PORTLAND STATE UNIVERSITY
EC 201 - PRINCIPLES OF MICROECONOMICS
EXAM ONE -- SUMMER 2001
Jack Richards, Instructor
Name: ______
OPEN BOOKS AND OPEN NOTES
Turn-in both your test and scantron. Your test can not 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 other things remain constant, which of the following may cause a decrease in the price of used homes?
EXAM ONE -- SUMMER 2001
a. an increase in property taxes.
b. an increase in mortgage interest rates.
EXAM ONE -- SUMMER 2001
c. an increase in the construction price for new homes.
d. a decrease in the number of first-time homebuyers.
e. None of the above are correct.
EXAM ONE -- SUMMER 2001
2. If the demand for agricultural products is highly price elastic, an increase in supply will cause:
a. declines in farm prices and incomes.
b. increases in farm prices and incomes.
c. a decline in farm prices, but an increase in farm incomes.
d. an increase in farm prices, but a decrease in farm incomes.
e. None of the above are correct.
3. Janice has a marginal utility for an additional bottle of beer that is twice has high as her marginal utility for an additional piece of pizza. If beer costs $1.00 per glass, Janice should buy pizza only if its price is:
a. $1.00 or less per slice.
b. $.50 or less per slice.
c. $2.00 or less per slice.
d. $.50 or more per slice.
e. None of the above are correct.
4. Suppose the cross-price elasticity of demand for Meadows when prices are changed by Timberline is 0.3. This information tells us that:
a. These two ski areas are complements.
b. That most consumers probably do not consider these two areas to be very good substitutes.
c. A 10% decrease in Timberline prices can be expected to reduce demand at Meadows around 3%.
d. Both "b" and "c" are correct.
e. All of the above are correct.
5. Equilibrium price and quantity means that:
a. Consumers are happy.
b. Producers are happy.
c. Price elasticity = -l.0
d. Prices are always elastic
e. None of the above are necessarily true.
6. If the quantity demanded is greater than the quantity supplied, market price will be expected to:
a. Rise.
b. Fall.
c. Remain unchanged.
d. A market surplus will result.
e. Both "a" and "d" above are correct.
FOR QUESTION 7 THRU 12, ASSUME THAT THE FOLLOWING DEMAND AND SUPPLY SCHEDULES REPRESENT THE CURRENT MARKET SITUATION FOR A FIRM THAT SELLS HOT DOGS AT SCHOOL BASKETBALL GAMES:
DEMAND AND SUPPLY
(All quantities are 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 57 2.25 48
2.50 52 2.50 52
2.75 49 2.75 57
3.00 48 3.00 60
3.25 44 3.25 63
3.50 36 3.50 64
3.75 25 3.75 70
4.00 13 4.00 78
7. If this firm increases its price from $2.50 to $2.75, we know that:
a. The firm faces an elastic demand for its product in this price range.
b. The firm faces an inelastic demand for its product in this price range.
c. The firm's demand function will shift to the right.
d. Both "a" and "c" are correct.
e. Both "b" and "c" are correct.
8. At the current equilibrium price, each of the 13 consumers that would be willing to pay $4.00 for a hot dog receive a consumers surplus of:
a. $0.25
b. $1.00
c. $1.50
d. Zero
e. None of the above are correct.
9. An increase in demand of 25% that shifts the demand curve to the right could be caused by:
a. A sharp fall in the price of a complement, (e.g. hot dog buns).
b. A discovery that eating hot dogs reduces the risk of cancer.
c. A decrease in the price charged for hot dogs at basketball games.
d. All of the above could shift the demand curve to the right.
e. Only "a" or "b" could shift the demand curve to the right.
10. If demand increases by 25%, the new equilibrium price is:
a. $3.00.
b. $3.25.
c. $3.50.
d. $4.25.
e. None of the above are correct.
11. If demand increases by 25%, and government establishes a ceiling price of $2.50 we expect a:
a. Shortage of 4 units.
b. Shortage of 8 units.
c. Shortage of 13 units.
d. Surplus of 8 units.
e. None of the above are correct.
12. If the price of a substitute product declines, we would expect:
a. The surplus indicated in question 11 to decrease.
b. The shortage indicated in question 11 to decrease.
c. The surplus indicated in question 11 to increase.
d. The shortage indicated in question 11 to increase.
e. None of the above are correct.
13. If the demand for airline tickets to Miami Beach is elastic:
a. Airline revenue will increase if supply increases.
b. Airline revenue will increase if supply decreases.
c. A small price change will cause a large shift in demand.
d. A large price change will cause a small shift in demand curve.
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.
15. You are the newly appointed financial manager for PSU. You have been given the task of increasing revenues. Your economics consultants have informed you that at present tuition levels, the price elasticity of demand is inelastic. To increase total revenue you should:
a. Decrease student tuition.
b. Increase student tuition.
c. Hold tuition constant and attempt to increase enrollment through additional advertising.
d. Cut advertising expenditures to decrease enrollment.
e. None of the above will increase total revenue.
16. If pork is a good substitute for beef, an increase in the supply of pork is most likely to cause the:
a. Demand for beef to shift to the left.
b. Demand for beef to shift to the right.
c. Supply of beef to shift to the left.
d. Supply of beef to shift to the right.
e. Both "a" and "c" are correct.
17. If beef producers reduce their prices to compete with lower prices for pork (see question 16), this is most likely to cause:
a. Demand for beef to shift to the left.
b. Demand for beef to shift to the right.
c. Supply of beef to shift to the left.
d. Supply of beef to shift to the right.
e. None of the above are correct.
18. In the demand/supply model, which of the following will not cause the demand curve to shift:
a. Income.
b. Taste.
c. Prices of other related goods.
d. The price of the product itself.
e. All of the above will cause the demand curve to shift.
19. If the going market price of pine lumber is 20 cents a board foot but the equilibrium price is 15 cents a board foot, there will be:
a. A shortage of pine lumber, the quantity demanded will be more than the quantity supplied.
b. A surplus of pine lumber, the quantity demanded will be less than the quantity supplied.
c. Either a surplus or shortage could exist.
d. The answer can not be determined with only this information.
e. None of the above are correct.
20. Any point on a market:
a. Demand curve reflects the lowest price that sellers are willing to accept for a given quantity of the good.
b. Demand curve reflects the highest price that buyers are willing to pay for a given quantity of the good.
c. Supply curve reflects the lowest price that sellers are willing to accept for a given quantity of the good.
d. Both "b" and "c" are correct.
e. All of the above are correct.
21. Which, if any, of the following are false:
a. If total revenue falls as a result of an increase in price, then demand is inelastic.
b. If total revenue increases as a result of an increase in price, then demand is elastic.
c. If total revenue is unchanged as a result of an increase in price, then demand is unit elastic.
d. All of the above are correct.
e. None of the above are correct.
USE THIS INFORMATION TO ANSWER QUESTIONS 22 THRU 24: The seating capacity for a university football stadium is 100,000 (i.e. S = 100,000). Assume that 500,000 people would attend each game if there were no admission charge, but for each increase of $1.00 in average ticket prices the number of people wanting to attend is reduced by 20,000 (i.e. Qd = 500,000 - 20,000P).
22. The equilibrium price for home football games will be:
a. $30.
b. $20.
c. $18.
d. $40.
e. None of the above are correct.
23. The expected attendance (i.e. sales) at the price determined in question 22 will be:
a. 80,000.
b. 92,400.
c. 100,000.
d. 400,000.
e. None of the above are correct.
24. Since it is common to share the revenue from college football games with the visiting team, the athletic director has decided to reduce the price to $10 and give priority to organizations or individuals that contribute to the school's athletic program. (Note: contributions do not have to be shared.) With this strategy, will there be much added pressure to contribute to the athletic program to obtain tickets? The expected ticket shortage will be:
a. 20,000.
b. 300,000.
c. 200,000.
d. 160,000.
e. None of the above are correct.
END OF QUESTIONS RELATING TO FOOTBALL STADIUM EXAMPLE.
USE THE FOLLOWING INFORMATION FOR THE TWT CABLE TV COMPANY TO ANSWER QUESTION 25. ASSUME THAT THIS FIRM HAS ACCURATELY DETERMINED THAT THE PRICE ELASTICITY OF DEMAND FOR CABLE TV HOOKUPS IS -4.0 AND FOR THE MONTHLY SERVICE CHARGES IT IS -0.5. 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.
25. If this firm increases its monthly service charge by 40% and reduces its hookup charge by 30%, it should expect which of the following:
a. 20% increase in the number of customers it serves each month.
b. 20% decrease 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.
d. None of the above are correct.
26. The demand for peaches would be:
a. more elastic than the demand for all types of fruit.
b. less elastic than the demand for all types of fruit.
c. would have the same elasticity as the demand for all fruit.
d. could be either more or less elastic than the demand for all types of fruit.
e. None of the above are correct.
27. A commodity with a high use value (e.g. water) but low exchange or market value will result in:
a. high total utility but low marginal utility.
b. high marginal utility but low total utility.
c. high total utility but negative marginal utility.
d. high marginal utility but negative total utility.
e. None of the above are correct.
28. In the demand/supply model:
a. Elasticity is always constant at all points on the demand curve.
b. Elasticity is always constant at all points on the supply curve.
c. Marginal utility is constant at all points on the demand curve.
d. All of the above are correct.
e. None of the above are correct.
29. A firm wishes to reduce an excess inventory of 10,000 units within 20 weeks. Current sales are 5,000 units per week. How much must it lower its price if price elasticity of demand is - 2.0.
a. 2.5%
b. 5.0%
c. 4.0%
d. 5.8%
e. None of the above are correct.
30. The price reduction is question 29 will:
a. Cause total revenue (i.e. total receipts) to increase.
b. Cause total revenue (i.e. total receipts) to decrease.
c. Will not change total revenue.
d. Will cause profit to increase.
d. Both "a" and "d" are correct.
ANSWERS TO EXAM ONE – EC201 – PSU – SUMMER 2001
1. – d / 7. – b / 13. – a / 19. – b / 25. – d2. – c / 8. – c / 14. – c / 20. – d / 26. – a
3. – b / 9. – e / 15. – b / 21. – c / 27. – a
4. – d / 10. – a / 16. – a / 22. – b / 28. – e
5. – e / 11. – c / 17. – e / 23. – c / 29. – b
6. – a / 12. – b / 18. – d / 24. – c / 30. – a