Fall 2021_ABM 1041_Exam 2_ver 2

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1 ABM 1041 Applied Microeconomics Fall 2021 Exam #2 Version 2 INSTRUCTIONS: You must use a pencil! First, at the top of the Student Answer Sheet, write your name, instructors (Prof James & Prof Segovia), course number (ABM 1041) and section (1). Second, write your Last Name, First Name, and 8 digit MU student ID on the Student Answer Sheet, using one letter or number in each box, and then darken the corresponding circle below each box. Third, write a large 2 in the space above the words “Assessment Resource Center.” This identifies your exam. You may write on this exam, but you must record your answers on the back side of the Student Answer Sheet. Do not write in any other part of the Student Answer Sheet. Notice how the answers are numbered and organized on the Student Answer Sheet. You may keep this exam but you must turn in your Student Answer Sheet. You will not be graded on anything you write on the exam. Only answers recorded on the Student Answer Sheet will be graded. There are no exceptions to this policy! There are 50 questions, each worth 2 points, for a total of 100 points. The exam is closed book and closed notes, but open mind! Good luck, and do your best! 1. ____ As the length of time increases, the elasticity of demand for products tends to increase. A. True B. False 2. ____ The more responsive buyers are to a change in price, the greater the price elasticity of demand. A. True B. False 3. ____ Measuring elasticities in percentage terms allows us to compare the sensitivity of demand curves, compare characteristics of dissimilar products, and not worry about the magnitude of changes. A. True B. False 4. ____ A news report said that with an expected 30% increase in the price of bread, producers expect sales to be reduced by 10%. From this we can infer that the demand for bread is elastic. A. True B. False 5. ____ If a firm earns an additional $1,500 in revenue by selling 10 additional units of output, then its marginal revenue is $150. A. True B. False 6. ____ A firm producing a product that is not necessary and has many substitutes can increase revenues by decreasing prices. A. True B. False 7. ____ Total utility is the total satisfaction derived from the consumption of given quantity of a good. A. True B. False 8. ____ When choosing the amounts of two or more goods to purchase, maximization of total utility occurs when the marginal utility per dollar is equal for all of the goods. A. True B. False

2 9. ____ Suppose the price of DVDs increases. As a result, Mary increases the number of DVDs she purchases. This will lead to higher marginal utility from the last DVD purchased. A. True B. False 10. ____ An important difference between corporations and partnerships is that corporations have limited liability but partnerships have unlimited liability. A. True B. False 11. ____ A business owner will always prefer zero economic profit to zero accounting profit. A. True B. False 12. ____ At the current level of a perfectly competitive firm’s level of output, the market price is greater than marginal cost. The firm should increase its level of production. A. True B. False 13. ____ Some costs remain fixed even in the long run. A. True B. False 14. ____ In the long run, if firms are making a normal profit, then new entrants would be encouraged to move into the industry. A. True B. False 15. ____ If it takes a week to obtain a vendor’s license and buy a pushcart, then a week would be the long run for the hot dog stand business. A. True B. False For questions 16-18, match the type of cost at right with the statement that is most helpful is in assessing the requested information. 16. ____ Used to determine whether or not a firm should produce in the short run. 17. ____ Used to determine whether to increase or decrease output, assuming that the firm will produce in the short run. 18. ____ Used to determine how and why productive efficiency is affected by the scale of production. 19. ____ Home heating gas tends to have _____ demand because _____. A. elastic; it has many close substitutes B. elastic; it is a necessity C. inelastic; people spend a large share of their incomes on heat D. inelastic; people do not have time to adjust their consumption patterns 20. ____ Knowing a product’s price elasticity allows economists to A. respond quickly to tariff changes. B. predict how changes in consumer incomes will affect sales. C. predict the amount by which quantity supplied will change in response to a change in price. D. predict the amount by which quantity demanded changes in response to a change in price. A. Fixed cost B. Variable cost C. Total cost D. Marginal cost E. Average cost

3 21. ____ A product’s price changes from $2 to $6 and its quantity demanded changes from 6 to 4 units. This is an example of A. price elastic demand. B. price inelastic demand. C. unitary price elasticity of demand. D. price inelasticity of supply. 22. ____ Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would be expected to increase sales by A. 2% B. 25% C. 50% D. 200% 23. ____ Which of the following is a clear example of the law of diminishing marginal utility? A. Young Joey wants his mother to read him the same story over and over again and he is equally thrilled every time she reads it. B. As the price of his favorite candy bar rises, Martin buys fewer and fewer candy bars. C. Marta develops an allergy to milk. She drinks less of it each month as the allergy gets worse. D. Julia eats three cookies. She takes 20 seconds to eat the first one, 1 minute to eat the second one, and 3 minutes to finish the third one. 24. ____ Suppose the marginal utility per dollar for bottled water is greater than the marginal utility per dollar for bags of chips. To maximize total utility, the consumer should buy A. more bags of chips and less bottled water. B. more bottled water and fewer bags of chips. C. more of both goods. D. less of both goods. E. None of the above 25. ____ Jeremy's level of satisfaction from consuming the first cookie was 25 utils. The second cookie increased the level of satisfaction by 20 utils. After eating three cookies, Jeremy's total level of satisfaction 60. What is the marginal utility for the third cookie? A. 15 B. 25 C. 45 D. 60 E. None of the above 26. ____ At an all-you-can eat buffet, a person will stop eating when A. total utility increases at a diminishing rate. B. marginal utility increases at a diminishing rate. C. marginal utility is equal to zero. D. total utility is equal to zero. E. None of the above 27. ____ Which is an example of a fixed cost of production? A. The cost of electricity B. The cost of raw materials C. Wages paid to workers D. Monthly rent on a year-long lease E. None of the above

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4 28. ____ What do sole proprietorships, partnerships, and corporations have in common? A. They all have limited liability. B. They all can sell stock. C. They all dissolve upon the death of the chief executive officer. D. They all react to the profit incentives of the market. 29. ____ Economists calculate profits as total revenue minus A. depreciation. B. explicit and implicit (opportunity) costs. C. explicit costs and depreciation. D. costs of raw materials. 30. ____ If the Clearwater Candy Company lays off workers and shuts down, it incurs costs of $30,000. If it produces at full capacity, it incurs costs of $90,000. We can conclude that A. fixed costs are $90,000. B. variable costs at half-capacity are $45,000. C. fixed costs are $60,000. D. the cost of variable inputs at full capacity is $60,000. 31. ____ Suppose the price of tomatoes is $2 each and JoAnne sells 25 tomatoes at the perfectly competitive local farmer’s market. The total revenue is ____ and the marginal revenue is ____. A. $12.50; $12.50 B. $12.50; $2.00 C. $50.00; $2.00 D. $50.00; $12.50 32. ____ An increase in the price a perfectly competitive firm receives for output will induce the firm to A. expand output and earn greater profits or smaller losses. B. leave output unchanged and earn greater profits. C. leave output unchanged and earn larger losses. D. reduce output and earn smaller losses. 33. ____ The market for toothbrushes in the land of Econia has 1,000 producers. There are no barriers to entry. Some producers are able to charge higher prices than others because of small differences in their toothbrushes. What type of market exists for toothbrushes in Econia? A. Perfect competition B. Monopolistic competition C. Oligopoly D. Monopoly 34. ____ If Glass Inc. produces 80 window panes per day at the market price of $60 in a perfectly competitive market, what would happen to market prices if Glass Inc. increases production to 120 window panes, all else being equal? A. The price would remain the same. B. The price would fluctuate in an unknown pattern. C. The price would increase as production by Glass Inc. rises. D. The price would decrease as production by Glass Inc. rises. E. There is not enough information to answer this question.

5 35. ____ Jack is making a normal profit by selling firewood in a perfectly competitive market. His price is $100 per load. If the market price goes up to $120, then he can expect A. more competition in the future. B. less competition in the future. C. about the same amount of competition in the future. D. more customers in the future. 36. ____ When firms in an industry are earning normal profits A. they are likely to be investigated for price gouging. B. they are earning zero accounting profits. C. the number of firms in the industry is stable. D. their stocks are not valued by investors. 37. ____ Farmer Bob sells cotton in a perfectly competitive market. At his current level of production, the marginal cost of a pound of cotton is $14, his average total cost is $14, and his average variable cost is $12. The industry price for cotton is $14. To maximize profits or minimize losses, Farmer Bob should A. increase production. B. decrease production. C. continue at his current level of production. D. shutdown. 38. ____ A bicycle factory finds that it can lower costs if it also produces tricycles and unicycles. This is an example of A. economies of scale. B. economies of opportunities. C. economies of scope. D. economies of comparative advantage. 39. ____ If a perfectly competitive firm can sell a bushel of soybeans for $19 per bushel and it has an average variable cost of $20 per bushel, and the marginal cost is $22 per bushel, it should A. expand output. B. reduce output. C. increase price. D. decrease price. E. shutdown. 40. ____ Which statement is not a characteristic of perfect competition? A. There are many firms and consumers in the market. B. Firms produce identical products. C. There are no barriers to entry into or exit from the market. D. There are many firms in the industry, but some firms can affect the market price. E. No firm has sufficient market power to affect market price. 41. ____ Which sequence describes the long-run adjustment process in a competitive market when firms experience short-run economic losses? A. some firms exit, industry supply decreases, market price rises B. some firms exit, industry supply decreases, market price falls C. market price rises, some firms exit, industry demand decreases, market price falls D. market price falls, some firms exit, industry supply falls E. None of the above

6 Suppose consumer has $26 to spend, the price of a movie ticket is $10 and the price of a pizza slice is $2. Use the following chart showing marginal utility (not total utility) to answer questions 42-43. 42. ____ How many movie tickets will they purchase to maximize utility? A. 1 ticket D. 4 tickets B. 2 tickets E. 5 tickets C. 3 tickets 43. ____ How many pizza slices will they purchase to maximize utility? A. 1 pizza slice D. 4 pizza slices B. 2 pizza slices E. 5 pizza slices C. 3 pizza slices Use the following figure of a competitive firm to answer questions 44-46. Assume the cost curves depict economic costs. 44. ____ When the market price is $5, what is the profit maximizing or loss minimizing level of output? A. 4 C. 8 E. 12 B. 6 D. 9 45. ____ At a quantity of 9, what are the firm’s average total costs? A. $2 C. $5 E. None of these B. $4 D. $45 46. ____ What market price will produce above normal profits for the firm? A. $1 C. $4 E. $8 B. $2 D. $5 Use the information in the table to answer questions 47-50. Assume costs represent economic costs. 47. ____ What is the average fixed cost of producing 3 units of output? A. $2 B. $3 C. $6 D. $7.50 E. None of these 48. ____ If the market price is $6 and the firm chooses output to maximize profits or minimize losses, then how much profit or loss will the firm have? A. -$3 B. -$1 C. $0 D. +$1 E. +$4 49. ____ If the market price is $7 and the firm chooses output to maximize profits or minimize losses, then how much profit or loss will the firm have? A. -$3 B. -$1 C. $0 D. +$1 E. +$4 50. ____ If the market price is $7, then the firm is making normal profits. A. True B. False Q MU of tickets MU of tickets per $ MU of pizza slice MU of pizza slice per $ 1 40 ____ 10 ____ 2 30 ____ 8 ____ 3 20 ____ 6 ____ 4 10 ____ 4 ____ 5 5 ____ 2 ____ Q TC VC MC 0 $6 ___ xx 1 10 ___ ___ 2 15 ___ ___ 3 21 ___ ___ 4 28 ___ ___ 5 36 ___ ___ 4 6 8 9 12 8 5 4 2 1

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