Micro Final Practice Exam

Exam 1
1. In economics, choices must be made because we live in a world of
A) unemployment.
B) scarcity.
C) greed.
D) unlimited resources

2. You have an absolute advantage whenever you

A) are better educated than someone else.
B) can produce more of something than others with the same resources.
C) prefer to do one particular activity.
D) can produce something at a lower opportunity cost than others.

3. During the recession of 2007-2009, Subway experienced increased sales. This

increase in demand
for food such as a Subway sandwich indicates that Subway sandwiches are inferior
goods, which in
economic terms means
A) the Subway sandwich is of low quality.
B) the Subway sandwich is not as large as it used to be.
C) competitors' sandwiches, such as those from Quiznos, taste better than Subway
sandwiches.
D) the demand for the Subway sandwich increases when income decrease.

4. Which of the following statements best describes the concept of consumer

surplus?
A) "Safeway was having a sale on Dreyer's ice cream so I bought 3 quarts."
B) "I was ready to pay $200 for a new jacket that I had seen in Macy's but I ended
up paying only $135
for the same jacket."
C) "I paid $130 for a printer last week. This week the same store is selling the same
printer for $110."

D) "I sold my Blu-ray copy of Modern Family: Season One for $18 at a garage sale
even though I was
willing to sell it for $10."

5. Which of the following is a normative economic statement?

A) Rising global demand for coal has led to increases in the price of coal.
B) With rising mortgage rates and rising unemployment rates, the number of unsold
homes has
increased.
C) The state of Texas is considering increasing funds for light-rail development to
promote the use of
public transportation.
D) Pharmaceutical manufacturers should not be allowed to patent their products so
prescription drugs
would be more affordable.

6. Comparative advantage means

A) the ability to produce more of a product with the same amount of resources than
any other producer.
B) the ability to produce a good or service at a lower opportunity cost than any
other producer.
C) the ability to produce a good or service at a higher opportunity cost than any
other producer.
D) compared to others you are better at producing a product.

7. If the Apple iPad and the Samsung Galaxy Tab are considered substitutes, then,
other things equal,
an increase in the price of the iPad will
A) decrease the demand for the iPad.
B) increase the demand for the Galaxy Tab.
C) decrease the quantity demanded for the Galaxy Tab.
D) increase the quantity demanded for the iPad.

8. The area above the market supply curve and below the market price is equal to
the
A) consumer surplus.
B) producer surplus.
C) marginal benefit.
D) marginal cost.

9. The highest valued alternative that must be given up to engage in an activity is

the definition of
A) economic equity.
B) marginal benefit.
C) opportunity cost.
D) marginal cost.

10. The attainable production points on a production possibility curve are

A) the horizontal and vertical intercepts.
B) the points along the production possibilities frontier.
C) the points outside the area enclosed by the production possibilities frontier.
D) the points along and inside the production possibility frontier.

11. Which term refers to a legally established minimum price that firms may
charge?
A) a price ceiling
B) a subsidy
C) a price floor
D) a tariff

12. Large home improvement stores like Home Depot and Lowes recently started to
stock tankless
water heaters. How does the fact that more home improvement stores now offer
these products affect

the tankless water heater market?

A) The demand curve for tankless water heaters shifts to the right.
B) The demand curve for tankless water heaters shifts to the left.
C) The supply curve for tankless water heaters shifts to the right.
D) The supply curve for tankless water heaters shifts to the left.

13. An outward shift of a nation's production possibilities frontier represents

A) economic growth.
B) rising prices of the two goods on the production possibilities frontier model.
C) an impossible situation.
D) a situation in which a country produces more of one good and less of another.

14. When Toyota introduced its 2010 Prius, it announced that the average retail
price of the 2010
model would be lower than the average retail price was for the equivalent 2009
model. Which of the
following would explain the price differential?
A) The demand for the Prius had increased, and the supply of the Prius remained
unchanged.
B) The supply of the Prius had decreased, and the demand for the Prius remained
unchanged.
C) The demand for the Prius had decreased, and the supply of the Prius had
increased.
D) The demand for the Prius had increased, and the supply of the Prius had
decreased.

15. To affect the market outcome, a price ceiling

A) must be set above the price floor.
B) must be set below the price floor.

C) must be set above the equilibrium price.

D) must be set below the equilibrium price.

Exam 2
1) Jason gets utility out of a skateboard since the skateboard
A) is scarce.
B) has a high price.
C) can be used for several purposes.
D) generates enjoyment or satisfaction.

2) When dealing with a negative externality in production, the market supply curve
reflects the
A) external benefits of producing a good or service.
B) external costs of producing a good or service.
C) social costs of producing a good or service.
D) private costs of producing a good or service.

3) Which of the following statements about the price elasticity of demand of cereal
is correct?
A) Demand for cereal in general is more elastic than the demand for Cinnamon
Toast Crunch, a
particular brand of cereal.
B) Demand for cereal, a necessity, is more elastic than the demand for Orioles
baseball tickets, a
luxury.
C) Demand for cereal is more elastic when you graduate from Loyola than it is
today.
D) Demand for cereal, which takes up a smaller percentage of your income, is more
elastic than the
demand for apartments, which take up a larger percentage of your income.

4) Which of the following is the best example of a short run adjustment?

A) A local bakery purchases another commercial oven as part of its capacity
expansion.
B) The local Wal-Mart hires two more sales associates.
C) Loyola completed negotiations to acquire a large piece of land to build its new
lacrosse stadium.
D) Toyota builds a new assembly plant in Texas.

5) According to an article in the Wall Street Journal, unlike airlines, even elite hotels
don't have
sophisticated systems that can react quickly to changes in demand. Even if they
could, many hoteliers
say people don't respond that much to lower rates. "We've tested this, cutting our
rates by $50 [per
night], and we didn't see an appreciable response in occupancy," says Jim
Schultenover, a vice
president for Ritz-Carlton. Based on this information, the demand for hotel rooms is
A) elastic.
B) unit-elastic.
C) inelastic.
D) perfectly elastic.

6) If policymakers use a tax to control pollution, the tax should be set

A) equal to the external cost.
B) equal to the private cost.
C) equal to the social cost.
D) equal to the amount of the deadweight loss created.

7) Over longer periods of time, increases in oil prices provide firms with incentives
to explore and
recover oil. What does this indicate about the long run price elasticity of supply for
oil?
A) The price elasticity of supply is likely to be higher in the long run than in the
short run.

B) The price elasticity of supply is likely to be lower in the long run than in the short
run.
C) The price elasticity of supply approaches 0 in the long run.
D) The price elasticity of supply is the same in the long run as in the short run.

8) Which of the following is likely to occur as the result of the law of diminishing
marginal utility?
A) Nunes total utility after drinking two cups of coffee is less than her total utility
from drinking one
cup of coffee.
B) Lisa went to the animal shelter and adopted only one dog instead of two dogs.
C) Delta Air Lines charges its customers a higher price for two one-way tickets
versus one roundtrip
ticket.
D) Ravi enjoyed his second round of golf less than his first round of golf.

9) If diminishing marginal returns have already set in for Golden Lark Woodworks,
and the marginal
product of the 6th carpenter is 8 chairs, then the marginal product of the 7th
carpenter is
A) negative.
B) less than 8 chairs.
C) more than 8 chairs.
D) zero.

10) Which of the following demonstrates the endowment effect?

A) Chris decides to go to the state fair even though he had previously purchased
tickets to go to a
Ravens game that day because he would have more fun at the state fair than at the
football game.
B) Chris decides to go to a Ravens game because he already purchased tickets for
the game even
though he would have more fun at the state fair that day.

C) Justin Timberlake commands a premium in the music industry because he is

endowed with dashing
looks.
D) Jessica was not willing to part with her Justin Timberlake CD although she was
offered $50 for it, a
sum greater than what it costs to purchase another such CD

11) The market demand for a public good can be determined by

A) adding up the private benefit and the external benefit at each quantity amount.
B) adding up the quantity demanded by each consumer at every possible price.
C) adding up how much each consumer is willing to donate at each quantity
amount.
D) adding up the revenue from each consumer at every possible price.

12) Which of the following displays these two characteristics: nonrival and
nonexcludable in
consumption?
A) FM radio
B) cable television
C) cell phone
D) fish in a lake

13) If the marginal cost curve is below the average variable cost curve, then the
A) average variable cost curve must be upward sloping.
B) average variable cost must be downward sloping.
C) marginal cost curve must be downward sloping.
D) average variable cost must be horizontal.

14) For people who live near a bus route, a subway station, or a light rail line, public
transportation
provides a substitute to driving their own cars. So, for these people, the cross-price
elasticity of demand

between gasoline and public transportation is

A) positive.
B) negative.
C) zero.
D) infinity.

15) In 1955, the chairman of the Sony corporation offered to sell transistor radios
through department
stores in the United States. Sony based its selling price on its 6average total cost of
production. If a store
bought 5,000 radios, Sony would sell them at $29.95 each. For 10,000 there would
be a discount, and
for more than 10,000 the price would begin to climb. Based on this information,
Sony reached
minimum efficient scale
A) at a quantity below 5,000 radios.
B) at a quantity of 5,000 radios.
C) at a quantity of 10,000 radios.
D) at a quantity above 10,000 radios

Word Problems

Exam 1
1. The Fruit Farm produces only apples and pears. The table below shows the
maximum possible output combinations of the two fruits using all resources and
currently available technology.

Possible Output
Combinations
A
B
C
D
E
F
G
H

Apples (thousands of
Pounds
70
60
50
40
30
20
10
0

Pears (thousands of
pounds)
0
20
36
48
56
60
63
65

a. Graph The Fruit Farm's production possibilities frontier. Put apples on the
horizontal axis and pears on the vertical axis. Make sure that your graph illustrates
whether the Fruit Farm experiences constant or increasing opportunity costs. (3
points)

b. Suppose The Fruit Farm is currently producing at point D. What is the opportunity
cost of producing an additional 8,000 pounds of pears? (1 point)

2. Suppose that the United States and Japan both produce cars and computers. The
following table shows combinations of the goods that each country can produce in a
day:
_____________________________________________________________________________________
Japan

United

States
Cars

Computers

Cars

Computers
0
1
2
3
4

16
12
8
4
0

0
1
2
3
4
5

25
20
15
5
0

a. Who has a comparative advantage in producing cars? Briefly explain. (1 point)

b. Who has a comparative advantage in producing computers? Briefly explain. (1

point)

c. Suppose that Japan is currently producing 2 cars and 8 computers, and the United
States is currently producing 2 cars and 15 computers. Create a table to
demonstrate that Japan and the United States can both be better off if they
specialize in producing only one good and then engage in trade. (3 points)

3. As oil prices rose from 2005 to 2006, the demand for alternative fuels increased.
Ethanol, one alternative fuel, is made from corn. According to an article in the Wall
Street Journal, the price of tortillas, which are made from corn, also rose during
2006: The price spike [in tortillas] is part of a ripple effect from the ethanol boom.
a. The increase in the demand for ethanol affected the corn market since corn is
used to produce ethanol. Illustrate the effect that the increase in the demand for
ethanol had on the corn market by drawing a demand and supply graph for corn
before and after the increase in the demand for ethanol. Be sure to label your graph

completely and indicate any shifts in the demand curve and/or supply curve, as well
as any changes to equilibrium price and equilibrium quantity. (2 points)

b. As the demand for ethanol increased, farmers were allocating more corn towards
the production of ethanol and less corn towards the production of tortillas. Illustrate
the effect that the increase in the demand for ethanol had on the tortilla market by
drawing a demand and supply graph for tortillas before and after the increase in the
demand for ethanol. Be sure to label your graph completely and indicate any shifts
in the demand curve and/or supply curve, as well as any changes to equilibrium
price and equilibrium quantity. (2 points)

c. During 2009, ethanol producers were asking the Environmental Protection Agency
(EPA) to raise the allowable amount of ethanol in gasoline blends from 10 percent to
15 percent. As a result, more corn would be used in the production of ethanol. If the
EPA were to agree to this proposal, do you think that tortilla prices would increase or
decrease? Explain.

4. The figure below represents demand and supply in the market for gasoline. Use
the diagram to answer the following questions. (Copy by Hand)

a. What is the equilibrium price if no tax was implemented on gas? (1 point)

b. How much is the government tax on each gallon of gasoline? (1 point)

c. What is the market price after the implementation of the tax? (1 point) (Hint: This
is the price that consumers would pay including the tax)

d. Calculate the tax burden for consumers. (1 point)

e. Calculate the tax burden for sellers. (1 point)

Exam 2
1. Real estate agents advise their clients to keep their front yard well maintained in
order to increase their real estate value. However, an attractive front yard will also
help the value of the homes of the clients neighbors.
a. Does having a nice front yard exhibit an externality? If so, is this an example of a
negative or positive externality? Explain. (1 point)

b. Draw a graph showing this externality. Make sure to identify the market quantity
and efficient quantity, as well as label all of the curves in your graph. (2 points)

c. What can the government do in response to the externality associated with

aesthetically pleasing front yards? Explain how this government policy would bring
about the efficient level of consumption. (2 points)

2. Suppose that Nike sells 600 golf polos a day at a price of $50. When Nike
increased the price to $75, the quantity of golf polos decreased to 200 a day.
a. Use the midpoint formula to calculate the price elasticity of demand. Be sure to
show all of your work for full credit. (2 points)

b. Indicate whether demand for Nike golf polos is elastic or inelastic. Briefly explain.
(1 point)

c. Consider the original situation in which Nike sells 600 golf polos at a price of $50.
Assuming that the price elasticity of demand is equal to your answer in part a., what
percent change in price would induce an increase in quantity demanded by 20%? (2
points)

3. Suppose Matt has $245 per week to spend on any combination of video games
and comic books. The price of a video game is $50 and the price of a comic book is
$10. The table below shows Matts utility values. Use the table to answer the
questions that follow the table.

Quantity of
Video Games

Total
Utility

Quantity of Comic
Books

Total
Utility

0
0
0
0
1
1000
1
150
2
1850
2
280
3
2500
3
390
4
2950
4
480
5
3200
5
550
6
3250
6
600
7
3275
7
620
a. Complete the table below by calculating the Marginal Utility and Marginal Utility
per Dollar columns for both video games and comic books. (2 points)

Quantity
of Video
Games

Total
Utility

0
1
2
3
4
5
6
7

0
1000
1850
2500
2950
3200
3250
3275

Marginal
Utility

Marginal
Utility
per
dollar

Quantity
of Comic
Books

Total
Utility

0
1
2
3
4
5
6
7

0
150
280
390
480
550
600
620

Marginal
Utility

Marginal
Utility
per
Dollar

b. Use the information in the previous page to create a table that determines the
number of comic books and movie tickets Matt should buy to maximize his utility. (3
points)

4. Cassandra owns a snow cone stand. She leases 4 snow cone machines, for which
she pays $20 for each machine. She cannot change the number of machines she
leases without giving the manufacturer three months notice. She can hire as many
workers as she wants at a cost of $40 per worker. These are the only two inputs she
uses in her business. Use this information to fill in the columns in the table. Be sure
to show all of your work. You can round your answers to the nearest penny. (5
points)

Quantity
of
Workers
0

Quantity
of Snow
Cones
0

40

85

105

115

10

120

Fixed Cost

Variable
Cost

Total Cost

Average
Total Cost

Marginal
Cost