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Spring 2012Weston Practice Exam.Multiple Choice1. Microeconomics refers to@ an approach to economics in which an attempt is made to explain socialphenomena in terms of individual behavior.(b) decisions made concerning small quantities, usually one unit or less.(c) the economics of small countries, such as Robinson Crusoe's island.(d) economic problems that can be solved on a personal computer.

2. Suppose that in constructing a theory about consumer behavior an economist statesthat he believes consumers can rank, but not quantify, their subjective preferences.This tells you that the economist believes in o( [\\f\0-( ~ or e\er(a) cardinal but not ordinal utility. Cl"c1; (\c\.t z : C " \

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6. When the price of one good decreases, with all other prices and money incomeremaining the same,e > the consumer must buy more of the good whose price decreased in order to satisfythe equi-marginal condition.(b) the consumer must buy less of the good whose price decreased in order to satisfy. the equi-marginal condition.(c) the consumer will but more of the good whose price decreased only if her demand.- for that good is price elastic.(d) it is impossible to know what the consumer will do, since preferences areSUbjective.

7. When the price of one good decreases, with all other prices and money incomesremaining the same ~(\(Qlf\o( w= -(a) the person's real income decreases. '\C ',(\C "\' _) bu~ ~( ) the person's real income increases. o f I r '-(c) the person's real income is unaffected. ~~ (\'uSl < J O C d _

~ (d) the person's real income is affected only if the good whose price decreased is an \ "ct ~inferior good.

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8. The marginal rate of substitution in consumption is(a) the slope of a budget line.@ ) the slope of an indifference curve.(c) the slope of a total utility curve.(d) the change in total utility that results from obtaining one more unit of a good.(e) the marginal utility of money.

9. Ina diagram of an individual's indifference curves, the best affordable combinationof the two goods is found where(a) the indifference curve crosses on of the axes.~ the price ratio is equal to the marginal rate of substitution.(c) the marginal utilities of both goods are equal.(d) the budget line equals the equi-marginal condition.

10. The reason for distinguishing between income and substitution effects is(a) at high levels of income the Law of Demand does not apply.(b) income changes can distort the marginal rate of substitution.@ we are trying to derive demand curves; the Law of Demand refers strictly to therelationship between price and quantity demanded; lowering a price alters realincome also.(d) it's not fair for people to gain real income just because a price decreases.

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11. The price elasticity of demand is defined as@ the percentage change in quantity demanded divided by the percentage change inthe price of the good.(b) the percentage change in price divided by the percentage change in the quantitydemanded of the good.(c) quantity demanded divided by price.(d) price divided by quantity demanded.

12. Ifa doctor raises his price by 20% and the quantity demanded of his servicesdecreases by 10%, demand for the doctor's services is(a) elastic.(!)) inelastic.(c) unit elastic.(d) perfectly inelastic.

13. If a doctor raises his price by 20% and his total revenue increases by 10%, demandfor the doctor's services is(a) elastic.a inelastic.(c) unit elastic.(d) in violation of the Law of Demand.

14. Politicians today like to tax cigarettes for the same reason that ancient politiciansliked to tax salt. That reason is(a) taxing these goods benefits public health.(b)no one can complain since they don't really need these goods.(c) the demand for both goods is elastic; hence increasing the tax will increase

revenue.o the demand for both goods is inelastic; hence increasing the tax will increaserevenue.15. When the price of a Giffen good decreases

(a) the substitution effect will decrease the quantity demanded.(b) the income effect will be less than the substitution effect.< 9 the net effect of the income and substitution effects is ambiguous.tg ) the negative income effect will outweigh the positive substitution effect.

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B = 'P I Q , ~ P ' 2 . Q - zProblems and Short Essays Qz . .: S / p , _ +- f~1A0I1. Groucho Marx has a budget of $250. The price of good 1 is $10 and the price ofgood 2 is $5. If you were to draw Marx's budget line in a space with good 2 on thevertical axis. calculate: 0 _ a50 :::-> \0Q > ~ 5 Q 1.-(a) the vertical intercept. 5tJ 1 2 ) - ,(b) the horizontal intercept. ~ 5 d 50 ~ .o~I I- 5 " 'j'

\ 6,/,'" [) (c) the slope. -SOl ~Q -lOt'(. = r o ~d 4',,! r, . ,--{.'1 T 5 - : -?.. _ -=- ---1~-- -

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4. Define the income elasticity of demand. What can you say about the incomeelasticity of an inferior good?

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