ECN 303, Midterm Spring 2002 Folland. with Answers

ECN 303, Midterm Spring 2002 Folland. With Answers

Multiple choice. (2 pts each)

1. If a consumer's indifference curves over X and Y were to slope upward, we would know that they were not "well-behaved." But, which of the following would we also know? A. both goods were unpleasant to him when consuming more B. one of the goods is unpleasant to him when consuming more C. these goods are complements to him, he likes to mix them together D. these goods are addictive to him

2. When the price elasticity of demand is known to be extremely elastic, which of the following is most likely to represent this curve? A. one that is parallel B. one that is nearly horizontal C. one that is nearly vertical D. one that slopes upward and to the right

3. Given two goods x and y and a budget B, let the price of x increase and assume that the person has well-behaved indifference curves. Which of the following does the theory predict is not logically possible? A. the person buys more of both goods B. the person buys less of good x C. the person buys more of good y D. the person buys less of good y

4. Suppose that MUx/px > MUy/py. This consumer can improve her utility without spending any additional money. To do this she can A. trade some x for some y B. trade some y for some x C. ask for the prices to be reduced D. buy some z

5. If you planned to run a company that sells widgets on the internet, which estimated price elasticity for your product would you be happiest to have your economists report to you, other things being equal? A. very inelastic B. very elastic C. unitary elastic 6. Economists know from the mathematics that the slope of an indifference curve between any goods x and y is -MUx/MUy. From what you know about the budget constraint, choose which of the following equations will hold at the consumer equilibrium? A. -MUx/MUy = 1 B. -MUx/MUy = -px/py C. -MUx/MUy = -px D. MUx=MUy

7. When there is a shortage (or anticipated shortage) of a needed product like gasoline, fuel oil, or electricity, a rise in price can be beneficial in which of the following ways? A. a price rise encourages consumers to conserve the scarce good B. a price rise can in some cases induce producers to bring more of the good to market C. a price rise helps to ration the needed product toward the people who value it most D. all of the above

8. Given a demand function, Qy = 100 - 10Py - 3Px, goods X and Y are A. substitutes B. complements C. inferior goods D. we can’t tell based on just this information

9. Given the estimated demand function, Q = 26.67 - 0.088Price + 0.138Tuition -.076Softdrinkprice - 0.544Urban, and given projections of Price2002=100, Tuition2002=14, Softdrinkprice2002=110, and Urban2002=1, develop the econometric prediction for quantity demanded in 2002. A. 3.78 B. 10.90 C. 201.01 D. 79.00 E. 100.00

10. Given demand equation, Q = 298 - .7P, find the price elasticity at price P=100. A. -0.12 B. -0.30 C. -0.56 D. -1.30 E. -3.26

11. Given the demand equation in #10, find the quantity, Q, that maximizes total revenue. A. 13 B. 78 C. 149 D. 243 E. 589 12. If the price of cat food rises, what, if anything, is likely to happen to the market for kitty litter? A. demand will shift left and supply will stay the same B. demand will shift right and supply will stay they same C. demand will stay the same and supply will shift left D. demand will stay the same and supply will shift right

13. If the marginal utility of oranges is 33 while the marginal utility of apples is 78 and the price of an organge is 10 while the price of an apple is 50, then A. this consumer is in equilibrium B. this consumer could improve utility by increasing the quantity of oranges and decreasing the quantity of apples C. this consumer could improve utility by increasing the quantity of apples and decreasing the quantity of organges D. we cannot tell from this information

14. If your marketing department reported its estimate that the price elasticity of demand for your product is -0.78, assuming other sources of information are consistent with this, what is the most logical strategy for your firm? A. discount your product to large buyers B. raise the price of your product C. lower the price of your product D. host a week-long sale at 20% off

15. The more price inelastic demand for cigarettes is, the more an excise tax increase will be A. quantity reducing B. tax revenue enhancing C. effective in curbing smoking D. tax neutral—tax revenue will not change

16. If the consumer's budget function is $3000 = $40X + $60Y, what is the slope of the budget constraint when X is on the horizontal and Y is on the vertical? A. -50 B. -0.66 C. -1.75 D. -23 For the next five questions, assume that the economists at your firm had estimated a demand equation with cross-section data from the 120 retail outlets that you operate. This demand equation for your product, X, is properly “identified” and is as follows:

(Eq I) Qx = 339 – 0.35Px + 0.0025Income + 0.20Education + 0.10Pz (2.82) (3.20) (0.95) (3.33) where t values are in parens, R2=0.78, F=17.2, and ProbF = 0.01.

17. Which is true of the relationship of your good X to the other firm’s product Z? A. substitutes B. complements C. we can’t tell based on just this information

18. Which of the independent variables is not significant at the 5% level? A. your own price, Px B. the other firm’s price, Pz C. income, the per capita income in each retail outlet’s community D. education, the average number of years of schooling among adults in each community E. none, all are significant

19. Assume that Px = 120, Income=24,000, Education=13 and Pz=80. First, calculate the quantity demanded. Then, which of the following would be our own price elasticity? A. –3.30 B. 0.11 C. 0.78 D. 1.23 E. 5.67

20. Which of the following words or phrases can be confidently applied to your product based on the information contained in Equation I? A. it is an inferior good B. it is a product used mainly by educated people, such as OU graduates C. it is a normal good D. your firm is profitable E. we can be confident of all of the above and then some

21. Suppose that you recheck the above calculations, and then make an economically logical recommendation to your CEO based on this information. Which of these fits. A. strike a bargain with the firm that sells product Z getting them to raise Pz B. lower your own price, Px C. raise your own price, Px D. have your firm contribute $10 million to higher education E. donate money to the community so as to raise the per capita income 22. Which of the following is likely to be the relatively price inelastic, and why? A. a BMW car, because luxuries tend to be inelastic B. cigarettes, because they are addictive C. housing, because it represents a large share of personal income D. skis, because many people need these

23. If the price of Pepsi rises, what, if anything, is likely to happen to the market for Coke? A. demand will shift left and supply will stay the same B. demand will shift right and supply will stay they same C. demand will stay the same and supply will shift left D. demand will stay the same and supply will shift right

24. When word reaches Wall Street of severe fire damage to Esso’s offshore drilling program, what will most likely happen to the supply and/or the demand for shares of Esso stock? A. demand will shift right and supply will stay the same B. demand will shift left and supply will shift right C. demand will stay the same and supply will shift left D. demand will stay the same and supply will shift right

25. Given the demand function Q = 100P-.90Y.03Z-.33 where P is own price, Y is consumer income, and Z is a "tastes" variable, what is the price elasticity of demand in absolute value? A. 100 B. .90 C. 2.5 D. 9.0 E. 1.2

26. Suppose that you, privately, hold the best estimates of the price elasticity of the demand for gasoline in Michigan, and suppose that your data show it to be very inelastic. Which of the following statements is correct about the consequences of an increased gasoline tax? A.  “It will raise a lot of tax revenue.” B. “It would reduce driving sharply.” C. “We will end up with lower gasoline prices.”

27. Which best describes the "satisficing" objective suggested for some firms? A. the firm seeks profits to be at maximum B. the firm seeks pleasant perquisites like gold-plated washrooms C. the firm seeks new information if profits fall below an acceptable level D. the firm seeks a buyer if the profits fall below an acceptable level 28. Suppose that Sally’s budget constraint is $1000= 12F + 26OG. On scratch paper, draw this constraint and label the intercepts (in numbers) and the slope. Which of the following is true? A. Sally’s intercept for Food is 12 B. Sally’s intercept for OG is 83.3 C. the slope of her budget constraint (when C is on the horizontal) is -2.17 D. the most Food Sally could buy is 1000 bags E. the best choice for Sally is to buy equal amounts of Food and OG

29. Find the marginal utility of Food if the consumer's utility function is U=1890F0.2OG0.9. A. 378F0.2OG0.9 B. 945F-0.8OG0.9 C. 378F-0.8OG0.9 D. 1890F0.2OG0.9

30. Find the second derivative of the following function: Q = 30 + X - 7X2 + 10X3. A. 30 + 1 -14X B. 31 - 14X +30X2 C. -14 + 60X D. X(X - 7X2 + 10X3)

31. The 2nd order condition for a maximum of f(X) is which of the following? A. first derivative with respect to X > 0 B. first derviative with respect to X = 0 C. second derivative with respect to X = 0 D. second derivative with respect to X > 0 E. second derivative with respect to X < 0

32. Which of the following results about indifference curves is implied soley by the assumption that more is preferred to less? A. they cannot logically cross each other B. they cannot logically slope upwards C. they cannot logically be altered by the economist for a given person D. they cannot have breaks in them

33. If the price of good x is set to zero and assuming you had drawn good x on the horizontal axis, then which of the following best describes the looks of the budget constraint? A. it is vertical B. it is flat C. it is downward sloping D. it is upward sloping E. it lies directly on the horizontal axis The next four questions pertain to interpreting the following regression equation where all variables are in logs and the dependent variable is the firm's quanity demanded with t values in parens, the data are time series: lnQ = 5.3 - 1.43lnP + 0.91lnY + +0.72lnPz + 0.07lnAdv + 1.2lnPopDen (-2.3) (3.0) (4.5) (1.1) (3.2) where P is own price, Y is per capita income, Pz is the price of another firm's product, Adv is advertising and PopDen is the population density.

34. Which of the following can we reasonably conclude just from the above information? A. price is irrelevant B. this is a rural area product C. the firm is not a monopoly in this market area D. according to the coefficient of lnY, the firm's good is a luxury good

35. Which of the following can we reasonably conclude just from the above information? A. the demand curve is downward sloping B. the firm is not maximizing its profits C. the product is more attractive to city dwellers D. the product Z is a substitute E. all but one of the above

36. What is the price elasticity of demand for this equation? A. -5.3 B. -1.43 C. -1.43/.91 D. .91 E. it cannot be determined without more information

37. If advertising were literally free, would you advertise given this equation? A. yes, though insignificant at the 5% level, by chance advertising could be effective and it is worth a try provided zero cost B. no, the proper estimate of advertising's effect is zero, so there is no point in trying C. yes, adverstising is a significant contributor to demand in this equation D. no, advertising is wasteful unless the advertising elasticity is greater than 1.

38. Which is the derivative of the following polynomial?: y = 3 + 1.2x -10.5x2 + 0.45x3 A. 3 + 1.2x - 10.5x2 B. 1.2 - 21x + 1.35x2 C. 3 +1.2x D. - 21x + .45x2 39. The Stock Corporation makes two products, paper and cardboard. The relationship between , the firm's annual profit in thousands of dollars, and its output of each good is

 = -50 + 33X + 30Y -10X2 - 6Y2 - 5XY, where X is the firm's annual output of paper (in tons) and Y is the firm's annual output of carboard (in tons). Find the output of each good that the Stock Corporation should produce if it wants to maximize profit: A. X=20 and Y =15 B. X=7.33 and Y =4.51 C. X=1.15 and Y=2.02 D. X=33.2 and Y = 17.5 E. X=1.74 and Y=3.45

40. Identify the correct setup for the LaGrangian function for the following problem: ACME managers have gone through cost control training and want to show their new skills. The board, however, insists on output quotas that must be acheived. A. Z= cost function - (maintained output requirement) B. Z = maintained output function - (cost function) C. Z = cost function - (cost requirement) D. Z = maintained output requirement - (cost function)

41. Which of the following best represents the slope of an indifference curve between goods X and Y? A. XY B. -( marginal utility of X)/(marginal utility of Y) C. - PX/PY D. the derivative of X with respect to P

42. After which of the following changes will the old budget constraint and the new budget constraint remain parallel? A. a rise in the price of X B. a fall in the price of X C. a 10% rise in the price of together with a 20% rise in the price of Y D. a rise in the consumer's income E. two of the above

43. When deriving the demand curve from indifference curve analysis, which of the following is true? A. the indifference curves shift toward the cheapening good B. the indifference curves toward the origin C. the budget constraint changes slope D. the budget is increased 44. The following is the logic by which a regression coefficient is "rejected" that is when it is decided that a regression coefficient is insignicant. A. assume the coefficient's t distribution is actually centered on zero and ask is there a greater than 5% chance of observing the value in our regression output? B. check to see if the observed coefficient is twice as large as zero C. check to see if the observed coefficient is 5% larger than its elasticity D. check to see if the observed t value is less than 1.0

45. There is a regression term called "goodness of fit" , which we haven't emphasized or used, but you can reason through its meaning, because one of your regression statistics is its proper indicator, which of the following statistics fits this description? A. the F statistic B. the R Squared statistic C. the t values D. the standard error of estimate

46. In the "Adjusted R Square" statistic, what is R Square being adjusted for? A. linearity B. multicolinearity C. hetereoscadicity D. degrees of freedom E. autocorrelation

47. In the following Cobb-Douglass demand function, find the price elsticity.

Q = APbYcZd

A. bAPb-1YcZd B. b C. APb-1YcZd/ APbYcZd D. bA

48. Find the price elasticity in the following equation when the P=33, Y=100, and Pz=14:

Q = 1000 - 45.5P + 30Y - 23Pz. =2176.5 33/2176.5 = 0.01516 x

A. - 0.689 B. - 3.102 C. - 1.20 D. - 100 E. -.2.98 49. Demand theory generates which of the following results in the case of a price subsidy? A. price subsidies set above the equilibrium have no effect B. price subsidies generally create excess demand C. price subsidies generally reduce consumption from its equilbrium level D. price subidies generally generate queues for the product E. all of the above.

50. We know that the price elasticity changes as you move along a linear demand curve, but in what way does it change? A. price elasticities are larger in absolute value on the upper part of the curve B. price elasticities are highest in absolute value in the middle of the curve C. price elasticities are smaller in absolute value on the upper part of the curve D. it's a trick question, because price elasticity really is constant along a linear demand curve