in a market economy is that: A) firms decide how much workers must work, and workers decide how much leisure to have. B) workers don't decide how much leisure to have. The amount of leisure depeworkn the number of hours they must work, which is determined by the firm. C) workers decide how to allocate their time between work and leisure. D) the trade-off between work and leisure is determined by factors other than what workers or firms would determine to be optimal. Answer: C 3. In the definition of a market, economists consider: A) only actual interactions between buyers and sellers, not potential interactions. B) both actual and potential interactions between buyers and sellers. C) neither actual nor potential interactions between buyers and sellers. D) actions by third parties that do not include buyers or sellers in the market. Answer: B 4. Use the following two statements to answer this question: I. A market is a collection of buyers and sellers that, through actual or potential interactions, determine the price for a product or set of products. II. An industry is a collection of markets for similar or closely related products. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false. Answer: B 5. Washington, D.C.'s metro train system is being extended further into the neighboring states of Maryland and Virginia, thereby reducing the cost of commuting into the United States' capitol. Other things being held constant, this can be expected to: A) decrease the extent of the market for housing around Washington, D.C.

Practice Problems Microeconomics (UGBA 101) B) increase the extent of the market for housing around Washington, D.C. C) have no effect on the extent of the market for housing around Washington, D.C. as the actual geography remains unchanged. D) have no effect on the extent of the market for housing around Washington, D.C. as the range of houses available has not changed. E) have no effect on the extent of the market for housing around Washington, D.C. as property taxes have not changed. Answer: B 6. Since last year, the price of gold has risen from $1100 to $1420. What annual inflation rate would leave the real price of gold unchanged over the last twelve months? A) Approximately 29% B) 40% C) Approximately 71% D) 320% E) none of the above Answer: A 7. A supply curve reveals: A) the quantity of output consumers is willing to purchase at each possible market price. B) the difference between quantity demanded and quantity supplied at each price. C) the maximum level of output an industry can produce, regardless of price. D) the quantity of output that producers are willing to produce and sell at each possible market price. Answer: D 8. Sugar can be refined from sugar beets. When the price of those beets falls, A) the demand curve for sugar would shift right. B) the demand curve for sugar would shift left. C) the supply curve for sugar would shift right.

Practice Problems Microeconomics (UGBA 101) D) the supply curve for sugar would shift left. Answer: C Figure 1 9. Refer to Figure 1 above. Lower material costs — indeed lower costs of any kind — make production more profitable. Starting at point A , which of the following best represents this assertion? A) The move from A to B B) The move from A to C C) A move from A to B , and then to C D) A move from A to C , and then to B Answer: B 10. Refer to Figure 1 above. Starting from point A , how do the firms in the market react when the price of coffee increases from $6.00 to $7.50 per pound? A) The supply curve shifts to the right and the quantity supplied increases to 10 million pounds per year. B) The supply curve shifts from S1 to S2, but the market moves from A to B , so the quantity supplied increases to 9 million pounds per year. C) The market moves from A to B temporarily, but eventually will settle at point C , where the quantity supplied will be 10 million pounds. D) The supply curve does not shift, but the quantity supplied increases from 7 to 9 million pounds per year. Answer: D 11. The price of good A goes up. As a result, the demand for good B shifts to the left. From this we can infer that: A) good A is used to produce good B. B) good B is used to produce good A. C) goods A and B are substitutes. D) goods A and B are complements. E) none of the above Answer: D

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Practice Problems Microeconomics (UGBA 101) 12. Assume that the current market price is below the market clearing level. We would expect: A) a surplus to accumulate. B) downward pressure on the current market price. C) upward pressure on the current market price. D) lower production during the next time period. Answer: C 13. Suppose the equilibrium price of milk is $3 per gallon but the federal government sets the market price at $4 per gallon. The market mechanism will force the milk price back down to $3 per gallon unless the government: A) rations the excess demand for milk among consumers. B) buys the excess supply of milk and removes it from the market. C) Both A and B are plausible actions. D) The government cannot maintain the price above the equilibrium level. Answer: B Figure 2 14. Refer to Figure 2 above. An imposed price of $2.25 can be called: A) a price ceiling. B) a price floor. C) a consumer-friendly price. D) a price of equilibrium difference. Answer: B 15. Refer to Figure 2 above. If the price of $2.25 is an artificial price imposed by the government, and the government is expected to remove it, what will happen in this market? A) There will be a tendency for the price to be higher than the imposed price. B) There will be a tendency for the new price to be lower than the imposed price. C) The new price would not be expected to be any different than the already imposed price. D) The new price will tend to fluctuate above and below the equilibrium price of $2.00. Answer: A 16. We observe that both the price of and quantity sold of golf balls are rising over time. This is due to: A) continual improvements in the technology used to produce golf balls.

Practice Problems Microeconomics (UGBA 101) B) increases in the price of golf clubs over time. C) decreases in membership fees for country clubs with golf facilities. D) more stringent professional requirements on the quality of golf balls requiring producers to use more expensive raw materials. Answer: C 17. Indifference curves are convex to the origin because of: A) transitivity of consumer preferences. B) the assumption of a diminishing marginal rate of substitution. C) the assumption that more is preferred to less. D) the assumption of completeness. E) none of the above Answer: B 18. Goods that are considered "bads" have this characteristic: A) their marginal rates of substitution are constant. B) for those goods, less is preferred to more. C) preferences for those goods are not complete. D) those goods have horizontal or vertical indifference curves. Answer: B 19. Jane is trying to decide which courses to take next semester. She has narrowed down her choice to two courses, Econ 1 and Econ 2. Now she is having trouble and cannot decide which of the two courses to take. It's not that she is indifferent between the two courses, she just cannot decide. An economist would say that this is an example of preferences that: A) are not transitive. B) are incomplete. C) violate the assumption that more is preferred to less. D) all of the above Answer: B 20. Refer to Figure 3. This indifference map shows that this consumer: A) prefers cars with more space and less acceleration. B) obtains the same additional utility from more space or more acceleration. C) obtains more utility only when acceleration increases, even if space remains about the same. D) takes notice of the fact that, as acceleration increases, space decreases.

Practice Problems Microeconomics (UGBA 101) Answer: A . Figure 3 21. Suppose your utility function for food ( F ) and clothing ( C ) is u ( F , C ) = F + 4 C . If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level? A) 2 units B) 4 units C) 6 units D) 8 units Answer: D 22. An individual consumes only two goods, X and Y . Which of the following expressions represents the utility maximizing market basket? A) MRSxy is at a maximum. B) P X /P Y = money income. C) MRSxy = money income. D) MRSxy = P X /P Y . E) all of the above Answer: D 23. An individual demand curve can be derived from the ________ curve. A) price-consumption B) price-income C) income-substitution D) income-consumption E) Engel Answer: A 24. Which of the following is true regarding utility along a price-consumption curve? A) It is constant. B) It changes from point to point. C) It changes only if income changes. D) It changes only for normal goods. Answer: B

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Practice Problems Microeconomics (UGBA 101) Figure 4 25. Refer to Figure 4 above. The connection of points A and B on the graph yields: A) a price-consumption curve. B) an income-consumption curve. C) individual demand curves. D) an Engel curve. Answer: B 26. Refer to Figure 4 above. From the information on the figure we can derive: A) a price-consumption curve. B) two points on an individual demand curve. C) a shifting demand curve. D) an upward-sloping demand curve. Answer: C 27. Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. A) more; more B) more; less C) less; more D) less; less Answer: B

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