Portland State University s3

PORTLAND STATE UNIVERSITY EC 201 - PRINCIPLES OF MICROECONOMICS EXAM ONE -- FALL 2001 Jack A. Richards, Instructor Name: ______

OPEN BOOKS AND OPEN NOTES Turn-in both your test and scantron. Your test cannot be graded unless both are turned-in. Be certain that your name is on both. Both will be returned to you. Do not staple them together. If you erase on the scantron, you must write the answer you want to count to the RIGHT side of the scantron (the machine won't grade the scantron if anything is written on the left side.)

1. If the demand for airline tickets to Miami Beach is unit elastic: a. airline revenue will increase if supply increases. b. airline revenue will increase if supply decreases. c. a small change in price will cause a large shift of the demand curve. d. Both "b" and "c" are correct. e. None of the above are correct.

USE THE FOLLOWING INFORMATION FOR THE TWT CABLE TV COMPANY TO ANSWER QUESTION 2. ASSUME THAT THIS FIRM HAS ACCURATELY DETERMINED THAT THE PRICE ELASTICITY OF DEMAND FOR CABLE TV HOOKUPS IS -3.6 AND FOR THE MONTHLY SERVICE CHARGES IT IS -0.4. TWT CURRENTLY CHARGES $200 FOR THE HOOKUP FEE AND $25 MONTHLY FOR THE SERVICE CHARGE. THE FIRM CURRENTLY HAS 1000 CUSTOMERS. WITH CURRENT PRICES, NEW CUSTOMERS (i.e. HOOKUPS) IS EQUAL TO THOSE CANCELLING THEIR TV CABLE SERVICE. 2. If this firm increases its monthly service charge by 30% and reduces its hookup charge by 30%, it should expect which of the following: a. 120% increase in the number of customers it serves each month. b. 92% increase in the number of customers it serves each month. c. No change in the number of customers it serves each month. d. 100% increase in the number of customers it serves each month. e. None of the above are correct.

3. If a floor price is set at $3.00 when the equilibrium price is $2.40, this will result in: a. an increase in market price. b. an increase in market quantity supplied. c. an decrease in market quantity demanded. d. Both "a" and "b" are correct. e. All of the above are correct.

4. If price elasticity is -1.5 while income elasticity is 2.0, during a period when incomes are improving by 4% annually, if the firm increases its prices by 4%, we would expect sales to increase by: a. 2 percent. b. 6 percent. c. 14 percent. d. zero since the two impacts will cancel each other. e. None of the above are correct.

EXAM ONE -- FALL 2001 5. Assuming that the price of a good substitute product declines, while all other factors remain unchanged, Sito Company can be certain that which of the following, if any, will always happen? a. their sales will decrease. b. their competitors total revenue will decrease. c. their total revenue will increase. d. both "a" and "b" will always happen. e. None of the above are correct.

6. Which, if any, of the following are true: a. When a sporting event "sells out", we know that the market for this event is in equilibrium because the number of tickets sold equals the number of tickets available. b. If cross elasticity of commodity A is negative, an increase in the price of A will cause the demand for your product to decrease. c. If income elasticity is positive, a decrease in income levels will increase the demand for your product. d. All of the above are true. e. None of the above are true.

7. Which of the following does not demonstrate an opportunity cost? a. Mexico's labor force becomes more productive and produces more food and manufactured goods. b. The government of the U.S. increases defense preparedness and cuts back on domestic programs. c. Japan produces more machines for future productivity and reduces their current output of consumer items. d. A hundred thousand acres of farmland in Sweden are taken out of dairy pasture and sown with corn. e. All of the above demonstrate an opportunity cost.

8. An unusually bountiful crop of coffee beans might be expected to: a. Increase the supply of coffee. b. Lower the price of tea. d. Reduce the price of coffee. d. Do all of the above. e. Do none of the above.

9. Other things being equal, which of the following might shift the demand curve for gasoline to the left? a. the discovery of vast new oil reserves in Montana. b. the development of a low-cost electric automobile. c. an increase in the price of train and air transportation. d. a large decline in the price of automobiles. e. None of the above are correct.

10. The demand for Cheerios would be: a. more elastic than the demand for all cereals. b. less elastic than the demand for all cereals. c. would have the same elasticity as all cereals. d. could be either more or less elastic than the demand for all cereals. e. None of the above are correct.

11. During the 1970s the price of oil rose dramatically, which in turn caused the price of coal to increase. This can best be explained by saying that: a. oil and coal are complementary goods and the higher price for oil increased the demand for coal.

EXAM ONE -- FALL 2001 b. oil and coal are substitute goods and the higher price for oil increased the demand for coal. c. oil and coal are complementary goods and the higher price for oil decreased the supply of coal. d. oil and coal are substitute goods and the higher price for oil decreased the supply of coal. e. Both "b" and "d" are correct.

12. The price elasticity of demand for oranges is - 0.8. Assuming no change in the demand for oranges, a 16 percent increase in sales implies that prices have been reduced by: a. 1 percent. b. 12 percent. c. 12.8 percent d. 20 percent e. None of the above are correct.

13. If government sets a floor price on gasoline that is above the equilibrium price: a. The quantity supplied will be less than the equilibrium quantity. b. There will be a shortage of gasoline. c. Buyers will find it difficult to find willing sellers. d. The market will be in equilibrium. e. None of the above are correct.

14. If the minimum wage is $4.00 when jobs are readily available that pay a starting wage of $4.50 per hour, this is an example of: a. Ceiling price set below the market price. b. Ceiling price set above the market price. c. Floor price set below the market price. d. Floor price set above the market price. e. None of the above are correct.

Refer to the following information to answer question 15.

SLEEP CUMULATIVE POINTS (AVERAGE HOURS PER DAY) (ON ECONOMIC EXAMS) 4 490 6 475 8 400 10 300

15. What is the opportunity cost of increasing sleep from 4 to 6 hours per day? a. 475 economic points b. 490 economic points. c. 2 hours sleep. d. 4 hours sleep. e. None of the above are correct.

16. The demand for cable television service for KROC is characterized by the following elasticities: price elasticity = -2.2, cross elasticity with "Howdie Doodie" (a movie channel) = -1.2, advertising elasticity = 2.5, and income elasticity = 4. Based on this information, which of the following is/are true: a. A price reduction will increase both the number of units demanded and the total revenue received by KROC.

EXAM ONE -- FALL 2001 b. A 2 percent increase in advertising will offset the effect of a 3 percent increase in price. c. A 2 percent price reduction by "Howdie Doodie", will increase the demand for basic cable television by 2.4 percent. d. Both "a" and "c" are correct. e. All of the above are correct.

For questions 17 thru 19, assume that the following demand and supply schedules represent the current market situation for a firm that sells hot dogs at school basketball games: (quantity in hundreds) DEMAND SUPPLY P Q P Q $1.00 80 $1.00 10 1.25 75 1.25 15 1.50 72 1.50 25 1.75 68 1.75 38 2.00 62 2.00 44 2.25 58 2.25 48 2.50 52 2.50 52 2.75 49 2.75 57 3.00 48 3.00 60 3.25 42 3.25 63 3.50 36 3.50 64 3.75 25 3.75 70 4.00 13 4.00 78

17. A decrease in both price and quantity could be caused: a. An increase in the price of labor b. An increase in consumer incomes c. A decrease in the price of a close substitute product d. An improvement in the technology used to produce the good. e. None of the above are correct.

18. If demand increases by one-third and supply falls by one-fourth, the new market equilibrium price is: a. $3.00. b. $3.25. c. $3.50. d. $3.75. e. None of the above are correct.

19. If the firm establishes a price of $3.00 on this product, the quantity that the firm is willing to supply (after the adjustments in question 18) is: a. 40. b. 48. c. 52. d. 64 d. None of the above are correct.

20. Which, if any, of the following statements are true? A demand curve: a. With a positive slope would indicate that products can be supplied at lower cost as quantity increases.

EXAM ONE -- FALL 2001 b. With a positive slope would indicate that consumers would be willing to buy larger quantities as price increases. c. Represents a schedule of many possible prices and quantities, consequently a change in price or quantity moves us along the demand curve (i.e. to a different point in this schedule). d. Both "b" and "c" are correct. e. All of the above are correct.

21. If OPEC raised oil prices, which caused significant increase in the cost of providing trucking service, this would represent a: a. shift in supply of trucking services to the left. b. shift in supply of trucking services to the right. c. shift in demand for trucking services to the left. d. shift in demand for trucking services to the right. e. None of the above are correct.

22. The Motor Carrier Act of 1980 permitted railroads to lower rail prices, which took long distance business away from trucking firms. This would represent a: a. Shift in supply of trucking services to the left. b. Shift in supply of trucking services to the right. c. Shift in demand for trucking services to the left. d. Shift in demand for trucking services to the right. e. None of the above are correct.

23. Many trucking firms lower prices for long distance hauling in order to compete with the railroads lower prices (see question 22): a. Shift in supply of trucking services to the left. b. Shift in supply of trucking services to the right. c. Shift in demand for trucking services to the left. d. Shift in demand for trucking services to the right. e. None of the above are correct.

24. Suppose the cross-price elasticity of demand for automobiles with respect to the gasoline price is -0.2. If gasoline prices rise 20%, then we would expect automobile sales to: a. Increase about 4% since gasoline and automobiles are complements. b. Decrease about 4% since gasoline and automobiles are substitutes. c. Decrease about 4% since gasoline and automobiles are complements. d. Increase about 4% since gasoline and automobiles are substitutes. e. None of the above are correct.

25. The total revenue of almond growers will rise when: a. Demand for almonds is inelastic and price falls. b. The price of almonds rises and demand is elastic. c. The price of close substitute walnuts rises, regardless of the elasticity of demand for almonds. d. Both "b" and "c" are correct. e. None of the above are correct.

26. The demand for Cheerios: a. is more elastic than the demand for all cereals. b. is less elastic than the demand for all cereals.

EXAM ONE -- FALL 2001 c. would have the same elasticity as all cereals. d. could be more or less elastic than the demand for all cereals. e. None of the above are correct.

27. Assuming that the price of a good substitute product declines, while all other factors remain unchanged, Sito Company can be certain that which of the following, if any, will always happen? a. their total revenue will decrease. b. their competitors total revenue will decrease. c. their total revenue will increase. d. both "a" and "b" will always happen. e. None of the above are correct.

28. commodity A commodity B Marginal Utility 500 10 Price $100 $ 2

According to this information, the consumer: a. Should spend more on A and less on B. b. Should spend more on A and more on B. c. Should spend more on B and less on A. d. is maximizing satisfaction. e. None of the above are correct.

29. QUANTITY OF TOTAL BENEFITS OF TOTAL COSTS OF POLLUTION (TONS) POLLUTION CONTROL POLLUTION CONTROL 1 45 25 2 80 50 3 110 75 4 130 100 5 145 125

The total net benefits (i.e. total benefits minus total costs) if the community maximizes the net benefits from this program is: a. $15 b. $35 c. $25 d. $45 e. None of the above are correct.

30. It is common for a sole proprietor to receive the accounting profits from their firm and some receive a salary as well. The sole proprietor of the Milwaukee Machine Company receives all the accounting profits earned by her firm and a $28,000 a year salary. She has a standing salary offer of $35,000 a year working for a large corporation. She estimates that she could have invested her capital outside her own company and earned $22,000 per year. If accounting profits for the year were $50,000, her economic profits for the year were: a. $0 b. -$7000 c. $21,000 d. $50,000 d. None of the above are correct.

EXAM ONE -- FALL 2001 Exam 1 Fall 2001 1. 2. 3. 4. 5. e e e a a 6. 7. 8. 9. 10. b a d b a 11. 12. 13. 14. 15. b d e c e 16. 17. 18. 19. 20. d c c e d 21. 22. 23. 24. 25. a c e c c 26. 27. 28. 29. 30. a a d b c

EXAM ONE -- FALL 2001