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)
	
Fundraisers for What'sAMatterU 

1.	The marginal labor cost (extra labor cost) of the 4th employee is 	
A)	$9,500. 	
B)	$10,000. 	
C)	$10,750. 	
D)	$11,000. 	
E)	$13,000. 	

2.	Sean studied 5 hours for his first Economics test and his test score was 85; 6 hours for his second Economics test and scored 90; and 7 hours for his third Economics test and scored 95. He also studied 5 hours for his first Math test and his test score was 68; 6 hours for his second Math test and scored 78; and 7 hours for his third Math test and scored 88. The  average benefit per hour studied for the Economics tests was ________ and the average benefits per hour studied for the Math tests was _______ . 	
A)	15; 13 	
B)	5; 10 	
C)	90; 78 	
D)	13; 15 	
E)	10: 5 	

3.	Lynn has estimated that with a college education she will be able to earn an additional $50,000 of income. The cost of attending a state university is $35,000, while a private university costs $50,000 (all estimates are calculated in current dollars). Lynn would make a rational decision if she chooses to attend: 	
A)	the private university, but not the state university. 	
B)	the state university, but not the private university. 	
C)	neither the state nor the private university. 	
D)	either the state or the private university 	
E)	any university regardless of the cost and income. 	

4.	Total expenditures for coffee reaches a maximum at price of $5 per lb. At this price the demand curve for coffee is 	
A)	elastic 	
B)	inelastic 	
C)	unitary elastic 	
D)	perfectly elastic 	
E)	perfectly inelastic 	

	

5.	From P=14 to P=10, what would happen to the elasticity? 	
A)	It will increase 	
B)	It will decline 	
C)	It will stay the same 	
D)	It will first decline then increase 	
E)	None of the above 	

6.	Which one of the following goods or services should have the highest price elasticity of demand based on the share of income devoted to the good or service? 	
A)	Toilet paper. 	
B)	Headache medicine. 	
C)	A new car. 	
D)	Salt. 	
E)	Toothpicks. 	

7.	Suppose the price P gives us a price elasticity of demand equal to 1. Any price lower than P will move us to the _______ part of the demand curve. 	
A)	elastic 	
B)	unitary elastic 	
C)	inelastic 	
D)	perfectly elastic 	
E)	perfectly inelastic 	

	

8.	Assume that column A and column B are demand and supply curves.  The market would achieve an equilibrium quantity of 	
A)	100 units. 	
B)	90 units. 	
C)	85 units. 	
D)	80 units. 	
E)	70 units. 	

	

9.	Assume the market is originally at point Z.  Movement to point W is a combination of 	
A)	a decrease in quantity supplied and an increase in demand. 	
B)	a decrease  in supply and a decrease in demand. 	
C)	an increase in supply and an increase in quantity demanded. 	
D)	a decrease in quantity supplied and a decrease in demand. 	
E)	a decrease in supply and a decrease in quantity demanded. 	

10.	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 	

11.	A movement along a demand curve from one price-quantity combination to another is called 	
A)	a change in quantity demanded. 	
B)	a shift in the demand curve. 	
C)	a change in demand. 	
D)	a change in quantity supplied. 	
E)	a change in supply. 	

	

12.	Mike's opportunity cost of producing an extra pizza is delivering ______ fewer pizzas. 	
A)	3 	
B)	2 	
C)	3/2 	
D)	2/3 	
E)	15 	

	
The following data describe Buffy's abilities to produce either weapons or food per hour.

13.	Buffy's production possibilities curve has a __________ slope because producing 6 extra units of food means  __________ weapons can be produced. 	
A)	upward; two more 	
B)	downward; two fewer 	
C)	downward; three fewer 	
D)	downward; six fewer 	
E)	downward; .333 fewer 	

14.	Point x on a production possibilities curve represents a combination of 500 candies and 200 cookies, and point y represents 200 candies and 500 cookies. Suppose, candies are on the vertical axis and cookies are on the horizontal axis. The absolute value of the slope of the production possibilities curve between points x and y equals: 	
A)	5 	
B)	3 	
C)	1 	
D)	1/3 	
E)	61/5 	

	

15.	The comparative advantage for pizza production belongs to __________ and the comparative advantage for pizza delivery belongs to __________. 	
A)	Lorie, Lorie 	
B)	Mike, Mike 	
C)	Mike, Lorie 	
D)	Lorie, Mike 	
E)	Both, Mike 	

Fundraisers for What'sAMatterU 

16.	The President of What'sAMatterU decides to hire fundraisers as long as the average benefit exceeds the average cost, resulting in __________ employees being hired and a net benefit (total donations minus total labor costs) of __________. 	
A)	5; $17,080 	
B)	5; $67,080 	
C)	4; $60,000 	
D)	4; $22,000 	
E)	5; $38,000 	

Essay (16 points)

Suppose that an effective price floor in the market for dental floss is established by the federal government.  What are the likely short and long run consequences of this price support program? 

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 market for gopher wood on Mount Ararat can be described by the following equations:

P = 30 – 1/5 Q    _________Demand_________________________

P = 10 + 1/5 Q   __________Supply________________________

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

(b) What are the equilibrium price and quantity?

30 – 1/5 Q = 10 + 1/5 Q

20 = 2/5 Q

Q = 50
 
P = 20

(c) What is the price elasticity of demand at a price of $12?

P = 12  Q = 90

(1/5)-1(12/90) = 2/3

(d) Calculate producer surplus in the market for gopher wood.

PS = (½)(20-10)(50) = 250