Econ 315, CSUF

**Practice Exam #1**

#### Instructor: Dr. Denise Stanley

My recommendation is to read each question very carefully, and to draw graphs, write down formulas, work through the algebra EACH time it is needed. Try to see common problems across the homework, quizzes, and practice exam. To help studying, print out the lecture slides and write ideas from the book on the slides.

##### REMINDERS

- Exam day. Bring with you a calculator, a pencil, Scantron Form X-101864 (or 882), knowledge. While you wait for the exam to be distributed, keep busy filling in the general information (name and student id, as well as reference to class and section #) requested in the Scantron. I will provide the scratch paper and formulas. Closed book, close notes, no cheat sheet, side vision not allowed☺
- The readings from Baye: Chapter 1, chapter 2, and Chapter 3, 1
^{st}half. Of course, lecture notes as well. - MUST KNOW (and this is NOT necessarily an exclusive and complete list):

-rules of derivation, partial derivatives, optimization problems (max and min)

-derivative, slope, marginal value

-the marginal benefits=marginal cost rule

-applications of opportunity cost

-difference between economic costs and accounting costs

-applications of net present value rule

**–**Demand, Supply: where do they come from, what information they carry, and how to use them. Market equilibrium and out of equilibrium adjustments. Price floors, price ceilings.

**–**Consumer and producer surplus: what they measure, how to calculate them.

-Normal and inferior goods, substitutes versus complements and implications of these characteristics on demand or supply estimated coefficients.

-Price elasticity of demand, related pricing decisions, total revenues and marginal revenues. Revenue maximization, relationship between price and quantity values, elasticity values and marginal revenue values.

-Income elasticity, cross-price elasticity, linear demand and log-linear demand.

-Factors that affect how elastic or inelastic the demand for a product can be

-How to use linear demand equations to examine a market, graph the demand (reduced form), and make predictions/elasticities for future demand.

**Practice Midterm 1 **

1. Firms face tradeoffs because

A) managers don’t know which inputs to use.

B) inputs are scarce.

C) markets set prices of goods they sell.

D) marginal reasoning leads to uncertainty.

2. Suppose the growth rate of the firm’s profit is 5%, the interest rate is 6%, and the current profits of the firm are 80 million dollars. What is the value of the firm?

A) $8,480 million

B) $1,413.3 million

C) $89.2 million

D) none of the above

3. What is the marginal cost of producing the fifth unit?

A. | 270 |

B. | 110 |

C. | 50 |

D. | 0 |

4. A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner’s business profit is ________ and the economic profit is ________.

A) $20,000, $20,000

B) $20,000, -$5,000

C) $25,000, -$5,000

D) $25,000, $20,000

5. Which of the following is NOT an explicit cost?

A) $200 to hire 2 gardeners for landscaping work

B) $1500 to buy bricks for the driveway of your house

C) $25 for lunch to serve to your workers

D) The $100 in interest you lost by using your CD funds to pay for new pizza oven

6. If the price of automobiles were to increase substantially, the demand curve for gasoline would most likely

A) shift leftward.

B) shift rightward.

C) remain unchanged.

D) become steeper.

7. Assume Joe is only willing to pay $5 for a Ferrari sports car.

A) Joe is not considered part of the demand for Ferraris.

B) Joe won’t be sold a Ferrari.

C) Joe is not considered rational.

D) Joe’s willingness to pay is not indicative of how much he values the Ferrari.

8. The above figure shows four different markets with changes in either the supply curve or the demand curve. Which graph best illustrates the market for tea after a reduction in tariffs allows for more imports of coffee?

A) Graph A

B) Graph B

C) Graph C

D) Graph D

9. If the demand for CD players decreases and the supply of CD players decreases, then

A) it is clear that prices will decrease, the change in the quantity of CD players sold is ambiguous.

B) it is clear that prices will increase, the change in the quantity of CD players sold is ambiguous.

C) it is clear that quantity sold will decrease, the change in the price of CD players is ambiguous.

D) it is clear that change in quantity sold is ambiguous, the change in the price of CD players is ambiguous.

10. Suppose the market supply curve is p = 5Q. At a price of 10, producer surplus equals

A) 50.

B) 25.

C) 12.50.

D) 10.

11. Given a linear supply function of the form Q_{X}^{S} = 3,000 + 3P_{X} – 2P_{r} – P_{w}, find the inverse linear supply function assuming P_{r} = $1,000 and P_{w} = $100.

A. | Q_{X}^{S} = 900 + 3P_{X}. |

B. | P_{X} = 300 + 0.3333Q_{X}. |

C. | P_{X} = -300 + 0.3333Q_{X}. |

D. | P_{X} = 2,900 + 3P_{X}. |

12. In a competitive market, the market demand is Q^{d} = 60 – 6P and the market supply is Q^{s} = 4P. A price floor of $8 will result in a

A. | shortage of 20 units. |

B. | shortage of 15 units. |

C. | surplus of 20 units. |

D. | surplus of 12 units. |

13. Suppose the market demand for good X is given by Q_{X}^{d} = 20 – 2P_{X}. If the equilibrium price of X is $5 per unit, then the total value a consumer receives from consuming the equilibrium quantity is

A. | $100. |

B. | $75. |

C. | $50. |

D. | $25. |

14. Suppose supply increases and demand increases. What effect will this have on the price?

A. | It will fall. |

B. | It will rise. |

C. | It may rise or fall. |

D. | It will remain the same. |

15. Consider a market characterized by the following demand and supply conditions: P_{X} = 50 – 5Q_{X} and P_{X} = 32 + Q_{X}. The equilibrium price and quantity are, respectively,

A. | $35 and 3 units. |

B. | $3 and 35 units. |

C. | $82 and 50 units. |

D. | $20 and 6 units. |

16. There is an excess demand in a market for a product when

a.the current price is higher than the equilibrium price.

b. supply is less than demand

c. quantity demanded is less than quantity supplied

d. quantity demanded is greater than quantity supplied

17. The demand for good X is estimated to be Q_{x}^{d} = 10,000 – 4P_{X} + 5P_{Y} + 2M + A_{X,} where P_{X} is the price of X, P_{Y} is the price of good Y, M is income, and A_{X} is the amount of advertising on X. Suppose the present price of good X is $50, P_{Y} = $100, M = $25,000, and A_{X} = 1,000 units. Based on this information, goods X and Y are:

A. | substitutes. |

B. | complements. |

C. | normal goods. |

D. | inferior goods. |

18. If supply increases, then

a) the supply curve shifts to the left.

b) the equilibrium price goes down.

c) the equilibrium quantity goes down.

d) the demand curve shifts to the right.

19. The supply function for good X is given by Q _{x} ^{s} = 1,000 + P_{X} – 5 P_{Y} – 2P_{W} , where P_{X} is the price of X, P_{Y} is the price of good Y and P_{W} is the price of input W. If the price of input W decreases by $10, then the supply of good X

a) will increase by 10 units.

b) will increase by 20 units.

c) will decrease by 10 units.

d) none of the above.

20.The market supply curve indicates the total quantity all producers in a competitive market would produce at each price,

a) holding only input price fixed.

b) allowing input price to vary.

c) holding all supply shifters fixed.

d) allowing all supply shifters to vary.

21. Which of the following statements is incorrect?

a) As the population rises, the market demand curve shifts to the right.

b) As a greater fraction of the population becomes elderly, the demand for medical services will tend to increase.

c) The changes in the composition of the population affect the demand for a product.

d) none of the above.

22. Suppose market demand and supply are given by Q^{ d} = 100 – 2P and Q ^{S } = 5 + 3P. If the government sets a price floor of $30 and agrees to purchase all surplus at $30 per unit, the total cost to the government will be:

a) $1,650.

b) $1,375.

c) $900.

d) $1,125.

23. Suppose that in each of four successive years producers sell more of their product and at lower prices. This could be explained

a) by small annual increases in demand.

b) in terms of a stable supply curve and increasing demand.

c)in terms of a stable demand curve and increasing supply.

d) as an exception to the law of supply.

24. Suppose the demand function for cable TV service is given by Q _{CTV} = 15 – 0.25 × P _{CTV} + 0.0005 × M + 0.3 × P _{STV}, Q _{CTV} is the quantity of cable TV demanded (thousands of households), P _{CTV} is the price of cable TV, M is income and P _{STV} is the price of satellite TV service. Suppose consumers’ income is $50,000 and the price of satellite TV service is $90. At what price would the demand for cable TV services be equal to 55,000 households?

A) there is not enough information

B) $67

C) $48

D) $12

25. Consumers and firms are known as price takers only if

A) no market exists to determine the equilibrium price.

B) they can set the market price.

C) they cannot unilaterally affect the market price.

D) excess demand exists.

26. If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, using the formula for arc price elasticity what is the percentage change in quantity?

A) -18.18%

B) -29.89%

C) -26%

D) -35.14%

27. Suppose the demand function for a good is expressed as Q = 100 – 4p. If the good currently sells for $10, then the point price elasticity of demand equals

A) -1.5.

B) -0.67.

C) -4.

D) -2.5.

28. The price elasticity of demand for Best Paints one gallon sized paint cans is -0.79. If Best Paints increased the price of their gallon sized paint cans by 10 percent, which of the following is expected to occur?

- Quantity demanded falls 0.79%
- Quantity demanded increases 7.9%
- Quantity demanded increases 0.79%
- Quantity demanded falls 7.9%

29. Demand is perfectly elastic when the absolute value of the own price elasticity of demand is:

a. zero

b. infinite

c. one

d. unknown

30. We would expect the demand for jeans to be:

A. | more elastic than the demand for clothing. | |

B. | less elastic than the demand for clothing. | |

C. | the same as the demand for clothing. | |

D. | neither more elastic, less elastic, nor the same elasticity as that of the demand for clothing. |

31. A cross-price elasticity less than zero tells us that the good is:

A. | a complement to another. |

B. | a normal good. |

C. | an inferior good. |

D. | A substitute to another. |

32. Suppose the demand function is given by Q_{x}^{d} = 8P_{x}^{-0.5} P_{y}^{0.25} M^{0.12} H. Then the demand for good x is:

A. | inelastic. |

B. | unitary. |

C. | elastic. |

D. | perfectly elastic. |

33. The market demand for wheat is Q_{d} = 5000 – 2p + 1pr – 2Y. If the price of wheat, p, is $4, and the price of rice, pr, is $3, and income, Y, is $2000, the income elasticity of wheat is

A. -0.95

B. -2.01

C. -3

D. -4.02

34. You are the manager of a popular shoe company. You know that the advertising elasticity of demand for your product is .15. How much will you have to increase advertising in order to increase demand by 10%?

a) .02%

b) 38.6%

c) 66.7%

d) 4.3%

35. How does a firm maximize total revenue when choosing sales along a linear demand curve?

a) choose the point with the highest price possible

b) choose the point where the marginal revenue is the highest possible

c) choose the point where the own-price elasticity of demand is -1

d) choose the point with the highest own-price elasticity of demand

Worked Problems (a selection from problems **like those below and discussion forums, homework**)

- Assume a demand equation as:

Qd = 9 – 0.1p –pc + 0.01 ps + 0.0001Y

And a supply equation:

Qs = 0.1p – 0.02pi + 0.01N + 0.01T – 0.1w

Where

P = price good

Pc= price complement = $3

Pcm = price substitute= $200

Y = consumer income = $40,000

Q = quantity in 000s

Pi = price input= $450

N = number firms = 700

T = index of technology = 300

W = wage rate = $20

- Substitute in the external factors and determine the reduced form equations:

Quantity demanded =

Quantity supplied =

If the price is $55, will the market be in equilibrium?

If not, there will be a __________ units supplied and ________ units demanded, for

a ___________ in the market.

- How would you graph these functions?
- In the market for a cancer drug, availability (demand) is perfectly inelastic in the short-run. Initially a) supply for the drug there is filled only by a local compound pharmacy. Then b) foreign sellers are able to import the drug directly to buyers.
- Describe a graph of the cancer drug market, and discuss how the supply and demand curves will be shaped and with what slope.
- Which curve will shift given the event of b). What will be the changes in equilibrium price and equilibrium quantity compared to your answer in a)?
- A software company trying to find optimal price for its program

It has an estimated demand curve: Qd = 1600 – 4P

(so inverse: P = 400-1/4Qd)

What are 2 points on the demand curve which would be the wrong price to maximize total revenue? What is the actual best price for the firm to charge?

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