MBA AF 601 Spring 2017 Midterm NAME:__________________________________ Instructions: Use this page to record your answers. Midterm questions start on page 2 and end on page 7. Upload your answers to Blackboard by 11:59pm EST on Sunday, March 26, by clicking on “Midterm Exam” link and uploading your file. There are 20 multiple choice questions, each worth 5 points. There is only one correct answer for each question. If you do not answer a question or provide two or more answers it will be counted as incorrect response. Review your answers carefully before submission, you will have only one opportunity to submit your exam. Problem # Answer Problem # Answer 1 11 2 12 3 13 4 14 5 15 6 16 7 17 8 18 9 19 10 20 1 Midterm Questions (5 points each) 1) Suppose MPL = 0.5 ∗ (q/L) and MPK = 0.5 ∗ (q/K). In the long run, the firm will hire equal amounts of capital and labor A) all of the time. B) only when w = 2 * r. C) only when w = 0.5 ∗ r. D) only when w = r. E) at no point in time. 2) Jill likes to consume coffee and cream in a very particular way: with every cup of coffee she always consumes two 0.5 oz. cream containers. Jill is a utility maximizer and decides to spend her income is $120 per month on coffee and cream. If the price of each coffee cup is $2.50, and the price of each cream container is $0.25, she will consume ______ cups of coffee and ______ cream containers per month. A) 48; 96. B) 96; 48. C) 240; 480 D) 40; 80 E) None of the above 3) Joshua is a utility maximizer and likes ice cream. He likes vanilla ice cream, but would happily switch to chocolate ice cream if offered 1 scoop of chocolate ice cream for every scoop of vanilla ice cream he has to give up. He has $5 of income to spend on ice cream If vanilla ice cream costs $2.5 per scoop and chocolate ice cream costs $1 per scoop, Joshua will consume ______ scoops of chocolate and ______ scoops of vanilla ice cream per day. A) 2; 5 B) 5; 2 C) 2; 0 D) 0; 5 E) None of the above 4) A microeconomic model CANNOT be used to A) evaluate the impact of a price change on a firm’s revenue. B) predict the impact of an increase in the minimum wage on unemployment. C) evaluate the fairness of a proposal to nationalize health insurance. D) evaluate the effect of an increase in stadium size on the price of a sport team’s tickets. E) All of the above. 2 5) Consider the following bundles of avocadoes and peaches: Bundle A = {5, 2}; Bundle B = {4, 2}; Bundle C = {3, 5}; Bundle D = {2, 5}. The first number in curly brackets is the number of avocadoes; the second number is the number of peaches. Rachel has the following preferences over these four bundles: she prefers A to B and she also prefers C to D. She is indifferent between bundle B and bundles C and she is indifferent between bundles A and D. Given this information, we can say that, A) Rachel’s preferences satisfy all axioms of rational choice. B) Rachel’s preferences violate transitivity axiom. C) Rachel’s preferences violate completeness axiom. D) Rachel’s preferences violate more is better axiom. E) B and D only. 6) The above diagram shows the market for oranges given current market supply and demand conditions. The government passes the law declaring current equilibrium price to be the “fair” price, and legally imposing “price ceiling” on the price of oranges. Next, suppose that demand and supply conditions change in the following way: foreign producers bring more oranges to the market, while consumers decide to consume more tangerines and fewer oranges. Such change in market conditions would lead to ________ equilibrium price and _______excess demand. Finally, equilibrium quantity will________. A) lower; positive; decrease. B) higher; positive; either decrease or increase. C) higher; no; either decrease or increase. D) lower; no; either decrease or increase. E) lower; no; increase. 3 7) In the above diagram at a price ceiling of $7, the quantity demanded would be ____ and quantity exchanged/sold would be _______. A) 0; 60 B) 10; 40 C) 30; 40 D) 30; 70 E) None of the above 8) Suppose the production function for good q is given by ! = 3 ∙ ! + 2 ∙ ! where K and L are capital and labor inputs. Consider three statements about this function: I. The function exhibits constant returns to scale II. The function exhibits constant marginal productivities to all inputs III. The function has a constant marginal rate of technical substitution Which of these statements are true? A) All of them B) None of them C) I and II but not III D) I and III but not II E) Only I 9) For any given output level, a firm’s long-run costs A) are always greater than or equal to its short-run costs. B) are usually greater than or equal to its short-run costs except in the case of diminishing returns to scale C) are always less than or equal to its short-run costs D) are usually less than or equal to its short-run costs except in the case of diminishing returns to scale. E) are usually less than or equal to its short-run costs except in the case of increasing returns to scale. 10) Suppose that the utility function of an individual can be described as U(X,Y) = X + Y. For this utility function the MRS A) is always X*Y B) is always X-Y C) is always X/Y D) is always X+Y E) is always constant 4 11) Stanley consumes only white and red wines and his utility function can be described by U(R,W) = !!.!” ∙ !!.!”, where R is the number of bottles of red wine and W is the number of bottles of white wine that he consumes per month. Suppose that his income is $500 and the price of a bottle of red wine $20 and the price of a bottle of white wine is $15. In this case, Stanley will purchase _____ bottles of red wine and _____ bottles of white wine per month. Next, suppose that the price of red wine goes up to $35 per bottle. In this case, Stanley would consume ______ quantity of bottles of white wine compared to the original situation. A) 10; 20; smaller B) 20; 10; smaller C) 10; 20; the same D) 20; 10; the same E) None of the above 12) Leyla consumes goods X and Y. The price of good X is Px and the price of good Y is Py, Leyla’s income is I. If both prices and Leyla’s income decrease by 50%, then the A) slope of the budget constraint will decrease. B) slope of the budget constraint will increase. C) budget constraint will be unchanged. D) budget constraint will shift outward in a parallel fashion. E) None of the above 13) Consider a technology exhibiting diminishing MRTS. If capital is fixed, but a firm varies labor A) the firm stays on the same isoquant. B) the firm moves to a new isoquant. C) the firm might move to a new isoquant, depending on how much labor is added. D) the firm’s output will be dependent on the marginal rate of technical substitution. E) None of the above 14) Given the production function q = 1.37LK, what is the marginal product of capital? A) 1.37 B) 0 C) 1.37K D) 1.37L E) Cannot be determined with the information given. 5 15) If the average cost (AC) of producing a good is increasing as a firm produces more output (q), then which of the following must be TRUE? A) AFC is falling; AVC is rising; MC > AVC B) AFC is falling; AVC is falling; MC > AVC C) AFC is rising; AVC is rising; MC > AVC D) AFC is rising; AVC is rising; MC < AVC E) AFC is falling; AVC is falling; MC < AVC 16) Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q, where q is output level. Which of the following statements is FALSE for all positive finite levels of output? A) MC = AVC B) MC = AC C) MC > AFC D) All of the above. E) A and B only 17) If Qs = -60 + 10p, and Qd = 600 – 20p, what is the equilibrium quantity? A) 22 B) 146.6 C) 360 D) 160 E) 100 18) Joe’s budget constraint equals 600 = 2F + 100S, where $600 is Joe’s income, $2 is the price of food (F, y-axis) and $100 is the price of shelter (S, x-axis). How much food can Joe buy if he buys one unit of shelter? A) 2 units B) 200 units C) 250 units D) 400 units E) 300 units 19) By selecting a bundle of good X and good Y where MRS = MRT, the consumer is saying A) “I value my last unit of each good equally.” B) “I will equate the amounts spent on all goods consumed.” C) “I am willing to trade one good for the other at the same rate that I am required to do so by the market prices” D) All of the above. E) A and B only 6 20) In a given market, a competitive equilibrium is described by A) a price and a quantity B) a price only. C) a quantity only. D) the excess supply minus one half of the excess demand. E) the excess supply plus one half of the excess demand. 7