Microeconomics (Fall 2015)
Sample Midterm
Part I (4 points each; total 40 points), Part II (30 points each; total 60 points)
Part I: Short‐answer questions (4 points each)

1. How can we treat a subsidy like a ‘negative tax’?
2. Explain the difference between the marginal product of labor and the average product of
   labor.
3. Suppose that the market demand for cola‐bottles is Q = 200 – 100P. What is the price
   elasticity of demand for cola‐bottles at P = $1. Is it elastic or inelastic? Explain your answer
   and show your working.
4. True or false; explain your answer. “High school education is a classic example of a public
   good because it is both provided by the government and also benefits everyone.”
5. Write down in words what is meant by the marginal rate of substitution of bananas for
   apples.
6. Explain the difference between economic cost and accounting cost.
7. On a fully‐labeled graph, draw an Engel Curve for a normal good.
8. Define what is meant by the law of diminishing marginal returns.
9. What are the main characteristics of a perfectly competitive industry?
10. What is the difference between a positive and normative statement in economics? Give
    an example of each type of statement when explaining your answer.
    Part II: Long‐answer questions (30 points each; 60 points total)
11. Sweet Corporation produces orange juice. OJ is produced with the use of squeezing
    machines S and labor L according to the production function:
    Q = F(L,S) = L*S
    Where Q is in 100s of gallons
    1.1 (5 points) What is the marginal rate of technical substitution of labor for squeezing
    machines?
    1.2 (5 points) When the factory has 6 squeezing machines and 2 workers, how many
    squeezing machines can be substituted by an additional worker?
    1.3 (10 points) Suppose that each machine costs $20 an hour and workers get paid $10 an
    hour. If Sweet wants to produce Q gallons of juice, what is the cheapest way to do so? (In
    other words, how many workers and machines should it employ in order to minimize costs
    subject to producing Q gallons?)
    1.4 (5 points) What is the cost function of Sweet? What is its average cost and marginal cost
    function?
    1.5 (5 points) Now, suppose that a change in climate makes oranges less juicy, which
    results in a new cost function:
    TC = Q*Q
    Does Sweet’s new cost function exhibit economies or diseconomies of scale?
12. Bob likes video games V and clubbing C. His utility function is:

U(V,C) = SQRT (V*C)
2.1 (6 points) What is the marginal rate of substitution of video games for clubbing?
2.2 (12 points) Suppose that the price of video games is Pv and the price of a night of
clubbing is Pc and that Bob has I dollars per month to spend on entertainment. How many
units of V and C will he purchase in order to maximize utility?
2.3 (12 points) Suppose that the price of video games is Pv = $37.50 and the price of a night
of clubbing is Pc = $25 and that Bob has I = $150 per month to spend on entertainment.
How many units of V and C will he purchase in order to maximize utility?