econ

Question 1

1.  

Chez Henri is a restaurant chain that operates in 40 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
X3	Number of competing restaurants within a 5-mile radius

The following information was obtained from the regression analysis: Multiple R: 0.92 R-Square: 0.85 Std. Error of Est.: 0.40

Analysis of Variance
	DF	Sum Squares	Mean Sqr.	F-Stat
Regression	3	220	73.3	18.2
Residual	36	60	1.7
Variable	Coefficient	Std. Error	T-Value
Constant	0.4	0.2	2.0
X1	0.01	0.004	2.5
X2	0.02	0.015	1.3
X3	-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?

Answer

image16 image17 Path:body image20.png

20 points  

Question 2

1.  

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

Option A: Price today: $1000 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?

Answer

image36 image37 Path:body image40.png

20 points  

Question 3

1.  

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?

Answer

image56 image57 Path:body image60.png

20 points  

Question 4

1.  

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.

Answer

image61.wmf		rise, substitutes, positive
image62.wmf		rise, substitutes, negative
image63.wmf		fall, substitutes, positive
image64.wmf		fall, complements, negative

10 points  

Question 5

1.  

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

Answer

image65.wmf		breakfast cereal
image66.wmf		table salt
image67.wmf		Kellogg’s Corn Flakes
image68.wmf		gasoline

10 points  

Question 6

1.  

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.

Answer

image69.wmf		demand, shifts to the right, an increase, an increase
image70.wmf		supply, shifts to the left, an increase, a decrease
image71.wmf		supply, shifts to the right, a decrease, an increase
image72.wmf		demand, shifts to the left, an increase, a decrease
image73.wmf		supply, shifts to the left, a decrease, an increase

10 points  

Question 7

1.  

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.)

Answer

10 points  

Question 8

1.  

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

Answer

image75.wmf		that another factor, such as income, changed, shifting the demand curve for hats to the right.
image76.wmf		the demand curve for hats is upward sloping.
image77.wmf		the law of demand is violated.
image78.wmf		another factor, such as income, changed, shifting the demand curve to the left.
image79.wmf		the supply curve of hats shifted upward.

10 points  

Question 9

1.  

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.)

Answer

10 points  

Question 10

1.  

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  

Question 11

1.  

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.)

Answer

10 points  

Question 12

1.  

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

Quantity	TC	TFC	TVC	ATC	AFC	AVC	MC
0	40
1				52
2			20
3				21.33
4							4
5			40
6				15.67
7						10
8			96
9						15
10							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.

15 points  

Question 13

1.  

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.

Answer

image94.wmf		4.35 million
image95.wmf		5.65 million
image96.wmf		5.85 million
image97.wmf		4.58 million
image98.wmf		5 million

10 points  

Question 14

1.  

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.

Answer

image99.wmf		5.425 million
image100.wmf		4.61 million
image101.wmf		5.2 million
image102.wmf		4.8 million
image103.wmf		6.17 million

10 points  

Question 15

1.  

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?

Answer

image104.wmf		108
image105.wmf		210
image106.wmf		48
image107.wmf		54
image108.wmf		105

10 points  

Question 16

1.  

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?

Answer

image109.wmf		480
image110.wmf		750
image111.wmf		531
image112.wmf		1075
image113.wmf		780

10 points  

Question 17

1.  

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?

Answer

image114.wmf		The demand curve shifts to the left and the supply curve shifts to the right.
image115.wmf		The demand curve shifts to the left and the supply curve shifts to the left.
image116.wmf		The demand curve shifts to the right and the supply curve shifts to the right.
image117.wmf		The demand curve shifts to the right and the supply curve shifts to the left.
image118.wmf		Neither the supply nor demand curve shifts.

10 points  

Question 18

1.  

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?

Answer

image119.wmf		Equilibrium price rises; the effect on equilibrium quantity is uncertain.
image120.wmf		Equilibrium quantity rises; the effect on equilibrium price is uncertain.
image121.wmf		Equilibrium price falls; the effect on equilibrium quantity is uncertain.
image122.wmf		Equilibrium quantity falls; the effect on equilibrium price is uncertain.
image123.wmf		Nothing happens to the market equilibrium price or quantity.