ECONOMICS 514 PRACTICE QUESTIONS 1 A statement that takes the form of if A then B (where A and B are facts) is called

a(n) a. b. c. d. e. 2 test condition theory refutable assumption axiom

Which of the following statements is incorrect? a. b. c. d. e. if supply declines and demand remains constant, equilibrium price will rise if demand decreases and supply increases, equilibrium price will fall if supply increases and demand remains constant, equilibrium price will fall if demand increases and supply decreases, equilibrium price will fall none of the above

The _______ of any action is the highest valued forgone alternative. a. d. value efficiency b. e. price c. None of the above cost

The _______ of good X is the ratio at which it can be traded for another good. a. d. value efficiency b. e. price c. None of the above cost

The ________ of good X is the maximum amount of another good which an individual is willing and able to substitute for it. a. d. value efficiency b. e. price c. consumer surplus cost

Which of the following would cause both the equilibrium price and equilibrium quantity of potatoes (a normal good) to increase? a. b. c. d. e. an increase in consumer income an increase in the price of a complement a decrease in consumer income a reduction in the marginal cost of producing potatoes None of the above

7 A very talented T.A. has been offered three jobs. The first pays $25,000/year, the second pays $45,000/year, and the third pays $50,000/year. What is his/her opportunity cost of taking the second job? a. b. c. d. e. $5,000 $95,000 $25,000 $50,000 None of the above.

What is the result of a decrease in the demand for product X? a. b. c. d. e. Prices of X are bid up and there is an increase in quantity supplied. Prices of X are bid down and there is an increase in quantity supplied. Prices of X are bid up and there is a decrease in quantity supplied. Prices of X are bid down and there is a decrease in quantity supplied. None of the above

Which of the following statements is correct? a. b. c. d. e. If trade occurs, economists believe that it is because individuals in the market are acting as if they are rational and trying to increase their wealth. A rational supplier of a good will always supply the next unit if the value he/she places on that next unit is less than or equal to its price. Consumer surplus is the difference between the total value that consumers place on a particular quantity of a good and the amount actually paid. Equilibrium occurs when the quantity demanded equals the quantity supplied in a market. All of the above are correct.

10

In one day Paul can produce 50 Purdue T-shirts or 30 Purdue hats. In the same amount of time John can produce 25 Purdue T-shirts or 20 Purdue hats. T-shirts 50 25 Hats 30 20

Paul John a) b) c) d) e) 11

Paul has an absolute advantage in the production of T-shirts John has an absolute advantage in the production of T-shirts No one has an absolute advantage in the production of T-shirts John has an absolute advantage in the production of hats None of the Above.

Which of the following is correct? a) b) c) d) e) John has a comparative advantage in the production of T-shirts Paul has a comparative advantage in the production of both goods John has a comparative advantage in the production of hats Paul has a comparative advantage in the production of T-shirts Both c and d are correct

12

For Paul the marginal cost of 1 T-shirt is a) b) c) d) e) 0.4 T-shirts 0.6 hats 0.6 T-shirts 0.8 hats None of the Above.

13

If the demand for product X decreases and the supply of product X increases, a. b. the equilibrium price of product X will decrease. the equilibrium quantity of product X will increase, decrease or stay the

c. d. e.
14

same depending upon the magnitude of the shift in the two curves the equilibrium price of product X will increase, decrease or stay the same depending upon the magnitude of the shift in the two curves b and c are both correct a and b are both correct

Which of the following will shift out the production possibility frontier? a) b) c) d) e) An increase in federal tax rates An increase in the level of prices A labor strike An increase in the quantity of inputs (factors) of production None of the above

15

Suppose good X is an inferior good, then a decrease in income will cause the equilibrium price for good X ______ and equilibrium quantity sold for good X ______. a) b) c) d) e) increase; increase decrease; increase increase; decrease decrease; decrease none of the above.

The remainder of the test questions will all relate to the TABLE below. This table gives the demand schedule for 3 individuals; A, B and C, for product X. Prices are measured in dollars, and all units of X are discrete units, that is parts of a unit cannot be traded; just whole units of X. Assume that all transaction costs are zero unless stated otherwise in a particular question and assume that if the MV of a buyer is equal to the MV of a seller that the marginal unit will be traded. TABLE A $P 16 15 14 12 11 10 9 7 5.5 2 16 Q 1 2 3 4 5 6 7 8 9 10 $P 16 15 12 10 8 7 6 5 2 0 B Q 1 2 3 4 5 6 7 8 9 10 $P 22 20 17 12 10 9 8 7 6 3.5 C Q 1 2 3 4 5 6 7 8 9 10

A has 3 units of X, B has 7 units and individual C has 4 units, so there are a total of 14 units of X in the market. Assume that transaction costs are zero and they start trading among themselves. In equilibrium, what price would emerge from this exchange process? a. 14

b. c. d. e. 17

11 12 15 10

In the equilibrium in the preceding question, A would end up with _____ units of X, B would end up with ____ units of X and C would end up with ____ units of X. a. b. c. d. e. 5, 4, 5 6, 3, 5 8, 3, 3 7, 3, 4 none of the above

18

In the equilibrium from the preceding question, what would be A's consumer surplus? a. b. c. d. e. 5 3 6 4 none of the above

The table below shows the quantities of product X that a producer can produce in one week in a factory using different amounts of labor. When indifferent, assume the producer will produce and sell. Cost is measured in dollars. Assume the wage rate for a unit of labor is $800 and, for now, the cost of the factory will be zero. Labor units are not divisible. This table will be used for the next 16 questions. Average Marginal Total Cost Cost (MC) (ATC)
66.67 64.00 61.54 61.54 62.50 64.00 66.67 70.33 75.00 80.00 85.44 91.43 98.11

Factory
1 1 1 1 1 1 1 1 1 1 1 1 1 1

Labor
0 1 2 3 4 5 6 7 8 9 10 11 12 13

Total Marginal Product Product

0 12 25 39 52 75 84 91 96 100 103 105 106 12

Total Cost
800 1600 2400 3200 4000 4800 5600 6400 7200 8000 8800 9600 10400

12 11 9 5 4 3 2 1

66.67 72.73 88.89 114.29 160.00 266.67 400.00 800.00

19

Marginal cost is at a minimum when the total product is a. e. 12 b. None of the above 25 c. 39 d. 52

20

Marginal cost reaches a minimum when a. b. c. d. e. When marginal product is falling When ATC is equal to the marginal cost When ATC is rising When marginal product is rising None of the above

21

What is the total product of 5 units of labor? a. e. 64, b. None of the above 60, c. 58, d. 62,

22

What is the marginal product of the 8th unit of labor? a. e. 6, b. none of the above 8, c. 10, d. 7

23

What is the marginal cost of increasing output from 96 to 100 units of X per week? a. e. $180, b. None of the above $200 c. $220 d. $240

24

If product X was selling for a price of $60.00 per unit, how many units of X would this producer be willing and able to produce each week? a e. 0 b. None of the above 25 c. 39 d. 52

25

If product X was selling for a price of $100.00 per unit, how many units of X would this producer be willing and able to produce each week? a e. 84 b. None of the above 91 c. 75 d. 52

26

From the preceding question, how much profit would this producer earn each week? a d. $3000 $2800 b. e. $2470 c. none of the above $2600

27

If product X was selling for a price of $175 per unit, how many units of labor would this producer be willing and able to hire each week? a. 7, b. 9, c. 11, d. 5

e. 28

None of the above

Suppose that there are five producers of product X, each with the same production data shown in the above table. If labor continues to trade for $800 per week, how many units of X would they be willing and able to supply all together each week if product X sold at a price of $400.00? a e. 500 b. none of the above 515 c. 520 d. 530

The graph below shows the market demand curve for product X per week. Use this graph for the next 7 questions. Unless otherwise specified, assume that there are no transaction costs.
Price $100.0 0 $80.00 $72.73 $66.67 Demand

420

475

575 670 7

Quantity of X/per week

29

Combining the information in the above graph with the supply information in the previous questions, what will be the equilibrium price for product X? a. d. $66.67 $100 b. e. $72.73 None of the above c. $80.00

30

From the preceding question, how many units of X will each of the 5 producers produce? a. e. 64, b. None of the above 75, c. 84, d. 91

31

How much profit will each producer make each week? a. d. $2800, $590 b. e. $2650, c. None of the above $2275

Up to now, we have assumed that the factory cost was zero. Suppose that the owner of the factory starts charging this producer a weekly rent of $1200. As a result of this rent increase, the market equilibrium price of X will be a. d. 32 $66.67, $0 b. e. $160.00, None of the above c. 114.29,

How much profit will each producer make each week? a. d. $1800, $0 b. e. $1600, c. None of the above $1275

33

All of the conditions are the same as they were in the previous question. However, now some of the buyers of X decide they no longer want X. This will cause the market demand curve to ______ and the market equilibrium price to _______ a c. e. increase decrease decrease increase none of the above b. d. increase decrease increase decrease

34

All of the conditions are the same as they were in the previous question. However, another producer enters this market and starts producing and selling product X. This will cause the market demand curve to _____ and the market equilibrium price to ________. a c. e. increase decrease decrease increase none of the above b. d. increase decrease increase decrease