Midterm Exam-

1. Given the budget equation 5M + 10P = 100, where M represents movies and P represents pizza, the slope of the budget line is

A) the relative price of one good in terms of the other.

B) the price of good M.

C) the price of good P.

D) dependent upon the quantities of the goods consumed.

2. Lizzie's preferences are shown in the figure below. Lizzie is just as happy to have ____ as she is to have ____.

A) 6 comic books and 6 cookies; 5 comic books and 13 cookies.

B) 2 comic book and 12 cookies; 8 comic books and 8 cookies.

C) 4 comic books and 8 cookies; 6 comic books and 12 cookies.

D) 2 comic books and 12 cookies; 4 comic books and 8 cookies.

3. Henry initially consumes the quantity of pens and pencils shown as B in figure 2. After the prices of both goods change, he buys combination A. From figure 2 and these facts, it must be true that . . .

A) Henry prefers A to B.

B) Henry prefers B to A.

C) Henry is indifferent between A and B.

D) Henry considers pens and pencils to be perfect substitutes.

E) Henry preferences cannot be determined from the information given.

4. Chris chooses between two goods, X and Y (see figure below). At first, the price of X is low and the price of Y is high (budget line B1). Chris tells you his best affordable combination of X and Y is at point A. Then the price of X rises, while the price of Y falls (budget B2). Chris tells you that at these new prices, his optimal consumption bundle is still point A. What must be true of Chris's preferences?

A) Chris prefers X to Y.

B) Chris prefers Y to X.

C) X and Y are perfect complements.

D) X and Y are perfect substitutes.

E) Chris's preferences must violate one of our assumptions about consumer behavior.

5. The substitution effect from a fall in the price of a gallon of gasoline is shown in the below figure by the movement from

A) point A to point C.

B) point A to point B.

C) point B to point C.

D) point A to point B and then to point C.

6. In the following figure, Daniel has an income of $40 per month. He spends his income on either Potato Chips or Coke. The price of Potato Chip is $5 per bag and the price of Coke is $4 per bottle.

(a) Graph Daniel's budget constraint with potato chips on the vertical axis. Also write down the corresponding budget constraint equation.

(b) Then suppose that Daniel's income increases to $60, what's the change of Daniel's budget line?

(c) Shortly after the increase of Daniel's income, the price of potato chips falls to $3 per bag. Coke's price remains the same. Draw Daniel's new budget constraint.

(d) Consider budget constraints in part (b) and (c). Suppose Daniel is initially consuming at point A. After the price change in part (c), Daniel chooses the consumption bundle C. Indicate what portion of the change corresponds to the income effect and what part corresponds to the substitution effect.

(e) Are potato chips a normal good? Why?

(f) Is Coke a substitute for potato chips? Why?

7. Suppose that Joe has an income of $480 per month to purchase food and clothing. The price of food is $10 per meal, and the price of clothing is $12 per article. At his optimal consumption bundle Joe decides to purchase 30 meals and 15 articles of clothing.

One day, Joe sees that a local discount store (CostCo) advertises a deal. He can become a member of the store for $ 120 per month. As a member, Joe's price for food will be $9 and his price for clothing will be $6.

Should Joe join, and why? (Hint: draw your budget lines in the same graph and assume a set of "typical" indifference curves).

8. Over the past decade, medical costs have increased more rapidly than other prices. In order to illustrate how rising medical costs have affected consumer alternatives, let X represent the quantity of medical services, and let Y represent the quantity of other goods. Furthermore, let income (M) be measured in hundreds of dollars, the price of medical services and other goods in terms of dollars per minute, with M = 100, P_x = 4, and P_y = 5.

a. Graph the budget line, and determine the market rate of substitution.

b. Illustrate the budget set.

c. Show in your graph what happens to the budget constraint if P_x increases to $10.

d. What is the meaning of the slope of the two budget constraints?

9.  Standard Enterprises produces an output that it sells in a highly competitive market at a price of $100 per unit. Its inputs include two machines (which cost the firm $50 each) and workers, who can be hired on an as-needed basis in a labor market at a cost of $2,800 per worker.

Based on the above production data, how many workers should the firm employ to maximize its profits?

10) Roger, David, Nick and Paul own a coffee shop called "The Wall" downtown Huntington. The production function uses only two input Labor (L) and Capital (K). The following chart displays the relevant information about production:

(1) Is the "The Wall" in the long run or in the short run?

(2) Calculate the total product of labor (Q), the marginal product of labor (MPL) and the average product of labor (APL) for each quantity of labor (Show on Table).

(3) Draw on the same graph the MPL and the APL. Which is of the two curves is flatter. What is the intuition behind this result?

(4) Find the quantity of labor that maximizes the MPL.

(5) Explain the intuition behind the MPL becoming negative.

11)  Imagine that you own 1,000 acres of land just outside of Huntington.  With continued application of fertilizer, you should be able to produce enough corn to feed the entire word!  Do you agree?  Why or why not? Also a yes or no answer will not do!  Explain your reasoning.