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Economics 2150 Practice Exam

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Department
Economics
Course
Economics 2150A/B
Professor
Peter Streufert
Semester
Fall

Description
Version 111 THE UNIVERSITY OF WESTERN ONTARIO LONDON CANADA G. Stirling Economics 2150A – 003 November, 2012 Sample Mid-term #2 Multiple Choice (2 marks each) 1. Diminishing marginal returns occur when the total product function is A) decreasing. B) increasing at a decreasing rate. C) increasing at a constant rate. D) increasing at an increasing rate. E) decreasing at an increasing rate. 2. The slope of the isoquant can be expressed as A) the ratio of the input prices. B) the ratio of the inputs. C) the ratio of the marginal productivities of the inputs. D) the sum of the marginal productivities of the inputs. E) the product of the marginal productivities of the inputs. 3. If capital cannot easily be substituted for labour, then the elasticity of substitution is A) close to zero. B) negative. C) close to one. D) approaching infinity. E) any positive number 4. Suppose over time that a firm’s production process undergoes capital-saving technological progress. This implies A) the isoquants corresponding to any particular level of output will shift outward from the origin and the MRTS L,Kalong any ray from the origin will increase. B) the isoquants corresponding to any particular level of output will shift outward from the origin and the MRTS L,Kalong any ray from the origin will decrease. C) the isoquants corresponding to any particular level of output will shift inward toward the origin and the MRTS L,Kalong any ray from the origin will increase. D) the isoquants corresponding to any particular level of output will shift inward toward the origin and the MRTS L,Kalong any ray from the origin will decrease. E) the isoquants corresponding to any particular level of output will shift outward toward the origin and the MRTS L,Kalong any ray from the origin will remain constant 1 Version 111 5. With a linear production function, the MRTS L,K A) declines as the firm substitutes labour for capital. B) is diminishing. C) implies upward-sloping, straight-line isoquants. D) is undefined. E) remains constant as the firm substitutes labour for capital. 6. If a good is an inferior good A) A consumer would not purchase it. B) The good would not enter the utility function. C) The income effect reinforces the substitution effect. D) The income effect works in the opposite direction to the substitution effect. E) There is only a substitution effect from a price change. 7. For a lender, an increase in the interest rate A) has a substitution effect greater than the income effect. B) has an income effect greater than the substitution effect. C) has an income effect that works in the opposite direction to the substitution effect. D) has an income effect that works in the same direction to the substitution effect. E) has a only a substitution effect. 8. If a consumer’s preferences for two goods, say food and clothing, are such that as income decreases, consumption of food increases but consumption of clothing decreases, we can say that A) food and clothing are inferior goods. B) food is a normal good and clothing is an inferior good. C) food and clothing are both normal goods. D) food is an inferior good and clothing is a normal good. E) food is a necessary good and clothing is a luxury good. 9. Suppose when the consumer’s income rises by 100%, the consumer’s consumption of good x falls by 1%. We can infer that the consumer’s income elasticity for good x is A) –1 B) –100 C) 1 D) 0.01 E) –0.01 2 Version 111 10. Identify the truthfulness of the following statements. I. It is possible for an Engel curve to be positively sloped for a certain region of income and negatively sloped for another region. II. The income elasticity of demand for a normal good is negative. A) Both I and II are true. B) Both I and II are false. C) I is true; II is uncertain. D) I is false; II is true. E) I is true; II is false. 11. The substitution effect graphically is always denoted A) by movement along the original indifference curve, whereas the income effect is represented by a rotation of the budget line. B) by moving in the direction of the item that is becoming relatively more expensive. C) by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line. D) by movement along the original indifference curve, whereas the income effect is represented by a parallel shift of the budget line. E) by movement along the original budget line, whereas the income effect is a movement along the indifference curve 12. Suppose the consumer’s utility function is given by U(x,y) = xy + y ,and where A) Then the consumer must always consume both goods. B) The utility function is quasi-linear. C) The indifference curves are straight lines. D) Good x is a normal good. E) All of the above. y x 13. Let U(x,y) = xy with MU =x and MU = y . Let I = $100, P x $5 and 2 x 2 y P = $10 be the initial set of prices and income. Now, let P rise to $10. What are the y x (approximate) substitution and income effects of this change in prices? A) Income effect = -3.1; Substitution Effect = -1.9 B) Income effect = -2.1; Substitution Effect = -2.9 C) Income effect = -1.3; Substitution Effect = -2.7 D) Income effect = -2.7; Substitution Effect = -1.3 E) Income effect = -1.3; Substitution Effect = -1.7 3 Version 111 14. Consider a market with Q  240 6P and Q = 2P What is the consumer surplus in this . market? A) 1,000 B) 500 C) 750 D) 300 E) 1,500 d s 15. Consider a market with Q  240 4P  2I and Q  6P . Suppose that initially income is I = 60, and that income then increases to I = 80. What is the increase in consumer surplus from this increase in income? A) 1300 B) 1368 C) 1421 D) 1472 E) 1468 16. Compensating variation is A) the change in income necessary to hold the consumer at the final level of utility as price changes. B) always the area under the demand curve and above the price paid. C) the change in income necessary to make the consumer better off. D) the difference in the consumer’s income between the purchase of the original basket and the new basket at the old prices. E) the change in income necessary to restore the consumer to
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