Wilfrid Laurier University

Course code & title : EC260 - Intermediate Microeconomic Analysis for Management

Session : Winter 2013/14

Time allowed : Two hours

This paper has ELEVEN pages (including this cover page).

1. This paper consists of 40 multiple choice questions (60%) and 3 short questions (40%).

2. Answer ALL questions in Section A and B.

This is a closed-book examination.

 
Candidates are allowed to use the following materials/aids: 
 
A calculator 
 
Materials/aids other than those stated above are not permitted. Candidates will be 
  subject to disciplinary action if any unauthorized materials or aids are found on 
them. 
 

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EC260 Midterm

Student: ___________________________________________________________________________

SECTION A: Multiple Choice Questions (ANSWER ALL QUESTIONS) 

1. Suppose total benefits and total costs are given by B(Y) = 100Y - 8Y2 and C(Y) = 10Y2. What level of Y will
yield the maximum net benefits?
A. 75/36
B. 75/18
C. 50/18
D. 100/36

2. Negotiations between the buyer and seller of a new house are an example of:
A. consumer-consumer rivalry.
B. consumer-producer rivalry.
C. producer-producer rivalry.
D. monopoly.

3. If the interest rate is 5 percent, $100 received at the end of seven years is worth how much today?
A. 100/(0.05)7
B. 100/(1 + 0.05)7
C. 100/(1 + 5)7
D. 100

4. Which of the following is the incorrect statement?

A. The marginal benefits curve is the slope of the total benefits curve.
B. dB(Q)/dQ = MB.
C. The slope of the net benefit curve is horizontal where MB = MC.
D. The difference in the slope of the total benefit curve and the total cost curve is maximized at the optimal
level of Q.

5. Suppose the growth rate of the firm's profit is 5 percent, the interest rate is 6 percent, and the current profits
of the firm are $100 million. What is the value of the firm?
A. $111.5 million
B. $1,766.6 million
C. $10,600 million
D. None of the statements associated with this question are correct.

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6. What is the total benefit associated with producing four units of the control variable, Q (identify point A in
the table)?

A. 600
B. 2,600
C. 3,000
D. 3,400

7. What is the total cost associated with producing eight units of the control variable, Q (identify point B in the
table)?

A. 3,000
B. 3,600
C. 3,800
D. 4,200

8. In a competitive market, the market demand is Qd = 60 - 6P and the market supply is Qs = 4P. A price ceiling
of $3 will result in a
A. shortage of 30 units.
B. shortage of 15 units.
C. surplus of 30 units.
D. surplus of 12 units.

9. If A and B are complements, an increase in the price of good A would:

A. have no effect on the quantity demanded of B.
B. lead to an increase in demand for B.
C. lead to a decrease in demand for B.
D. none of the statements associated with this question are correct.

10. Suppose X and Y are complements and demand for X is Qxd = α0 + αXPX + αYPY + αMM + αHH. Then we
know
A. αH > 0.
B. αX > 0.
C. αY < 0.
D. αM < 0.
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11. If the price of good X becomes lower, then the level of consumer surplus becomes
A. lower.
B. higher.
C. unchanged.
D. lower in the short-run but higher in the long run.

12. Good X is an inferior good if a decrease in income leads to

A. an increase in the supply of good X.
B. a decrease in the supply of good X.
C. an increase in the demand for good X.
D. a decrease in the demand for good X.

13. Given a linear supply function of the form QXS = -10 + 5PX, find the inverse linear supply function.
A. PX = 2 + 0.2QX.
B. PX = -10 + 0.2QX.
C. PX = -10 + 5QX.
D. PX = 2 + 5QX.

14. Suppose the market supply for good X is given by QXS = -100 + 5PX. If the equilibrium price of X is $100
per unit then producers' revenue from X is
A. $100.
B. $20,000.
C. $40,000.
D. cannot be determined from the information contained in the question.

15. Consider a market characterized by the following inverse demand and supply functions: PX = 10 - 2QX and
PX = 2 + 2QX. Compute the loss in social welfare when an $8 per unit price floor is imposed on the market.
A. $0.
B. $1.
C. $2.
D. $3.

16. Firms advertise in order to cause the demand for their products to
A. shift to the right.
B. shift to the left.
C. remain unchanged.
D. all of the statements associated with this question are correct.

17. A price elasticity of zero corresponds to a demand curve that is:

A. horizontal.
B. downward sloping with a slope always equal to 1.
C. vertical.
D. either vertical or horizontal.

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18. If quantity demanded for sneakers falls by 6 percent when price increases 20 percent, we know that the
absolute value of the own price elasticity of sneakers is:
A. 0.3.
B. 0.7.
C. 2.3.
D. 3.3.

19.

The residual sum of squares and degrees of freedom due to the regression are:
A. 44,539.54 and 2, respectively.
B. 747,851.57, and 98, respectively.
C. 1,540,242.68 and 48, respectively.
D. There is not sufficient information to answer this question.

20. Determine the intercept coefficient (point E) and whether that estimate is statistically significant at the 5
percent level.
A. 1,664.46 and statistically significant since the P-value is less than 5 percent.
B. 2.32 and statistically significant since the t-statistic is greater than 2 in absolute value.
C. 1,664.46 and statistically insignificant since the P-value is less than 5 percent.
D. 2.32 and statistically insignificant since the t-statistic is less than 2 in absolute value.

21. If the demand function for a particular good is Q = 50 - 4P, then demand at a price of $10 is:
A. elastic.
B. unit elastic.
C. inelastic.
D. Elasticity cannot be determined.

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22. The demand for which of the following commodities is likely to be most price inelastic?
A. Food
B. Hamburgers
C. Big Macs
D. Sandwiches

23. The demand for good X is given by ln Qxd = 120 - 0.9 ln Px + 1.5 ln Py - 0.7 ln M. Which of the following
statements is correct?
A. X has constant income elasticity.
B. An economic downturn will decrease demand for X.
C. A 15 percent increase in income would increase demand for X by 10.5 percent.
D. X has a constant income elasticity, and an economic downturn will decrease the demand for X.

24. The management of Local Cinema has estimated the monthly demand for tickets to be ln Q = 22,328 - 0.41
ln P + 0.5 ln M - 0.33 ln A + 100 ln PDVD, where Q = quantity of tickets demanded, P = price per ticket, M =
income, A = advertising outlay, and PDVD = price of a DVD rental. It is known that P = $5.50, M = $9,000, A =
$900, and Pvcr = $3.00. Based on the information given, which of the following statements is false?
A. Advertising decreases the demand for movie tickets.
B. Movies are normal goods.
C. Movies are complements for DVD rentals.
D. The advertising elasticity of demand for movie tickets is -0.33.

25. Suppose a consumer with an income of $100 is faced with Px = 1 and Py = 1/2. What is the market rate of
substitution between good X (horizontal axis) and good Y (vertical axis)?
A. 0.50
B. -1.0
C. -2.0
D. -4.0

26. A situation where a consumer says he does not know his preference ordering for bundles X and Y would
violate the property of:
A. more is better.
B. completeness.
C. substitutability.
D. complementarity.

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27. Suppose a manager's preferences depend only on profit. Such a manager will then have an indifference
curve that:

A. is tangent to the profit curve somewhere between quantities of 0 and 2.5.

B. is tangent to the profit curve somewhere between quantities of 2.5 and 5.
C. is tangent to the profit curve at a quantity exactly equal to 2.5.
D. intersects the profit curve at a quantity exactly equal to 5.

28. What is the maximum amount of good X that can be purchased if X and Y are the only two goods available
for purchase and Px = $10, Py = $20, Y = 5, and M = 400?
A. 80
B. 20
C. 40
D. 30

29. Suppose that three consumers are in the market for good X. Consumer 1's (inverse) demand is PX = 40 -
5QX; Consumer 2's (inverse) demand is PX = 10 - QX; and Consumer 3's (inverse) demand is PX = 30 - 2QX.
When PX = $5, the market will demand:
A. 15.5 units.
B. -12 units.
C. 24.5 units.
D. None of the statements is correct.

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30. Kate's money income is $250, the price of X is $3, and the price of Y is $2. Given these prices and income,
Kate buys 60 units of X and 35 units of Y. Call this combination of X and Y bundle J. At bundle J, Kate's MRS
is 3. At bundle J, if Kate increases consumption of Y by 1 unit, how many units of X must she give up in order
to satisfy her budget constraint?
A. 3/2
B. 3
C. 2/3
D. 1

31. If the price of good X increases, what will happen to the budget line?
A. It will have a parallel shift inward.
B. It will have a parallel shift outward.
C. It will become steeper.
D. It will become flatter.

32. If the slope of the budget line is steeper than the slope of the indifference curve, and X is on the horizontal
axis:
A. the consumer is willing to give up more of good X to get an additional unit of good Y than is necessary
under the current market prices.
B. MRS > PX/PY.
C. MRS = -PX/PY.
D. the consumer is willing to give up more of good Y to get an additional unit of good X than is necessary
under the current market prices.

33. If income increases, then the:

A. budget line rotates counterclockwise.
B. budget line rotates clockwise.
C. budget line shifts to the right.
D. opportunity set contracts.

34. The equilibrium consumption bundle is:

A. the bundle where the budget line and the indifference curve meet.
B. the affordable bundle that yields the greatest satisfaction to the consumer.
C. any bundle that is the farthest from the origin.
D. any affordable bundle in the budget set.

35. Suppose the production function is Q = min{K, 2L}. How much output is produced when 4 units of labor
and 9 units of capital are employed?
A. 2
B. 4
C. 8
D. 9

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36. For the cost function C(Q) = 100 + 2Q + 3Q2, the marginal cost of producing 2 units of output is:
A. 2.
B. 3.
C. 12.
D. 14.

37. You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces
and sells a given output. If w = $40, r = $100, MPL = 4, and MPK = 40 the firm:
A. is cost minimizing.
B. should use less L and more K to cost minimize.
C. should use more K and less L to cost minimize.
D. is profit maximizing but not cost minimizing.

38. The production function for a competitive firm is Q = K.5L.5. The firm sells its output at a price of $10, and
can hire labor at a wage of $5. Capital is fixed at one unit and costs $2. The maximum profits are:
A. 3.
B. 10.
C. 15.
D. None of the answers are correct.

39. What is the average product of labor, given that the level of labor equals 10, total output equals 1200, and
the marginal product of labor equals 200?
A. 20
B. 120
C. 6
D. 2,000

40. Given the following table, how many workers should be hired to maximize profits?

A. 1
B. 2
C. 3
D. 4

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SECTION B: Short Questions (ANSWER ALL QUESTIONS)

41. (15 marks) While at a discount shoe store, a customer asked a clerk, "I see that your shoes are ‘buy one, get
one free-limit one free pair per customer.' Will you sell me one pair for half price?" The clerk answered, "I can't
do that." When the customer started to leave the store, the clerk hastily offered, "However, I am authorized to
give you a 40 percent discount on any pair in the store." Assuming the consumer has $200 to spend on shoes
(X) or all other goods (Y), and that shoes cost $100 per pair, answer the following questions:

a. Illustrate the consumer's opportunity set with the "buy one, get one free" deal and with a 50 percent discount.
b. Why was the 40 percent discount offered only after the consumer rejected the "buy one, get one free" deal
and started to leave the store?
c. Why was the clerk willing to offer a "buy one, get one free" deal, but unwilling to sell a pair of shoes for half
price?

42. (5 marks) As the manager of a local hotel chain, you have hired an econometrician to estimate the demand
for one of your hotels (H). The estimation has resulted in the following demand function: QH = 2,000 - PH -
1.5PC - 2.25PSE + 0.8POH + 0.01M, where PH is the price of a room at your hotel, PC is the price of concerts in
your area, PSE is the price of sporting events in your area, POH is the average room price at other hotels in your
area, and M is the average income in the United States. What would be the impact on your firm of:

a. A $500 increase in income?

b. A $10 reduction in the price charged by other hotels?
c. A $7 increase in the price of tickets to local sporting events?
d. A $5 increase in the price of concert tickets, accompanied by an $8 increase in income?

43. (20 marks) Retail inverse demand is 141-x/100. The total cost of manufacturing x units is TC(x) = 10,000 + 11x. If the
retailer is used, his total cost of retailing x units is 1000+12x plus the wholesale price Pw for each car. If manufacturer
sells directly to consumers, her cost of retailing x units is 5000+30x. Will Porsche keep the dealership? (You must show
all steps including maximized profits for each situation and the corresponding prices, revenue and cost.)

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