Please note that this is sample/practice exam. Number of ...web.uvic.ca/~aahoque/VIU/ECON211 Sample MTII.pdf · Please note that this is sample/practice exam. Number of questions

Please note that this is sample/practice exam. Number of questions in each section and structure of questions in Part B would vary as discussed in class

VANCOUVER ISLAND UNIVERSITY

ECON211: PRINCIPLES OF MICROECONOMICS, Spring 2013

SAMPLE MIDTERM II EXAM

Name (Last, First): ______________________________________________

ID #: ______________________________________________

Signature: _______________________________________________

THIS EXAM HAS TOTAL ___PAGES INCLUDING THE COVER PAGE

Instructions:

Total marks ____ and you have 75 Minutes to complete the exam.

Please answer your MCQs in the table provided on the last page and short questions in the space provided.

For short answer questions YOU MUST SHOW YOUR ALL WORK TO GET FULL MARKS. IF YOU DO NOT SHOW WORK,

YOU MAY NOT GET FULL MARKS EVEN FOR A CORRECT ANSWER. Use the marks assigned to each question as a guide to allocating your time across

questions.

Good Luck on Your Exam

Sample Midterm II, ECON211 Spring 2013

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PART A: MCQ

(There will be 30 MCQs in this section which is worth 30 marks)

1. The idea that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases is known as

a. diminishing total utility b. utility maximization c. diminishing marginal utility d. the paradox of value e. the utility theory of demand

2. The "law" of diminishing marginal utility implies that the

a. marginal utility of a good diminishes over time b. total utility is negative c. last unit of a good consumed will contribute most to the consumer's satisfaction d. first unit of a good consumed will contribute most to the consumer's satisfaction e. total utility is constant as more units are consumed

3. Economists use the term "marginal utility" to describe the a. total satisfaction received from consumption of a good b. average utility of each unit of a good consumed c. change in total satisfaction caused by consumption of an additional unit of a good d. inverse of the measure of total utility e. price paid for every unit consumed

4. Suppose a production function for a firm takes the following algebraic form:

, where Q is the output of sweaters per day. Now suppose the firm is operating with 8 units of capital and 10 units of labour . What is the output of sweaters?

a. 155 sweaters per day b. 80 sweaters per day c. 30 sweaters per day d. 140 sweaters per day e. 60 sweaters per day

5. Which of the following items is NOT a characteristic of a corporation?

a. It is legally obliged to distribute all profits to shareholders b. It can incur debt that is an obligation of the corporation but not of its individual owners c. It is an entity separate from the individuals who own it d. It can enter into contracts e. It has the right to sue and be sued

Sample Midterm II, ECON211 Spring 2013

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6. If the price of toffee bars is $1 each, bags of cashews are $2 each, and this consumer has $7 per week to spend on these two snacks, how many of each will he/she purchase to maximize utility?

Toffee Bars Cashew Bags

Units Marginal utility Total utility Marginal utility Total utility

1 10 10 12 12

2 8 18 10 22

3 5 23 7 29

4 3 26 5 34

5 1 27 2 36

6 0 27 1 37

7 0 27 0 37

a. 1 toffee bars and 3 bags of cashews b. 2 toffee bars and 2 bags of cashews c. 7 toffee bars and 0 bags of cashews d. 0 toffee bars and 3 bags of cashews e. 3 toffee bars and 2 bags of cashews

7. The table below provides the annual revenues and costs for a family-owned firm producing

catered meals

Total Revenue ($) 500000

Total Costs ($)

- wages and salaries 200,000

- risk-free return of 6% on owners' capital of 250,000 15,000

- rent 105,000

- depreciation of capital equipment 25,000

- risk premium of 8% on owners' capital of 250,000 20,000

- intermediate inputs 150,000

- forgone wages of owners in alternative employment 80,000

- interest on bank loan 10,000

The implicit costs (opportunity cost) for this family-owned firm are a. $100,00 b. $80,000 c. $35,000 d. $490,000 e. $115,000

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8. The opportunity cost of any factor of production is

a. its explicit cost b. the benefit forgone by not using it in its worst alternative c. the money actually paid to the factors of production d. its accounting cost e. the benefit forgone by not using it in its best alternative

9. Productivity is defined as

a. the efficient use of technology b. the cost of a unit of output c. a measure of output per unit of resource input d. output per combination of two or more inputs e. a measure of input used

10. Refer to the table. The table below shows 4 alternative production techniques for producing

1000 widgets per month. Which production technique is technically inefficient? a. C b. A c. D d. B e. All four techniques

are inefficient

Technique A B C D

Labour 25 35 50 30

Capital 50 35 25 60

11. At any disequilibrium price, whether controlled or not, the quantity actually exchanged is determined by

a. the elasticity of demand b. the lesser of quantity demanded and quantity supplied c. the greater of quantity demanded and quantity supplied d. the elasticity of supply e. government decree

12. If a consumer is consuming products X and Y and is maximizing his utility, the following is true

a. b. c. d. e.

13. We know that the demand curve for a normal good is downward sloping because of

a. the combination of the income and substitution effects b. the substitution effect c. the income effect d. neither the substitution effect nor the income effect e. none of these responses is correct

Sample Midterm II, ECON211 Spring 2013

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14. Suppose there is a theory that several things influence the price of fish in Halifax, one of which is the weather during the fishing season. When examining the determinants of the price of fish, the weather is a. an exogenous variable, as it is determined outside the theory. b. a stock, as it influences the quantity of fish caught. c. an endogenous variable, as it is determined within the theory. d. an endogenous variable, as it influences the price of fish. e. an act of God and, therefore, has no legitimate connection with the theory.

15. If total utility is decreasing as more units are consumed, then marginal utility must be

a. increasing at a decreasing rate b. positive c. decreasing at an increasing rate d. negative e. decreasing

16. The figure below illustrate the law of

a. Diminishing marginal utility

b. Maximizing utility

c. Diminishing total utility

d. Increasing marginal utility

e. Increasing total utility

17. Marginal utility is zero when total utility is

a. Is deceasing

b. Is increasing

c. Equal to marginal utility

d. At its maximum

e. Equal to zero

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18. A firm can raise capital without incurring debt by issuing new shares and/or

a. investing in new capital equipment

b. issuing bonds

c. reinvesting profits

d. increasing its bank loans

e. making extra dividend paymnets

19. The total utility from consuming two units of the good is

a. decreasing at an increasing rate

b. increasing at a decreasing rate

c. decreasing at a decreasing rate

d. increasing at an increasing rate

e. constant

20. A single proprietorship is a form of business organization which

a. allows easy transferability of ownership by the trading of shares

b. has limited liability

c. has one owner-manager who is personally responsible for the firm's actions and debts

d. has unlimited access to money capital

e. has a single owner but has directors who are responsible for the firm's debts

21. The statement "The most important goal of firms is to maximize profits"

a. is a normative statement and thus cannot be tested

b. has been proved by empirical testing to be always true

c. applies only to corporations

d. is an assumption used by economists to predict the behaviour of firms

e. is an unrealistic assumption, and therefore of little use to economists

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22. The opportunity cost to a firm of using an asset is zero if

a. the asset has no alternative uses

b. the asset was given to the firm for free

c. the asset is already owned by the firm

d. no money was spent to acquire the asset

e. the asset has zero sunk costs associated with it

23. A firm's depreciation costs

a. are irrelevant to an accounting of the firm's total costs

b. measure payments to those outside the firm

c. are an estimate of the loss of value of the firm's physical capital

d. are the cost of money borrowed to buy a durable asset

e. are a measure of the depreciation of financial assets of the firm

24. A demand schedule is drawn under all of the following conditions EXCEPT:

a. the price of the commodity is held constant

b. the distribution of income of the consumers is held constant

c. the tastes of consumers are held constant

d. the income of consumers is held constant

e. the prices of related commodities are held constant

25. Suppose that a better way to produce a good is discovered, thus lowering production costs for

the good. This will cause

a. no change in the supply curve, only a change in price

b. an increase in supply (a rightward shift of the supply curve)

c. a decrease in supply (a leftward shift of the supply curve)

d. a movement down the supply curve

e. a movement up the supply curve

Sample Midterm II, ECON211 Spring 2013

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PART B: Short Answer Questions

Question 01

Use the following hypothetical table to analyze a consumer behavior

Good X Good Y

Unit

Consumed

Price/

unit

($) PX

Total

Utility

(TUX)

Marginal

Utility

(MUX)

MUX/PX MUY/PY Marginal

Utility

(MUY)

Total

Utility

(TUY)

Price/

Unit

($), PY

Unit

Consumed

1 5 40 40 8 5 10 10 2 1

2 4 60 20 5 3 6 16 2 2

4 3 90 15 5 3 22 2 3

5 2 95 5 2.5 2.5 27 2 4

a. Fill up gaps for marginal utilities and marginal utility per additional dollar for good x and good

y in the above table.

b. Find the equilibrium and interpret the meaning of the equilibrium condition

Equilibrium in the above table is found using the condition:

: marginal utility per dollar

spent on good x and y must be the same. When the consumer consumes 5 units of x and 4 unit of

y, the equilibrium condition is satisfied. This combination of x and y is the stable consumption

level for this consumer. Once the consumer achieves this combination, he does not like to move

away – no substitution needed to be made unless there is a change in budget.

Sample Midterm II, ECON211 Spring 2013

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Question 02

Amy has $20 a week to spend on coffee and cake. The price of coffee is $4 a cup and the price of cake is

$2 a slice.

a. Calculate Amy’s real income in terms of cake and the relative price of cake in terms of coffee.

Let`s assume

Quantity of coffee Any can purchase is , and price of coffee is

Quantity of cake Any can purchase is , and price of cake is

Amy`s real income in terms of cake means how many cakes she can purchase with her budget:

Relative price of cake means price of cake in terms of coffee

which is the opportunity cost of cake – what she needs to give up to get one extra slice of cake

b. Calculate the equation for Amy’s budget line

Expenditure on coffee at the price $4

Expenditure on cake at the price $2

She is constrained by a budget

Here total expenditure on both goods is

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c. Draw the budget line (consumption possibility curve) for Amy (with coffee on the horizontal

axis)

d. Show the impact on the budget line if the coffee price goes down to $2

If the price of coffee goes down to $2, her real income in terms of coffee goes up – she now

purchase 10 coffee. The budget line will pivot rightward on the coffee side

Cake

10

5 Coffee

Budget line,

10

5 10 Coffee

Budget line,

Cake

New Budget line,

Sample Midterm II, ECON211 Spring 2013

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e. What happens to the budget line if her income increases to $24

If her income increases to $24 leaving prices at initial level the budget line will shift to

the right parallelly.

*END OF EXAMINATION*

10

5 6 Coffee

Budget line,

New Budget line,

Cake

12

Sample Midterm II, ECON211 Spring 2013

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Name: ______________________________________________

Signature: _______________________________________________

Please answer your MCQs in the following table

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21. 22. 23. 24. 25.

26. 27. 28. 29. 30.