Managerial Economics Section B Quiz 1. Duration: 1 hour.

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Name ______________________________________ Roll No.___________________________________ Instructions: Each correct answer carries 2 points and the wrong answer negative half. There are a total of 25 questions. Please fill the table given at the end of the quiz with your solutions. All the Best!

1) An upward sloping indifference curve defined over two goods violates which of the following assumptions from the theory of consumer behavior? a) b) c) d) transitivity. preferences are complete. more is preferred to less. none of the above.

Ans: c) more is preferred to less. 2) Use the following two statements to answer this question. I. If utility is ordinal, a market basket that provides 30 utils provides twice the satisfaction of a market basket that provides 15 utils. II. When economists first studied utility it was believed that utility was cardinal, but it was later discovered that ordinal preferences are sufficient to explain how most individual decisions are made. a) b) c) d) Both I and II are true. I is true, and II is false. I is false, and II is true. Both I and II are false.

Ans: c) I is false, and II is true. 3) The effect of the September 11 attacks on the World Trade Center on the market for office space in downtown Manhattan was that both the equilibrium price and the equilibrium quantity fell. What is the most likely explanation for this? a) b) c) d) Supply and demand both shifted left, and the magnitude of the demand shift was greater. Supply and demand both shifted left, and the magnitude of the supply shift was greater. Supply shifted left, demand shifted right, and the magnitude of the demand shift was greater. Supply shifted left, demand shifted right, and the magnitude of the supply shift was greater.

Ans: a) Supply and demand both shifted left, and the magnitude of the demand shift was greater.

4) Use the following statements to answer this question I. Even though people need water to survive, the price of water is less than the price of diamonds because water is in greater supply than diamonds. II. Suppose that the demand for corn is highly price inelastic. If every corn farmer's harvesting technologies become more efficient, the total revenue received by all corn farmers would fall. a) b) c) d) I and II are true. I is true, and II is false. II is true, and I is false. I and II are false.

Ans: a) I and II are true 5) An important determinant of the amount of grains harvested next year by Ethiopian farmers is the amount of seeds planted this year. Given that Western nations have guaranteed to donate five hundred tons of grain next year, this year the Ethiopian farmers will: a) b) c) d) plant more seeds as the food aid establishes a minimum price for grain. plant more seeds as the farmers confidence is restored. plant fewer seeds as consumers demand for grain is completely price elastic. plant fewer seeds as the price of grain will be lower with the food aid.

Ans: d) plant fewer seeds as the price of grain will be lower with the food aid 6) Suppose the demand for gourmet coffee can be represented by a linear demand curve. At the prevailing market price the income elasticity of demand for gourmet coffee is 2. When income rises the demand curve for gourmet coffee: a) b) c) d) becomes less elastic at every price. becomes less elastic at the price that prevailed before the change in income becomes more elastic at every price becomes more elastic at the price that prevailed before the change in income

Ans: a) becomes less elastic at every price 7) Use the following two statements to answer this question. I. The supply of newly mined copper is more elastic in the long run than in the short run. II. The supply of scrap copper is more elastic in the short run than in the long run. a) b) c) d) Both I and II are true. I is true, and II is false. I is false, and II is true. Both I and II are false.

Ans: a) Both I and II are true 8) Other things being equal, the increase in rents that occur after rent controls are abolished is smaller when a) b) c) d) the own price elasticity of demand for rental homes is price inelastic. the own price elasticity of demand for rental homes is price elastic. rented homes and owned homes are complements. rented homes and owned homes are substitutes.

Ans: b) the own price elasticity of demand for rental homes is price elastic 9) A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals:

a) b) c) d)

the magnitude of the slope of the indifference curve through that point. one over the magnitude of the slope of the indifference curve through that point. Px/Py Py/Px

Ans: c) Px/Py 10) Good A is a Giffen good. If the price of good A were to suddenly double, the income effect would cause the purchases of good A to increase by a) b) c) d) more than double. less than double. any of the above are possible. none of the above.

Ans: c) any of the above are possible 11) If an Engel curve has a positive slope a) b) c) d) both goods are normal. the good on the horizontal axis is normal as the price of the good on the horizontal axis increases, more of both goods in consumed. as the price of the good on the vertical axis increases, more of the good on the horizontal axis is consumed.

Ans: b) Ans: a) both goods are normal 12) From 1970 to 1993, the real price of eggs decreased and the total annual consumption of eggs decreased. Which of the following would cause an unambiguous decrease in the real price of eggs and an unambiguous decrease in the quantity of eggs consumed? a) b) c) d) A shift to the right in the supply curve for eggs and a shift to the right in the demand curve for eggs. A shift to the left in the supply curve for eggs and a shift to the right in the demand curve for eggs. A shift to the left in the supply curve for eggs and a shift to the left in the demand curve for eggs. None of the above.

Ans: d) None of the above 13) Suppose that a consumer regards two types of soap as perfect substitutes for one another. The price consumption path generated by changing the price of one type of soap is a) b) c) d) Ans: c) 14) Which of the following describes the Giffen good case? When the price of the good a) b) c) d) rises, the income effect is opposite to and greater than the substitution effect, and consumption falls. falls, the income effect is in the same direction as the substitution effect, and consumption rises. falls, the income effect is in the opposite direction to the substitution effect, and consumption falls. falls, the income effect is in opposite direction to the substitution effect and consumption rises. always horizontal always vertical overlaps the axes corresponding to the cheaper soap overlaps the axes corresponding to the more expensive soap

Ans: c) falls, the income effect is in the opposite direction to the substitution effect, and consumption falls 15) The Russian government wants to reduce the consumption of vodka. A one hundred rouble tax on each bottle purchased may reduce the consumption of vodka under which circumstance(s)?

a) b) c) d)

vodka is a normal good vodka is an inferior good and the taxes collected from this tax are rebated to consumers vodka is a normal good and the taxes collected from this tax are rebated to consumers Both (a) and (b)

Ans: d) Both (a) and (b) 16) The price of Coke is Rs. 50; the price of popcorn is Rs.100. If you have maximized your utility by purchasing Coke and popcorn, your marginal rate of substitution will be: a) b) c) d) 2 Cokes for each popcorn. 1 Coke for each popcorn. 1/2 Coke for each popcorn. indeterminate unless more information on your marginal utilities is provided.

Ans: a) 2 Cokes for each popcorn 17) To determine whether an increase in the price of gasoline results in a consumer spending a larger share of their expenditure on gasoline we need to know a) b) c) d) only how much money the consumer spends on gasoline before the price change only the change in the price of gasoline only the change in the price of gasoline as a percentage of the original price only the own price elasticity of demand for gasoline

Ans: d) only the own price elasticity of demand for gasoline 18) Which of the following would cause an unambiguous decrease in the real price of DVD players? a) A shift to the right in the supply curve for DVD players and a shift to the right in the demand curve for DVD players. b) A shift to the right in the supply curve for DVD players and a shift to the left in the demand curve for DVD players. c) A shift to the left in the supply curve for DVD players and a shift to the right in the demand curve for DVD players. d) A shift to the left in the supply curve for DVD players and a shift to the left in the demand curve for DVD players. Ans: b) A shift to the right in the supply curve for DVD players and a shift to the left in the demand curve for DVD players 19) For an inferior good, the income and substitution effects a) b) c) d) work together. work against each other. can work together or in opposition to each other depending upon their relative magnitudes. always exactly cancel each other.

Ans: b) work against each other 20) Consider a graph on which one good Y is on the vertical axis and the only other good X is on the horizontal axis. On this graph the income-consumption curve has a positive slope for low incomes, then it takes a zero slope for a higher income, and then it takes a negative slope for even higher incomes (the curve looks like an arc, first rising and then falling as income increases). This curve illustrates that, for all income levels, a) b) c) d) both X and Y are normal. only Y is normal. both X and Y are inferior. only X is normal.

Ans: d) only X is normal 21) Use the following statements to answer this question I. A price-consumption curve is derived by varying the price of asparagus. If the price-consumption curve is an upward sloping straight line, the demand curve for asparagus must be downward sloping. II. Fred consumes only food and clothing. Fred's Engel curve traces out the utility maximizing combinations of food and clothing associated with each and every income level. a) b) c) d) I and II are true. I is true, and II is false. I is false, and II is true. I and II are false.

Ans: b) Ans: a) I and II are true 22) Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monicas income is $120.00, how much of good A will she purchase? a) b) c) d) 12 24 48 120

Ans: d)120 Solution: Using equations that allow maximization of utility and the budget constraint: Pa.Qa + Pb.Qb = I 0.5Qa + 4Qb = 120 -- (1) MCa/MCb= Pa/Pb Qb/Qa = Pa/Pb 8.Qb = Qa Solve equation (1) and (2) 23) Which of the following is true regarding income along a price consumption curve? a) b) c) d) Ans: c) 24) The change in the price of one good has no effect on the quantity demanded of another good. These goods are: a) b) c) d) complements. substitutes. both Giffen goods. none of the above. Income is increasing. Income is decreasing. Income is constant. The level of income depends on the level of utility.

--(2)

Ans: d) none of the above 25) From 1970 to 1993, the real price of a college education increased, and total enrollment increased. Which of the following could have caused this increase in price and enrollment?

a)

A shift to the right in the supply curve for college education and a shift to the left in the demand curve for college education. b) A shift to the left in the supply curve for college education and a shift to the right in the demand curve for college education. c) A shift to the left in the supply curve for college education and a shift to the left in the demand curve for college education. d) None of the above. Ans: b) A shift to the left in the supply curve for college education and a shift to the right in the demand curve for college education