ECON 2510 Practice for Exam 1 with Elaine Peterson

Part I (30 points): Please explain the following briefly:
1. What's the difference between empirical and theoretical economics?
2. Kenneth Arrow has said "We need a higher minimum wage." Arrow has also said "California has the lowest minimum wage on the West Coast". Milton Friedman has said "increasing the minimum wage will increase unemployment". Friedman has also said "There are better ways to help the working poor".
Explain which statements are normative and which are positive.
3. What does price elasticity of demand tell us?
4. What's the law of demand?
5. Is water scarce?

6. What is the law of diminishing marginal utility?

Part II (25 points): Using separate diagrams for each of the following, with supply and demand clearly labeled, please depict the effect on the equilibrium price and quantity of the good that will be produced and sold.
1) The effect of an increase in the cost of oranges on the orange juice market.
2) The effect of an increase in the number of people over 65 on the market for gerontologists.
3) The effect of an increase in the price of Coca-Cola on the market for Pepsi.
4) The effect of an improvement in the production technology on the market for watches.
5) The effect of a decrease incomes on the market for do it yourself plumbing books.

Part III (25 points) : Choose the best answer.
1. Suppose that Good A yields 500 utils while Good B yields only 50 utils. You have sufficient income to purchase the first unit of either. You should:
a) Purchase A                                       b) Purchase B                           c) Purchase both A and B
d) Cannot tell without prices                   e) Purchase neither A nor B

2. A price floor:
a) is just like a price ceiling.                    b) benefits all consumers.           c) benefits all suppliers.

3. If the price of a good falls by 20% and sales increase by 12%, then the price elasticity of demand at that price is approximately:
a) -12%             b) -1.2             c) +.6             d) -.6             e) + 1.66

4. Consumer surplus:
a)  is when too much of a good is made so there is a surplus from the consumer’s perspective.
b) is increased by imposition of a tax.
c) is increased by imposition of a subsidy.
d) the result of producing luxury goods rather than necessities
e) includes only the monetary outlay for inputs

5. A firm has been lowering its price over the past several weeks and total revenue has been steadily rising. We can conclude that:
a) Price elasticity is probably falling.                               b) Price elasticity is probably less than one.
c) Price elasticity is probably positive.                             d) Price elasticity is probably equal to one.
e) Price elasticity is probably rising.

Part IV (20 points):

1. A firm has fixed costs of \$500 and other costs as indicated in the table below.
a) Complete the table.

 Total Product Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average  Variable Cost Average  Total  Cost Marginal Cost 0 1 340 2 1060 3 240 4 350 5 220 6 1400 7 380

(b)Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships which they bear to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and ATC curves at their minimum points.

(c) Explain how the locations of each of the four curves graphed would be altered if (1) total fixed cost had been \$100 rather than \$500, and (2) total variable cost had been \$10 less at each level of output.