Practice Questions: Chaps. 1-3, Answers

Econ 310 Practice Questions: Chaps. 1-3 1. A) B) C) D) Explicit cost equals opportunity cost minus sunk cost. implicit cost minus sunk cost. economic cost minus opportunity cost. opportunity cost minus implicit cost. 2. Bob leases a car for 36 months, paying $500 down at the beginning of the lease and $100 per month for the duration of the lease. After a year, the dealer introduces a new lease contract for the identical car (same mileage that Bob’s car has after he has driven it for a year) with no money down and a monthly payment of $150 for 24 months. Assuming that neither car has an option to buy at the end of the lease and that there is no penalty to Bob from terminating a lease early, Bob should A) switch to the second car because the total opportunity cost of the first car is $4100 compared to $3600 for the second car. B) keep the first car for the remaining 24 months because the opportunity cost of doing so is $4100 compared to an opportunity cost of $5400 for the second car. C) keep the first car for the remaining 24 months because the opportunity cost of doing so is $2400 compared to an opportunity cost of $3600 for the second car. D) Makes no difference because the opportunity cost of both cars is $3600. 3. A) B) C) D) The opportunity cost of a good is always increasing if the production possibility frontier is a downward-sloping straight line. concave to the origin (bowed outward). an upward-sloping straight line. convex to the origin (bowed inward). Wine Beer A 480 10 B 460 20 Table 1.1 C 420 30 D 340 40 E 240 50 F 100 60 4. A) B) C) D) In Table 1.1, the opportunity cost of producing additional units of beer is constant. increasing. decreasing. cannot be determined from the data provided. 5. A) B) C) D) E) In Table 1.1, the opportunity cost per unit of beer in moving from point C to point D is 80 units of wine. 340 units of wine. 8 units of wine. 10 units of beer. 0.125 units of wine. 6. A) B) C) D) E) In Table 1.1, the opportunity cost per unit of wine in moving from point C to point B is 0.25 units of beer. 40 units of wine. 20 units of beer. 4 units of beer. 10 units of beer. 7. Which of the following will not cause an increase in demand for apples, assuming that apples are a normal good? A) Publication of new research which shows that eating apples prevents heart disease. B) An increase in consumers’ incomes. C) An increase in the price of oranges, assuming oranges are a substitute for apples. D) A decrease in the price of apples. 8. A) B) C) D) E) When the government establishes a price ceiling below the equilibrium price the quantity supplied will exceed the quantity demanded. the market equilibrium price will prevail. the quantity demanded will exceed the quantity supplied. the price ceiling will have no effect. Both (B) and (D) of the above. 9. The price of good x rises from $7.00 per unit to $10.00 per unit, as a result of which the quantity demanded decreases from 1400 units to 1200 units per week. Using the arc elasticity formula, the price elasticity of demand for x is A) -2.294. B) -0.436. C) -3.000. D) -0.556. E) -0.333. 10. Consumer purchases of good x increase from 56 to 65 units per week when the average weekly income of consumers increases from $900 to $1200. Using the point elasticity formula, the income elasticity of demand for x is A) 0.482. B) 1.806. C) 0.521. D) 2.074. E) 1.921. 11. A) B) C) D) In question 10 above, good x is necessarily an inferior good. a bad. a normal good. an economic neuter. 12. When the price of good x increases from $7.00 to $9.00 per unit, the quantity demanded of good y decreases from 120 to 90 units per week. Using the point elasticity formula, the crossprice elasticity of demand for good y with respect to good x is A) -0.667. B) -1.143. C) -1.969. D) -0.875. 13. A) B) C) D) In question 12 above, goods x and y are necessarily complements. bads. substitutes. inferior goods. 14. When the price of good x increases from $32.00 to $44.00 per unit, the quantity supplied increases from 3700 to 4300 units per month. Using the point elasticity formula, the price elasticity of supply of x is A) 1.955. B) 0.432. C) 2.313. D) 0.475. E) 2.105. Figure 3.1 y U2 U1 0 15. A) B) C) D) According to the indifference map in Figure 3.1, both goods x and y are bads. x and y are substitutes. y is a good and x is a bad. x is a good and y is a bad. 16. A) B) C) D) Negatively-sloped, straight-line indifference curves imply that one of the goods has no effect on utility. that the goods are perfect complements. that the goods are perfect substitutes. that one of the goods is in fact a bad. x 17. When the income-consumption curve is backward-bending to the left, the good represented on the x-axis must necessarily be A) a normal good. B) an inferior good. C) an economic neuter. D) a bad. 18. Along an indifference curve, if the MRS of food for clothing is 3F/2C, this means the consumer A) would be willing to give up 3 units of food for 2 units of clothing, and would be better off with the exchange. B) would be willing to give up 2 units of food for 3 units of clothing, but his or her well-being would not improve. C) would be willing to give up 2 units of food for 3 units of clothing, and would be better off with the exchange. D) would be willing to give up 3 units of food for 2 units of clothing, but his or her well-being would not improve. 19. Suppose initially that the price of x is $6, the price of y is $5, and the consumer’s income is $300. If y is measured on the vertical axis and x is measured on the horizontal axis, and if the price of y increased to $10, A) the budget line will pivot inward toward the origin along the y axis (i.e., the y-intercept will decrease), with the slope changing from -0.6 to -1.2. B) the budget line will pivot inward toward the origin along the y axis (i.e., the y-intercept will decrease), with the slope changing from -1.2 to -0.6. C) the budget line will pivot inward toward the origin along the x axis (i.e., the x-intercept will decrease), with its slope changing from -1.2 to -0.6. D) the entire budget line will shift inward toward the origin, parallel to the original budget line. Figure 3.2 Other goods A’ B A U2 U1 0 C C’ Food 20. In Figure 3.2, AC is a consumer’s initial budget line and ABC’ is the budget line corresponding to a food-stamp subsidy from the government that allows the consumer to purchase AB units of food per month. A’BC’ represents the budget line the same consumer would confront if he or she received a monthly cash transfer equal in value to the food stamps. According to the indifference map illustrated in the figure, the consumer A) prefers to spend his or her entire income on food. B) is better off with the food stamps than with the cash transfer. C) is equally well off with the food stamps as with the cash transfer. D) is better off with the cash transfer than with the food stamps. E) Both (A) and (B) of the above. Answer key: 1. D 2. C 3. B 4. B 5. C 6. A 7. D 8. C 9. B 10. A 11. C 12. D 13. A 14. B 15. C 16. C 17. B 18. D 19. B 20. C