midterm exam -ECO

1. If hurricanes destroy a large percentage of orange trees in Florida, the equilibrium priceof oranges in California will ________________ because Florida and California orangesare _________________ and have a ________________ cross elasticity of demand.a) rise, substitutes, positiveb) rise, substitutes, negativec) fall, substitutes, positived) fall, complements, negative2. Which of the following items is likely to have the most price elastic demand?a) breakfast cerealb) table saltc) Kelloggs Corn Flakesd) gasoline3. If the cost of water used to irrigate orange groves in California increases, the __________curve of California oranges ___________________. This leads to _________________in the equilibrium price for California oranges and ____________ in the equilibriumquantity sold.a) demand, shifts to the right, an increase, an increaseb) supply, shifts to the left, an increase, a decreasec) supply, shifts to the right, a decrease, an increased) demand, shifts to the left, an increase, a decreasee) supply, shifts to the left, a decrease, an increase4. When average consumer income increases from $40,000 to $44,000 in Mapleville, thequantity demanded of widgets went from 10 to 9 units per capita, even though the priceof widgets and other products did not change. The income elasticity of demand forwidgets (using the midpoint method) is: (DO NOT USE SYMBOLS OTHER THAN ADECIMAL POINT OR NEGATIVE SIGN IN YOUR ANSWER. IF YOU USE ANEGATIVE SIGN, DO NOT LEAVE A SPACE BETWEEN IT AND THE NUMBER.)Answer: —————–5. Last month Jones Hat Company sold 100 hats at $10 each. This month it raised theprice of hats to $11 and sold 101 hats. This result indicatesa) that another factor, such as income, changed, shifting the demand curve for hats to theright.b) the demand curve for hats is upward sloping.c) the law of demand is violated.d) another factor, such as income, changed, shifting the demand curve to the left.e) the supply curve of hats shifted upward.6. Jesse sells 400 candles per month at an average price of $5 per candle. Costs of suppliesto produce and sell the candles are $500. Rather than producing and selling candles, Jessecould be working at a second job earning $800 per month. What is Jesse’s monthlyECONOMIC profit? (DO NOT USE SYMBOLS OTHER THAN A DECIMAL POINTIN YOUR ANSWER.)Answer: ————-7. Use the terms "rising," "falling," or "staying the same" (but without the quotation marks)when filling in the following blanks. When the average total cost curve is "U" shaped, theaverage total cost curve is ————- if the marginal cost curve is below it and ———–if the marginal cost curve is above it. When average variable cost is minimized, marginalcost is ————– and when average total cost is minimized, marginal cost is——————–.8. Firm XYZ measured its MP of labor curve to be the following: MP = 4000 – 2L where Lis the number of hours of labor hired per day. XYZ produces gadgets that are sold for $20each and is able to hire workers for $10 per hour. How many hours of labor should XYZhire each day to maximize its profits? (DO NOT USE SYMBOLS OTHER THAN ADECIMAL POINT OR NEGATIVE SIGN IN YOUR ANSWER. IF YOU USE ANEGATIVE SIGN, DO NOT LEAVE A SPACE BETWEEN IT AND THE NUMBER.)Answer: —————–9. Given the following information about Mega Corps costs, provide answers to thequestions below.QuantityTC0TFCTVC4012ATCMC2021.3346AVC5235AFC44015.677108969151045a) Total fixed costs equal ————-. (b) When the rate of output is equal to 1, AVCis equal to ————-. (c) When the rate of output is equal to 2, MC is equal to———–. (d) Average variable costs are minimized at a rate of output of————. (e) When the rate of output is 7, total costs are equal to ———-. (f) Ata rate of output of ———, total variable costs are equal to 135. (g) At a rate ofoutput of ———marginal costs (MC) are equal to 14. (h) Average total costs areminimized at a rate of output of —————.USE ONLY INTEGERS (WHOLE NUMBERS) WITHOUT DECIMAL POINTS OROTHER SYMBOLS FOR YOUR ANSWERS. ROUND TO THE NEAREST INTEGER IFNECESSARY.10. Suppose that the current market price of VCRs is $300, that average consumer disposableincome is $30,000, and that the price of DVD players (a substitute for VCRs) is $500.Under these conditions annual U.S. demand for VCRs is 5 million per year. Statisticalstudies have shown that for VCRs the own-price elasticity of demand is 1.3. The incomeelasticity of demand for VCRs is 1.7. The cross-price elasticity of demand for VCRs withrespect to DVDs is 0.75. Use this information to predict the annual number of VCRs soldif increasing competition from Asia causes VCR prices to fall by 10% with income andthe price of DVDs is unchanged.a) 4.35 millionb) 5.65 millionc) 5.85 milliond) 4.58 millione) 5 million11. Suppose that the current market price of VCRs is $300, that average consumer disposableincome is $30,000, and that the price of DVD players (a substitute for VCRs) is $500.Under these conditions annual U.S. demand for VCRs is 5 million per year. Statisticalstudies have shown that for VCRs the own-price elasticity of demand is 1.3. The incomeelasticity of demand for VCRs is 1.7. The cross-price elasticity of demand for VCRs withrespect to DVDs is 0.8. Use this information to predict the annual number of VCRs soldif Income tax reductions raise average disposable personal income by 5%, with prices forDVDs and VCRs unchanged.a) 5.425 millionb) 4.61 millionc) 5.2 milliond) 4.8 millione) 6.17 million12. The widget industry in Springfield is competitive, with numerous buyers and sellers.Consumers don’t differentiate among the various brands of widgets (no productdifferentiation). The industry demand curve is given by: Qd = 998 5Pw + 4 Y 6PgAnd the industry supply curve is given by Qs = +15Pw 3 Wage Where Pw representsthe price of widgets, Pg is the price of gasoline, Y is disposable personal income inSpringfield, and Wage is wages paid to workers in widget factories. Currently, Y= $10,Pg = $3, and Wage = $20. What is the market equilibrium price?a) 108b) 210c) 48d) 54e) 10513. The widget industry in Springfield is competitive, with numerous buyers and sellers.Consumers don’t differentiate among the various brands of widgets (no productdifferentiation). The industry demand curve is given by: Qd = 998 5Pw + 4 Y 6PgAnd the industry supply curve is given by Qs = +15Pw 3 Wage Where Pw representsthe price of widgets, Pg is the price of gasoline, Y is disposable personal income inSpringfield, and Wage is wages paid to workers in widget factories. Currently, Y= $10,Pg = $3, and Wage = $20. What is the market equilibrium quantity?a) 480b) 750c) 531d) 1075e) 78014. The widget industry in Springfield is competitive, with numerous buyers and sellers.Consumers don’t differentiate among the various brands of widgets (no productdifferentiation). The industry demand curve is given by: Qd = 998 5Pw + 4 Y 6PgAnd the industry supply curve is given by Qs = +15Pw 3 Wage Where Pw representsthe price of widgets, Pg is the price of gasoline, Y is disposable personal income inSpringfield, and Wage is wages paid to workers in widget factories. Currently, Y= $10,Pg = $3, and Wage = $20.Suppose Springfields economy moves into a recession and Y falls to $9 and risingunemployment allows widget makers to reduce wages to $18 per hour. What happens tothe supply and demand curves?a) The demand curve shifts to the left and the supply curve shifts to the right.b) The demand curve shifts to the left and the supply curve shifts to the left.c) The demand curve shifts to the right and the supply curve shifts to the right.d) The demand curve shifts to the right and the supply curve shifts to the left.e) Neither the supply nor demand curve shifts.15. The widget industry in Springfield is competitive, with numerous buyers and sellers.Consumers don’t differentiate among the various brands of widgets (no productdifferentiation). The industry demand curve is given by: Qd = 998 5Pw + 4 Y 6PgAnd the industry supply curve is given by Qs = +15Pw 3 Wage Where Pw representsthe price of widgets, Pg is the price of gasoline, Y is disposable personal income inSpringfield, and Wage is wages paid to workers in widget factories. Currently, Y= $10,Pg = $3, and Wage = $20. Suppose Springfields economy moves into a recession and Yfalls to $9 and rising unemployment allows widget makers to reduce wages to $18 perhour. What happens to the equilibrium price and quantity?a) Equilibrium price rises; the effect on equilibrium quantity is uncertain.b) Equilibrium quantity rises; the effect on equilibrium price is uncertain.c) Equilibrium price falls; the effect on equilibrium quantity is uncertain.d) Equilibrium quantity falls; the effect on equilibrium price is uncertain.e) Nothing happens to the market equilibrium price or quantity.16. Cameron is an investor trying to decide among the following three different investmentoptions.Option A: Price today: $1000 One year from today Cameron will receive one of thefollowing payments: $1,250 with a probability of 90% $1,000 with a probability of 8%$0 with a probability of 2%Option B: Price today: $1000 One year from today Cameron will receive one of thefollowing payments: $4,000 with a probability of 30% $1,000 with a probability of 50%$0 with a probability of 20%Option C: Price today: $1000 One year from today Cameron will receive one of thefollowing payments: $2,000 with a probability of 33% $1,000 with a probability of 34%$0 with a probability of 33%a. What is the expected value (payment) of each of the options at the end of the year? b.Which of the options has the highest risk? Why? c. If Cameron is a risk neutral inventor,which option will be selected? d. How would your answer change if Cameron is a riskadverse investor?17. Chez Henri is a restaurant chain that operates in 40 different cities. It hired aneconomist to estimate the factors affecting the demand for its sales. Thefollowing equation was estimated using cross sectional data from each of its 40restaurants.YX1X2X3Annual restaurant sales (in thousands)Disposable per capital income (in thousands) of the residents living within 5 miles of a restaurantPopulation (in thousands) within a 5-mile radius of a restaurantNumber of competing restaurants within a 5-mile radiusThe following information was obtained from the regression analysis: Multiple R: 0.92 RSquare: 0.85 Std. Error of Est.: 0.40Analysis of VarianceRegressionResidualDF336Sum Squares22060Mean Sqr.73.31.7VariableConstantX1X2X3Coefficient0.40.010.02-20.2Std. Error0.20.0040.0154.50F-Stat18.2T-Value2.02.51.3-4.6Answer the following questions: a. Give the estimated demand equation forpredicting restaurant sales. b. Provide an interpretation for each of the regressioncoefficients. c. Which of the coefficients are statistically significant and which arenot? Explain. d. What percent of variation are restaurant sales explained by thisequation?18. Hernandez Corp. uses two variable inputs, X and Y, to produce its final product,canoes. Its engineering department has estimated the marginal product functions forinputs X and Y as follows: MPx = Y/X MPy = 4 X/Y Where X and Y denote, respectively,the quantity in hours of inputs X and Y used. At present Hernandez Corp. pays $40 perhour for input X and $10 per hour for input Y. It is using 200 hours of X and 100 hours ofY per day.a. Write a paragraph explaining how the Hernandez Corp. finds the least costcombination of inputs for producing a given rate of output.b. Using the data provided above, determine if the Hernandez Corp. is using a costminimizing combination of inputs. Explain your answer/show your work. If your answeris no, how should the input combination be adjusted?