Temple University
Department of Economics

Economics 52: Principles of Microeconomics

Name _________________________________

Directions: You have 50 minutes to complete all parts of this exam.  This is a closed book exam.  All work must be your own.  You may neither give nor receive help. You may not use your cell phone as a calculator.

Multiple Choice (30 points)

	1.	Jose is vacationing on Padre Island during Spring Break. He goes to the beach early on a sunny afternoon because he knows it will be crowded and he wants to have sufficient room to put out a large beach towel to lie on while sunning himself. Later that afternoon the beach fills to capacity and the family next to Jose raises a large beach umbrella to shade themselves from the sun. The shade from the umbrella also covered the area where Jose was lying. In this case, the sunlight was: 
	A)	scarce because the beach was full to capacity 
	B)	scarce because the neighboring family absorbed all the sunlight with their umbrella. 
	C)	scarce because Jose would have to forego a place on the beach to receive the sunlight. 
	D)	not scarce because Jose could move to another location to receive the sunlight. 
	E)	not scarce because it is freely available (i.e., Jose did not have to pay money for it). 

	2.	With ATM machines it is possible to retrieve cash from the bank at any time.  One hundred years ago, one could only get cash from the bank during business hours, say, 9 am to 3 pm.  The difference is because 
	A)	cash is a more popular means of making payments today. 
	B)	flexibility was not valued 100 years ago. 
	C)	the cost of providing 24 hour a day service is much lower today. 
	D)	it was impossible to provide 24 hour a day service 100 years ago. 
	E)	government forced banks to become more convenient. 

	3.	The textbook suggests that applying the basic principles of economics to the details of everyday life will 
	A)	give an air of intellectual superiority. 
	B)	lessen one's understanding of the world. 
	C)	get one invited to fewer parties. 
	D)	make even the simplest decision overly complex and paralyze action. 
	E)	make one an economic naturalist. 

	4.	Jack has a ticket to see Smashmouth which he paid $30 for yesterday.  He takes an unpaid day off from work to get ready for the concert. When he arrives at the concert, 5 different people offer him $70 for his ticket.  The cost to Jack of seeing Smashmouth is 
	A)	$30. 
	B)	$40. 
	C)	$70 plus his forgone earnings. 
	D)	his forgone earnings. 
	E)	$70. 

Use the following to answer question 5:
David finds he has one hour of time in the evening to allocate on the first day of the new semester.  He can do one of two things.  He can watch TV for one hour or he can open his economics textbook and read for an hour.  The benefit of watching TV is 30; the benefit of reading about economics is 20. 

	5.	If David applies the cost-benefit principle accurately, he will 
	A)	watch TV. 
	B)	watch TV but fret that he should be reading. 
	C)	flip a coin because the net benefits are the same. 
	D)	read about economics but resent missing TV. 
	E)	read about economics. 

	6.	When 5 units of activity M are chosen, the average benefits are $13 and the average costs are $12.  One can infer that 
	A)	5 is the optimal amount. 
	B)	total benefits are less than total costs. 
	C)	more units should be chosen. 
	D)	insufficient information is available to judge if 5 units are optimal or not. 
	E)	fewer units should be chosen. 

	7.	According to the textbook, VCR's were developed and initially produced in the U.S. but currently are produced abroad.  This is because 
	A)	as VCR design stabilized and production became more automated, countries with low wage workers gained a comparative advantage. 
	B)	the U.S. lost its absolute advantage in VCR's. 
	C)	consumers fail to look for the "Made in the U.S.A" label. 
	D)	foreign countries gained an absolute advantage in VCR's. 
	E)	foreign countries encourage the "dumping" of VCR's on the U.S. 

	8.	In general, individuals and nations should specialize in producing those goods for which they 
	A)	have the lowest opportunity cost compared to others. 
	B)	have an average opportunity cost. 
	C)	can produce less quickly than others. 
	D)	have the highest opportunity cost compared to others. 
	E)	can produce more quickly than others. 
Use the following to answer question 9:
Smith and Jones comprise a two-person economy.  Their hourly rates of production are shown below.

	9.	By coordinating their production decisions, the maximum number of computers Smith and Jones can produce is 
	A)	10. 
	B)	6. 
	C)	16. 
	D)	100. 
	E)	120. 

	10.	If the demand for a good increases as consumers' incomes rise, the good is termed a(n) 
	A)	typical good. 
	B)	inferior good. 
	C)	normal good. 
	D)	complement good. 
	E)	substitute good. 

	11.	In the 1970's, OPEC increased the price of crude oil significantly.  This should have caused 
	A)	the price of fuel efficient cars to fall. 
	B)	a decrease in the demand for gasoline 
	C)	an increase in the demand for automobiles with V8 engines. 
	D)	the price of gasoline to fall. 
	E)	the supply curves of firms using crude oil as an input to shift to the left. 

	12.	Without the aid of a graph, one can say definitively that if both supply and demand decrease simultaneously, the new equilibrium price is ___________  and the new equilibrium quantity is _________________. 
	A)	higher; indeterminate. 
	B)	indeterminate; lower 
	C)	lower; indeterminate 
	D)	indeterminate; higher 
	E)	lower; lower 

	13.	Given that Chris' marginal utility from his 1st taco is 15 and his marginal utility for the 2nd taco is 12, one can infer that Chris' 
	A)	average utility for 2 tacos is 24. 
	B)	should eat 2 tacos. 
	C)	total utility of 2 tacos is 27. 
	D)	marginal utility for the 3rd taco will exceed 12. 
	E)	should not eat 2 tacos. 
	14.	If, as price falls from $10 to $9, quantity demanded rises from 7 to 12 units, demand is ______ (recall that % DX=DX/X). 
	A)	inelastic 
	B)	unit elastic 
	C)	elastic 
	D)	perfectly inelastic 
	E)	perfectly elastic 

	15.	Assume the consumer is correctly applying the rational spending rule for goods X and Z.  The proper sequence of events is 
	A)	MUX/PX falls, the price of X falls, purchases of X increase. 
	B)	purchase of X increase, MUX/PX falls, the price of X falls. 
	C)	the price of X falls, MUX/PX falls, purchases of X increase. 
	D)	purchase of X increases, the price of X falls, MUX/PX falls. 
	E)	the price of X falls, purchases of X increase, MUX/PX falls. 

Problem (45 Points)

The demand curve and supply curve for black robes at Madame Malkin’s in Diagon Alley are given by

P = 20 + 3/10 Q         ________Supply_____________________

Q = 200 – 2 P             ________Demand_____________________ 

a. On the lines above indicate which equation is the demand curve and which is the supply curve.

b. What are the equilibrium price and quantity for black robes?

P _______________________________   Q ______________________________

P=20+(3/10)(200-2P)

P=20 + 600/10 - (6/10) P

(16/10)P = 80

P = 50 

Q = 200 – 2(50) = 100

c.  What is the own price elasticity of demand at the equilibrium?

ε = |(1/slope)(P/Q)| = |(-2)|(50/100) = 1

d.  Is the demand for trips ⁯ elastic or ⁯ inelastic It is unit elastic (check one)?

e.  Calculate consumer surplus at the equilibrium price and quanity.

CS = ½ (100 – 50)(100) = 2500

f.  An excise tax of $10 per robe is imposed on those purchasing robes for school.  What are the new equilibrium price and quantity?

Price ____________________________   Quantity _________________________

P = 20 + (3/10) Q + 10
P = 30 + (3/10) (200 – 2P) = 30 + 60 – (6/10)P
(16/10) P = 90
P = 900/16 = 56.25
Q = 200 - 2(56.25) =  87.5

g.  As a result of the tax, what do you expect to happen to consumer surplus? 

It will decrease.

Essay (25 Points)  In addition to the content of your answer you will also be graded on spelling, grammar and syntax.  Also, if your writing is illegible then your answer will be considered non-responsive and you will receive no credit.

Suppose that the federal government establishes a price floor, above the equilibrium, for milk.  What are the likely short and long run consequences of this effective price support?

1.	The price floor above the equilibrium price will cause sellers to produce too much; there will be an excess supply of milk.
2.	 Consumer surplus will decline.  Producer surplus will increase for those able to sell their output.  If the gov’t buys the excess supply then producer surplus will rise for all firms.
3.	 There will be some deadweight loss.
4.	 More firms will enter the dairy industry.

Answer Key

	1.	C	
	2.	C	
	3.	E	
	4.	E	
	5.	A	
	6.	D	
	7.	A	
	8.	A	
	9.	C	
	10.	C	
	11.	E	
	12.	B	
	13.	C	
	14.	C	
	15.	C