Sample Midterm 2 answer key

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1) A minimum permissible price established by the government is called A) the equilibrium price. B) the margin price. C) a price ceiling. D) a price floor. E) the fair price. Answer: D 2) In free and competitive markets, shortages are eliminated by A) government price controls. B) rationing. C) hidden markets. D) price increases. E) price decreases. Answer: D 3) Consider a competitive labour market. The likely consequence of a binding minimum wage in this labour market is A) a labour shortage. B) a lower wage for all individuals. C) a higher wage for all individuals. D) excess demand for workers. E) unemployment. Answer: E 4) Suppose the government decides to eliminate a binding price floor that it had previously imposed on a particular good. It can be expected that A) the price would increase, the quantity demanded would decrease, and the quantity supplied would increase. B) the price would increase, the quantity demanded would increase, and the quantity supplied would decrease. C) the price would decrease, the quantity demanded would decrease, and the quantity supplied would increase. D) the price would decrease, the quantity demanded would increase, and the quantity supplied would decrease. E) no changes would take place. Answer: D

FIGURE 5-3 5) Refer to Figure 5-3. To be effective, a price floor must lie A) above P 1 but below P 2 . B) anywhere above P 1 . C) below P 1 but above P 3 . D) anywhere below P 1 . E) within the boundaries of P 2 and P 3 . Answer: B 6) Refer to Figure 5-3. Suppose P 3 represents the maximum price permitted by the government. The result would be A) excess supply of Q 3 Q 4 . B) excess supply of Q 3 Q 0 . C) excess demand of Q 0 Q 2 . D) excess demand of Q 1 Q 2 . E) excess demand of Q 3 Q 4 . Answer: E 7) With respect to some commodity, X, if government objectives are to (1) restrict production and (2) keep prices down to protect consumers, then legislated price ceilings will A) be a dismal failure as neither goal can ever be achieved with price ceilings. B) satisfy both goals but only if a hidden market develops. C) satisfy only the second goal if a hidden market develops. D) only have an effect on commodities at the international level. E) satisfy both goals as long as a hidden market does not develop. Answer: E

FIGURE 5-4 (S 1 is the Short-run supply curve for apartments . S 2 is the long-run supply curve for apartments.) 8) Refer to Figure 5-4. Suppose the government imposes a rent-controlled price of $600 per month on apartments in this city. In the short run we can expect the shortage of apartments to be ________ units. A) 0 B) 200 C) 300 D) 800 E) 1000 Answer: C 9) Refer to Figure 5-4. Suppose the government imposes a rent-controlled price of $600 per month on apartments in this city. In the long run, we can expect the shortage of apartments to be ________ units. A) 0 B) 200 C) 300 D) 800 E) 1000 Answer: D 10) Refer to Figure 5-4. Based on your answers in the previous two questions, why is there a difference between the short-run and the long-run effects of rent controls? A) Over time, the supply of apartments becomes less elastic, and landlords reduce the supply of apartments. B) Over time, the demand for apartments becomes less elastic, and fewer renters are looking for apartments.

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C) Over time, the demand for apartments becomes more elastic, and more renters are looking for apartments. D) Over time, the supply of apartments becomes less elastic, and landlords reduce the supply of apartments. E) Over time, the supply of apartments becomes more elastic, and landlords reduce the supply of apartments. Answer: E 11) Who are likely to be the biggest beneficiaries of rent controls? A) landlords B) prospective tenants C) current tenants D) construction companies E) No group will benefit from the controls. Answer: C 12) When economists describe a market for a specific product as being economically "efficient," what do they mean? A) Production techniques are such that resources are used in the most technologically efficient manner. B) Consumption of the product is such that economic surplus is maximized. C) Production of the product is such that economic surplus is maximized. D) The quantity of the product produced and consumed is such that the economic surplus is maximized. E) There are no price controls in that market. Answer: D FIGURE 5-5 15

13) Refer to Figure 5-5. At the market-clearing price and quantity of $30 per hour and 4000 hours of gardening services purchased, the economic surplus or market welfare is A) areas 1, 2, 6. B) areas 1, 2, 3, 4, 5, 6, 7, 8, 9. C) areas 3, 4, 7. D) areas 1, 2, 3, 4, 6, 7. E) areas 1, 2, 3, 4, 5, 6, 7, 8. Answer: D 14) Refer to Figure 5-5. Suppose this market for gardening services is in a free-market equilibrium. If the government then imposes a price floor of $50 per hour for gardening services, the consumer surplus will be A) area 1. B) areas 1, 2, 6. C) areas 6, 7. D) areas 3, 4, 7. E) areas 2, 3, 4. Answer: A 15) Refer to Figure 5-5. Suppose this market for gardening services is in a free-market equilibrium. If the government then imposes a price floor of $50 per hour for gardening services, the producer surplus will be A) area 1. B) areas 1, 2, 6. C) areas 6, 7. D) areas 3, 4, 7. E) areas 2, 3, 4. Answer: E 16) Economists use the term "marginal utility" to describe the A) change in total satisfaction caused by consumption of an additional unit of a good. B) average utility of each unit of a good consumed. C) inverse of the measure of total utility. D) total satisfaction received from consumption of a good. E) price paid for every unit consumed. Answer: A 17) A basic hypothesis of marginal utility theory is that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases. This hypothesis is known as A) the paradox of value. B) the utility theory of demand. C) utility maximization. D) diminishing marginal utility. E) diminishing total utility. Answer: D

The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period. Toffee (bars) Cashews (bags) Units Marginal Utility Total Utility Marginal Utility Total Utility 1 10 10 12 12 2 8 18 10 22 3 5 23 7 29 4 3 26 5 34 5 1 27 2 36 6 0 27 1 37 7 0 27 0 37 TABLE 6-4 18) Refer to Table 6-4. If the prices of toffee bars and bags of cashews are both $1 and this consumer has $7 per week to spend on these two snacks, how many of each will he/she purchase to maximize utility? A) 2 toffee bars and 5 bags of cashews B) 3 toffee bars and 4 bags of cashews C) 4 toffee bars and 3 bags of cashews D) 5 toffee bars and 2 bags of cashews E) 6 toffee bars and 1 bag of cashews Answer: B 19) Bjorn is a student with a monthly budget of $500, which he allocates between transportation services and "all other goods." Suppose the price of transportation is $5 per unit, and the price of "all other goods" is $20 per unit. The marginal utility he currently receives from his consumption of transportation services is 60. What is his marginal utility from the consumption of "all other goods" if he is maximizing his utility? A) 5 B) 20 C) 25 D) 200 E) 240 Answer: E

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20) The table below shows the quantities of good X a consumer could consume over a 1-week period. Units Total Utility Marginal Utility 0 0 A 1 30 12 2 B 5 3 C D 4 50 E 5 F 1 6 53 TABLE 6-3 Refer to Table 6-3. The missing value of C is: A) 10 B) 25 C) 47 D) 50 E) 52 Answer: C 21) A demand curve for a normal good is downward sloping due to A) the income effect. B) the substitution effect. C) the combination of income and substitution effects. D) only the substitution effect nor the income effect. E) the Giffen effect. Answer: C 22) Consider the income and substitution effects of price changes. The substitution effect is the change in quantity demanded that occurs A) as a result of a change in absolute prices, with real income held constant. B) as a result of a change in relative prices, with money income held constant. C) as a result of a change in relative prices, with real income held constant. D) when one good is substituted for another. E) with a change in the relative prices of two or more goods. Answer: C

23) The substitution effect of a price change A) will result in the consumer buying less of a good at a lower price. B) will result in the consumer buying less of a good at a higher price. C) outweighs the income effect for Giffen goods. D) is equal to the income effect for normal goods. E) is equal to the income effect for inferior goods. Answer: B 24) FIGURE 6-4 Refer to Figure 6-4. For both goods, the price falls from P 0 to P 1 . The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good X is certainly a(n) ________ good. A) normal B) inferior C) luxury D) necessity E) Giffen Answer: B 25) The substitution effect of a price change leads consumers to ________ their demand for goods whose prices have risen. The income effect leads consumers to buy less of all ________ goods whose prices have risen. A) reduce; normal B) increase; inferior C) increase; normal D) reduce; Giffen E) reduce; complement

Answer: A 26) Consider the income and substitution effects of price changes. Suppose the price of potatoes falls and we observe a decrease in an individual's purchases of potatoes. Which of the following can we infer? A) The income effect is negative and outweighs the substitution effect. B) The income effect is negative and reinforces the substitution effect. C) The income effect just offsets the substitution effect. D) The income effect is positive and exceeds the substitution effect. E) The substitution effect outweighs the income effect. Answer: A 27) Consider the pizza market, with a downward-sloping demand curve and an upward-sloping supply curve. Suppose 100 pizzas are purchased at the free-market equilibrium price. The consumer surplus on the 100th pizza is A) positive. B) negative. C) non-negative. D) unknown. E) zero. Answer: E TABLE 6-5. Dave's Willingness to Pay on Movie Rentals per Week Number of movies rented per week Amount Dave’s willingness to pay to rent this movie ($) 1st 10.00 2nd 8.00 3rd 6.50 4th 5.50 5th 4.50 6th 4.00 28) Refer to Table 6-5. Suppose it costs $5 to rent a movie. In order to maximize his consumer surplus, Dave should rent ________ movies in one week, his total consumer surplus is ________ and the total amount he pays is ________. A) 2 movies; $8; $10 B) 3 movies; $9.5; $15 C) 4 movies; $10; $20 D) 5 movies; $10; $25 E) 6 movies; $10; $30 Answer: C

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29) What is consumer surplus? A) It is the same as Karl Marx's notion of surplus value. B) It is the same concept as total utility. C) It is the sum of the extra value placed on each unit of a commodity above the market price paid for each. D) It is the total value that consumers place on their purchases. E) It is the marginal value that consumers place on their purchases. Answer: C 30) At typical consumption levels of water and diamonds, the good with the higher marginal utility is ________; the good with the higher total utility is ________; and the good with the greatest consumer surplus is ________. A) water; diamonds; water B) water; water; water C) water; water; diamonds D) diamonds; water; water E) diamonds; water; diamonds Answer: D 31) Consider the various forms of organization of firms. Which of the following statements about a corporation are true? 1. It is an entity separate from the individuals who own it. 2. It can incur debt that is an obligation of the corporation but not of its individual owners. 3. It is legally obliged to distribute all profits to shareholders. A) 1 only B) 2 only C) 3 only D) 1 and 2 only E) 2 and 3 only Answer: D 32) It is assumed in standard economic theory that a firm makes decisions in an effort to A) become as large as possible. B) have as large a market share as possible. C) have a positive social impact. D) maximize its revenue. E) maximize its profits. Answer: E 33) Economic profits are less than accounting profits because economic profits A) include an amount for depreciation. B) include an explicit charge for risk taking. C) include the implicit costs of the use of capital owned by the firm. D) include the implicit costs of government taxes. E) are stipulated in regulations set forth by the Canada Revenue Agency. Answer: C

34) We can predict that resources will move into an industry whenever A) accounting profits for firms in that industry are greater than zero. B) accounting profits for firms in that industry are zero. C) economic profits for firms in that industry are zero. D) economic profits for firms in that industry are greater than zero. E) economic losses for firms in that industry are minimized. Answer: D 35) With regard to economic decision making for firms, the short run is A) less than five years. B) less than one year. C) a period over which the quantities of all factors of production and technology are variable. D) a period over which the quantity of at least one factor of production is fixed. E) a period over which the quantities of all factors of production are variable but technology is fixed. Answer: D 36) Consider an Internet-based grocery delivery business. The managers are considering investing in multiple new local distribution centres. This firm is making a(n) ________ decision. A) very short-run B) short-run C) intermediate run D) long-run E) very long-run Answer: D 37) Consider a basket-producing firm with fixed capital. The firm can produce 36 baskets per day with 3 workers and then increases productivity to 44 baskets per day with 4 workers. Which of the following statements is true? A) The marginal product of the fourth worker is 11. B) The firm has passed the point of diminishing average productivity. C) The marginal product is above the average product. D) The firm has not yet reached the point of diminishing marginal productivity. E) With 4 workers, the firm's average product of labour is 13. Answer: B

FIGURE 7-1 Short-Run Production Functions 38) Refer to Figure 7-1. The firm’s production is exhibiting increasing marginal returns to labour A) from 0 to 32 units of output. B) from 0 to 140 units of output. C) between 140 to 200 units of output. D) between 200 to 250 units of output. E) over the whole output range. Answer: B 39) Refer to Figure 7-1. Suppose each unit of labour represents one worker for one month . What is the maximum number of workers the firm could hire so that the final worker hired still raises the average product of the other workers? A) 7 B) 8 C) 9 D) 11 E) 15 Answer: C 40) Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total variable cost of $6000. It can be concluded that average fixed cost is A) $40. B) $60. C) $100. D) $160. E) $4000. Answer: A 41) Short-run cost curves for a firm are eventually upward-sloping because of the effects of A) the increasing price of variable inputs. B) diminishing marginal product.

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C) increasing fixed costs. D) increasing marginal productivity of the variable inputs. E) decreasing total product. Answer: B 42) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its short-run costs are as follows: ATC = $0.37 per unit AVC = $0.32 per unit AFC = $0.05 per unit MC = $0.43 per unit Given these short-run costs, which of the following statements is true? A) The firm is operating below capacity. B) The firm is operating at capacity. C) The firm is operating above capacity. D) The firm has no capacity constraints. E) The firm is producing a level of output where capacity is increasing. Answer: C 43) When a plant is operating at the level of output where its short-run average total cost is at its minimum, A) average fixed cost is at a minimum. B) marginal cost is at a minimum. C) average variable cost is at a minimum. D) the plant is operating at its capacity. E) more of the variable factor of production should be employed. Answer: D 44) If the marginal product is equal to average product, the A) average fixed cost must be at its minimum. B) average variable cost must be at its minimum. C) average total cost must be at its minimum. D) marginal cost must be at its minimum. E) marginal cost must be equal to average total cost. Answer: B 45) The period of time over which at least one factor of production is fixed is called the A) very-short run. B) short run. C) long run. D) very-long run. E) immediate run. Answer: B

Sample Midterm 2 answer key

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