Sample Questions for ECN 302 Midterm 1

The correct answers are highlighted in yellow and the explanations for
selected questions are provided in bold italics.

Question (1): Which of the following will NOT cause a shift to the right in the
demand curve for beer?
a. A change in the price of beer.
(Notes: A change in the price of beer would induce a
movement along the demand curve for beer, rather than a shift
in the demand curve for beer.)
b. A health study indicating positive health benefits of moderate
beer consumption.
c. An increase in the price of French wine (a substitute).
d. A decrease in the price of potato chips (a complement).

Scenario 1:

The demand for books is: QD = 120 - P

The supply of books is: QS = 5P

Question (2): Refer to Scenario 1. What is the equilibrium price of books?

a. 5
b. 10
c. 15
d. 20
(Notes: To find this, set QD=QS (i.e. 120-P=5P). Thus, 6P=120
and P=20)

Question (3): Refer to Scenario 1. What is the equilibrium quantity of books

sold?
a. 25
b. 50
c. 75
d. 100
(Notes: To find this, substitute P=20 into QD or QS)

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Question (4): Suppose there is a decrease in both the demand for and supply of
a good. What happens to equilibrium price and quantity?

a. Equilibrium quantity increases, but the effect on equilibrium price

is ambiguous
b. Equilibrium quantity decreases, but the effect on
equilibrium price is ambiguous
(Notes: Both the demand curve and the supply curve shift to
the left in this case. The new market equilibrium is given by
the intersection of the new demand curve and the new supply
curve. While the quantity is unambiguously lower at the new
market equilibrium since there is downwards pressure on the
quantity on both sides of the market, the net effect on price
depends on the relative magnitudes of the shifts since the
decrease in demand exerts downwards pressure on the price
while the decrease in supply exerts upwards pressure on the
price.)
c. Equilibrium price increases, but the effect on equilibrium quantity
is ambiguous
b. Equilibrium price decreases, but the effect on equilibrium
quantity is ambiguous.
Question (5): According to basic supply and demand analysis, when Hurricane
Katrina caused oil prices to rise, what happened to the equilibrium
price and quantity of sport utility vehicles?
a. Equilibrium price and quantity both increased
b. Equilibrium price and quantity both decreased
(Notes: Gasoline and sport utility vehicles are complements.
Thus, when the price of oil (and gasoline) increases, the
demand for sport utility vehicles decreases (i.e. the demand
curve for sport utility vehicles shifts to the left). Thus, the
equilibrium price and quantity for sport utility vehicles will
decrease.)
c. Equilibrium price increased and equilibrium quantity decreased
d. Equilibrium price decreased and equilibrium quantity increased

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Question (6): Which of the following would cause a shift to the right of the supply
curve for gasoline?
I. A large increase in the price of public transportation.
II. A large decrease in the price of automobiles.
III. A large reduction in the costs of producing gasoline.

a. I only.
b. II only.
c. III only.
(Notes: Statement I and Statement II describe shocks to the
demand schedule for gasoline and thus the scenarios
described by these two statements would not affect the supply
curve for gasoline. Statement III describes a reduction in the
costs of producing gasoline. A reduction in the costs of
producing gasoline increases the supply of gasoline and
would shift the supply curve for gasoline to the right.)
d. II and III only.

Figure 1

Question (7): Refer to Figure 1 above. At point E, demand is:

a. completely inelastic.
(Notes: We went through a very similar example in class. Refer
to the lecture notes for Chapter 2.)
b. inelastic, but not completely inelastic.
c. infinitely elastic.
d. elastic, but not infinitely elastic.

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Question (8): Table 1

Good Price Elasticity of Demand

Car repair -1.2

Bread -.2

Lamb -2.7

According to Table 1, which presents hypothetical data on price elasticity

of demand, which of the following is true about lamb?

a. Each 2.7% change in the price of lamb causes a 1% change in

the quantity demanded of lamb
b. The demand for lamb is inelastic
c. Each 1% change in the price of lamb causes a 2.7% change
in the quantity demanded of lamb
%QD
(Notes: Since E PD = = 2.7 , a 1% increase in the price of
%P
lamb causes a 2.7% decrease in the quantity demanded of
lamb.)
d. Lamb is a normal good

Question (9): When the government controls the price of a product, causing the
price to be above the free market equilibrium price,
a. all producers are made better off.
b. both producers and consumers are made better off.
c. all consumers are made better off.
d. some, but not all, sellers can find buyers for their goods.
(Notes: The government is instituting a binding price floor in
this question. The quantity supplied will be greater than the
quantity demanded when the price is above the equilibrium
price.)

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Question (10): The price elasticity of supply for gasoline in the U.S. is 0.4. If the
price of gasoline rises by 8%, what is the expected change in the
quantity of gasoline supplied in the U.S.?
a. +3.2%
%Qs
(Notes: E PS = %Qs = E PS (%Ps ) . Thus, if E PS = 0.4 and
% P
%Ps = 8% , % Qs = EPS (% Ps ) = (0.4)(8%) = +3.2% .)
b. -3.2%
c. +32.0%
d. +0.32%

Question (11): Consider a supply curve of the form: Q = c + dP. If d=0, then
supply is:
a. completely inelastic.
(Notes: The price elasticity of supply is (P/QS)(QS/P). Since
d=QS/P=0, the price elasticity of supply is zero and supply is
completely inelastic. This means that the supply curve is a
straight vertical line.)
b. inelastic, but not completely inelastic.
c. elastic, but not infinitely elastic.
d. infinitely elastic

Question (12): When government intervenes in a competitive market by imposing

an effective price ceiling, we would expect the quantity supplied to
_____________ and the quantity demanded to ____________.
a. fall; rise
(Notes: The fact that the price ceiling is effective implies that the
government is forcing the maximum price to be lower than the
equilibrium price. Thus, we would expect the quantity supplied
to fall (since the supply curve is upwards sloping) and we would
expect the quantity demanded to rise (since the demand curve is
downwards sloping).)
b. fall; fall
c. rise; rise
d. rise; fall

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Question (13): Consider the following three market baskets:
Table 2
Food Clothing
A 6 3
B 8 5
C 5 8
If preferences satisfy all three of the usual assumptions:
a. A is on the same indifference curve as B.
b. B is on the same indifference curve as C.
c. A is preferred to C.
d. B is preferred to A.
(Notes: Market basket B contains more food and more clothing
compared to market basket A. If preferences satisfy the more
is better assumption, B must be preferred to A. Note that we
will not be able to make inferences about how C compares to
A and B unless we have more information.)

Question (14): Gary Franklin is a movie critic. He invented the Franklin Scale
with which he rates movies from 1 to 10 (10 being best). When
asked about his scale, Mr. Franklin explained "that it is a subjective
measure of movie quality. A movie with a ranking of 10 is not
necessarily 10 times better than a movie with a ranking of 1, but it
is better. A movie with a ranking of 5 is better than a movie with a
ranking of 1, but is not as good a movie with a ranking of 10. That's
all it really tells you." Based on Mr. Franklin's description, his scale
is:
a. ordinal but not cardinal.
(Notes: The scale allows Mr. Franklin to rank the movies but it
does not indicate the extent to which one movie is preferred to
another.)
b. cardinal but not ordinal.
c. an objective standard to judge movies.
d. neither cardinal nor ordinal.

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Question (15): An upward sloping indifference curve defined over two goods
violates which of the following assumptions from the theory of
consumer behavior?
a. transitivity.
b. preferences are complete.
c. more is preferred to less.
d. all of the above.

Question (16): Alvin's indifference map for Good A and Good B are shown in the
diagram below.
Good B

Good A
Which of the following statements about Alvins preferences is
correct?
a. Alvin receives no satisfaction from consuming Good A.
b. Alvin receives no satisfaction from consuming Good B.
(Notes: Since Alvins indifference curves are vertical straight
lines, his utility will increase if and only if the quantity of Good
A increases. He receives no satisfaction from consuming
Good B.)
c. Alvin will only consume A and B in fixed proportions.
d. None of the above.

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Question (17): If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal
axis, candy is on the vertical axis), Jill would willingly give up:
a. 2, but no more than 2, units of popcorn for an additional unit of
candy.
b. 2, but no more than 2, units of candy for an additional unit
of popcorn.
(Notes: The MRS measures the maximum amount of candy
that Jill will give up for an additional unit of popcorn in this
case since popcorn is on the X-axis and candy is on the Y-
axis.)
c. 1, but no more than 1, unit of candy for an additional 2 units of
popcorn.
d. 2, but no more than 2, units of popcorn for an additional 2 units
of candy.

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Question (18): Theodore's budget line has changed from A to B, even though his
income has stayed the same. Which of the following price changes
explains the change in Theodore's budget line?

a. The price of food and the price of clothing increased.

b. The price of food increased, and the price of clothing
decreased.
c. The price of food decreased, and the price of clothing
increased.
(Notes: The value for the horizontal intercept has
increased, indicating that the price of food has decreased.
The value for the vertical intercept has decreased,
indicating that the price of clothing has increased.)
d. The price of food and the price of clothing decreased.

Question (19): A consumer has $100 per day to spend on product A, which has a
unit price of $7, and product B, which has a unit price of $15. What
is the slope of the budget line if good A is on the horizontal axis and
good B is on the vertical axis?
a. -7/15.
(Notes: The slope of the budget line is -(PA/PB)= -7/15)
b. -7/100.
c. -15/7.
d. 15/100.

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Question (20): When Joe maximizes utility, he finds that his MRS is greater than
Px/Py. It is most likely that:
a. Joe's preferences are incomplete.
b. Joe's preferences are irrational.
c. Joe is not consuming good X.
d. Joe is not consuming good Y.

(Notes: This is very similar to the ice cream/ frozen yogurt

example that we went though in class. Because the question
tells us that Joe is maximizing utility at this bundle, we know
that MRS> Px/Py indicates a corner solution for Joes utility
maximizing bundle where Joe is not consuming good Y.)

Question (21): Denise is shopping for lobsters and eclairs. When she faces
budget line b1, she chooses market basket A over market basket B.
When she faces budget line b2, she chooses basket B over basket
C. Which assumption of consumer theory helps us determine
Denises preference ordering over basket A and basket C?
a. completeness
b. more is better than less
c. transitivity
d. convexity

Question (22): Suppose a consumer's MRS is given by the formula MRSP for T =
T/P, where P stands for the number of pieces of pizza and T stands
for the number of tacos. Starting at 12 tacos and 4 pizzas, the
consumer must receive

a. 3 tacos to compensate them for the loss of one piece of

pizza
T
= 3 and also MRS PforT = , we
T 12
P
(Notes: Since MRS PforT = =
P 4
know that the consumer must receive 3 tacos to compensate
them for the loss of one piece of pizza.)
b. 3 pieces of pizza to compensate them for the loss of one taco
c. 1/3 taco to compensate them for the loss of one piece of pizza
d. 1/3 piece of pizza to compensate them for the loss of one taco

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Question (23): To maximize his utility (U) a consumer has to choose how many
cups of tea (T) and how many cups of coffee (C) to buy. The
consumers utility function is given by U=T+C, which means that
MRST for C=1 at all points on all of the consumers indifference
curves. If the price of a cup of tea is $3 and the price of a cup of
coffee is $2 and the consumer has $60 to allocate between tea and
coffee, then he will buy
a. 20 cups of tea and 30 cups of coffee
b. 0 cups of tea and 30 cups of coffee
(Notes: Since MRST for C=1 at all points on an indifference curve
for this consumer, tea and coffee are perfect substitutes for
this consumer and the indifference curves are downwards
sloping straight lines with slopes of -1. Since PT/PC=3/2 and
MRST for C=1, we know that the utility maximizing market basket
is represented by a corner solution where the consumer
consumes only the cheaper substitute (i.e. coffee). The
consumer will optimally choose to spend all of his budget on
coffee and buy 60/2=30 cups of coffee.)
c. 20 cups of tea and 0 cups of coffee
d. None of the above

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Question (24): Andy derives utility from two goods, potato chips (Qp) and Cola
(Qc). Andy receives zero utility unless he consumes some of at
least one good. The marginal utility that he receives from the two
goods is given as follows:
Qp MUp Qc MUc
1 12 1 24
2 10 2 22
3 8 3 20
4 6 4 18
5 4 5 16
6 2 6 14
7 -2 7 12
8 -4 8 10

Refer to the table above. What is the total utility that Andy will
receive if he consumes 5 units of potato chips (Qp) and no Cola
drink (Qc)?
a. 4 utils.
b. 10 utils.
c. 30 utils.
d. 40 utils.
(Notes: To get this answer, simply add up the MUp associated
with each increment from Qp=1 to Qp=5. Total utility from
consuming Qp=5 and Qc=0 is 12+10+8+6+4=40.)

Question (25): The price of lemonade is $0.50; the price of popcorn is $1.00. If
Fred has maximized his utility by purchasing strictly positive
quantities of both lemonade and popcorn, his marginal rate of
substitution will be:
a. 2 lemonades for one popcorn.

(Notes: Since Fred is consuming his utility maximizing

bundle, MRSpopcorn for lemonade=(Ppopcorn/Plemonade)=(1/0.5)=2.
Since MRSpopcorn for lemonade= -(lemonade/ popcorn), this
means that Fred is willing to give up 2 lemonades for one
popcorn.)

b. 1 lemonades for one popcorn.

c. 1/2 lemonade for one popcorn.
d. indeterminate unless more information on Fred's marginal
utilities is provided.

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