Temple University
Department of Economics
Principles of Microeconomics
Exam 1	

Name: _____________________________________________  

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

Multiple choice (64 points)

1.	The extra cost that results from an extra unit of an activity is the 	
A)	marginal benefit. 	
B)	marginal surplus. 	
C)	marginal cost. 	
D)	reservation cost. 	
E)	same as the opportunity cost. 	

2.	In deciding the number of guitars to buy for his shop before the Christmas season, Mark is making a(n) __________________ decision. 	
A)	microeconomic 	
B)	macroeconomic 	
C)	economic surplus 	
D)	marginal choice 	
E)	imperfect 	

You need a TV, VCR, and CD player. The sale flyer you got in mail shows the TV that you want to buy is 10% off regular price this week.  VCRs and CD players are 20% off next week. Last week you drove downtown to save $30 on some concert tickets, a 15% savings. The regular prices for TVs, VCRs, and CD players are:

TV             $300	

VCR          $120	

CD Player $200	

3.	If the regular price for the TV is $300, should you drive downtown to buy the TV this week? 	
A)	Yes, because you will save $30. 	
B)	No, because the discount is 20% next week. 	
C)	Yes, because you will save $60. 	
D)	Yes, because it is always worth it to drive downtown to earn a 10% discount. 	
E)	No, because it is never worth it to drive downtown to earn a 10% discount. 	

4.	Mike gives a non-refundable $100 to ACE adventure to reserve a raft for a group whitewater rafting trip in the New River. The raft has room for 5 people. He sells 3 rafting tickets at $25 each for a total of  $75. Mike usually sells 4 tickets at $25 each and goes on the trip for free. Should Mike cancel the trip? 	
A)	Yes, because he will lose his $100. 	
B)	No, because he is making $75 	
C)	Yes, because the $100 is lost no matter what. 	
D)	No, because losing $25 is better than losing $100 	
E)	Yes, because he will lose $25 on the venture. 	

5.	When a government reduces the ease with which international trade can occur, it is 	
A)	helping domestic consumers. 	
B)	hurting all domestic producers. 	
C)	reducing the total amount of output available to domestic consumers. 	
D)	keeping all domestic prices artificially high. 	
E)	keeping all domestic prices artificially low. 	

6.	The following data represents the production values for two goods, F and G, i.e., (F,G): (5,0); (4,1); (3,2); (2,3); (1,4); (0,5).  This data is 	
A)	consistent with a concave production possibilities curve. 	
B)	not consistent with a production possibilities curve. 	
C)	consistent with an upward sloping production possibilities curve. 	
D)	consistent with a convex production possibilities curve. 	
E)	consistent with a linear production possibilities curve. 	

7.	A point on Mark's production possibilities curve represents 8 TVs and 4 VCRs produced in a week. A combination of 16 TVs and 0 VCRs is a(n): 	
A)	efficient and attainable point. 	
B)	efficient but not attainable point. 	
C)	attainable and inefficient point. 	
D)	unattainable point. 	
E)	unattainable and inefficient point. 	

	
Smith and Jones comprise a two-person economy.  Their hourly rates of production are shown below.

8.	Suppose Smith and Jones begin at the point of 16 computers and 0 calculators.  If they wish to have 14 computers and 40 calculators, then Smith will spend __________ and Jones will spend __________. 	
A)	1 hour on computers; 40 minutes on computers and 20 minutes on calculators 	
B)	1 hour on computers; 20 minutes on computers and 40 minutes on calculators 	
C)	30 minutes on each; 30 minutes on each 	
D)	45 minutes on computers and 15 on calculators; 1 hour on calculators 	
E)	1 hour on computers; 50 minutes on computers and 10 minutes on calculators 	

9.	You can spend $5 for lunch and you would like to have two Double Cheeseburgers. When you get to the restaurant you, find out the price for Double Cheeseburger has increased from $2.50 to $2.99. Sadly you decide to have two single Cheeseburgers for lunch. This is best described as 	
A)	substitution effect 	
B)	income effect 	
C)	buyer's reservation price 	
D)	seller's reservation price 	
E)	none of the above 	

10.	Which of the following is NOT a characteristic of the capitalist economy? 	
A)	Joe can decide for himself which careers to pursue 	
B)	Tyco can produce whatever they want to 	
C)	Amy can buy whichever goods she wants, as long as she makes enough money at the government agency she works for. 	
D)	Dan can work in the factory as long as the factory meets the target set by the government. 	
E)	Leann can live in anywhere in Pennsylvania. 	

11.	One observes that the equilibrium price of VCR increases and the equilibrium quantity increases.  Which of the following best fits the observed data? 	
A)	An increase in demand with supply constant. 	
B)	An increase in demand coupled with a decrease in supply. 	
C)	An increase in demand coupled with an increase in supply. 	
D)	A decrease in demand with supply constant. 	
E)	Demand constant and an increase in supply. 	

12.	The quantity demanded of Honda Civics went down as the price increased, and the consumers that preferred Civics started to buy Toyota Corollas. This is because of 	
A)	income effect 	
B)	substitution effect 	
C)	Japanese cars last longer 	
D)	American cars cost more 	
E)	Demand for Honda Civic shift to the left 	

13.	If the price of roller- blades increase by one percent and the quantity demanded falls by 4 percent, then the price elasticity of demand for roller- blade has a value of 	
A)	0.04 	
B)	0.25 	
C)	0.40 	
D)	4 	
E)	40 	

14.	Suppose that each serving of Mac & Cheese costs exactly $0.50 no matter how many servings are produced.  This means that, the price elasticity of supply for Mac & Cheese is______ and the supply is _______. 	
A)	one, unitary elastic 	
B)	greater than one, elastic 	
C)	less than one, inelastic 	
D)	infinity, perfectly elastic 	
E)	zero, perfectly inelastic 	

15.	According to the text, the supply of ___________ is/are perfectly inelastic with respect to price in the long run. 	
A)	gasoline 	
B)	movies starring Will Smith 	
C)	diamonds 	
D)	NBA championship teams 	
E)	private jets 	

16.	If the percentage change in price is greater than the percentage change in quantity demanded, then the demand for that good, with respect to price, is 	
A)	elastic 	
B)	inelastic 	
C)	unitary elastic 	
D)	perfectly elastic 	
E)	perfectly inelastic 	

Essay (16 points)

An effective price floor is established in the market for running shoes.  What are the likely short and long run consequences of this effective price support?

Initially, since price is above the equilibrium, there will be excess supply.  Due to the price floor, suppliers cannot lower price to find the equilibrium.
 
The going price is above the opportunity cost of any and all producers in the market.  This will cause existing producers to expand capacity and attract new producers, further exacerbating the problem. 

The loss/distortion induced by the price floor can be measured by the change in economic surplus.  Consumer surplus decreases.  There will be a change in producer surplus.  In any case, there will be some deadweight loss.

Problem (20 points)

The following pair of equations can describe the market for runcible spoons:

P = 20 – 1/10 Q    _______Demand___________________

P = 5 + 1/20 Q     ______________Supply____________

(a) On the lines beside each equation indicate which is the supply curve and which is the demand curve.

(b) What are the equilibrium price and quantity?

20 – 1/10 Q = 5 + 1/20 Q

P = 10,  Q = 100

(c)  What is the price elasticity of demand at the equilibrium?

Elasticity = (1/10)-1 (10/100) = 1

(d) Calculate consumer surplus in the market for runcible spoons.

CS = (1/2)(20-10)(100) = 500