Posted: May 13th, 2018

ECO 550 Midterm Exam (Fall 2014)

Part 1 (Multiple-Choice)1. Economic profit is the best measure of a firm’s performance becauseA. normal profit is generally too difficult to measure.B. economic profit fully accounts for all sources of revenue.C. only explicit costs influence managerial decisions since, in general, only explicit costs can besubtracted from revenue for the purposes of computing taxable profit.D. the opportunity cost of using ALL resources is subtracted from total revenue.2. Until recently you worked as an accountant, earning $30,000 annually. Then you inherited apiece of commercial real estate bringing in $12,000 in rent annually. You decided to leave yourjob and operate a video rental store in the office space you inherited.At the end of the first year, your books showed total revenues of $60,000 and total costs of$30,000 for video purchases, utilities, taxes, and supplies. What is the total cost of operatingthe video store?A.B.C.D.E.3. Which of the following will cause a change in quantity supplied?A.B.C.D.4. A change in input pricesTechnological changeA change in the number of firms in the marketA change in the market price of the goodSuppose that the market for engagement rings is in equilibrium. Then political unrest in SouthAfrica shuts down the diamond mines there. South Africa is the world’s primary supplier ofdiamonds. What will happen?A.B.C.D.5.$60,000$42,000$30,000$12,000none of the aboveThe equilibrium quantity of engagement rings will decrease.The equilibrium price of engagement rings will decrease.The demand for engagement rings will decrease.The supply of engagement rings will increase.In which of the following cases will the effect on equilibrium output be indeterminate (i.e.,depend on the magnitudes of the shifts in supply and demand)?A.B.C.D.Demand increases and supply increasesDemand decreases and supply decreasesDemand decreases and supply increasesDemand remains constant and supply increasesUse the following figure to answer the next 4 questions:6.In the figure, the equilibrium price and quantity areA.B.C.D.E.7.Let demand remain constant at D; an increase in wages causes firms to be willing and able tosell 150 fewer units at each price than they were before the wage increase.A.B.C.D.8.The new equilibrium price and quantity will be P =$6 and Q = 150.The new equilibrium price and quantity will be P = $6 and Q = 400.The new equilibrium price and quantity will be P = $7 and Q = 250.The new equilibrium price and quantity will be P = $8 and Q = 300.Let supply remain constant at S; a decrease in income causes consumers to be willing andable to purchase 150 fewer units at each price than they were previously.A.B.C.D.9.P = $6 and Q = 800.P = $4 and Q = 300.P = $4 and Q = 400.P = $6 and Q = 300.P = $7 and Q = 800.The new equilibrium price and quantity will be P = $6 and Q = 150.The new equilibrium price and quantity will be P = $5 and Q = 150.The new equilibrium price and quantity will be P = $7 and Q = 250.The new equilibrium price and quantity will be P = $5 and Q = 200.Let supply remain constant at S; an increase in the price of a substitute good causesconsumers to be willing and able to buy 150 more units of the good at each price in the list thanthey were when demand was D. Which of the following statements is (are) true?A.B.C.D.E.At the original equilibrium price there will be a shortage of 150.At the original equilibrium price there will be a surplus of 150.At the new equilibrium P = $6 and Q = 450.At the new equilibrium P = $7 and Q = 400.both a and d10. If the demand for umbrellas is price inelastic,A. changes in price do not affect the number of umbrellas demanded.B. if more umbrellas are sold as the result of a price decrease, total expenditures by consumerson umbrellas will decrease.C. the percentage change in price is less than the percentage change in quantity demanded.D. the percentage change in quantity demanded is greater than the percentage change inprice.E. none of the aboveThe next 2 questions refer to the following figure:11. In the figure above, what is the point price elasticity of demand when price is $60?A.B.C.D.E.-0.50-0.75-1.00-1.60-2.0012. What is the interval elasticity of demand over the price range $60 to $80?A.B.C.D.E.-0.75-1.10-1.00-1.40-2.00The next question refer to the following table showing a demand schedule:13. If price falls from $200 to $150, what is the elasticity of demand over this range?A.B.C.D.E.-0.625-1.0-1.17-2.5-3.014. If the price elasticity of DVD recorders is -0.3 and price increases 20%, what happens to thequantity of DVD recorders demanded?A.B.C.D.Quantity decreases by 26%Quantity decreases by 6%Quantity increases by 15%Quantity increases by 21%15. The fact that the cross-price elasticity of natural gas with respect to the price of fuel oil is 0.4implies thatA. natural gas and fuel oil are substitutes.B. natural gas is a normal good.C. the quantity of natural gas demanded will decrease by 1.6% when the price of fuel oildecreases by 4%.D. both a and c16. Hiring one more guard per week will decrease the losses due to theft at the warehouse by_________ per week.A.B.C.D.$5,150$211$130$480.92In the table below and answer the next 3 questions:17. In the above table, the average product of labor when 4 units of labor are employed isA.B.C.D.22.20.19.16.18 In the above table, the marginal product of the fifth unit of labor isA.B.C.D.16.10.4.-2.19. In the above table, diminishing returns begin with theA.B.C.D.first unit of labor.third unit of labor.fourth unit of labor.sixth unit of labor.The next 3 questions refer to the following:Amount of total output produced from various combinations of labor and capital.20. If capital is fixed at two units, what is the marginal product of the fourth unit of labor?A.B.C.D.E.6080100420none of the above21. If capital is fixed at one unit, diminishing returns begin with theA.B.C.D.E.first unit of labor.second unit of labor.third unit of labor.fourth unit of labor.none of the above22. If labor is fixed at 5 units, how much does the second unit of capital add to total output?A.B.C.D.E.49039050100none of the above23. Diseconomies of scaleA.B.C.D.E.exist when fixed cost increases as output increases.exist when long-run average cost increases as output increases.result eventually as the firm uses more and more labor with a fixed capital stock.both a and ball of the above24. A price elasticity of zero corresponds to a demand curve that is:A.B.C.D.HorizontalDownward sloping with a slope always equal to 1.VerticalEither vertical or horizontal.25. An income elasticity less than zero tells us that the good is:A.B.C.D.a normal good.a Giffen good.an inferior good.an inelastic good.26. Suppose demand is given by Q xd = 50 – 4Px + 6Py + Ax, where Px = $4, Py = $2, and Ax = $50.What is the quantity demanded of good x?A.B.C.D.96.50.46.72.27. You are the manager of a popular shoe company. You know that the advertising elasticity ofdemand for your product is 0.15. How much will you have to increase advertising in order toincrease demand by 10%?A.B.C.D.0.02%.38.6%.66.7%.4.3%.28. The demand for video recorders has been estimated to be Qv = 134 – 1.07Pf + 46Pm -2.1Pv – 5I,where Qv is the quantity of video recorders, Pf denotes the price of video recorder film, Pm is theprice of attending a movie, Pv is the price of video recorders, and I is income. Based on theestimated demand equation we can conclude:A.B.C.D.video recorders are inferior goods.video recorder film is a substitute for video recorders.the demand for video recorders is inelastic.the demand for video recorders are neither inferior nor inelastic and video recorder film isnot a substitute for video recorders.29. If the absolute value of the own price elasticity of demand is greater than one, then demand issaid to beA.B.C.D.elastic.inelastic.unitary elastic.neither elastic, inelastic nor unitary elastic.30. Demand tends to beA.B.C.D.more elastic in the short-term than in the long-term.more inelastic in the short-term than in the long-term.equally elastic in the short-term and in the long-term.neither more elastic, more inelastic nor equally elastic than in the short-term and in thelong-term.31. When the own price elasticity of good X is -3.5 then total revenue can be increased byA.B.C.D.increasing the price.decreasing the quantity supplied.decreasing the price.neither increase price, decrease price nor decrease quantity supplied.32. The price elasticity of demand is -2.0 for a certain firm’s product. If the firm raises price, the firmmanager can expect total revenue toA.B.C.D.decrease.increase.remain constant.either increase or remain constant, depending upon the size of the price increase.33. Given the following table, how many workers should be hired to maximize profits?MRPlLA.B.C.D.1.2.3.4.34. Which of the following is an implicit cost of going to college?A.B.C.D.tuition.cost of books and supplies.room and board.foregone wages.35. EconomicsA.B.C.D.exists because of the scarcity.is not related to decision-making.is the science for the rich.has nothing to do with the allocation of resources.36. The law of demand states that, holding all else constant:A.B.C.D.as price falls, demand will fall also.as price rises, demand will also rise.price has no effect on quantity demanded.as price falls, quantity demanded rises.37. If A and B are complements, an increase in the price of good A would:A.B.C.D.have no effect on the quantity demanded of B.lead to an increase in demand for B.lead to a decrease in demand for B.none of the statements associated with this question are correct.Part II (Demand Estimation Questions)Franklin Electric is a holding company interested in the possible acquisition of electricity retailersthat are expected to be spun off as the industry is deregulated. As the project point person you havebeen asked to do some preliminary demand analysis in order to better understand this particularmarket. Given the need for expediency and the inability to request time series data from the currentsellers in the market, Franklin Electric hired a consultant to collect average values from each of thefifty US states and to generate a demand model using multiple-regression analysis.The estimated demand function is as follows:Qd = 36315 9937 * Price – .09 * Income + .02 * Customers + 2198 * Price of Natural GasFor the following six questions, select the best response.38.Assuming price is $3, income is $60,000, the market has 2,000,000 potential customers, andthe price of natural gas is $4, estimate the (own) price elasticity (of demand). (The followingnumbers are absolute values.)a..48b..60c..0001d.993639.Assuming price is $3, income is $60,000, the market has 2,000,000 potential customers, andthe price of natural gas is $4, estimate the cross-price elasticity (of demand).a.-.35b..18c..80d.219740.In general which of the following statements best describes the retail market for electricity?a.The electricity market is highly price sensitive.b.The electricity market is not highly price sensitivec.Electricity is a normal good.d.There is insufficient information to determine the price sensitivity of this market.

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