Temple University
Department of Economics
Spring 2005
Economics 52, Principles of Microeconomics
First Exam	

Name: _____________Key for beige exam___________________________  

Directions: This is a closed book exam.  You may use a handheld calculator, but not your cell phone.  Your answers are to be your own work.  You may neither give nor receive help. You must complete all questions.  You have 50 minutes for the exam.

Multiple Choice (40 Points) Go to the end of the exam for the answers to the multiple choice questions.

Matt has decided to purchase his textbooks for the semester. His options are to purchase the books via the Internet with next day delivery to his home at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16. 

1.	Assume the minimum that Matt would be willing to accept to drive to the university campus is equal to the amount he saved on the concert ticket. What would be the amount of his economic surplus if he bought his textbooks at the university bookstore rather than via the Internet? 	
A)	$5 	
B)	$1 	
C)	$50 	
D)	$20 	
E)	There would be no economic surplus from purchasing the books at the university bookstore. 	

2.	Which of the following questions would not be part of macroeconomics? 	
A)	What caused the great depression? 	
B)	At what rate does the US economy typically grow? 	
C)	Did the sharp increase in gasoline prices alter SUV sales? 	
D)	How does government spending affect the economy? 	
E)	Do trends exist in the national rate of unemployment? 	

	
Scenario 1
Your classmates from the University of Chicago planning to go to Miami for spring break, and you are undecided about whether you should go with them. The round-trip airfares are $600, but you have frequent-flyer coupon worth $500 you could use to pay part of the airfare. All other costs for the vacation are exactly $900. The most you would be willing to pay for the trip is $1400. Your only alternative use for your frequent-flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation. Which your parents are forcing you to attend. The Chicago-Atlanta round-trip airfares are $450. 

3.	If you use the frequent-flyer coupon to fly to Atlanta, would you get any economic surplus by making the trip? 	
A)	No, there is a loss of $50 	
B)	Yes, surplus of $350 	
C)	Yes, surplus of $400 	
D)	No, there is a loss of $2400 	
E)	Yes, surplus of $100 	

4.	Tony notes that an electronics store is offering a flat $20 off all prices in the store.  Tony reasons that if he wants to buy something with a price of $50 that it is a good offer but if he wants to buy something with a price of $500 it is not a good offer.  This is an example of 	
A)	inconsistent reasoning; saving $20 is saving $20. 	
B)	the proper application of the cost-benefit principle. 	
C)	rational choice because in the first case he saves 40% and in the second case he saves 4%. 	
D)	marginal cost equals marginal benefit thinking. 	
E)	opportunity costs. 	

5.	Any combination of goods that can be produced with currently available resources defines a(n) 	
A)	unattainable point. 	
B)	efficient point. 	
C)	inefficient point. 	
D)	attainable and efficient point. 	
E)	attainable point. 	

6.	An upward sloping production possibilities curve 	
A)	is rare. 	
B)	would violate the principle of resource scarcity. 	
C)	would show that production decisions require tradeoffs. 	
D)	is, at least, theoretically possible. 	
E)	is the norm. 	

	
Barbara and Sherry comprise a two-person economy.  Both of them works a 5-hour day. 

7.	If they exchange copied test and typed letters with one another, at the end of the day they can each have 	
A)	25 test, 25 letters 	
B)	50 test, 50 letters 	
C)	15 test, 20 letters 	
D)	20 test, 15 letters 	
E)	30 test, 10 letters 	

8.	Mike's opportunity cost of delivering an extra pizza is producing _____ pizzas. 	
A)	12 	
B)	10 	
C)	3/2 	
D)	2/3 	
E)	1/5 	

9.	"Holding all other relevant factors constant, consumers will purchase more of a good as its price falls."  This statement reflects the behavior underlying 	
A)	the demand curve. 	
B)	an increase in demand. 	
C)	the supply curve. 	
D)	a decrease in the demand curve. 	
E)	the production possibilities curve. 	

10.	A graph with price on the vertical axis and quantity on the horizontal axis depicting a positive relationship between price and quantity is a 	
A)	demand curve. 	
B)	production possibilities curve. 	
C)	supply curve. 	
D)	equilibrium curve. 	
E)	shortage curve. 	

11.	Which of the following is NOT a characteristic of a market in equilibrium? 	
A)	Quantity demanded equals quantity supplied. 	
B)	Excess supply is zero. 	
C)	All consumers are able to purchases as much as they wish. 	
D)	Excess demand is zero. 	
E)	The equilibrium price is stable, i.e., there is no pressure for it to change. 	

12.	Assume that D1 and S1 are the initial demand and supply curves.  The equilibrium occurs at a price of _______ and ________ units exchanged. 	
A)	$90; 50 	
B)	$60; 20 	
C)	$60; 40 	
D)	$30; 30 	
E)	$30; 70 	

13.	Generally speaking, demand for a good will be more inelastic 	
A)	if few substitutes exist. 	
B)	when the good represents a large share of the consumer's budget. 	
C)	in the long run. 	
D)	when many substitutes exist. 	
E)	if the price change is great. 	

14.	A perfectly elastic demand curve has a slope of ______ while a perfectly inelastic demand curve has a slope of ______. 	
A)	infinity; 0 	
B)	1; infinity 	
C)	0; 1 	
D)	0; infinity 	
E)	infinity; 1 	

15.	Suppose a 10% increase in the price of pain relievers leads to a 5% decrease in quantity demanded of pain relievers. The elasticity for pain relievers, with respect to price, is 	
A)	elastic 	
B)	inelastic 	
C)	unitary elastic 	
D)	perfectly elastic 	
E)	perfectly inelastic 	

16.	At a price of $75, quantity demanded of Microeconomics books is 265, while at price of $100, quantity demanded is 260. What is the price elasticity of demand for Microeconomics books (calculated using the midpoint formula)? 	
A)	15 	
B)	5 	
C)	1 	
D)	1/5 	
E)	1/15 	

Scenario 5-3:
Assume that Jonas has  $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. 

17.	If his income falls to $20, the rational spending rule would predict Jonas would buy 	
A)	more bread and less peanut butter. 	
B)	more bread and more peanut butter. 	
C)	less bread and more peanut butter. 	
D)	less bread and less peanut butter. 	
E)	more bread and the same amount of peanut butter. 	

18.	If a person gets maximum utility from owning 15 cars, than the total utility to that person from owning 9 cars is ______ the total utility from owning 10 cars. 	
A)	greater than 	
B)	greater than or equal to 	
C)	less than 	
D)	less than or equal to 	
E)	equal to 	

19.	For two goods, A and B, MUA/PA= 25 and MUB/PB=25.  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. 	

20.	If the marginal utility per dollar is not the same for each good, the consumer could _____ her utility by spending ______ on goods for which the marginal utility per dollar is higher. 	
A)	decrease, more 	
B)	increase, more 	
C)	maximize, less 	
D)	increase, less 	
E)	minimize, more 	

Essay (20 Points) Your answer will be graded not only for content, but for grammar, syntax and spelling as well.  Make sure that your answer is written legibly.  If I can’t read it then it cannot be graded.

From mid-December through mid-March the number of gallons of heating oil consumed is greater than in any other three month period of the year, and prices are also at their highest level.  In July, August and September more bushels of sweet corn are consumed than in any other period of the year and prices are at their lowest.  Why does the price of corn go down during the period of greatest consumption while the price of heating oil rises during the period of greatest consumption? Use supply and demand graphs to explain your answer. Continue your answer on the backside of the page if necessary.

Between July and September there is an increase in the supply of corn relative to the rest of the year.  That is, at any given price farmers will supply a greater quantity to the market.  As a result there will be a new equilibrium at a lower price and a greater quantity traded in the market place.

Between December and March there is an increase in the demand for heating oil, relative to the rest of the year.  That is, at any given price consumers are willing to purchase more heating oil.  As a result there will be a new equilibrium at a higher price and a greater quantity trade.

Considerations of elasticity of demand or elasticity of supply do not matter, unless you are asked to comment on the circumstance under which the response of price or quantity to the shift is going to be large or small.  But you cannot say anything about the magnitude of the change in price or quantity until you have got the shift in the demand or supply curve straight. 

		
Market for heating oil showing an increase in demand.	Market for corn showing an increase in supply.	
  
Problem (40 points)

The market for ocean cruises is described by the equations shown below. P is price per cruise in hundreds of dollars and Q is the quantity of cruisers, in thousands per year.

A.  On the lines next to the equations indicate which is the demand curve and which is the supply curve. 

Q = 25/2 + .8 P ________Supply________________________ 

P = 60 - .8 Q ___________Demand______________________

B. What is the equilibrium price?

P = 60 - .8Q  P = 60 - .8(25/2 + .9P)

P = 30.48

C. What is the equilibrium quantity?

Q = 25/2 + .8 (30.48)

Q = 36.89

D. What is the elasticity of demand at the equilibrium?

Elasticity = (1/slope)(P/Q) = (1/.8)(30.48/36.89) = 1.033

E. The port authority imposes an excise tax of $10 per passenger.  What will be the new equilibrium quantity?

First invert the supply curve so that you can add $10 to the intercept.

P = (Q-25/2)/.8   P = -125/8 +5/4 Q

New Supply after tax:

P = -125/8 + 80/8 + 5/4 Q

P = -45/8 + 5/4 Q

Set the demand curve equal to the supply curve

-45/8 + 5/4 Q = 60 - 4/5 Q

Q = 32.01

F. What price will be paid by consumers?

P = 60 - .8(32.01) = 34.39

G. What is the net price accruing to sellers after the tax?

P = 34.29 – 10 = 24.39
Answer Key

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