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Department of Economics Econ 101 - Principles of Microeconomics
Study Questions for ECON 101 Midterm Exam II-(Fall 2015/2016)
Answers
Multiple Choice Questions
Assuming that the price of cola is $1 each, and burgers cost $2 each fill the table below. Then,
answer the following two questions according to the table.
Number of Colas
Total Utility
MUc MU / $ Number of Burgers
Total Utility
MUb MU / $
1 - ) Which of the two goods demonstrates the law of diminishing marginal utility?
a. Cola only.
b. Burgers only.
c. Both cola and burgers.
d. Neither cola nor burgers.
2 - ) If the consumer has only $8 to spend, what would be the optimal consumption of both goods
for this consumer?
a. 4 colas and 2 burgers.
b. 5 colas and 1 burger.
c. 2 colas and 3 burgers.
d. 4 colas and 4 burgers.
Department of Economics Econ 101 - Principles of Microeconomics
3 - ) If MUa / Pa=1.5 and MUb / Pb=3 for a consumer who is spending her entire budget, then to
maximize utility she should
a. buy more of product A and less of product B.
b. buy more of product B and less of product A.
c. not change her situation.
d. None of the above.
4 - ) A fall in the price of Pepsi that causes a household to shift its purchasing pattern away from
substitutes and toward Pepsi is the
a. income effect of a price change.
b. substitution effect of a price change.
c. complementary effect of a price change.
d. diminishing marginal utility effect of a price change.
5 - ) Assume leisure is a normal good. The substitution effect of a wage decrease implies a
__________ demand for leisure and a __________ labor supply.
a. lower; higher
b. higher; lower
c. higher; higher
d. lower; lower
6 - ) Economic costs
a. include both a normal rate of return on investment and the opportunity cost of each
factor of production.
b. are equal to the direct costs of hiring all factors of production.
c. are the opportunity cost of each factor of production minus any interest charges paid on
borrowed funds.
d. are equal to total revenue minus accounting profit.
Department of Economics Econ 101 - Principles of Microeconomics
Table 1 Inputs Required to Produce a Product Using Alternative Technologies
12 - ) Refer to Table 1. Which technology is the most capital intensive?
a. A b. B c. C d. D
13 - ) Refer to Table 1. If the hourly wage rate is $10 and the hourly price of capital is $50, which
production technology should be selected?
a. A b. B c. C d. D
14 - ) A factory produces 1,000 radios a year. Average variable cost (AVC) is $10 and total fixed
cost is $5,000. Thus, the factory’s total cost (TC)
a. Equals $5,010.
b. Equals $
c. Equals $
d. Equals $5,000,
15 - ) A characteristic of perfect competition is that
a. It is difficult for new firms to enter the industry
b. The firm can influence the product’s price
c. The firms in the industry produce a homogenous product
d. The firm produces a large share of the industry’s total product
16 - ) In perfect competition, the marginal revenue curve
a. and the demand curve facing the firm are identical.
b. is always above the demand curve facing the firm.
c. is always below the demand curve facing the firm.
Department of Economics Econ 101 - Principles of Microeconomics
d. intersects the demand curve when marginal revenue is minimized.
17- )Refer to the Table below. Assume that fruit baskets are sold in a perfectly competitive
market. The market price of a fruit basket is $22. To maximize profits, Exotic Fruit should sell
__________ fruit basket(s).
a. Three
b. Four
c. Five
d. Six
18 - ) If a firm's demand curve is perfectly elastic, then at the profit maximizing level of output
a. P = MR = MC.
b. P > MR > MC.
c. P < MR < MC.
d. P > 0 and MR = 0.
Essay Questions
- What is the key differentiation between the short run and the long run for the profit-
maximizing firm?
Department of Economics Econ 101 - Principles of Microeconomics
MR=MC=20 so Output=4 then Profit=TR-TC=80-70=$
c) Calculate AVC and AFC when output is 4 units.
AVC=TVC/q=45/4= $11.25 AFC=TFC/q=25/4= $6.
d) Suppose the market price falls to $10 per unit of output. At this price, how many units of
output will the firm sell?
P=MR=MC then Output=
4 ) Suppose that Leyla’s monthly income is 200 $/month and she spends her income on two
goods: Entertainment and books. The price of entertainment is Pe=$20 and price of books
Pb=$10. Answer the following questions.
a. Suppose she spends all her money on these two goods. Sketch her budget constraint. Show at
least 4 points on this constraint which are attainable (Put books on the horizontal axis).
Entertainment Budget constraint; PeQe+PbQb=M A Point A: Qe=200/20=10 and Qb= Point B: Qe=0 and Qb=200/10=**
B Books
Department of Economics Econ 101 - Principles of Microeconomics
b. Last month she went to entertainment 5 times and bought 10 units of books. Is this attainable
for her? Show it on the figure you sketched in ‘a’.
Entertainment 10
5 a
Books 10 20
PeQe+PbQb=M and $520+$1010= $200 so it is attainable.**
c. Suppose the price of entertainment increased to $25. Sketch her new budget line. Can you tell
from this information how she could allocate her budget between the two goods in order to
maximize her utility?
Entertainment A F
Books B PeQe+PbQb=M and New budget line is FB**
At Point F: Qe=200/25=8 and Qb=
At Point B: Qe=0 and Qb=200/10=
d. Suppose that Leyla’s income doubled. Show her new budget line on a separate graph.
Leyla’s budget line is GH. At Point G: Qe=400/20=2 and Qb=0 ,
At Point H: Qe=0 and Qb=400/10= Entertainment G
A
B H Books
