ECO401 Paper [Ecnomics] Midterm Paper

ECO401 Midterm Fall 2009

Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following is a normative statement?

► Intermediate microeconomics should be required of all economics majors in order to build a solid foundation in economic theory.
► The minimum wage should not be increased, because to do so would increase unemployment.
► Smoking should be restricted on all airline flights.
► All of the given options.

Question No: 2 ( Marks: 1 ) - Please choose one
Which of the following is a positive statement?

► When the price of a good goes up, consumers buy less of it.
► When the price of a good goes up, firms produce more of it.
► When the Federal government sells bonds, interest rates rise and private investment is reduced.
► All of the given options.

Question No: 3 ( Marks: 1 ) - Please choose one
In a free-market economy, the allocation of resources is determined by:

► Votes taken by consumers.
► A central planning authority.
► Consumer preferences.
► The level of profits of firms.

Question No: 4 ( Marks: 1 ) - Please choose one
Our economy is characterized by:

► Unlimited wants and needs.
► Unlimited material resources.
► No energy resources.
► Abundant productive labor.

Question No: 5 ( Marks: 1 ) - Please choose one
When constructing a typical production possibilities curve, economists assume that:

► Economic resources are underutilized.
► Resources are equally productive in many alternative uses.
► All available resources are employed efficiently.
► Production technology is allowed to vary.

Question No: 6 ( Marks: 1 ) - Please choose one
Which of the following would lead to an inward shift of a nation's production possibilities curve?

► Immigration of skilled workers into the nation.
► An increase in the size of the working-age population.
► A decrease in the size of the working-age population.
► Increased production of capital goods.

Question No: 7 ( Marks: 1 ) - Please choose one
Government authorities have managed to reduce the unemployment rate from 8% to 4% in a hypothetical economy. As a result:

► The economy's production possibilities curve will shift outward.
► The economy's production possibilities curve will become steeper.
► The economy will move downward along its production possibilities curve.
► The economy will move from a point inside to a point closer to its production possibilities curve.

Question No: 8 ( Marks: 1 ) - Please choose one
If the quantity demanded of a product is greater than the quantity supplied of a product, then:
► There is a shortage of the product.
► There is a surplus of the product.
► The product is a normal good.
► The product is an inferior good.

Question No: 9 ( Marks: 1 ) - Please choose one
When movie ticket prices decrease, families tend to spend more time at cinema for watching videos instead at home. This best reflects:
► The rationing function of markets.
► The substitution effect.
► Diminishing marginal utility.
► The income effect.

Question No: 10 ( Marks: 1 ) - Please choose one
What happens in the market for airline travel when the price of traveling by rail decreases?

► The demand curve for airline travel shifts left.
► The demand curve for airline travel shifts right.
► The supply curve of airline travel shifts left.
► The supply curve of airline travel shifts right.


Question No: 11 ( Marks: 1 ) - Please choose one
A market is said to be in equilibrium when:
► Demand equals output.
► There is downward pressure on price.
► The amount consumers wish to buy at the current price equals the amount producers wish to sell at that price.
► All buyers are able to find sellers willing to sell to them at the current price.

Question No: 12 ( Marks: 1 ) - Please choose one
A demand curve is price inelastic when:
► Changes in demand are proportionately smaller than changes in price.
► Changes in demand are proportionately greater than changes in price.
► Changes in demand are equal to changes in price.
► None of the given options.

Question No: 13 ( Marks: 1 ) - Please choose one
Since the fish that are caught each day go bad very quickly, the daily catch will be offered for sale no matter what price it brings. As a result, we know that:

► None of the given options.
► The daily supply curve for fish slopes upward.
► The daily supply curve for fish is perfectly inelastic.
► The daily supply curve for fish is perfectly elastic.

Question No: 14 ( Marks: 1 ) - Please choose one
Law of diminishing marginal utility indicates that the slope of the marginal utility curve is:

► Horizontal.
► Vertical.
► Negative.
► Positive.

Question No: 15 ( Marks: 1 ) - Please choose one
If your demand price for one unit of a good is $100 and the market price is $75, your consumer's surplus is:

► $25.
► $50.
► $75.
► $100.

Question No: 16 ( Marks: 1 ) - Please choose one
Suppose the first four units of an output produced incur corresponding total costs of 400, 700, 900, and 1000. The marginal cost of the fourth unit of output is:

► 50.
► 100.
► 150.
► 200.


Question No: 17 ( Marks: 1 ) - Please choose one
Suppose there are only two goods A and B, if more of good A is always preferred to less, and if less of good B is always preferred to more, then:

► Indifference curves slope downwards.
► Indifference curves slope upwards.
► Indifference curves may cross.
► Indifference curves could take the form of ellipses.

Question No: 18 ( Marks: 1 ) - Please choose one
As long as all prices remain constant, an increase in money income results in:

► An increase in the slope of the budget line.
► A decrease in the slope of the budget line.
► An increase in the intercept of the budget line.
► A decrease in the intercept of the budget line.

Question No: 19 ( Marks: 1 ) - Please choose one
Which of the following is a correct statement about the substitution effect?

► The substitution effect is always negative.
► The substitution effect is positive for an inferior good.
► The substitution effect measures how demand changes when income changes.
► The substitution effect is positive for a Giffen good.

Question No: 20 ( Marks: 1 ) - Please choose one
In any production process, the marginal product of labour equals:

► Total output divided by total labour inputs.
► Total output minus the total capital stock.
► The change in total output resulting from a 'small' change on the labour input.
► Total output produced by labour inputs.

Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following statements describes increasing returns to scale?

► Doubling the inputs used leads to double the output.
► Increasing the inputs by 50% leads to a 25% increase in output.
► Increasing inputs by 1/4 leads to an increase in output of 1/3.
► None of the given options.

Question No: 22 ( Marks: 1 ) - Please choose one
An isoquant curve shows:

► All the alternative combinations of two inputs that yield the same maximum total product.
► All the alternative combinations of two products that can be produced by using a given set of inputs fully and in the best possible way.
► All the alternative combinations of two products among which a producer is indifferent because they yield the same profit.
► None of the given options.

Question No: 23 ( Marks: 1 ) - Please choose one
In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences:


► Decreasing returns to scale.
► Constant returns to scale.
► Increasing returns to scale.
► None of the given options.

Question No: 24 ( Marks: 1 ) - Please choose one
A monopoly occurs when:

► Each firm produces a product that is slightly different from the other firms.
► One firm sells a good that has no close substitutes and a barrier blocks entry for other firms.
► There are many firms producing the same product.
► All of the given options.

Question No: 25 ( Marks: 1 ) - Please choose one
A perfectly competitive firm maximizes profit by finding the level of production at which:

► Price = Marginal Cost.
► Price = Average Total Cost.
► Average Total Cost = Marginal Cost.
► Price < Marginal Cost.

Question No: 26 ( Marks: 1 ) - Please choose one
In the short run, a firm should shut down when:

► Production losses are less than fixed costs.
► Only normal profits are earned.
► Production losses exceed fixed costs.
► Fixed costs are zero.

Question No: 27 ( Marks: 1 ) - Please choose one
Discrimination based upon the quantity consumed is referred to as:
► Second degree price discrimination.
► Third-degree price discrimination.
► First-degree price discrimination.
► All of the given options.

Question No: 28 ( Marks: 1 ) - Please choose one
The most important factor in determining the long-run profit potential in monopolistic competition is:

► Free entry and exit.
► The elasticity of the market demand curve.
► The elasticity of the firm's demand curve.
► The reaction of rival firms to a change in price.

Question No: 29 ( Marks: 1 ) - Please choose one
Which of the following is NOT regarded as a source of inefficiency in monopolistic competition?

► The fact that price exceeds marginal cost.
► Excess capacity.
► Product diversity.
► The fact that long-run average cost is not minimized.

Question No: 30 ( Marks: 1 ) - Please choose one
Monopolistically competitive firms have monopoly power because they:

► Are great in number.


► Have freedom of entry.

► Are free to advertise.

► Face downward sloping demand curves.


Question No: 31 ( Marks: 1 ) - Please choose one
A leftward shift in the demand curve for product E might be caused by:
► A decrease in income if E is an inferior good.
► An increase in income if E is a normal good.
► An increase in the price of a product that is a close substitute for E.
► An increase in the price of a product that is complementary to E.

Question No: 32 ( Marks: 1 ) - Please choose one
Assume that a firm is a price taker in its input markets. If the firm's technology is characterized by diminishing marginal physical product of its variable input in the short run, the firm's short run:

► Marginal cost curve rises as output rises.
► Average cost curve rises as output rises.
► Marginal cost curve falls as output rises.
► Marginal cost curves and average cost curves rises as output rises.

Question No: 33 ( Marks: 1 ) - Please choose one
The "perfect information" assumption of perfect competition includes all of the following EXCEPT:
► Consumers know their preferences.
► Consumers know their income levels.
► Consumers know the prices available.
► Consumers can anticipate price changes.

Question No: 34 ( Marks: 1 ) - Please choose one
If the demand curve for a good is downward sloping, then the good:
► Must be inferior.
► Must be giffen.
► Can be normal or inferior.
► Must be normal.

Question No: 35 ( Marks: 1 ) - Please choose one
Economics is different from other social sciences because it is primarily concerned with the study of ________, it is similar to other social sciences because they are all concerned with the study of ________.


► Limited resources, market behavior.
► Scarcity, human behavior.
► Social behavior, limited resources.
► Biological behavior, scarcity.

Question No: 36 ( Marks: 1 ) - Please choose one
A normative economic statement:

► Is a statement of fact.
► Is a hypothesis used to test economic theory.
► Is a statement of what ought to be, not what is.
► Is a statement of what will occur if certain assumptions are true.

Question No: 37 ( Marks: 1 ) - Please choose one
_____ questions have to do with explanation and prediction, _____ questions have to do with what ought to be.

► Positive; negative.
► Negative; normative.
► normative; positive.
► Positive; normative.

Question No: 38 ( Marks: 1 ) - Please choose one
If consumer incomes increase, the demand for product Y:

► Will necessarily remain unchanged.
► Will shift to the right if Y is a complementary good.
► Will shift to the right if Y is a normal good.
► Will shift to the right if Y is an inferior good.

Question No: 39 ( Marks: 1 ) - Please choose one
Because of unusually warm weather, the supply of strawberries has substantially increased. This statement indicates that:

► The demand for strawberries will necessarily rise.
► The equilibrium quantity of strawberries will fall.
► The quantity of strawberries that will be available at various prices has increased.
► The price of strawberries will fall.

Question No: 40 ( Marks: 1 ) - Please choose one
The concept of a risk premium applies to a person that is:

► All of the given options.
► Risk averse.
► Risk neutral.
► Risk loving.

Question No: 41 ( Marks: 10 )
The following table shows the total utility that an individual receives from consuming various units of a commodity X.


a) Calculate Marginal Utility (MU) at each level.
b) What is the individual’s saturation point for commodity X?
c) If the price of commodity X is $8 then calculate the consumer surplus at each level.
(Marks: 3.5+3+3.5)