MIDTERM 1 REVIEW

Question 1

The analytical tools underlying nearly all microeconomic studies are:

Answer 1

constrained optimization, equilibrium analysis, and comparative statics.

Question 2

Microeconomics examines

Answer 2

the economic behavior of individual economic decision units

Question 3

An endogenous variable is:

Answer 3

a variable determined within the economic system being studied.

Question 4

In general, economics is the study of:

Answer 4

the allocation scarce resources to unlimited wants.

Question 5

Identifying the appropriate way to allocate an economy’s resources is an example of

Answer 5

a constrained optimization problem.

Question 6

Every society must answer which one of the following questions?

Answer 6

What goods and services will be produced, how much will be produced, who will produce them and who will receive them?

Question 7

Which of the following statements regarding exogenous and endogenous variables is correct?

Answer 7

Endogenous variables will always be determined within the model.

Question 8

The definition of an exogenous variable is:

Answer 8

a variable whose value is determined outside the model under study.

Question 9

Constrained optimization, equilibrium analysis and comparative statistics are the three essential tools of:

Answer 9

microeconomic analysis.

Question 10

Constrained optimization occurs when:

Answer 10

an individual is forced to choose between competing alternatives subject to some limitation such as budgetary considerations.

Question 11

The three tools used repeatedly in microeconomic analysis are:

Answer 11

constrained optimization, equilibrium analysis, comparative statics.

Question 12

An example of constrained optimization would be:

Answer 12

a firm trying to maximize its profits subject to its budget constraint.

Question 13

A manager cares about the number of workers under her command. She can choose between two projects: Project A allows her to hire workers who must be paid WA each, Project B allows her to hire workers who must be paid WB each. She is allocated a budget of $100 that she can allocate to either project. Which of the following accurately represents the manager’s problem?

Answer 13

a) The objective function is Max (NA+NB), where Ni is the number of workers on project i (i = A, B); the constraint is WANA + WBNB ≤ $100, where Wi is the wage on project i (i = A, B).

Question 14

Which of the following is not typically found in a constrained optimization problem?

Answer 14

Comparative statics analysis

Question 15

Which of the following is an example of a constraint?

Answer 15

L + W ≥ 5

Question 16

Which of the following is the best example of a consumer’s objective function?

Answer 16

satisfaction

Question 17

***FIGURE OUT FORMULA:

Suppose a consumer’s level of satisfaction is given by AB^2 and he/she has a total of $10 to spend on goods A and B. If the price of A is $1 and the price of B is $2, and assuming you can only purchase whole units (not fractional) of A and B, how many units of A and B should he/she purchase?

Answer 17

4 units of A and 3 units of B.

Question 18

An exogenous variable in a consumer’s choice problem would typically be:

Answer 18

price level.

Question 19

Suppose the price of X is $15 per unit, the price of Y is $12 per unit, the consumer’s income is $100, and the consumer’s level of satisfaction is measured by XY + Y. The consumer’s constraint is

Answer 19

15X + 12Y ≤ 100

Question 20

A good example of marginal reasoning would be:

Answer 20

the addition to total sales from spending an additional dollar on advertising.

Question 21

What term in microeconomics tells us how a dependent variable changes as a result of adding one unit of an independent variable?

Answer 21

Marginal impact

Question 22

An equilibrium:

a) is a condition that is reached eventually in any market.
b) is a state that will continue indefinitely as long as exogenous factors remain unchanged.
c) is a concept that is often meaningless because most markets never reach equilibrium.
d) is a temporary state.

Answer 22

d) is a temporary state.

Question 23

Identify the truthfulness of the following statements:

I. Marginal analysis can explain why you would always choose to eat Chinese food rather than pizza.

II. Marginal analysis can explain the incremental impact of an increase in total cost when one more unit of output is produced.

Answer 23

d) I is false; II is true

Question 24

Identify the truthfulness of the following statements:

I. Equilibrium analysis helps economists determine the market-clearing price.

II. Comparative statics help economists analyze how a change in an exogenous variable affects the level of a related endogenous variable in an economic model.

Answer 24

Both I and II are true

Question 25

Another term for equilibrium would be:

a) a point of infinite supply.
b) a point of insatiable wants.
c) a point of stability.
d) a point of scarcity.

Answer 25

c) a point of stability.

Question 26

Comparative statics:

a) examines how exogenous variables change as endogenous factors change.
b) examines how endogenous variables change as exogenous factors change.
c) presents a comparison of two separate markets at a single point in time.
d) is often rendered useless because exogenous variables can never be expected to remain constant for long.

Answer 26

b) examines how endogenous variables change as exogenous factors change.

Question 27

Suppose that market demand for a good slopes downward and market supply slopes upward. Equilibrium price is now $10 and 500,000 units of the good are traded at this price. Suppose now that the cost at which each unit of the good is produced falls. What is the likely effect of this change on the market equilibrium?

a) Excess supply
b) A fall in price
c) A shift in demand to the right
d) An increase in price

Answer 27

b) A fall in price

Question 28

Suppose the equilibrium price in a market is $5, and the government imposes a $4.50 price floor on the market. This will:

a) create excess supply.
b) create excess demand.
c) shift the demand curve to the right.
d) have no effect on the market.

Answer 28

have no effect on the market.

Question 29

Suppose the equilibrium price in a market is $5, and the government imposes a $4.50 price ceiling. This will:

Answer 29

create excess demand.

Question 30

Suppose the equilibrium rent for apartments in New York City is $2,000 per month. If the city authorities declared effective tomorrow that rents would not be allowed to exceed $1,800 per month, what do you think would happen to the relationship between supply and demand for rental apartments in New York City?

a) The supply of rental apartments would go up and rents would fall below $1800 per month.
b) There would be very little new construction of apartments in New York City and shortages would develop.
c) People would move out of New York City because of the new restrictions.
d) The demand for apartments would fall short of available supply.

Answer 30

There would be very little new construction of apartments in New York City and shortages would develop.

Question 30

Suppose the equilibrium rent for apartments in New York City is $2,000 per month. If the city authorities declared effective tomorrow that rents would not be allowed to exceed $1,800 per month, what do you think would happen to the relationship between supply and demand for rental apartments in New York City?

a) The supply of rental apartments would go up and rents would fall below $1800 per month.
b) There would be very little new construction of apartments in New York City and shortages would develop.
c) People would move out of New York City because of the new restrictions.
d) The demand for apartments would fall short of available supply.

Answer 30

There would be very little new construction of apartments in New York City and shortages would develop.

Question 31

Movements along a demand curve caused by a change in price probably means that: a) there has been an endogenous shift in the demand curve.
b) there has been an exogenous shift in the demand curve.
c) there has been a shift in an exogenous factor that affects supply.
d) the supply curve is not shifting.

Answer 31

there has been a shift in an exogenous factor that affects supply.

Question 32

Which of the following statements is true?
a) Endogenous changes to demand and supply curves cause them to shift.
b) Exogenous changes can never affect both the demand and supply curves.
c) Exogenous changes can sometimes affect both the demand and supply curves.
d) Movement along a demand curve means that only an endogenous factor is changing.

Answer 32

Exogenous changes can sometimes affect both the demand and supply curves.

Question 33

Currently, 100,000 units of a good are traded on a market. The government imposes a limit of a maximum of 50,000 units that may be traded on the market. This will:
a) create excess supply.
b) create excess demand.
c) raise price.
d) have no effect on the market.

Answer 33

c) raise price.

Question 34

Currently, 100,000 units of a good are traded on the market. The government imposes a tax on producers that raises the unit cost of production of the good. This will:
a) shift the supply curve to the left.
b) shift the supply curve to the right.
c) shift the demand curve to the left.
d) increase the quantity traded.

Answer 34

shift the supply curve to the left.

Question 35

If we were to build a model measuring the supply of corn, which of the following could be an example of an exogenous variable in the model?
a) The price of corn
b) The quantity supplied of corn c) The quantity of rain
d) The demand for corn

Answer 35

The quantity of rain

Question 36

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Which of the following statements is false?
a) Changes in exogenous variables are represented by shifts in the demand and/or supply curves.
b) Changes in endogenous variables are represented by movements along the supply and/or demand curves.
c) Price and quantity are the exogenous variables in this representation.
d) The equilibrium is represented as the intersection of supply and demand curves.

Answer 36

Price and quantity are the exogenous variables in this representation.

Question 37

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Which of the following statements is false?
a) The equilibrium remains unchanged unless an exogenous variable changes.
b) The equilibrium is represented as the intersection of supply and demand curves.
c) When a shift in demand or supply occurs, a comparative statics analysis compares the old and the new equilibrium points.
d) A change in price will cause a shift in the demand curve.

Answer 37

A change in price will cause a shift in the demand curve.

Question 38

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Let demand be a function of price and income, Qd (P, I). Which of the following statements is true?

a) A change in income will cause a shift in the supply curve.
b) A change in income level is represented by a movement along the demand curve.
c) Income is not represented on one of the axes, and so is treated as an exogenous variable in the graphical analysis.
d) Price and income together must change in order to create a shift in the demand curve.

Answer 38

c) Income is not represented on one of the axes, and so is treated as an exogenous variable in the graphical analysis.

Question 39

Suppose that we illustrate demand and supply with quantity on the horizontal axis and income on the vertical axis. Let demand be a function of price and income, Qd (P, I). Which of the following statements is true?
a) A change in income will cause a shift in the demand curve.
b) A change in income level is represented by a movement along the demand curve.
c) Income is treated as an exogenous variable in the graphical analysis.
d) Price and income together must change in order to create a shift in the demand curve.

Answer 39

b) A change in income level is represented by a movement along the demand curve.

Question 40

Which of the following statements about positive analysis is correct?
a) Positive analysis prescribes the best solution to an economic problem.
b) Positive analysis predicts how an economic system will change over time.
c) While normative analysis can be wrong, since it is often based on someone’s opinion, positive analysis is always accurate.
d) Since positive analysis is based on a model, and not the real world, it is mostly irrelevant.

Answer 40

Positive analysis predicts how an economic system will change over time.

Question 41

Which of the following statements about normative analysis is correct?
a) Normative analysis, because it is based on opinion, rarely employs any positive analysis when prescribing a solution to a given problem.
b) Normative analysis typically cannot be trusted because it is only someone’s opinion. c) Normative analysis ignores exogenous variables when making predictions.
d) Normative analysis typically focuses on issues of social welfare.

Answer 41

d) Normative analysis typically focuses on issues of social welfare.

Question 42

Which of the following statements represents normative analysis?
a) Eliminating rent controls in New York City will likely lead to greater supply of housing in the future.
b) Eliminating the minimum wage will likely lead to lower unemployment.
c) Subsidies to farmers to produce corn for ethanol will lead to a (desirable) reduced dependence on foreign oil.
d) Raising taxes on gasoline will reduce automobile traffic on our nation’s highways.

Answer 42

c) Subsidies to farmers to produce corn for ethanol will lead to a (desirable) reduced dependence on foreign oil.

Question 43

Which of the following statements has both positive and normative aspects to it?
a) Reducing taxes on telecommunications will lower the price for consumers and encourage families to communicate with one another more frequently.
b) Reducing the minimum wage will lead to lower unemployment and a lower average wage.
c) Increasing taxes on gasoline will lead to lower fuel consumption and fewer automobiles being sold each year.
d) Taxing alcohol leads to lower alcohol consumption per year.

Answer 43

a) Reducing taxes on telecommunications will lower the price for consumers and encourage families to communicate with one another more frequently.

Question 44

Which of the following statements has neither positive nor normative aspects to it?
a) On hot days, people drink more water.
b) Hot weather leads to greater numbers of heat exhaustion cases.
c) Providing free space heaters to poor people can reduce certain types of respiratory illness.
d) Hot weather is desirable.

Answer 44

d) Hot weather is desirable.

Question 45

Which of the following represents an example of positive analysis?
a) How will the equilibrium price of corn be affected by a government subsidy? b) What is the best way to assist low-income families with affordable housing? c) Would taxes on emissions be the best way to reduce pollution?
d) How can the government best design a tax cut?

Answer 45

a) How will the equilibrium price of corn be affected by a government subsidy?

Question 46

Which of the following represents an example of normative analysis?
a) How will the equilibrium price of coffee be affected by drought?
b) How will a government subsidy affect the quantity demanded of public housing? c) What is the best method for allocating tax revenues?
d) How will a tax cut affect a typical consumer’s disposable income?

Answer 46

c) What is the best method for allocating tax revenues?

Question 47

47. Endogenous changes to demand and supply curves cause them to shift.

Answer 47

False

Question 48

Exogenous changes can never affect both the demand and supply curves.

Answer 48

False

Question 49

Exogenous changes can sometimes affect both the demand and supply curves.

Answer 49

True

Question 50

Movement along a demand curve means that only an endogenous factor is changing.

Answer 50

False

Question 51

Currently, 75,000 units of a good are traded on a market. The government imposes a limit of a maximum of 50,000 units that may be traded on the market. This will create excess supply.

Answer 51

False

Question 52

Currently, 75,000 units of a good are traded on a market. The government imposes a limit of a maximum of 50,000 units that may be traded on the market. This will create excess demand.

Answer 52

False

Question 53

Currently, 75,000 units of a good are traded on a market. The government imposes a limit of a maximum of 50,000 units that may be traded on the market. This will create excess demand.

Answer 53

False

Question 54

Currently, 75,000 units of a good are traded on a market. The government imposes a limit of a maximum of 50,000 units that may be traded on the market. This will raise price.

Answer 54

True

Question 55

Currently, 75,000 units of a good are traded on a market. The government imposes a limit of a maximum of 50,000 units that may be traded on the market. This will have no effect on the market.

Answer 55

True.

Question 56

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Changes in exogenous variables are represented by shifts in the demand and/or supply curves.

Answer 56

True

Question 57

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Changes in endogenous variables are represented by movements along the supply and/or demand curves.

Answer 57

True

Question 58

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Price and quantity are the exogenous variables in this representation.

Answer 58

False

Question 59

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. The equilibrium is represented as the intersection of supply and demand curves.

Answer 59

True

Question 60

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. The equilibrium remains unchanged unless an exogenous variable changes.

Answer 60

True

Question 61

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. The equilibrium is represented as the intersection of supply and demand curves.

Answer 61

True

Question 62

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. When a shift in demand or supply occurs, a comparative statics analysis compares the old and the new equilibrium points.

Answer 62

True

Question 63

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. A change in price will cause a shift in the demand curve.

Answer 63

False

Question 64

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. A change in price will cause a shift in the demand curve.

Answer 64

False.

Question 65

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. A change in price will cause a shift in the demand curve.

Answer 65

False.

Question 66

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Let demand be a function of price and income, Qd (P, I). A change in income will cause a shift in the supply curve.

Answer 66

True

Question 67

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Let demand be a function of price and income, Qd (P, I). A change in income level is represented by a movement along the demand curve.

Answer 67

False

Question 68

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Let demand be a function of price and income, Qd (P, I). Income is not represented on one of the axes, and so is treated as an exogenous variable in the graphical analysis.

Answer 68

True.

Question 69

70. Suppose that we illustrate demand and supply with quantity on the horizontal axis and income on the vertical axis. Let demand be a function of price and income, Qd (P, I). Price and income together must change in order to create a shift in the demand curve.

Answer 69

False

Question 70

Positive analysis prescribes the best solution to an economic problem.

Answer 70

False

Question 71

Positive analysis prescribes the best solution to an economic problem.

Answer 71

False

Question 72

Positive analysis predicts how an economic system will change over time.

Answer 72

True

Question 73

While normative analysis can be wrong, since it is often based on someone’s opinion, positive analysis is always accurate.

Answer 73

False

Question 74

Since positive analysis is based on a model, and not the real world, it is mostly irrelevant.

Answer 74

False

Question 75

Since positive analysis is based on a model, and not the real world, it is mostly irrelevant.

Answer 75

False

Question 76

Normative analysis, because it is based on opinion, rarely employs any positive analysis when prescribing a solution to a given problem.

Answer 76

False

Question 77

Normative analysis typically cannot be trusted because it is only someone’s opinion.

Answer 77

False

Question 78

Normative analysis ignores exogenous variables when making predictions.

Answer 78

False

Question 79

Normative analysis typically focuses on issues of social welfare.

Answer 79

True

Question 80

A relationship that shows the quantity of goods that consumers are willing to buy at different prices is the:
a) elasticity
b) market demand curve c) market supply curve d) market equilibrium

Answer 80

market demand curve

Question 81

The law of demand states:
a) that price and quantity demanded are inversely related.
b) that price and quantity demanded are inversely related, holding all other factors that influence demand fixed.
c) that demand for a good comes from the desire of buyers to directly consume the good itself.
d) an increase in demand results in an increase in price.

Answer 81

b) that price and quantity demanded are inversely related, holding all other factors that influence demand fixed.

Question 82

3. Which of the following statements best illustrates the law of demand?
   a) When the price of pepperoni rises, the demand for pizza falls.
   b) When the weather gets hotter, the quantity demanded of ice cream rises. c) When the price of lemons falls, the demand for lemonade rises.
   d) When the price of eggs rises, the quantity demanded of eggs falls.

Answer 82

d) When the price of eggs rises, the quantity demanded of eggs falls.

Question 83

4. Which of the following is not typically a factor held constant when deriving a demand curve for clothing?
   a) Consumer income
   b) The price of clothing
   c) The price of other goods d) Consumer tastes

Answer 83

b) The price of clothing

Question 84

5. What is the difference between a derived demand curve and a direct demand curve?
   a) Derived demand is unknown, whereas direct demand is known.
   b) Derived demand is unobservable, whereas direct demand is observable.
   c) Derived demand is demand determined by the demand for another good, whereas direct demand is demand for a good itself.
   d) Derived and direct demand are both terms referring to the same thing.

Answer 84

c) Derived demand is demand determined by the demand for another good, whereas direct demand is demand for a good itself.

Question 85

6. What is the quantity of televisions demanded per year when the average price of a television is $100 per unit and the demand curve for televisions is represented by Qd = 3.5million – 5000P?
   a) 2.5 million televisions b) 3.0 million televisions c) 3.2 million televisions d) 4.0 million televisions

Answer 85

b) 3.0 million televisions

Question 86

The linear demand curve is represented by the equation

Answer 86

b) Q=a – bP