1) Assume that Andy spends his money on only two things: food and fun. Assume that both are normal goods and that Andy has a very nicely behaved utility function. Andy is also a savvy consumer (who correctly maximizes his utility). When the price of fun increases how will Andy react?
A. He will consume less fun, however, his food consumption may increase, decrease or remain unchanged.
B. He will consume less food, however, his fun consumption may increase, decrease or remain unchanged.
C. He will consume more food, however, his fun consumption may increase, decrease or remain unchanged.
D. He will consume more food and more fun.
E. He will consume less food and more fun.
2) Assume only one variable input, which is labor (L). Which one of the following is a correct statement for a typical short run production function? Assume TP=total product of labor, AP=average product of labor, MP=marginal product of labor.
A. The law of diminishing marginal returns implies that the TP curve must eventually fall.
B. The law of diminishing marginal returns implies that the MP will eventually become negative.
C. When the value of AP = MP, then TP is at its maximum value.
D. At the moment when the TP curve starts to increase at a decreasing rate, then MP has reached its maximum value and will start to fall.
E. The law of diminishing marginal returns implies that the units of labor must be heterogeneous with some laborers more productive workers than others.
3) Which one of the following statements about a firm’s cost curves is true?
A. The average variable cost curve only includes explicit costs.
B. Increases in input prices for variable factors of production will shift the firm’s marginal cost curve up and also shift the firm’s total variable cost curve up.
C. Fixed costs only include implicit costs.
D. An increase in the price of a fixed factor of production will shift the firm’s variable cost curve up.
E. A competitive firm’s short run supply curve is identical at all points to its short run marginal cost curve.
4) You run an internet startup company from your home. You have solar panels installed in your home which generate electricity that you sell to the local electric company any time you use less electricity than you are generating with your panels. Which one of the items listed below would be factored into economic profit but would NOT be factored into accounting profit?
A. Rent you pay a landlord for a small office.
B. The time your friends spend testing your software apps just because they like you.
C. The electricity that you use to run the business.
D. Monthly fees you pay a computer company to host your site.
E. Consultant fees you’ve already paid IBM consultants and cannot get back.
5) Jannet took $40,000 out of her bank account to buy a commercial hemp necklace weaver to use for her necklace making business. Her bank account gives her 1 percent interest per year. During the first year of her business Jannet sold 2,700 necklaces for $5.00 each. During this year her necklace making business incurred $7,000 in explicit costs for mainly materials. Jannet’s weaver has not depreciated at all in the first year of business. Were Jannet not working for herself making necklaces, she’d be working 20 hours a week, for 40 weeks at $7 an hour. Jannet’s economic profit for the year was
A. $‐39,100.
B. $6,100.
C. $500.
D. $200.
E. $‐52,600
6) When is it definitely in the firm’s best interest to shut down in the short run? Assume all the firm’s fixed costs are sunk.
A. The firm is earning exactly zero economic profit.
B. The firm’s total revenues are less than the cost of variable factors of production.
C. The firm’s total revenues are less than the cost of fixed factors of production.
D. The firm’s total revenues are less than the total cost of production.
E. None of the above is correct.
7) The market demand curve in this market is given by PD = 500 ‐ 5Q and the market supply curve is given by
PS = 20Q. A perfectly competitive profit maximizing firm’s marginal cost curve is given by mc=10q. The firm has no fixed cost. How much does the firm produce?
A. 400
B. 20
C. 40
D. 29
E. We can’t say, because we haven’t been told how many firms are in the market.
8) Hannah’s Sporting company makes Badminton rackets. They are currently producing 24,800 rackets a month using 100 hours of labor and 15 units of capital. The marginal product of labor at 100 hours is 54 rackets. The marginal product of capital at 15 units of machinery is 96 rackets. Hannah’s input prices are as follows. The price of labor is $9 per hour and the price of capital is $24 per unit of machinery. Hannah is happy with the level of output, but she wants to be sure she is minimizing cost. She should
A. do nothing, her costs are minimized already.
B. use more capital only since it is more productive.
C. use less labor only since it is not very productive.
D. use more labor and less capital.
E. use less labor and more capital.
9) In the long run, a perfectly competitive firm makes zero economic profits. This implies that, in the long run, (read all choices before selecting)
A. marginal revenue equals marginal cost.
B. average revenue is greater than marginal cost.
C. average total cost equals marginal cost.
D. All of the above are true.
E. Only A and C are true.
10) Martin and Kingsley have the exact same cost structures for writing novels except that Martin used his own money to buy his typewriter while Kingsley borrowed money from the bank to buy his. The prevailing market interest rate is 10% for both savings and borrowing for both Martin and Kingsley. Both Martin and Kingsley would write for Vanity Fair and earn salaries of $60,000/year if they quit writing for themselves and joined Vanity Fair. Assume that the novel writing business is a perfectly competitive industry. Which one of the following is true?
A. Martin earns more accounting profit and more economic profit than Kingsley does.
B. Martin earns the same accounting profit and more economic profit as Kingsley does.
C. Martin earns the same accounting profit and the same economic profit as Kingsley does.
D. Martin earns less accounting profit and less economic profit than Kingsley does.
E. Martin earns more accounting profit and the same economic profit as Kingsley does.
11) Joe Cool went to a baseball game and got very hungry for a hotdog. While it is true that the ballpark sells soda and hotdogs separately, Joe Cool never has one without having one of the other. His indifference curve map between these two goods is most likely
A. made up of linear indifference curves.
B. made up of indifference curves that bow “out” away from the origin.
C. made up of indifference curves that are positively sloped.
D. made up of indifferences curves that cross each other.
E. made up of “L” shaped indifference curves.
