The following 28 questions cover some of the material that is relevant for the second exam.

The exact questions given below will not be on the exam. Questions that are similar to (at least) some of them will be. Understanding the answers to these questions will therefore help you prepare for the exam.

Please note that studying for the second exam should entail more than merely reviewing this page. The exam itself has 17 questions, and while these sample questions cover much of what we've done in class, there will certainly be topics appearing on the exam that do not appear in these sample questions. Make sure to also study your class notes and the homework questions, and read the material on the (web-page) outside reading list.

1. Unit	Kate's WtoP	Emma's WtoP
   1st	$50	$40
   2nd	$30	$34
   3rd	$18	$28
   4th	$14	$22
   5th	$10	$16

   The accompanying table shows the willingnesses to pay of Kate Nash and Emma Pollock for various units of (the same kind of) shirt.
   Suppose that the market price of this shirt is $26 per unit. Given the above numbers, _____ chooses to buy more shirts than does the other person; as a result of buying shirts, _____ experiences more consumer surplus from buying shirts than does the other person.
   
   1. Emma   ;   Kate
   2. Emma   ;   Emma
   3. Kate   ;   Kate
   4. Kate   ;   Emma

   

2. The accompanying figure shows the market demand curve for some good, as well as the market price that must be paid to purchase the good. When some consumer buys the 1000th unit of the good, what is the value of the surplus that he or she experiences as a result of (just) that purchase?
   
   1. 30
   2. 20
   3. 10
   4. 0

3. An article in the February 14, 2007 issue of The New York Times ("Four Brands in Car Rental May Merge", by Andrew Ross Sorkin) explains that General Motors, Ford, and DaimlerChrysler "have tried to move away from providing discounted fleet vehicles to rental car companies [in order to instead] focus on higher-margin retail customers." As a result, the "average rental price of a midsize car has risen to about $57 a day this year, from $52 last year, according to ... [the] president of Abrams Consulting Group ... which follows the rental car business." Consider the following possible changes in the market for rental cars.
     I.   a change in the supply of rental cars
     II.   a change in the demand for rental cars
     III.   a change in the quantity demanded of rental cars (in the market equilibrium)
   In which way(s) do the events described above affect the rental-car market?
   1. only I
   2. only I and III
   3. only II
   4. only II and III
   5. all of I, II, and III

4. Apple juice and orange juice are substitute goods. A freeze in Florida destroys half the orange crop, and thus substantially reduces the production of orange juice. As a result, _____.
   1. the price of orange juice rises, and the price of apple juice falls
   2. the price of orange juice falls, and the price of apple juice rises
   3. the prices of both orange juice and apple juice rise
   4. the prices of both orange juice and apple juice fall
   5. the prices of both orange juice and apple juice remain unchanged

5. The following is a true statement. In July, 1996, the price of corn (actually, the price for a "futures contract" on a bushel of corn to be delivered in December '96, but don't worry about this) fell dramatically. A Wall Street Journal story (9/9/96) that noted this fact attributed the drop in price to the weather Conditions in July in the major corn-growing areas of the U.S.. Which of the following is the best explanation of how the weather could cause a large drop in the price of corn?
   1. A beneficial rain storm caused a shift in supply.
   2. A beneficial rain storm caused a shift in demand.
   3. The continuation of a drought caused a shift in supply.
   4. The continuation of a drought caused a shift in demand.
   5. No weather event could ever cause supply or demand to shift.

6. Indicate what direction price change is implied by the situations described in these two newspaper articles. (i) According to a June 1, 2002 story ("Onion farmer's tears") in the Atlanta Journal-Constitution, "Georgia's ... Vidalia onion industry is reeling from its worst crop season in 15 years". As a result, the price charged by farmers changed from "_____" per 40 pounds. (ii) According to a July 8, 2002 story ("An Oversupply of Coffee Beans") in The Wall Street Journal, increased production of "robusta coffee from Vietnam and Brazil" has led to wholesale coffee prices that "currently hover around 50 cents a pound, _____ ... in May 1997."
   1. $16 to $12   ;   up more than 80% from their brief bottom
   2. $12 to $16   ;   up more than 80% from their brief bottom
   3. $16 to $12   ;   down more than 80% from their brief peak
   4. $12 to $16   ;   down more than 80% from their brief peak

7. The following material is taken from a story that appeared in the Atlanta Journal-Constitution in January, 1997. [Note: propane gas is both used to provide heat and to dry grain.]
   "Propane gas customers ... are now paying $1.25 to $1.35 a gallon, compared with 85 cents this same time last year." Some people claim that the price increases are "due to `excessive profiteering by the major oil companies.' " Industry spokesmen, however, say that the price increase is due to "market forces" caused by the following factors: (i) "severely cold weather in Europe," (ii) "needs for propane gas in the Midwest, where flooding spawned needs to dry certain crops," and (iii) "a fire [in Chiapas, Mexico] ... at one of the largest exporters of propane gas."
   Accepting the "market forces" explanation for the price increase, how many of the three factors listed above would have contributed to a price increase by shifting the demand curve for propane?
   1. 0
   2. 1
   3. 2
   4. 3
   5. There is no possible way that market forces could have lead to an increase in the price of propane gas.

8. An article by Mary Lou Pickel in the January 25th, 2006 Atlanta Journal-Constitution reports that "[i]n countries with outbreaks of bird flu, poultry consumption has dropped 20 percent to 30 percent" Ms. Pickel quotes a member of the poultry industry as saying that "the price of leg quarters has dropped from about 38 cents down to 24 cents in the last six months", a change he "attribute[s] ... in part to [concerns about] bird flu". In a supply-and-demand framework, what event must have caused these price and quantity (in non-U.S. markets) changes?
   1. a decrease in demand
   2. an increase in demand
   3. a decrease in supply
   4. an increase in supply

9. Suppose that, for some reason, the price of wheat falls; wheat is the major ingredient used to produce bread. At the same time, a fungus reduces rice production; rice and bread are substitutes. With both of these events occurring simultaneously, we can be sure that the price of bread will rise _____.
   1. if the shift of supply is more sizable than is the shift of demand
   2. if the shift of demand is more sizable than is the shift of supply
   3. no matter whether the supply shift is more or less sizable than is the demand shift

10. We know that there have been shifts of both the demand curve for and the supply curve of a good. We also know that one end result of the changes in this market was that the equilibrium price of the good rose. Given this information, which combination of supply and demand changes could not possibly have occurred?
    1. an increase in supply and a decrease in demand
    2. a decrease in supply and an increase in demand
    3. an increase in both supply and demand
    4. a decrease in both supply and demand
    5. Knowing only that price rose does not allow us to rule out any of the above.

11. Assume that there has been a decrease in both the demand for and the supply of a product. The only way that we could be certain that the supply curve had shifted by relatively more than did the demand curve would be if the product's equilibrium market _____.
    1. quantity rose
    2. quantity fell
    3. price rose
    4. price fell

12. Suppose that, for some reason, the price of raw cow milk falls. Milk is the major input used for butter production. At the same time, some people become increasingly concerned about harmful medical effects of eating margarine. Butter and margarine are substitutes. How do these two events affect the equilibrium outcome in the market for butter?
    1. price increases, but we can't be certain about how quantity changes
    2. quantity increases, but we can't be certain about how price changes
    3. price and quantity both increase
    4. quantity increases and price decreases
    5. price and quantity likely change, but we can't be certain about the direction in which either moves

13. We know only that the per-unit price of a particular good is higher now than it was one year ago. From this fact alone we know it must be true that there has been _____.
    1. a decrease in the quantity demanded of the product
    2. either a decrease in the supply of or an increase in the demand for the product
    3. either an increase in the supply of or a decrease in the demand for the product
    4. Both (a) and (b) are correct.
    5. Both (a) and (c) are correct.

14. People are buying fewer units of Product X than they bought previously. This fact tells us that ____.
    1. there must have been a decrease in the demand for Product X
    2. there must have been an increase in the supply of Product X
    3. if there was an increase in the demand for Product X, then there must have been a decrease in the supply for Product X
    4. if there was an increase in the demand for Product X, then there must have been an increase in the supply of Product X

15. Suppose that at the current price being charged for a certain product, the quantity supplied by producers exceeds the quantity demanded by consumers. This situation exists (and can last) because a law prevents the market price of the product from changing. Such a situation could be best described by saying that a _______ law has created a _______ of the relevant product.
    1. maximum-price law   ;   surplus
    2. maximum-price law   ;   shortage
    3. minimum-price law   ;   surplus
    4. minimum-price law   ;   shortage
    5. No law could have the effect described above.

16. Throughout this question, assume that supply slopes up and demand slopes down in the standard way. In the absence of any government regulation, the market price of this good would be $15 and 30 consumers would buy it. Suppose that a law requires that this good be sold at a price of $10 per unit. At this price, the amount of the good produced and bought would be _____. We can furthermore state that the effect of this law _____ to make better off every one of the 30 consumers who would have bought at a price of $15.
    1. less than 30   ;   would be
    2. greater than 30   ;   would be
    3. less than 30   ;   would not be
    4. greater than 30   ;   would not be
    5. equal to 30   ;   would be

17. In the absence of any government action, Product X would sell for a price of $30 per unit. Suppose in fact that government legislation imposes an upper limit on the monetary price that can be charged for this good. In particular, suppose that the selling price of this good can legally be no higher than $20. In this case, the "effective" price of this good _____.
    1. must be less than $20
    2. must equal $20
    3. may be higher than $20, but must be less than $30
    4. must equal $30
    5. could be greater than $30

18. Two ways in which the government could affect the monetary selling price of a good are by imposing either a "price ceiling" or a "price floor". [Throughout this question, assume that the laws actually do cause a good's selling price to differ from what it would have been in the absence of the law.] Which of these laws would result in consumers, in effect, paying more (combining their monetary and (if any) time (or other) costs) for the relevant good when the law is in force than they would have paid if the law hadn't been imposed?
    1. a "price ceiling" definitely has this effect; a "price floor" definitely does not
    2. a "price floor" definitely has this effect; a "price ceiling" definitely does not
    3. a "price ceiling" definitely has this effect; a "price floor" might if the "effective price" rises high enough
    4. a "price floor" definitely has this effect; a "price ceiling" might if the "effective price" rises high enough

19. In the absence of any government intervention, a certain good would sell at a price of $20 per unit, and 1000 units would be produced and sold. A law sets the cash price that consumers pay for this item at $15. At this price, only 700 units of the item are produced; desired purchases at the $15 price, however, equal 1400. Which of the following correctly describes the ultimate outcome that results from the price-restriction law?
    1. The law definitely makes better off (than they would have been without the law) each person who, with no law and at a price of $20, would have bought one of the 1000 units of the good.
    2. The law definitely makes better off (than they would have been without the law) each person who, with the law, actually buys one of the 700 units of the good.
    3. The law definitely makes worse off (than they would have been without the law) each person who, with no law and at a price of $20, would have bought one of the 1000 units of the good.
    4. Both (a) and (b) are definitely correct.
    5. None of (a), (b), or (c) is definitely correct.

20. Firm A		Firm B		Firm C
    Units of Input	Units of Output	Units of Input	Units of Output	Units of Input	Units of Output
    1	6	1	6	1	6
    2	10	2	14	2	14
    3	13	3	18	3	24
    4	15	4	21	4	36

    Consider the information about firm production levels shown in the accompanying table. Up through 4 units of the input, which of these firms has (have) hit the "region of diminishing marginal returns"?
    1. only Firm A
    2. only Firms A and B
    3. only Firm C
    4. all of Firms A, B, and C
    5. none of Firms A, B, and C

21. Suppose that when a certain firm produces 5 units of output, its fixed cost of production is $30 and its variable cost of production is $20. If the firm were to produce a 6th unit, its marginal cost of producing that unit would be $4. Given this information, this firm's average total cost of producing 6 units would be
    1. $4
    2. $9
    3. $10
    4. $54
    5. None of the above are correct.

22. Suppose that when a certain firm produces 7 units of output per day, its average total cost of production is $21. If the firm were to produce a 8th unit, its marginal cost of producing that unit would be $13. Given this information, this firm's average total cost of producing 8 units would be _____.
    1. $8.25
    2. $13.00
    3. $16.50
    4. $18.00
    5. $20.00

23. When a certain firm produces two units (per day), its fixed cost of production is $50, and its variable cost is $30. If the firm was to raise its production to four units, its variable cost would rise to $70. If the firm did increase its production from two to four units, its average variable cost of production would _____ and its average total cost of production would _____.
    1. fall   ;   fall
    2. fall   ;   rise
    3. rise   ;   fall
    4. rise   ;   rise
    5. not change   ;   not change

24. When a firm produces 31 units of output, its average total cost of production is lower than was its ATC when it produced only 30 units. In other words, production of the 31st unit pulled down the firm's ATC of production. This fact tells us that the following is true: the firm's marginal cost of producing its 31st unit must be _____.
    1. higher than is its average total cost of producing 30 units
    2. lower than is its average total cost of producing 30 units
    3. higher than is its marginal cost of producing its 30th unit
    4. lower than is its marginal cost of producing its 30th unit
    5. equal to its marginal cost of producing its 30th unit

25. Complete the following statement. If a firm sells the quantity of output at which its marginal revenue _____, then that firm can be absolutely certain that its total revenue _____.
    1. equals its marginal cost   ;   exceeds its total cost by the largest possible amount
    2. equals its marginal cost   ;   equals its total cost
    3. exceeds its marginal cost by the largest possible amount   ;   exceeds its total cost by the largest possible amount
    4. exceeds its marginal cost by the largest possible amount   ;   equals its total cost
    5. Both (a) and (d) are correct.

26. We know that when Firm XYZ produces and sells 20 units of its product, it earns a larger profit than it would earn if it produced and sold 19 units, or 21 units, or any other quantity. From this fact, we know that the following statement must also be true. The marginal revenue that Firm XYZ receives as a result of selling the 20th unit must _____.
    1. exceed the marginal cost of producing the 20th unit by more than MR exceeds MC for any other unit that XYZ produces
    2. be less than the marginal cost of producing the 20th unit by a greater amount than MR is less than MC for any other unit that XYZ produces
    3. exceed (or be equal to) the marginal cost of producing the 20th unit, while the MR from the 21st unit must be less than the MC of that unit
    4. be less than (or be equal to) the marginal cost of producing the 20th unit, while the MR from the 21st unit must exceed the MC of that unit
    5. equal zero

27. Quantity	Total Cost
    1	$37
    2	$45
    3	$55
    4	$68
    5	$86
    6	$111
    7	$145

    Betty owns a firm, and that firm's total cost of producing various quantities of output are given in the table. If Betty can sell as many units of this output as she wishes at an unchanging price of $20 per unit, Betty would maximize her profits by selling _____ units.
    1. 3
    2. 4
    3. 5
    4. 6
    5. 7

28. Regardless of the number of days on which he opens his store, Frank pays a set amount of $1200 per month (for an average cost of $40 per day) to rent the building in which his store is located. Frank is committed to making this payment. Frank doesn't actually work at the store, but he does decide what its hours of operation will be. For every day that Frank opens the store, he must both pay wages to his employees and pay for electricity. These costs add up to $100 per day. If Frank decides to open his store on Sunday, the store will collect $300 in revenue; the items it sells that day cost $180 to buy. Frank's business is generally profitable, but he is trying to decide whether to stay open or close down on Sunday. Assume that whether he opens or closes on Sunday has no effect on the store's sales on other days. Given the above numbers, if Frank decides to keep his store open on Sunday, the result will be that his store's total profit will _____.
    1. rise
    2. fall
    3. remain unchanged
    4. definitely fall to zero