ECON2310 Fall2013 Midterm page 1
STUDENT ID# Circle Lab InstructPARISA JOOYOUNG GEORGE
University of Guelph
College of Management and Economics
Department of Economics and Finance
ECON*2310: Intermediate Microeconomics
Fall Semester 2013
Midterm B ANSWER KEY
DO NOT OPEN THIS EXAM UNTIL YOU ARE TOLD TO DO SO
AT THE TOP OF THE PAGE WRITE YOUR NAME AND ID NUMBER ON THIS
EXAM AND PROVIDE A SIGNATURE. Indicate your lab instructor
TURN OFF YOUR CELL PHONE AND PUT AWAY ANY FOOD OR MUSIC
This quiz consists of 34 True/False Statements and 44 Multiple Choice Problems. The True/False
Statements are worth 1 point each while the Multiple Choice Problems are worth 1½ points each.
There are 100 points in total on the exam. If there is an error on the exam (we don’t believe there
is) or the question is unintentionally ambiguous (we don’t think so) we will make the necessary
adjustments during grading. Don’t ask us during the exam if there is a “right” answer to a
question as the two of us think there is.
You have two hours to complete the exam
The exam consists of 19 pages including a blank page at the end.
You may use a BASIC calculator (adds, subtracts, divides, multiplies, takes reciprocals and
square roots). Scientific, business, financial, and programmable calculators cannot be used.
NOBODY MAY LEAVE IN THE FIRST 60 MINUTES.
NOBODY MAY LEAVE IN THE LAST 5 MINUTES TO MINIMIZE THE DISRUPTION
TO YOUR FELLOW STUDENTS - CHECK YOUR ANSWERS. PLEASE REMAIN
SEATED UNTIL ALL EXAMS ARE COLLECTED. TURN IN YOUR EXAM BOOKLET
AND YOUR COMPUTER SCANTRON FORM. ECON2310 Fall2013 Midterm page 2
I) True/False Statements (34 statements - 1 point each): Suggested time 35
minutes. Circle either T (True) or F (False) on your exam and record on the
scantron form ( A IS TRUE AND B IS FALSE ) before moving on to part II.
NOTE* A statement is false if you can think of a counterexample (no credit for writing it)
Hint* A graph is useful for many of the statements. THINK!
1. T F If net benefits are negative where marginal costs equal marginal benefits the level
of a finely divisible action should be set at zero.
2. T F In order for net benefits to be maximized at a particular activity level it must be
the case that marginal benefits equal marginal costs.
3. T F If marginal benefits are given by MB = 5 - x and marginal costs are given by
MC = 10 + x the value of x which maximizes net benefits is 0.
4. T F An increase in the price of corn results in a downward shift in the demand curve
5. T F When the demand curve shifts, the change in equilibrium price will be smaller the
closer the price elasticity of supply is to 0.
6. T F A good whose income elasticity of demand is negative is called an inferior good.
7. T F If the price elasticity of demand is -2 at a price of $5 and a quantity of 750 units
the equation of a linear demand curve consistent with that information is
Q = 2250 – 300P
8. T F If MU XP X MU /P Yt tYe best affordable bundle with goods X and Y the
individual will not consume any of good Y. ECON2310 Fall2013 Midterm page 3
9. T F A halving of both income and prices will NOT result in a change in the utility
10. T F The utility function U = X + Y and U = X + Y + 1 will both rank bundles of goods
X and Y identically.
11. T F Consumer surplus is the total benefit the consumer derives from consuming a
12. T F The utility maximizing bundle of current and future consumption goods occurs
where the MRS for current goods (C) with future goods (F) is less than 1.
13. T F The effect of increasing the interest rate on saving is to lower current
14. T F Two different indifference curves for the same individual may have equal utility.
15. T F If Elena has the utility function U = 2(X + Y) she is two times better off if he
consumes two units of both X and Y rather than one unit of both X and Y.
16. T F Suppose a consumer is willing to substitute 3 apples for 1 orange at their current
consumption bundle and apples cost 2 times as much as oranges. If the consumer
reduces their consumption of oranges and increase their consumption of apples
they can increase utility.
17. T F Suppose Ann has 80 peanuts and is willing to exchange 5 peanuts for one walnut.
Bob has 20 walnuts and is willing to exchange one walnut for 6 peanuts. Ann will
trade some peanuts to Bob for walnuts.
18. T F Consumer surplus is zero if demand is perfectly elastic. ECON2310 Fall2013 Midterm page 4
19. T F If the substitution effect is of the opposite sign of the income effect the good
cannot be a normal good.
20. T F The labour supply curve of an individual is always upward sloping.
21. T F Compensating variation is positive if the price of a good declines.
22. T F The marginal rate of technical substitution is constant if the inputs are perfect
23. T F The production function Q = Max [ aL, bK] is one in which the inputs would be
deemed (characterized as) perfect complements.
Question not graded as we didn’t discuss this production function in class. In contrast to the
function Q = Min [ aL, bK] where inputs are used in a fixed proportion, for this production
function only one input is used – the one where additional output per dollar spent is greatest.
24. T F A firm that can produce the same type of good in either of two plants with labour
the firm will allocate all labour to the plant that initially has the highest marginal
product of labour.
25. T F If marginal product is falling average product cannot be rising.
26. T F The area under the marginal product curve represents total product (or output).
27. T F The production function Q = 2K + 3L exhibits constant returns to scale.
28. T F Short run average cost curves can never lie below the long run average cost curve.
29. T F The area under the short-run marginal cost curve is total cost. ECON2310 Fall2013 Midterm page 5
30. T F The long- run average cost curve is horizontal if there are constant returns to
31. T F Increasing returns to scale production functions do not exhibit diminishing
marginal productivity for its inputs.
32. T F Total costs equal sunk fixed costs plus avoidable fixed costs plus variable costs.
33. T F When the MRTS equals the factor price ratio the additional output per dollar
spent on each input is also equal.
34. T F Marginal cost is positively related to marginal product.
MAKE SURE YOU HAVE TRANSFERRED YOUR ANSWERS TO THE SCANTRON
FORM WHERE A IS TRUE AND B IS FALSE ECON2310 Fall2013 Midterm page 6
II) Multiple Choice Problems (44 problems – 1.5 points each): Circle the best
response. Suggested Time - 85 minutes. Circle the best answer on your exam
and then RECORD YOUR ANSWERS ON THE SCANTRON FORM.
35. If a supply curve is perfectly elastic the supply curve can be drawn as a/an line with
price on the vertical axis and quantity on the horizontal axis.
B) downward sloping
C) upward sloping
E) None f the above
36. Consider in the corn market demand function is Q corn=5 - 2P corn+ 4Ppotatoesnd supply
function is Q corn=9 + 5P corn- 1.25P soybeans If the price of soybeans rises from $4 to $6
per bushel and everything else does not change, market price of corn and equilibrium
output for corn
A) falls, falls
B) falls, does not change
C) increases, falls
D) increases, increases
E) falls, increases
37. Total expenditure is maximized at a downward sloping linear demand curve where the
price elasticity of demand is
38. If a change in the price of Y of 25% results in a change in the demand for X of 5%
A) the cross price elasticity of demand is 5 and the goods are substitutes.
B) the cross price elasticity of demand is 5 and the goods are complements.
C) the cross price elasticity of demand is 1/5 and the goods are substitutes.
D) the cross price elasticity of demand is 1/5 and the goods are complements
E) None of the above ECON2310 Fall2013 Midterm page 7
39. If the demand curve for a perfectly competitive market is P = 30 - 4Q and the market
supply curve is P = 2Q
A) Equilibrium output is 6 units.
B) Consumer surplus is 50.
C) Demand is inelastic at the equilibrium price.
D) Both (B) and (C).
E) All of the above.
Question 40 – 42 are based on the following information:
Suppose you can hire you2 mechanic for up to six ho2rs. The total benefit and total cost functions
are B(H) = 750H - 40H and C(H) = 110H + 120H . The corresponding formulas for marginal
benefit and marginal cost are MB(H) = 750 - 80H and MC(H) = 110 + 240H.
40. How many hours should you hire the mechanic?
41. Suppose your mechanic charges non-refundable fee of $300 when you reserve her time.
If you have not paid the fee, your best choice is
42. Suppose the non-refundable fee increases to $700. If you have not paid the fee, your best
E) 6 ECON2310 Fall2013 Midterm page 8
43. When one of the two goods is a bad, indifference curves with the bad on the horizontal
A) upward sloping
B) horizontal lines
C) downward sloping
D) vertical lines
E) Both A and B
44. Peter consumes both pizza (P) and cola (C). Suppose the formula for his indifference
curves is P = U /C where U represents utility. Which of the following would Peter prefer?
A) 5 pizzas and 5 colas.
B) 8 pizzas and 3 colas.
C) 2 pizzas and 10 colas.
D) 3 pizzas and 9 colas.
E) To answer this question we must know Peter’s income.
45. The marginal rate of substitution is constant along an entire indifference curve if
A) the MRS is diminishing
B) the goods are consumed in the same proportion regardless of price or income.
C) the utility function is U = 52 3Y.
D) the utility function is U = XY .
E) the utility function is Y = U/X.
46. David has10 litres of soup. Kate has10 kilograms of bread. Suppose Kate is willing to
give up one kilogram of bread for 3 litres of soup while David is willing to give up 4
litres of soup for one kilogram of bread. Assuming that both David and Kate consider the
two goods perfect substitutes. Which of the following possible trades would make both
David and Kate better off?
A) David gives Kate 3 litres of soup for 2 kilograms of bread
B) David gives Kate 3 litres of soup for 4/5 kilograms of bread
C) Kate gives David 2 kilograms of bread for 10 litres of soup
D) Kate gives David 2 kilograms of bread for 9 litres of soup
E) None of the trades above make both David and Kate better off. ECON2310 Fall2013 Midterm page 9
47. At a boundary (or corner) choice for the consumption bundle that maximizes utility,
A) the individual’s indifference curve is always tangent to his budget constraint.
B) one good usually provides more utility per dollar spent than the other good.
C) the marginal rate of substitution is equal to the price ratio.
D) All of the above.
E) None of the above.
Question 48 - 50 are based on the following information
Joe's income is $1200 per month. He spends all of it on movies (M) and pizza (P). Movies cost
$20 and pizzas cost $30. His preferences correspond to the utility function U(M,P) = MP. For
that utility function, the marginal benefit of movies is P and the marginal benefit of pizza is M.
48. If he spends his income on movies and pizza, what is the MRS PM at the best choice
49. How many movies and how many pizzas will he purchase in a month?
A) 0 movies and 60 pizzas.
B) 60 movies and 0 pizzas.
C) 20 movies and 30 pizzas.
D) 30 movies and 20 pizzas.
E) None of the above.
50. If Joe is limited to seeing 15 movies per month, how many movies and how many pizzas
will he purchase in a month?
A) 0 movies and 40 pizzas.
B) 0 movies and 60 pizzas.
C) 5 movies and 20 pizzas.
D) 15 movies and 30 pizzas.
E) 10 movies and 30 pizzas. ECON2310 Fall2013 Midterm page 10
51. If the income-consumption path slopes down, then
A) the law of demand must be violated.