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.	Which of the following statements is true? 	
A)	All fixed costs are sunk costs. 	
B)	Variable costs can also be sunk costs. 	
C)	Sunk costs can be fixed costs. 	
D)	Some opportunity costs are sunk costs. 	
E)	All sunk costs are fixed costs. 	

2.	Suppose Xena  is willing to pay  $1,000 for a new sword, but she is able to purchase one for $900.  Her __________ is __________. 	
A)	benefit; $100 	
B)	cost; $100 	
C)	economic surplus; $1,000 	
D)	economic surplus; $100 	
E)	costs; $1000 	

3.	The number of US households with access to the Internet and those with broadband connections is growing rapidly.  As an economic naturalist, one could predict that when a major purchase is being considered, families will 	
A)	collect as much information as humanly possible beforehand. 	
B)	always buy online. 	
C)	never buy online. 	
D)	collect more information before making the purchase because the cost of finding and acquiring it is lower. 	
E)	collect more information before making the purchase because the benefit of information is now larger. 	

4.	Rich, a full time student at Virginia Tech, is enrolled in 15 credit hours this semester. For their tuition a full time student may take 15-18 credits.  His grade in the Physics class is a passing grade, but below his expectations. Fearing that his grade may slip into the failing range, he is considering withdrawing from the course. He tells a friend, "I would drop the course but I don't want to waste the $600 I paid in tuition for the course."  His friend replies, "The $600 tuition you paid for the course is irrelevant to your decision. Next semester you can take it again and not incur any additional tuition charges. Your grade in the course is the only thing that is important, now." The friend is: 	
A)	incorrect, because the tuition will have to be paid again when Jim retakes the course. 	
B)	correct, because the tuition is a marginal cost that should never be considered when making decisions. 	
C)	incorrect, because the tuition is a average cost and average costs should always be considered when making decisions. 	
D)	correct, because the tuition is a sunk cost and sunk costs should not be considered when making decisions. 	
E)	incorrect, and obviously so rich that money means nothing to him/her. 	

	

5.	Based on their comparative advantages, Matt should specialize in _______ while Amy should specialize in _______ 	
A)	oil changes, rotating tires 	
B)	rotating tires, oil changes 	
C)	neither, both 	
D)	both, neither 	
E)	rotating tires, rotating tires 	

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

6.	The absolute value of the slope of Buffy's production possibilities curve (weapons are on the vertical axis) is 	
A)	.222. 	
B)	2. 	
C)	6. 	
D)	3. 	
E)	.333. 	

	

7.	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)	insufficient information to say 	

8.	If a nation can produce a good more quickly than any other nation, that nation has a(n) 	
A)	comparative advantage. 	
B)	total advantage. 	
C)	relative advantage. 	
D)	absolute advantage. 	
E)	the greatest need to trade. 	

9.	For two goods, X and Y, to be classified as complements, it must be the case that 	
A)	X and Y are indistinguishable. 	
B)	consumers tend to purchase either X or Y. 	
C)	when the price of X rises, the demand for Y decreases. 	
D)	when the price of X rises, the demand for Y increases. 	
E)	X and Y look alike. 	

	
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10.	Moving from supply curve S2 to supply curve S1 could be caused by a(n) 	
A)	increase in consumers' incomes. 	
B)	increase in quantity demanded. 	
C)	improvements in the technology the firms use to produce the good. 	
D)	decrease in the price of raw materials. 	
E)	increase in the wages of laborers. 	

	

11.	At a price of $45, the market will experience ______________ in the amount of __________ units. 	
A)	excess demand, 50 unit 	
B)	excess supply, 300 units 	
C)	equilibrium, 200 units 	
D)	excess demand, 400 units 	
E)	excess supply, 250 units 	

12.	In a free market, if the price of a good is below the equilibrium price, then 	
A)	government needs to set a higher price. 	
B)	suppliers, dissatisfied with growing inventories, will raise the price. 	
C)	demanders, wanting to ensure they acquire the good, will bid the price higher. 	
D)	government needs to set a lower price. 	
E)	suppliers, dissatisfied with growing inventories, will lower the price. 	

	

13.	If the price of pumpkin decreased from $1 to $0, the price elasticity of demand equals (using the midpoint formula)______.  At this price range demand of pumpkin is_______. 	
A)	13, elastic 	
B)	13, inelastic 	
C)	1, unitary elastic 	
D)	1/13, elastic 	
E)	1/13, inelastic 	

14.	Suppose that, the demand for electricity has been found to be inelastic.  The most likely explanation for this finding is 	
A)	electricity is not a necessity 	
B)	the fraction of income spent on electricity is trivial 	
C)	few substitutes exist for electricity 	
D)	electricity is a monopoly market 	
E)	air pollution regulation has made electricity expensive 	

	

15.	If the price changes from $10 to $4, what happens to the elasticity of supply? 	
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 	

	

16.	The price elasticity of demand at point B is 	
A)	2 	
B)	4/3 	
C)	1 	
D)	3/4 	
E)	1/2 	

Essay (16 points)

Suppose that the federal government establishes a price floor, above the equilibrium, for milk.  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 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 = 2/5Q
Q = 50
P = 20

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

P = 12  Q = 90

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

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

CS = ½ (30-20)(50) = 250