Temple University
Department of Economics
Economics 52 - - Principles of Microeconomics
First Exam
	
Directions:  You may have 1 hour and 20 minutes to complete this exam.  You must do all of the questions. The point values of the questions is shown.  It is advisable to show your numerical work.  This is a closed book exam.  You may neither give nor receive help.	

Name: __________________________  Date: _____________
Multiple Choice (40 points)

1.	Why don't auto manufacturers make cars without radios? 	
A)	No one will buy the car without the radio. 	
B)	Radios are necessity 	
C)	Because every one loves music 	
D)	It is cheaper to put radios in all cars 	
E)	Because every one can afford a radio in their car 	

Dave just paid $5,000 cash for a 1992 Mustang and he needs to travel to Los Angeles this summer. He can either drive his car or take a bus. In order to make a rational decision, he decides to calculate the costs of driving the car on the trip. He knows the cost of the car was $5,000, he estimates the cost of gas at 20 cents per mile, the car repair shop estimates maintenance at 5 cents per mile, his car insurance costs $660 for 6 months, and from a web site he determines that depreciation is about $3 per mile.	

2.	Which of the above costs are sunk cost and, therefore, should not be included in his analysis? 	
A)	The cost of the car 	
B)	Insurance and loan payment costs 	
C)	Depreciation, insurance and loan payment costs 	
D)	Maintenance, depreciation and insurance costs 	
E)	Maintenance, depreciation, insurance and loan payment costs 	

3.	Assuming Dave decides to drive his car to Los Angeles and back on a two-month trip, which of the listed costs would be fixed costs and which would be variable costs? 	
A)	The costs of the car and insurance would be sunk costs, and the cost of gas,  maintenance and depreciation would be variable costs. 	
B)	The costs of the car, depreciation and insurance would be a sunk costs, and the cost of gas and maintenance would be variable costs. 	
C)	The cost of the car would be a sunk cost, and the cost of gas, insurance, maintenance and depreciation would be average costs. 	
D)	All of the costs would be sunk costs. 	
E)	All of the costs would be variable costs. 	

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. 	
D)	$70 plus his forgone earnings. 	
E)	his forgone earnings. 	

5.	If a nation has an absolute advantage in the production of toilet paper, then it 	
A)	must also have a comparative advantage. 	
B)	will always produce enough for domestic consumption. 	
C)	will never produce toilet paper. 	
D)	may or may not have a comparative advantage. 	
E)	must also have an absolute advantage for other paper products. 	

6.	The benefits to specialization are enhanced when the two trading partners have 	
A)	absolute advantages in producing the same goods. 	
B)	similar consumption preferences. 	
C)	very similar opportunity costs. 	
D)	large comparative advantages in different goods. 	
E)	the same inborn talent and experience. 	

	

7.	As Bobby Jo and Mary Lou choose to efficiently produce fewer apple pies and more apple cider, __________ devotes more time to apple cider because his __________. 	
A)	Mary Lou; absolute advantage is larger 	
B)	Bobby Jo; absolute advantage is smaller 	
C)	Bobby Jo; opportunity costs are lower 	
D)	Mary Lou; opportunity costs are lower 	
E)	Mary Lou; comparative advantage is smaller 	

8.	Suppose that the production of oranges reduces global warming by .1%. The equilibrium price of oranges is _______ because not all of the _________ are accounted for in the marketplace. 	
A)	too high; benefits 	
B)	too low; benefits 	
C)	too high; costs 	
D)	too low; costs 	
E)	optimal; costs 	

9.	Suppose that the equilibrium price of french fries rises while the equilibrium quantity falls.  The most consistent explanation for these observations is 	
A)	a decrease in demand for french fries with no change in supply. 	
B)	an increase in demand for french fries with no change in supply. 	
C)	a increase in the supply of french fries and a increase in the demand for french fries. 	
D)	a decrease in the supply of french fries with no change in demand. 	
E)	an increase in the supply of french fries with no change in demand. 	

10.	If a market is in equilibrium and demand increases while supply decreases, the change in the equilibrium price is ________ and the change in the equilibrium quantity is _________. 	
A)	positive; positive 	
B)	positive; negative 	
C)	positive; indeterminate 	
D)	indeterminate; positive 	
E)	negative; negative 	

11.	In general, when the supply curve shifts to the left and demand is constant then 	
A)	the market cannot reestablish an equilibrium. 	
B)	the equilibrium price will fall. 	
C)	the equilibrium quantity will rise. 	
D)	the equilibrium price will rise. 	
E)	quantity supplied falls. 	

12.	A decrease in the demand for bananas with no concurrent change in the supply of bananas will result in a ________ equilibrium price and a(n) ________ equilibrium quantity. 	
A)	higher; lower 	
B)	lower; lower 	
C)	higher; unchanged 	
D)	higher; higher 	
E)	lower; higher 	

13.	Suppose one could rent a car or take the train to go to Chicago from DC. If the price of train tickets increase 	
A)	the demand for train tickets will increase 	
B)	the demand for rental cars will increase 	
C)	the demand for train tickets will decrease 	
D)	the demand for rental cars will decrease 	
E)	the quantity demanded of train tickets will increase 	

14.	Mike knows how to make hamburgers (like many other people) and got a minimum wage job at Burger King.  With respect to price elasticity of supply, hamburgers are __________ because the inputs to production are __________. 	
A)	inelastic, mobile 	
B)	elastic, mobile 	
C)	inelastic, flexible 	
D)	elastic, flexible 	
E)	perfectly elastic, mobile 	

15.	Firms that produce goods with many substitutes will find that 	
A)	lowering price increases total revenues. 	
B)	lowering price decreases total revenues. 	
C)	raising price increases total revenues. 	
D)	lowering price leaves total revenues unchanged. 	
E)	raising price leaves total revenues unchanged. 	

Use the following figure to answer question 16.	

16.	When P=3,the price elasticity of demand for the demand curve D1is______ and D2 is_____. 	
A)	3,1/3 	
B)	1/3,3 	
C)	1,3 	
D)	3,1 	
E)	1,1/3 	

17.	A price elasticity of demand of 0.3 means a 	
A)	10 percent increase in the price results in a 3 percent increase in quantity demanded. 	
B)	3 percent increase in the price results in a 3 percent decrease in quantity demanded. 	
C)	10 percent increase in the price results in a 3 percent decrease in demand. 	
D)	10 percent increase in the price results in a 3 percent decrease in quantity demanded. 	
E)	10 percent increase in the price results in a 3 percent increase in demand. 	

18.	For two goods, A and B, MUA/PA= 10 and MUB/PB=12.  The consumer should 	
A)	Leave their choices as they are. 	
B)	purchase less of A and more of B. 	
C)	purchase more of A and B. 	
D)	purchase less of A and B. 	
E)	purchase more of A and less of B. 	

19.	If the marginal utility of the 3rd cup of coffee is 23 and the marginal utility of the 4th cup is 15, then 	
A)	it is optimal for the consumer to have 3 cups of coffee. 	
B)	the price of a cup of coffee must be relatively low. 	
C)	it is optimal for the consumer to have 4 cups of coffee. 	
D)	there is evidence of the law of diminishing marginal utility. 	
E)	the price of a cup of coffee must be relatively high. 	

20.	The term marginal utility denotes the amount by which ______ changes when consumption changes by_____ unit(s). 	
A)	satisfaction, 5 	
B)	demand, 5 	
C)	demand, 1 	
D)	total utility, 5 	
E)	total utility, 1 	

Essay  (20 points)

Between September and November the number of bushels of apples consumed is seen to be greater than during any other three month period of the year, and yet prices are also lowest during that period.  Between May and August the occupancy rate and the rental price of houses ‘down the shore’ are seen to be higher than at any other time of the year. Why do the prices of some goods, like apples, go down during the months of heaviest consumption while others, like beachfront cottages, go up?  Use supply and demand graphs to explain your answer.

Problems (40 points)

1.	The market for digital video disks (DVDs) is characterized by the following two equations:

P = 3 + 2Q    __________________________

P = 42 – Q   ___________________________

a. On the lines beside the equations indicate which is the supply curve and which is the demand curve.

b. Find the equilibrium price and quantity.  Write your answers on the lines below.

Price _____________________     Quantity  _______________________

c. Sketch the supply curve and the demand curve in the space below.  Label the demand curve, the supply curve, and the axes.  Be sure to include the intercepts where appropriate.  Show the equilibrium price and quantity in your diagram.

d. Indicate in your diagram the area corresponding to consumer surplus.

e. Calculate consumer surplus.

f. Indicate in your diagram the area corresponding to producer surplus.

g. Calculate producer surplus.

f.  The government imposes a price support of $32.  At that price what is the quantity demanded?

g. At the support price of $32, what is the quantity supplied?

h. What is the amount of the deadweight loss associated with the imposition of the price support?
 
Answer Key

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