Temple University
Department of Economics
Economics 52
Principles of Microeconomics
Exam 1
Name _______________________

Directions: You have 50 minutes to complete all of the questions.  Your answers must be your own work; you may neither give nor receive help.  Put your answers on the exam. Point values are shown.   

Multiple Choice (40 points)

	1.	If the market for coffee has excess supply, then one can say that 
	A)	supply is greater than demand. 
	B)	quantity supplied is greater than quantity demanded. 
	C)	demand is greater than supply. 
	D)	supply is greater than quantity demanded. 
	E)	quantity demanded is greater than quantity supplied. 

Use the following to answer questions 2-3:

	2.	According to data, Jenny has an absolute advantage in 
	A)	the production of shoes. 
	B)	neither shoe nor pants production. 
	C)	the production of pants. 
	D)	both shoe and pants production. 
	E)	pants and possibly shoe production. 

	3.	The comparative advantage for shoes belongs to __________ and the comparative advantage for pants belongs to __________. 
	A)	Craig; Jenny 
	B)	Craig; Craig 
	C)	Jenny; Craig 
	D)	Jenny; Jenny 
	E)	both; Craig 

	4.	Class attendance today is nearly 100% but on most other days it is less.  The likely explanation for this would be 
	A)	the opportunity cost of not attending today is much higher than usual. 
	B)	random chance. 
	C)	the episode of Jerry Springer was a rerun. 
	D)	students thought today's class was a review. 
	E)	the opportunity cost of attending today is much higher than usual. 

Use the following to answer questions 5-6:

DMA is in the process of developing a new microprocessor.  The data above reflect the past and future expenditures.  The question facing management is whether to go forward with the project.

	5.	The most important cost(s) in deciding the fate of the project is (are) 
	A)	salaries of engineers. 
	B)	salaries and materials. 
	C)	salaries, materials, and interest payments. 
	D)	materials. 
	E)	salaries, materials, interest payments, and past R&D. 

	6.	The least important cost(s) in deciding the fate of the project is the 
	A)	R&D expenditures to date. 
	B)	interest payments. 
	C)	salaries for engineers. 
	D)	salaries for support staff. 
	E)	materials. 

	7.	Mark recently switched his long distance telephone service from MTI to AC&C and had to pay his local telephone company a $10 fee to make the change. As an incentive to try their long distance services, AC&C promised to reimburse him for the switching fee  if  he choose to switch to another carrier after trying their service. From Marks perspective, the switching fee is a.: 
	A)	fixed cost and a  sunk cost 
	B)	fixed cost, but not a sunk cost. 
	C)	variable cost and a  sunk cost. 
	D)	variable cost, but not a sunk cost. 
E)	neither a fixed cost nor a sunk cost. 

	8.	Suppose one observes that when the price of peanut butter increases, the demand for jelly increases.  One must conclude that 
	A)	peanut butter and jelly are complements. 
	B)	peanut butter and jelly are substitutes. 
	C)	peanut butter and jelly are normal goods. 
	D)	peanut butter and jelly are inferior goods. 
	E)	peanut butter and jelly are superior goods. 

	9.	An increase in the demand for coal with no concurrent change in the supply of coal 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 

Use the following to answer questions 10-11:

	10.	The average cost of 4 units of activity is 
	A)	$2. 
	B)	$10. 
	C)	$18. 
	D)	$20. 
	E)	$50. 

	11.	The average benefit of 5 units of  activity is 
	A)	$41. 
	B)	$50. 
	C)	$60. 
	D)	$75. 
	E)	$100. 

	12.	Sonya is employed at a stock brokerage firm where she earns $25 per hour. The office she works at is located downtown. To get to work each day, she must either ride a series of buses that takes one-and-a-half hours at a cost of $2, or take a cab that takes 30 minutes and costs $20. The opportunity cost: 
	A)	of riding the bus is $2, and taking the cab is $20. 
	B)	of riding the bus is $37.50, and taking the cab is $12.50. 
	C)	of riding the bus is $35.50, and taking the cab is -$5. 
	D)	of riding the bus is $39.50, and taking the cab is $32.50. 
	E)	of riding the bus is $27, and taking the cab is $20. 

	13.	An increase in the price of Tomko toothpaste, a substitute for Durrell toothpaste, will cause 
	A)	the quantity of Durrell toothpaste demanded to increase. 
	B)	the quantity of Tomko toothpaste demanded to increase. 
	C)	the demand for Tomko toothpaste to decrease. 
	D)	the demand for Tomko toothpaste to increase. 
	E)	the demand for Durrell toothpaste to increase. 

	14.	The Smithville Elementary School Teachers Association petitions the Smithville School Board to provide a computer lab for their school. To support their argument the Association presents data from national studies that show  when students are provided with computer training they earn an average of $5,000 of additional income during their lives. In order for the School Board to make a rational choice, it should: 
	A)	determine if other elementary schools have computer labs. 
	B)	build the computer lab because the children will be able to earn a higher income during their lives. 
	C)	not build the computer lab because the study was not based on a study of the Smithville area. 
	D)	build the computer lab if the additional cost per student is less than or equal to the additional income. 
	E)	build the computer lab if the additional cost per student is greater than or equal to the additional income. 

Use the following to answer questions 15-16:
The following table shows the relationship between the speed of a computer's CPU and the benefits and costs.  Assume that all other features of the computer are the same, i.e., CPU speed is the only source of variation.

	15.	The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is 
	A)	$1,500. 
	B)	$500. 
	C)	$50. 
	D)	$5. 
	E)	$2.14. 

	16.	The total benefit of an 800 Mhz computer is 
	A)	$400. 
	B)	$500. 
	C)	$800. 
	D)	$1,900. 
	E)	$2,200. 

	17.	An economic naturalist is described as someone who 
	A)	uses economic arguments to protect forests and wetlands from development. 
	B)	has a natural talent for drawing graphs. 
	C)	applies economic insights to everyday life. 
	D)	studies the process of natural selection in a marginal cost and marginal benefit framework. 
	E)	is concerned about environmental issues but also enjoys wealth accumulation. 

	18.	At the beginning of the fall semester, college towns experience large increases in their populations, causing a(n) 
	A)	increase in the quantity of apartments demanded. 
	B)	increase in the supply of apartments. 
	C)	increase in the demand for apartments. 
	D)	decrease in the quantity of apartments supplied. 
	E)	decrease in the supply of apartments. 

	19.	Steve has estimated that the marginal benefit of studying an additional hour of economics (instead of biology) is an increase of 15 points on the weekly test and the marginal cost is a decrease of 10 points on his weekly biology test. Applying the optimal quantity rule to maximize his test scores, he should: 
	A)	not study the additional hour of economics, but rather should study an additional hour of biology. 
	B)	study the additional hour of economics, but no more than one additional hour. 
	C)	not study the additional hour of economics, but rather should study an additional one-and-one-half hours of biology. 
	D)	study the additional hour of economics, plus some additional time studying economics. 
	E)	not study economics nor biology. 

	20.	The U.S. generally has a comparative advantage in the development of technology because of 
	A)	larger amounts of natural resources. 
	B)	higher than world average IQ's of the population. 
	C)	a high concentration of the best research universities. 
	D)	tax incentives. 
	E)	the existence of patent law, which no other country provides. 

Essay (30 Points)

The above diagram shows the market for rental housing in New York City.  Monthly rent, in $ per month, is on the vertical axis.  Quantity, in millions of units on the market per day, is measured on the horizontal axis.

What is the equilibrium rent?  ______________________

What quantity of apartments are rented in equilibrium? ____________________

City Council imposes a control on rent of $800 per month.

What quantity of apartments will be supplied at the controlled price? ___________ 

What quantity of apartments will be demanded at the controlled price? ____________

What will be the consequences of rent controls in the market for apartments in New York?

Problem (30 Points)

Natalie Dresst can pick 4 pounds of coffee in an hour or sew 2 dresses.  Bruno Moore can pick 2 pounds of coffee in an hour or sew 4 dresses.  Each works for 6 hours per day.  In the following table enter the maximum pounds of coffee and dresses that can be produced by Natalie and Bruno in one day:

	Coffee (pounds per day)	Dresses	
Natalie			
Bruno			

What is Natalie’s opportunity cost of producing one more dress?

What is Bruno’s opportunity cost of producing one more pound of coffee?

What is the greatest amount of coffee Natalie and Bruno can produce together?

Who has the absolute advantage in dress production?

Who has the comparative advantage in coffee production?

If they want to maximize production of both goods who should produce dresses and how many will s/he produce? 

Answer Key -- 1st Midterm

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