Essay about Fbmicro Sample Final Solutions

Submitted By Omarioke
Words: 1759
Pages: 8

Principles of Microeconomics

Solutions to
Sample Final Examination

Part A: Multiple Choice Questions

1. E
2. C - There is insufficient information to determine which choice she should make, but an optimal choice should include the opportunity cost of the $75,000 salary offer if the management position is the best alternative to her current position.
3. A - We must give up something in order to get more of another. Note that increasing opportunity costs tells us the shape of the curve, not why we have a negative slope.
4. A
5. C
6. B - Set 6 = 10 –2×Q, solve for Q = 2. Thus =(1/-2)×(6/2) = |-1.5|.
7. A - Set 5 = 20 –5×Q, solve for Q = 3. Thus, TR = P×Q = 5×3 = 15.
8. C - Since a perfectly competitive firm has no control over the market price, the only decision to make is how much to produce.
9. C
10. E
11. C; that is, inelastic demand.
12. A
13. C
14. C
15. B
16. A
17. E
18. E
19. C
20. C
21. D
22. E
23. D
24. B
25. C
26. C
27. D
28. C
29. D
30. B

Part B: Short-Answer Questions

B1. Rational Spending Rule

David has two leisure activities – riding his new Triumph “Bonneville” motorcycle and growing award-winning orchids. David estimates that an hour’s worth of riding his motorcycle costs him $15 while an hour’s worth of orchid growing costs him $5.

(a) Assume David spends $100.00 per month on these two activities, “consuming” them in full hours only. How many hours/month will he ride his motorcycle? How many hours/month will he grow orchids? Explain your answer.

The Rational Spending Rule stipulates that spending is allocated across goods so that the marginal utility per dollar is the same for each good. Namely,

Where, MUM = the marginal utility of motorcycle riding; MUO = the marginal utility of orchid growing; PM = price of motorcycle riding / hour; and PO = price of orchid growing / hour. In this case, we need to divide all the marginal utilities by the respective dollar prices AND find the appropriate ratio, given our restriction on spending.

Hours Per Month
MU of Motorcycle Riding

MU of
Orchid Growing

1
2,250
150
500
100
2
1,950
130
475
95
3
1,650
110
450
90
4
1,500
100
425
85
5
1,200
80
400
80
6
1,050
70
375
75
7
900
60
350
70
8
750
50
325
65
9
600
40
300
60
10
450
30
275
55

There are four combinations of motorcycling riding and orchid growing where the Rational Spending Rule occurs:

# of hours motorcycle riding
# of hours orchid growing

Total Cost
100
4
1
$65
80
5
5
$100
70
6
7
$125
60
7
9
$150

The only combination that adds up to David’s income constraint is 5 hours of motorcycle riding and 5 hours of orchid growing.

(b) Suppose now that the price of motorcycle riding doubles to $30 per hour. How many hours/month will he ride his motorcycle? How many hours/month will he grow orchids? Explain your answer.

Following the same approach as above, we can construct a new table:

Hours Per Month
MU of Motorcycle Riding

MU of
Orchid Growing

1
2,250
75
500
100
2
1,950
65
475
95
3
1,650
55
450
90
4
1,500
50
425
85
5
1,200
40
400
80
6
1,050
35
375
75
7
900
30
350
70
8
750
25
325
65
9
600
20
300
60
10
450
15
275
55

Giving us the following three combinations of motorcycling riding and orchid growing where the Rational Spending Rule occurs:

# of hours motorcycle riding
# of hours orchid growing

Total Cost
75
1
6
$60
65
2
8
$100
55
3
10
$140
The only combination that adds up to David’s income constraint is 2 hours of motorcycle riding and 8 hours of orchid growing.

(c) Sketch a demand curve showing David’s demand for riding his motorcycle based on your answers to (a) and (b). You can assume that the demand curve is linear. Be certain to clearly label your graph.

From our results, we see that when:
PM = $15, = 5 hours of motorcycle riding and PM = $30, = 2 hours of motorcycle riding.

Therefore the demand curve is:



B2. Relationship between Productivity and Costs

Foothills Refrigerators assembles refrigerators for retail sales and…