MIDTERM EXAMINATION ECO401 Fall 2008

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

 The concept of a risk premium applies to a person that is:

       ► All of the given options.

       ► Risk averse.

       ► Risk neutral.

       ► Risk loving.

   

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

 Assume that the current market price is below the market clearing level.  We would expect:

       ► A surplus to accumulate.

       ► Downward pressure on the current market price.

       ► Upward pressure on the current market price.

       ► Lower production during the next time period.

   

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

 The "perfect information" assumption of perfect competition includes all of the following EXCEPT:

       ► Consumers know their preferences.

       ► Consumers know their income levels.

       ► Consumers know the prices available.

       ► Consumers can anticipate price changes.

   

Question No: 4    ( 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: 5    ( Marks: 1 )    - Please choose one

 The correlation between an asset's real rate of return and its risk (as measured by its standard deviation) is usually:

       ► Positive.

       ► Strictly linear.

       ► Flat.

       ► Negative.

   

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

 Insurance companies operate under the principle of:

       ► Law of large numbers.

       ► Law of small numbers.

       ► Law of zero numbers.

       ► All of the given options.

   

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

 A demand schedule is best described as:

       ► A numerical tabulation of the quantity demanded of a good at different prices, ceteris paribus.

       ► A graphical representation of the law of demand.

       ► A systematic listing of all the variables that might conceivably bring about a change in demand.

       ► A symbolic representation of the law of demand: P,Q and Q, P.

   

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

 A firm in monopolistic competition does not achieve minimum efficient scale because:

       ► It is not a monopoly.

       ► It is in competition with other firms.

       ► It is operating on the downward-sloping part of the average cost curve.

       ► It produces at the minimum average cost.

   

Question No: 9    ( 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: 10    ( 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: 11    ( Marks: 1 )    - Please choose one

 The break-even point occurs when:

       ► Price < Average Variable Cost.

       ► Price < Average Total Cost.

       ► Price = Average Total Cost.

       ► Price > Average Variable Cost.

   

Question No: 12    ( 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: 13    ( 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: 14    ( Marks: 1 )    - Please choose one

 A monopoly occurs when:

       ► Each firm produces a product that is slightly different from the other firms.

       ► One firm sells a good that has no close substitutes and a barrier blocks entry for other firms.

       ► There are many firms producing the same product.

       ► All of the given options.

   

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

 If current output is less than the profit-maximizing output then the next unit produced:

       ► Will decrease profit.

       ► Will increase cost more than it increases revenue.

       ► Will increase revenue more than it increases cost.

       ► Will increase revenue without increasing cost.

   

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

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

       ► 200.

       ► 5Q.

       ► 5.

       ► 5 + (200/Q).

   

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

 Incremental cost is the same concept as:

       ► Average cost.

       ► Marginal cost.

       ► Fixed cost.

       ► Variable cost.

   

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

 Fixed costs are fixed with respect to changes in:

       ► Output.

       ► Capital expenditures.

       ► Wages.

       ► Time.

   

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

 When an isocost line is just tangent to an isoquant, we know that:

       ► Output is being produced at minimum cost.

       ► Output is not being produced at minimum cost.

       ► The two products are being produced at the medium input cost to the firm.

       ► The two products are being produced at the highest input cost to the firm.

   

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

 A negatively sloped isoquant implies:

       ► Products with negative marginal utilities.

       ► Products with positive marginal utilities.

       ► Inputs with negative marginal products.

       ► Inputs with positive marginal products.

   

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

 Diminishing marginal returns implies:

       ► Decreasing marginal costs.

       ► Increasing marginal costs.

       ► Decreasing average variable costs.

       ► Decreasing average fixed costs.

   

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

 In economics, the “long run” is a time period in which:

       ► All inputs are variable.

       ► All inputs are paid for.

       ► All outputs are determined.

       ► All loans are repaid.

   

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

 The following table shows a firm’s Total Product of labor. What is the Marginal Product of labor between 20 and 30 units of labor?

Table
Quantity of Labor	Total Product
0	0
10	100
20	230
30	340
40	410
50	460

       ► 340 units.

       ► 220 units.

       ► 11 units.

       ► 110 units.

   

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

 If Average Physical Product (APP) is increasing then which of the following must be true?

       ► Marginal physical product is greater than average physical product.

       ► Marginal physical product is less than average physical product.

       ► Marginal physical product is increasing.

       ► Marginal physical product is decreasing.

   

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

 Assume Leisure is a normal good. If income effect exceeds substitution effect then a wage decrease will lead a person to:

       ► Decrease hours of work.

       ► Increase hours of work.

       ► Not change anything.

       ► All of the given options.

   

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

 If a market basket is changed by adding more to at least one of the goods, then every consumer will:

       ► Rank the market basket more highly after the change.

       ► Rank the market basket more highly before the change.

       ► Rank the market basket just as desirable after the change.

       ► Be unable to decide whether he prefers the first market basket to the second or the second to the first.

   

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

 Suppose there are only two goods A and B, if more of good A is always preferred to less, and if less of good B is always preferred to more, then:

       ► Indifference curves slope downwards.

       ► Indifference curves slope upwards.

       ► Indifference curves may cross.

       ► Indifference curves could take the form of ellipses.

   

Question No: 28    ( 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: 29    ( Marks: 1 )    - Please choose one

 Suppose the first four units of an output produced incur corresponding total costs of 400, 700, 900, and 1000. The marginal cost of the fourth unit of output is:

       ► 50.

       ► 100.

       ► 150.

       ► 200.

   

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

 Consumers will maximize satisfaction when:

       ► The price of each good is exactly equal to the price of every other good consumed.

       ► The price of each good is exactly equal to the total utility derived from the consumption of every other good.

       ► The marginal utility of the last dollar spent on each good is exactly equal to the marginal utility of the last dollar spent on any other good.

       ► Marginal utility is equal to average utility.

   

Question No: 31    ( 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: 32    ( Marks: 1 )    - Please choose one

 Cross price elasticity between coffee and tea is 1.5. It means that:

       ► Given a 1% increase in coffee price, we would expect a 1.5% increase in tea demand.

       ► Given a 1% increase in coffee price, we would expect a 1.5% decrease in tea demand.

       ► Given 1% increase in coffee price, there will be no change in tea demand.

       ► None of the given options.

   

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

 When the price of petrol rises by 12%, the quantity of petrol purchased falls by 8%. This shows that the demand for petrol is:

       ► Perfectly elastic.

       ► Unit elastic.

       ► Elastic.

       ► Inelastic.

   

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

 A price ceiling might be an appropriate government response to a:

       ► Period of falling farm prices due to unusually good harvests.

       ► Substantial increase in farm productivity due to applications of new  technology in

agriculture.

       ► National security crisis leading to major shortages of essential goods.

       ► Period of extraordinary large surpluses of farm goods.

   

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

 Assume that steak and potatoes are complements.  When the price of steak goes up, the demand curve for potatoes:

       ► Shifts to the left.

       ► Shifts to the right.

       ► Remains constant.

       ► Shifts to the right initially and then returns to its original position.

   

Question No: 36    ( 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: 37    ( Marks: 1 )    - Please choose one

 In a free-market economy, the allocation of resources is determined by:

       ► Votes taken by consumers.

       ► A central planning authority.

       ► Consumer preferences.

       ► The level of profits of firms.

   

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

 Which of the following might be considered to be a characteristic of a planned economy?

       ► Price is relatively unimportant as a means of allocating resources.

       ► Goods and services produced reflect consumer sovereignty.

       ► There is no incentive for people to work hard.

       ► All income is completely evenly distributed.

   

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

 Which of the following is a positive statement?

       ► When the price of a good goes up, consumers buy less of it.

       ► When the price of a good goes up, firms produce more of it.

       ► When the Federal government sells bonds, interest rates rise and private investment is reduced.

       ► All of the given options.

   

Question No: 40    ( 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: 41    ( Marks: 10 )

a.       What is the relationship between average physical product and marginal physical product in three cases if:

i.        Marginal physical product is equal to average physical product.

The average physical product will not change.

ii.      Marginal physical product is above the average physical product.

The average physical product will also increase.

iii.    Marginal physical product is below the average physical product.

The average physical product will also fall