Economics Midterm Exam

See the attached Economics Midterm exam

This midterm exam is worth a total of

2

1

5

points

. The point value for each question is listed.

2

0

points

1. Chez Henri is a restaurant chain that operates in

4

0

different cities. It hired an economist to estimate the factors affecting the demand for its sales. The following equation was estimated using cross sectional data from each of its

40

restaurants.

Y

Annual restaurant sales (in thousands)

X1

Disposable per capital income (in thousands) of the residents living within

 

5 miles of a restaurant

X2

Population (in thousands) within a 5-mile radius of a restaurant

X

3

Number of competing restaurants within a 5-mile radius

The following information was obtained from the regression analysis:
Multiple R: 0.

9

2
R-Square: 0.

8

5
Std. Error of Est.: 0.40

 

 

 

 

 

 

 

 

 

 

 

X1

 

X2

 

X3

 

Analysis of Variance
DF	Sum Squares	Mean Sqr.	F-Stat
Regression		3	2 20	7 3.3	18.2
Residual	3 6	60	1.7
Variable	Coefficient	Std. Error	T-Value
Constant	0.4	0.2	2.0
0.01	0.004	2.5
0.02	0.0 15	1.3
-20.2	4.50	-4.6

Answer the following questions:
a. Give the estimated demand equation for predicting restaurant sales

b. Provide an interpretation for each of the regression coefficients

c. Which of the coefficients are statistically significant and which are not? Explain

d. What percent of variation are restaurant sales explained by this equation?

20 points

2. Cameron is an investor trying to decide among the following three different investment options.

Option A: 
Price today: $

10

00
One year from today Cameron will receive one of the following 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 the following 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 the following 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 risk adverse investor?

20 points

3. Hernandez Corp. uses two variable inputs, X and Y, to produce its final product, canoes. Its engineering department has estimated the marginal product functions for inputs 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 per hour for input X and $10 per hour for input Y. It is using 200 hours of X and 100 hours of Y per day.

a. Write a paragraph explaining how the Hernandez Corp. finds the least cost combination of inputs for producing a given rate of output.

b. Using the data provided above, determine if the Hernandez Corp. is using a cost minimizing combination of inputs. Explain your answer/show your work. If your answer is no, how should the input combination be adjusted?

10 points

4. If hurricanes destroy a large percentage of orange trees in Florida, the equilibrium price of oranges in California will ________________ because Florida and California oranges are _________________ and have a ________________ cross elasticity of demand.

a) rise, substitutes, positive

b) rise, substitutes, negative

c) fall, substitutes, positive

d) fall, complements, negative

10 points

5. Which of the following items is likely to have the most price elastic demand?

a) breakfast cereal

b) table salt

c) Kellog’s Corn Flakes

d) gasoline

10 points

6. 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 equilibrium quantity sold.

a) demand, shifts to the right, an increase, an increase

b) supply, shifts to the left, an increase, a decrease

c) supply, shifts to the right, a decrease, an increase

d) demand, shifts to the left, an increase, a decrease

e) supply, shifts to the left, a decrease, an increase

10 points

7. When average consumer income increases from $40,000 to $44,000 in Mapleville, the quantity demanded of widgets went from 10 to 9 units per capita, even though the price of widgets and other products did not change. The income elasticity of demand for widgets (using the midpoint method) is: 
(DO NOT USE SYMBOLS OTHER THAN A DECIMAL POINT OR NEGATIVE SIGN IN YOUR ANSWER. IF YOU USE A NEGATIVE SIGN, DO NOT LEAVE A SPACE BETWEEN IT AND THE NUMBER.)

10 points

8. Last month Jones Hat Company sold 100 hats at $10 each. This month it raised the price of hats to $11 and sold 101 hats. This result indicates

a) that another factor, such as income, changed, shifting the demand curve for hats to the right.

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.

10 points

9. Jesse sells 400 candles per month at an average price of $5 per candle. Costs of supplies to produce and sell the candles are $500. Rather than producing and selling candles, Jesse could be working at a second job earning $800 per month. What is Jesse’s monthly ECONOMIC profit?
(DO NOT USE SYMBOLS OTHER THAN A DECIMAL POINT IN YOUR ANSWER.)

10 points

10. 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, the average 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, marginal cost is  and when average total cost is minimized, marginal cost is .

10 points

11. Firm XYZ measured its MP of labor curve to be the following:
MP = 4000 – 2L
where L is the number of hours of labor hired per day. 
XYZ produces gadgets that are sold for $20 each and is able to hire workers for $10 per hour. How many hours of labor should XYZ hire each day to maximize its profits? 
(DO NOT USE SYMBOLS OTHER THAN A DECIMAL POINT OR NEGATIVE SIGN IN YOUR ANSWER. IF YOU USE A NEGATIVE SIGN, DO NOT LEAVE A SPACE BETWEEN IT AND THE NUMBER.)

15 points

12. Given the following information about Mega Corp’s costs, provide answers to the questions below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

Quantity	TC	TFC	TVC	ATC	AFC	AVC	MC
0		40
1	52
2	20
21.33
	4
5
6	15.67
7		10
8	96
9	15
45

(a) Total fixed costs equal .
(b) When the rate of output is equal to 1, AVC is 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) At a rate of output of , total variable costs are equal to 135.
(g) At a rate of output of  marginal costs (MC) are equal to 14.
(h) Average total costs are minimized at a rate of output of .

USE ONLY INTEGERS (WHOLE NUMBERS) WITHOUT DECIMAL POINTS OR OTHER SYMBOLS FOR YOUR ANSWERS. ROUND TO THE NEAREST INTEGER IF NECESSARY.

10 points

13. Suppose that the current market price of VCRs is $300, that average consumer disposable income 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. Statistical studies have shown that for VCRs the own-price elasticity of demand is –1.3. The income elasticity of demand for VCRs is 1.7. The cross-price elasticity of demand for VCRs with respect to DVDs is 0.75. Use this information to predict the annual number of VCRs sold if increasing competition from Asia causes VCR prices to fall by 10% with income and the price of DVDs is unchanged.

a) 4.35 million

b) 5.65 million

c) 5.85 million

d) 4.58 million

e) 5 million

10 points

14. Suppose that the current market price of VCRs is $300, that average consumer disposable income 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. Statistical studies have shown that for VCRs the own-price elasticity of demand is –1.3. The income elasticity of demand for VCRs is 1.7. The cross-price elasticity of demand for VCRs with respect to DVDs is 0.8. Use this information to predict the annual number of VCRs sold if Income tax reductions raise average disposable personal income by 5%, with prices for DVDs and VCRs unchanged.

a) 5.425 million

b) 4.61 million

c) 5.2 million

d) 4.8 million

e) 6.17 million

10 points

15. The widget industry in Springfield is competitive, with numerous buyers and sellers. 
Consumers don’t differentiate among the various brands of widgets (no product differentiation).
The industry demand curve is given by:
Qd = 998 – 5Pw + 4 Y – 6Pg
And the industry supply curve is given by
Qs = +15Pw – 3 Wage 
Where Pw represents the price of widgets, Pg is the price of gasoline, Y is disposable personal income in Springfield, 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) 108

b) 210

c) 48

d) 54

e) 105

10 points

16. The widget industry in Springfield is competitive, with numerous buyers and sellers. 
Consumers don’t differentiate among the various brands of widgets (no product differentiation).
The industry demand curve is given by:
Qd = 998 – 5Pw + 4 Y – 6Pg
And the industry supply curve is given by
Qs = +15Pw – 3 Wage 
Where Pw represents the price of widgets, Pg is the price of gasoline, Y is disposable personal income in Springfield, 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) 480

b) 750

c) 531

d) 1075

e) 780

10 points

17. The widget industry in Springfield is competitive, with numerous buyers and sellers. 
Consumers don’t differentiate among the various brands of widgets (no product differentiation).
The industry demand curve is given by:
Qd = 998 – 5Pw + 4 Y – 6Pg
And the industry supply curve is given by
Qs = +15Pw – 3 Wage 
Where Pw represents the price of widgets, Pg is the price of gasoline, Y is disposable personal income in Springfield, and Wage is wages paid to workers in widget factories.
Currently, Y= $10, Pg = $3, and Wage = $20.

Suppose Springfield’s economy moves into a recession and Y falls to $9 and rising unemployment allows widget makers to reduce wages to $18 per hour. What happens to the 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.

10 points

18. The widget industry in Springfield is competitive, with numerous buyers and sellers. 
Consumers don’t differentiate among the various brands of widgets (no product differentiation).
The industry demand curve is given by:
Qd = 998 – 5Pw + 4 Y – 6Pg
And the industry supply curve is given by
Qs = +15Pw – 3 Wage 
Where Pw represents the price of widgets, Pg is the price of gasoline, Y is disposable personal income in Springfield, and Wage is wages paid to workers in widget factories.
Currently, Y= $10, Pg = $3, and Wage = $20.

Suppose Springfield’s economy moves into a recession and Y falls to $9 and rising unemployment allows widget makers to reduce wages to $18 per hour. 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.