Temple University
Department of Economics
Economics 52,  Microeconomic Principles
1st Hour Exam, Spring 2006

Name _______________________________________

Directions: You have 50 minutes to complete this exam.  You must do all questions; point values are shown.  Your work must be your own; you may neither give nor receive help.  This is a closed book exam.

A.	Multiple Choice (45 points)  Answers at the end.

Use the following to answer questions 1-2:
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. 

	1.	The net benefit of reading about economics is 
	A)	-10. 
	B)	30. 
	C)	0. 
	D)	10. 
	E)	20. 

	2.	The net benefit of watching TV is 
	A)	0. 
	B)	-10. 
	C)	20. 
	D)	30. 
	E)	10. 
	3.	At the individual level, comparative advantage results from: 
	A)	differences in education or training. 
	B)	cultural differences. 
	C)	language differences. 
	D)	amount of resources available. 
		E)  differences in natural resources.

	4.	A university observes that when it raises the price of football tickets, total revenue from football games increases and when they lower ticket prices, total revenue falls. This suggests 
	A)	the demand for tickets to football games must be elastic. 
	B)	the demand for tickets to football games is unit elastic. 
	C)	the demand for tickets to football games must be inelastic. 
	D)	there are many good substitutes for college football games 
	E)  football fans act irrationally.

Use the following to answer question 5:

	5.	Assume supply and demand both shift to the right so that D2 and S2 are now the relevant curves.  The new equilibrium occurs at a price of _______ and ______ units exchanged. 
	A)	$30; 30 
	B)	$30; 70 
	C)	$60; 40 
	D)	$60; 20 
	E)	$90; 50 

	6.	Joe has decided to purchase his textbooks for the semester. His options are to purchase the books via the Internet with next day delivery to his home at a cost of $250, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $245. Last week he drove to campus to buy a concert ticket because they offered 20 percent off the regular price of $20. 
	A)	It would not be rational for Joe to drive to campus to purchase the books because the $5 saving is only two percent of the cost of the books, and that is much less than the 20 percent he saved on the concert ticket. 
	B)	It would be rational for Joe to drive to campus because it costs less to buy the books there than via the Internet. 
	C)	It would not be rational for Joe to drive to campus to purchase the books because the cost of gas and his time must certainly be more than the $5 he would save. 
	D)	There is insufficient information to determine whether it would be rational or not for Joe to purchase the books via the Internet or on campus. 
	E)	It would be rational for Joe to drive to campus because the $5 saving is more than he saved by driving there to buy the concert ticket. 

	 

Use the following to answer question 7:

	7.	Based on their comparative advantages, Craig should specialize in producing __________ while Jenny should specialize in producing __________. 
	A)	pants; pants 
	B)	neither; both 
	C)	both; neither 
	D)	shoes; pants 
	E)	pants; shoes 

Use the following to answer question 8:

	8.	The marginal benefit of adding the 10th shirt to one's wardrobe is 
	A)	$75. 
	B)	$45. 
	C)	0. 
	D)	$10. 
	E)	$30. 

	9.	In general, it is true that 
	A)	specialization imposes costs as well as benefits. 
	B)	more specialization is always better. 
	C)	more specialization is always worse. 
	D)	less specialization is always worse. 
	E)	less specialization is always better. 

	10.	Nineteenth century economist Stanley Jevons argued the price of a good was determined by 
	A)	its value to the supplier. 
	B)	custom and tradition. 
	C)	government decree. 
	D)	the expense involved in producing it. 
	E)	its value to the consumer. 

	11.	For most goods, as the number of units consumed increases, total utility ______, while marginal utility ______. 
	A)	increases; decreases 
	B)	peaks; bottoms out 
	C)	decreases; decreases 
	D)	decreases; increases 
	E)	increases; increases 

	12.	If the total benefits of watching 1,2, and 3 baseball games on TV are 100, 120, and 125 then the marginal benefits are 
	A)	100, 240, and 375. 
	B)	100, 609, and 41.67. 
	C)	100, 10, and -30. 
	D)	100,120, and 125. 
	E)	100, 20, and 5. 

	13.	Which of the following statements about total utility is false? 
	A)	Total utility can't be measured. 
	B)	The increase in total utility from the first unit consumed exceeds the increase from the second unit consumed. 
	C)	At some point, the increase in total utility from consuming an extra unit begins to get smaller. 
	D)	The increase in total utility from the second unit consumed exceeds the increase from the first unit consumed. 
	E)	Total utility increases as more units of a good are consumed. 

Use the following to answer question 14:

In many cities, discount clubs are popular.  For a fixed annual fee, one can purchase goods at 95% of their listed price; otherwise, one pays the list price.  Suppose that the fee is $100 and the interest rate is 10%.  Finally, assume the discount club's list prices are the same as any other store. 

	14.	Suppose the Jones family plans to spend $1000.  They __________ purchase the membership because __________. 
	A)	will; it seems like a good deal. 
	B)	will; the net benefit of membership is $60. 
	C)	will not; the net benefit of membership is -$50. 
	D)	will; the net benefit of membership is $50. 
	E)	will not; the net benefit of membership is -$60. 
	15.	Which of the following will not cause a shift in the demand curve for Athlon processors? 
	A)	An increase in the price of memory. 
	B)	A decrease in the price of Athlon processors. 
	C)	An increase in consumers' incomes. 
	D)	A decrease in the price of motherboards. 
	E)	A decrease in the price of Pentium III processors. 

Essay (25 points) You will be graded on content, as well as spelling, grammar and syntax.  If you don’t write legibly, then I won’t read it.

During the summer months more people drink Snapple Iced Tea and the average price is seen to be lower than at other times of the year.  During the winter months more people purchase woolen mittens and the price is seen to be higher than at other times of the year. Explain how both observations can be true.

To produce the observed facts there must have been an increase in supply (a rightward shift of the supply curve) of tea.

To produce the observed facts there must have been an increase in demand (a rightward shift of the demand curve) for mittens.

Problem (30 points) 

Al Paca has determined that the market for wool sweaters can be described by the following equations

Q = 6P – 120   ____Supply__________________________

P = 100 – ½ Q _____Demand___________________________

a.  On the lines to the right indicate which is the supply curve and which is the demand curve.

b.  What are the equilibrium price and quantity?

P _______________________         Q  _________________________

P = 100 – ½ (6P – 120)
P = 100 – 3 P + 60
P = 160 – 3 P
4P = 160
P = 40
Q = 6(40) -120 = 120

c.  What is the elasticity of demand for woolen sweaters at the equilibrium price and quantity?

ε = (P/Q)(1/slope) = (40/120)(1/ ½ ) = 2/3

d.  In order to fund the treatment of the skin irritation due to the over-consumption of scratchy sweaters it is decided that an excise of $10 per sweater will be imposed.  Find the new equilibrium quantity of wool sweaters.

6P = Q + 120
P = 20 + 1/6 Q
Pt = 30 + 1/6 Q
100 – ½ Q = 30 + 1/6 Q
70 = 4/6 Q
Q = 105

e.  How much money will be raised by the tax?

Tax Revenue = 10(105) = 1050

f.  What price will be paid by consumers, inclusive of the tax?

P = 100 – ½ (105.) = 47.5

g.  What will be the net price received by the sellers of malt beverages?

Pnet = 47.5 – 10 = 37.5
Answer Key

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