ECO401 Economics Midterm Spring 2009

Question No: 1    ( Marks: 1 )    - Please choose one

 Microeconomics is the branch of economics that deals with which of the following topics?

       ► The behavior of individual consumers.

       ► Unemployment and interest rates.

       ► The behavior of individual firms and investors.

       ► The behavior of individual consumers and behavior of individual firms and investors.

   

Question No: 2    ( Marks: 1 )    - Please choose one

 If pen and ink are complements, then an increase in the price of pen will cause:

       ► An increase in the price of ink.

       ► Less ink to be demanded at each price.

       ► A decrease in the demand for pen.

       ► A rightward shift in the demand curve for ink.

   

Question No: 3    ( Marks: 1 )    - Please choose one

 When college students leave town for the summer, the demand for meals at the local restaurants decline. This results in:

       ► A decrease in equilibrium price and an increase in quantity of meal.

       ► An increase in equilibrium price and quantity of meal.

       ► A decrease in equilibrium price and quantity of meal.

       ► An increase in equilibrium price and a decrease in quantity of meal.

   

Question No: 4    ( Marks: 1 )    - Please choose one

 An increase in supply is shown by:

       ► Shifting the supply curve to the left.

       ► Shifting the supply curve to the right.

       ► Upward movement along the supply curve.

       ► Downward movement along the supply curve.

   

Question No: 5    ( Marks: 1 )    - Please choose one

 Assume that the government sets a ceiling on the interest rate that banks charge on loans. If the ceiling is set below the market equilibrium interest rate, the result will be:

       ► A surplus of credit.

       ► A shortage of credit.

       ► Greater profits for banks issuing credit.

       ► A perfectly inelastic supply of credit in the market place.

   

Question No: 6    ( Marks: 1 )    - Please choose one

 If a 12% price reduction causes quantity demanded to rise by 12% then:

       ► Demand is inelastic.

       ► Demand is elastic.

       ► Demand is perfectly elastic.

       ► Total revenue will remain constant.

   

Question No: 7    ( Marks: 1 )    - Please choose one

 Which of the following will be TRUE if demand is inelastic?

       ► The coefficient of elasticity is greater than one.

       ► The percentage change in quantity demanded is same as the percentage change in the price.

       ► An increase in price will increase total revenue.

       ► None of the given options.

   

Question No: 8    ( Marks: 1 )    - Please choose one

 Which of the following is the term that economists use to describe how consumers rank different goods and services?

       ► Satisfaction index.

       ► Goodness.

       ► Utility.

       ► None of the given options.

   

Question No: 9    ( Marks: 1 )    - Please choose one

 Marginal utility is best described as:

       ► The total satisfaction gained from the total consumption of the good.

       ► The change in satisfaction from consuming one additional unit of the good.

       ► The additional satisfaction gained by consumption of the last good.

       ► The per unit satisfaction of the good consumed.

   

Question No: 10    ( Marks: 1 )    - Please choose one

 According to the utility model of consumer demand, the law of diminishing marginal utility indicates that the demand curve is:

       ► Vertical.

       ► U-shaped.

       ► Upward-sloping.

       ► Downward-sloping.

   

Question No: 11    ( Marks: 1 )    - Please choose one

 Law of diminishing marginal utility indicates that the slope of the marginal utility curve is:

       ► Horizontal.

       ► Vertical.

       ► Negative.

       ► Positive.

   

Question No: 12    ( Marks: 1 )    - Please choose one

 A person with a diminishing marginal utility of income will be:

       ► Risk averse.

       ► Risk neutral.

       ► Risk loving.

       ► None of the given options.

   

Question No: 13    ( Marks: 1 )    - Please choose one

 Aslam spends all of his money on racquetballs and food. What would happen to Aslam’s budget line if his income increased by 10 percent holding prices constant?

       ► It would shift inward.

       ► It would rotate about the axis for food.

       ► It would rotate about the axis for racquetballs.

       ► It would shift outward.

   

Question No: 14    ( Marks: 1 )    - Please choose one

 Suppose you are a workaholic (like work a lot) and your friend is a leisure lover. Compared to your friend your indifference curve will be:

       ► Flatter.

       ► Steeper.

       ► Identical.

       ► None of the given options.

   

Question No: 15    ( Marks: 1 )    - Please choose one

 Which of the following statements about indifference curves is NOT correct?

       ► Indifference curves are generally negatively sloped.

       ► Without utility being quantifiable we can say that one indifference curve is higher than (or preferred to) another but we cannot say by how much.

       ► Two indifference curves cannot intersect unless they are identical throughout.

       ► Two different indifference curves can intersect but only once.

   

Question No: 16    ( Marks: 1 )    - Please choose one

 Which of the following is a correct statement about the substitution effect?

       ► The substitution effect is always negative.

       ► The substitution effect is positive for an inferior good.

       ► The substitution effect measures how demand  changes when income changes.

       ► The substitution effect is positive for a Giffen good.

   

Question No: 17    ( Marks: 1 )    - Please choose one

 A normal good can be defined as one which consumers purchase more of as:

       ► Prices fall.

       ► Prices rise.

       ► Incomes fall.

       ► Incomes increase.

   

Question No: 18    ( Marks: 1 )    - Please choose one

 The largest amount of output that a firm can produce with a given combination of inputs is determined by the:

       ► Marginal product of labor.

       ► Gains from specialization.

       ► Cost function.

       ► Production function.

   

Question No: 19    ( Marks: 1 )    - Please choose one

 Which of the following is most likely to be a fixed input in the short run for a Garage owner?

       ► The grease used to lubricate cars.

       ► The part-time labor employed to repair cars.

       ► The electricity used to heat and light the garage.

       ► The garage used to repair cars.

   

Question No: 20    ( Marks: 1 )    - Please choose one

 The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost?

       ► 5Q.

       ► 5.

       ► 5 + (200/Q).

       ► None of the given options.

   

Question No: 21    ( Marks: 1 )    - Please choose one

 A firm maximizes profit by operating at the level of output where:

       ► Average revenue equals average cost.

       ► Average revenue equals average variable cost.

       ► Total costs are minimized.

       ► Marginal revenue equals marginal cost.

   

Question No: 22    ( Marks: 1 )    - Please choose one

 Revenue is equal to:

       ► Price times quantity.

       ► Price times quantity minus total cost.

       ► Price times quantity minus average cost.

       ► Price times quantity minus marginal cost.

   

Question No: 23    ( Marks: 1 )    - Please choose one

 A price taker is:

       ► A firm that accepts different prices from different customers.

       ► A monopolistically competitive firm.

       ► A firm that cannot influence the market price.

       ► An oligopolistic firm.

   

Question No: 24    ( Marks: 1 )    - Please choose one

 Which of the following is an example of a natural monopoly?

       ► The trademark protecting Gatoraide.

       ► The talents of Tom Hanks.

       ► The local water company.

       ► The patent on an Intel processor.

   

Question No: 25    ( Marks: 1 )    - Please choose one

 A perfectly competitive firm maximizes profit by finding the level of production at which:

       ► Price = Marginal Cost.

       ► Price = Average Total Cost.

       ► Average Total Cost = Marginal Cost.

       ► Price < Marginal Cost.

   

Question No: 26    ( Marks: 1 )    - Please choose one

 If at the profit-maximizing quantity, profits are positive,then:

       ► Price < Average Total Cost.

       ► Price > Average Total Cost.

       ► Price < Average Variable Cost.

       ► Price = Marginal Cost.

   

Question No: 27    ( Marks: 1 )    - Please choose one

 If a firm experiences economies of scale, then the:

       ► Long-run average total cost curve is equal to the economies of scope.

       ► Long-run average total cost curve is positively sloped.

       ► Long-run average total cost curve is horizontal.

       ► Long-run average total cost curve is negatively sloped.

   

Question No: 28    ( Marks: 1 )    - Please choose one

 The monopolist has no supply curve because:

       ► The quantity supplied at any particular price depends on the monopolist's demand curve.

       ► The monopolist's marginal cost curve changes considerably over time.

       ► The relationship between price and quantity depends on both marginal cost and average cost.

       ► Although there is only a single seller at the current price, it is impossible to know how many sellers would be in the market at higher prices.

   

Question No: 29    ( Marks: 1 )    - Please choose one

 A firm never operates:

       ► At the minimum of its average total cost curve.

       ► At the minimum of its average variable cost curve.

       ► On the downward-sloping portion of its average total cost curve.

       ► On the downward-sloping portion of its average variable cost curve.

   

Question No: 30    ( Marks: 1 )    - Please choose one

 As compared to existing firms, a new firm entering in monopolist market has:

       ► High costs.

       ► Low costs.

       ► Equal costs.

       ► None of the given options.

   

Question No: 31    ( Marks: 1 )    - Please choose one

 Following are the disadvantages of monopoly EXCEPT:

       ► Monopolists earn higher profits.

       ► Monopolists produce high quality goods at higher prices.

       ► Most of the “surplus” (producer + consumer surplus) accrues to monopolists.

       ► Monopolists do not pay sufficient attention to increasing efficiency.

   

Question No: 32    ( Marks: 1 )    - Please choose one

 When a firm charges each customer the maximum price that the customer is willing to pay, the firm:

       ► Engages in a discrete pricing strategy.

       ► Charges the average reservation price.

       ► Engages in second-degree price discrimination.

       ► Engages in first-degree price discrimination.

   

Question No: 33    ( Marks: 1 )    - Please choose one

 Which of the following is NOT regarded as a source of inefficiency in monopolistic competition?

       ► The fact that price exceeds marginal cost.

       ► Excess capacity.

       ► Product diversity.

       ► The fact that long-run average cost is not minimized.

   

Question No: 34    ( Marks: 1 )    - Please choose one

 What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?

       ► It shifts rightward.

       ► It shifts leftward.

       ► It becomes horizontal.

       ► New entrants will not affect an incumbent firm's demand curve.

   

Question No: 35    ( Marks: 1 )    - Please choose one

           Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?

       ► Price = Marginal Cost.

       ► Marginal Cost = Average Total Cost.

       ► Price > Marginal Revenue.

       ► Profit equals zero.

   

Question No: 36    ( Marks: 1 )    - Please choose one

 Which one of the following is TRUE about pure monopoly?

       ► The monopoly's demand curve and the market demand curve are one and the same.

       ► The market is dominated by just two firms.

       ► The monopolist will always charge the highest possible price.

       ► The monopolist will always charge a high price because it wants to maximize profits.

   

Question No: 37    ( Marks: 1 )    - Please choose one

 If income elasticity is negative, the good is:

       ► Normal good.

       ► A substitute good.

       ► A complementary good.

       ► Inferior good.

   

Question No: 38    ( Marks: 1 )    - Please choose one

 If indifference curves cross, then:

       ► The assumption of a diminishing marginal rate of substitution is violated.

       ► The assumption of transitivity is violated.

       ► The assumption of completeness is violated.

       ► Consumers minimize their satisfaction.

   

Question No: 39    ( Marks: 1 )    - Please choose one

 If the demand curve for a good is downward sloping, then the good:

       ► Must be inferior.

       ► Must be giffen.

       ► Can be normal or inferior.

       ► Must be normal.

   

Question No: 40    ( Marks: 1 )    - Please choose one

 The marginal rate of substitution between food and shelter for a given point on an indifference curve:

       ► Is equal to the absolute value of the slope of the indifference curve at that point.

       ► Is equal to the rate at which the consumer is willing to exchange the two goods in the market place.

       ► Reflects the relative values the consumer attaches to the two good.

       ► Is described, in part, by each of the given statements.

   

Question No: 41    ( Marks: 10 )

 Explain all the factors which determine the value of price elasticity of demand.