FIGURE 1 Joses Tastes and Preferences over Goods X and Y

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BLUE Exam 1

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Econ 419 - Fall 2012

Joses tastes and preferences over baskets of two goods, Good X and Good Y, are partially depicted in Figure 1 on Page 1 of this exam. Jose has an income of $420 to spend on these goods, the current price of good X is 60 dollars per unit, and the price of good Y is 20 dollars per unit. 1. Jose maximizes his satisfaction consuming _____ units of good X. a) 2 b) 6 c) 10 d) 12 e) 16 The price of good X falls to 20 dollars per unit. Joses income and the price of good Y remain unchanged. The change in quantity demanded of good X due to the substitution effect equals ______ units. a) 3 b) 4 c) 5 d) 6 e) 9 The price of good X falls to 20 dollars per unit. Joses income and the price of good Y remain unchanged. The change in quantity demanded of good X due to the income effect equals ______ units. a) 3 b) 4 c) 5 d) 6 e) 9 Following this fall in the price of good X, we can determine that in the neighborhood of current prices and income Jose considers Good X to be a(n) _____ good and Good Y to a(n) ______ good a) inferior; inferior c) normal; inferior b) inferior; normal d) normal; normal Consumers consider bagels and cream cheese to be complements. A rise in the price of bagels and fall in the quantity sold of cream cheese would result from: a) a rise in the price of milk c) a fall in the price of flour b) a rise in the price of flour d) a fall in the price of milk Consumers consider bagels and cream cheese to be substitutes. A rise in the price of bagels and fall in the quantity sold of cream cheese would result from: a) a rise in the price of milk c) a fall in the price of flour b) a rise in the price of flour d) a fall in the price of milk At his current level of consumption of goods X and Y Jims marginal rate of substitution is 2 units of Y per unit of X. He is spending all of his income, facing prices PX = $5.00 per unit and PY = $2.00 per unit. Based upon this information we can conclude: a) Jim is maximizing his utility. b) Jim can increase his satisfaction consuming more units of X and less units of Y. c) Jim can increase his satisfaction consuming fewer units of X and more units of Y. d) Jim can increase his satisfaction consuming fewer units of X and fewer units of Y. Currently state governments are facing a budget crisis, and further cuts in subsidies to state universities will be made to address looming deficits. In addition, unless congress acts in the coming months the Bush tax cuts will expire. Income tax rates will rise for middle and upper income households. In the market for higher education these events will, ceteris paribus: a) decrease the number of students seeking a college degree and decrease tuition rates. b) decrease tuition rates, but the impact on the number of students seeking a college degree cannot be determined without further information. c) decrease the number of students seeking a college degree, but the impact on tuition rates cannot be determined without further information. d) increase the number of students seeking a college degree and increase tuition rates.

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BLUE Exam 1

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Econ 419 - Fall 2012

9.

Demand for your product is Q = 10,000 8P. Your cost of production C(Q) = 2,000,000 + 250Q. If you are a revenue maximizing firm, your maximum revenue equals: a) 3,025,000 b) 3,075,000 c) 3,125,000 d) 3,175,000 e) None of the above are correct. Demand for your product is Q = 10,000 8P. Your cost of production C(Q) = 2,000,000 + 250Q. At your revenue maximizing price, price elasticity of demand EQ,P equals: a) 2.0 b) 1.5 c) 1.0 d) 0.5 e) None of the above are correct. Demand for your product is Q = 10,000 8P. Your cost of production C(Q) = 2,000,000 + 250Q. If you are a profit maximizing firm, your maximum profit equals: a) - 50,000 b) 0 c) 125,000 d) 250,000 e) None of the above are correct. Demand for your product is Q = 10,000 8P. Your cost of production C(Q) = 2,000,000 + 250Q. At your profit maximizing price, price elasticity of demand EQ,P equals: a) 2.0 b) 1.5 c) 1.0 d) 0.5 e) None of the above are correct.

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A profit maximizing firm will always set a price in the price _______ portion of its demand curve. a) elastic b) unit elastic c) inelastic Accounting profits are ______ economic profits for a firm. a) less than b) equal to c) greater than For a given stream of future payments the annuity value will be ______ the present value. a) less than b) equal to c) greater than At a price equal to 15, the price elasticity of demand for a firms product is 5.0. At this price, marginal revenue equals: a) 6 b) 9 c) 12 d) 15 e) None of the above

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BLUE Exam 1

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Econ 419 - Fall 2012

P Consider the perfectly competitive market shown here. 17. In this market, consumer surplus equals: a) 2,400 d) 14,400 b) 4,800 e) None of the above. c) 7,200 An excise tax of 40 per unit sold is imposed on this market. The equilibrium price will rise to: a) 90 d) 120 b) 100 e) None of the above. c) 110 The change in producer surplus brought about by imposition of this excise tax of 40 per unit sold equals: a) -2,100 d) -12,600 b) -4,200 e) None of the above. c) -6,300 200

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The deadweight loss in efficiency caused by the imposition of this excise tax of 40 per unit sold equals: a) 600 b) 1,200 c) 1,800 d) 2,400 e) None of the above. Joses Cantina offers specials on beer and nachos during Happy Hours each week. The own price elasticities of demand for Joses beer and nachos are and . The cross (nachos) price elasticity of demand for Joses beer is and the cross (beer) price elasticity of demand for Joses nachos is . Joses weekly revenue from Happy Hour beer sales is $24,000 and his weekly revenue from Happy Hour nachos sales is $12,000. A two percent increase in the price charged for nachos during Happy Hours will generate a change in Joses total revenue from beer and nachos sales equal to ________ dollars. a) - 96 b) 48 c) +48 d) + 96 e) None of the above are correct.

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BLUE Exam 1

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Econ 419 - Fall 2012

22.

Ellens preferences over baskets of two goods, Good X and Good Y, are characterized by diminishing (absolute) Marginal Rates of Substitution. As the price of Good X rises, her quantity demanded of Good X rises. We can conclude from this information that her change in quantity demanded following this rise in the price of Good X due to the substitution effect is ______ , and her change in quantity demanded due to the income effect is ________. a) negative; negative d) positive; positive b) negative; positive e) None of the above are correct. c) positive; negative In a competitive market for a particular good, the price rises and the quantity sold falls. This could have been caused by a) a decrease in household income if this is an inferior good. b) a rise in the price of a good or service which is an alternative output for firms in the industry. c) improved technology in production. d) a fall in the price of an intermediate good used in production. e) None of the above. Marias preferences over baskets of two goods, Good X and Good Y, are Leontief. As the price of Good X falls, her quantity demanded of Good X rises. We can conclude from this information that her change in quantity demanded following this fall in the price of Good X due to the substitution effect will be ______ , and her change in quantity demanded due to the income effect will be ________. a) negative; negative d) positive; positive b) negative; positive e) None of the above are correct. c) positive; negative A competitive market for a normal good is hit with two events: Household incomes rise and the price of a complementary good rises. Ceteris paribus, we would expect a) the price of this good to rise, but we cannot make a prediction regarding the change in quantity sold without further information. b) the price of this good to fall, but we cannot make a prediction regarding the change in quantity sold without further information. c) the quantity sold of this good to fall, but cannot make a prediction regarding the change in price without further information. d) the quantity sold of this good to rise, but cannot make a prediction regarding the change in price without further information. e) None of the above are correct. A competitive market is hit with two events: the price of an intermediate good used in production falls and the price of a substitute good rises. Ceteris paribus, we would expect a) the price of this good to rise, but we cannot make a prediction regarding the change in quantity sold without further information. b) the price of this good to fall, but we cannot make a prediction regarding the change in quantity sold without further information. c) the quantity sold of this good to fall, but cannot make a prediction regarding the change in price without further information. d) the quantity sold of this good to rise, but cannot make a prediction regarding the change in price without further information. e) None of the above are correct.

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BLUE Exam 1

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Econ 419 - Fall 2012

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Profit for Acme, Inc. this year was $4,000,000. The firms profits are expected to grow at a rate of 5 percent per year in the future. The current Ex-Dividend market value of Acme, Inc. is $280,000,000. The rate of time discount used to arrive at this market value is _______ percent. a) 5.5 b) 6.0 c) 6.5 d) 7.0 e) None of the above are correct.

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Consider the annual percentage interest yields to U.S. government Bills, Notes and Bonds below: 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr 1.60 1.69 1.74 1.91 2.25 2.50 2.98 3.33 3.77 4.52 4.53 If bond traders are risk neutral and transactions costs of buying/selling bonds are negligible we can determine that traders expect the annual interest yield to 10 year bonds sold 20 years from this date to equal _______ percent. a) 3.77 b) 3.96 c) 4.05 d) 4.55 e) None of the above are correct.

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Twenty (20) years from today Mary hopes to have $200,000 in an account at her bank which offers 6.5 percent interest compounded annually. She can reach her goal if she deposits _______ dollars in this account when she opens it today. a) 54,506.36 b) 55,625.42 c) 56,759.41 d) 58,243.74

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Bill is considering a purchase of new computer equipment for his firm. The equipment costs $150,000. He estimates that with the new equipment his profits will be $40,000 higher at the end of each of the next 4 years. The current interest rate is 2 percent. The net present value of this investment project, given its current cost, the stream of additional profits, and current interest rate equals: a) 4,234.72 b) 1,316.06 c) 512.84 d) 2,309.15 e) 10,000

BLUE Exam 1

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Econ 419 - Fall 2012

You believe the demand for your product, product X, is determined by the price you charge, PX, the price of good Y, PY, the price of good Z, PZ, average household income in your market, M, and dollars spend on advertising, A. Furthermore, you believe demand for your product is linear: QX = 0 + 1PX + 2PY + 3PZ + 4M + 5A + E = 0

Consultants hired by your firm gather data and provide the following regression estimate of this demand function. Standard errors appear in parentheses below each estimated coefficient. QX = 500.0 1.2PX + 2.8PY 1.8PZ + 0.002M + 0.02A (112.5) (0.32) (0.48) (0.92) (0.00015) (0.008) You are assured, based upon the R2 = 0.76 and F-Stat = 38.2, that the regression provides a good fit. You are currently charging PX = 600. The price PY = 100 and the price PZ = 200. Average household income in your market M = 50,000, and your current advertising budget A = 20,000. 31. Using Mike Bayes rule of thumb, you cannot reject the possibility that the true value of parameter _____ may be equal to zero at a 5 percent level of significance. a) 1 b) 2 c) 3 d) 4 e) 5

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The 95 percent confidence interval again using Bayes rule of thumb - for parameter 1 is: a) - 1.84 < 1 < - 0.56 d) - 2.16 < 1 < - 1.52 b) - 1.24 < 1 < 0.16 e) None of the above c) - 0.88 < 1 - 0.24 From this regression equation, you can determine that in the neighborhood of current prices and income, the cross price elasticity of demand is equal to _____. a) 1.40 b) 1.80 c) 2.20 d) 2.60 e) None of the above.

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Given the current advertising elasticity of demand, in order to increase demand for your product by 10 percent you would increase your advertising budget by _____ percent. a) 20 b) 15 c) 10 d) 5 e) None of the above

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We can determine from this estimated demand function that consumers consider goods X and Y to be _______ and they consider X to be a(n) _______ good. a) substitutes; inferior c) substitutes; normal b) complements; inferior d) complements; normal

BLUE Exam 1

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Econ 419 - Fall 2012