Econ 101 Section 3– Principles of Microeconomics

Instructor: C. Burkart

Exam #7  [40 points total]

October 12, 2005

Questions 1 to 5 are worth 2 points each.  Clearly circle the one best answer to each question.  You will not receive credit if your answer choice is unclear or ambiguous.

1. A sunk cost
   1. is the present value of a future cost.
   2. is the deciding factor in any optimal choice.
   3. is a cost that will be incurred in the future.
   4. is a cost that has already been incurred and cannot be recovered.

2. Matt estimates the marginal benefit of eating one slice of pizza at $3. The marginal benefit of the 2nd slice is $2, the marginal benefit of the third slice is $1, and the marginal benefit of the 4th slice is $0. If the price is $1.50 per slice, to maximize his net benefit Matt should eat
   1. 3 slices.
   2. 2 slices.
   3. 1 slice.
   4. 4 slices.

3. What is the present value of $6,000 to be received three years from now?
   1. It depends on the likelihood that the money will actually be received.
   2. It depends on the interest rate.
   3. The present value is over $6,000.
   4. The present value is the amount of interest that could be earned on that sum over the three years.

4. The present value of a given sum to be received in the future
   1. will equal that sum times the interest rate.
   2. rises as the interest rate falls.
   3. should be ignored as a sunk cost.
   4. rises as the length of time until its receipt expands.

5. An individual wants to maximize her net gains from working. She estimates that the 12th hour of work per week yields monetary and nonmonetary benefits of $10, but involves $9 in additional costs. She should
   1. work the 12th hour only if she can negotiate a higher wage for that hour.
   2. definitely work the 12th hour since doing so raises her net gain from working.
   3. work for only 11 hours per week, since the 12th hour yields such a small net gain.
   4. work for only 11 hours since it doesn't make sense to undertake work that has positive costs associated with it.

Question 6 [10 pts.] Patty delivers pizza using her own car, and she is paid according to how many pizzas

she delivers.  The accompanying table shows Patty’s total benefit and total cost when she works a specific number of hours.

a.       Use marginal analysis to decide how many hours Patty should work: _____3_____ hours

b.      Calculate the total net gain to Patty from working 0, 1, 2, 3, 4, and 5 hours (enter in the table).  Compare her total net gain from working for 1 hour with her total net gain from working the optimal number of hours.  How much would she lose by working for only 1 hour? $21

Question 7 [15 pts.] Suppose that Felix’s marginal cost is the same for every lawn he mows.  His benefit is shown in the table on the right.

1. Calculate the marginal benefit associated with moving from one quantity of lawns mowed to the next (fill in the table).
2. Suppose his marginal cost is $18.50.  What is the optimal quantity of mowed lawns? ___6____.  What is his total net gain? __$43____
3. How high would marginal cost have to be such that Felix’s optimal quantity of lawns mowed is 0? __>$35__________ Specify a marginal cost for which the optimal quantity is 3: _<$26 or >$23_____

Question 8 [5 pts.] Karma and Don run a furniture-refinishing business form their home.  State whether each of the following inputs represents an implicit or explicit cost:

1. Supplies such as paint stripper, varnish, polish, sandpaper, and so on.

Explicit

2. Basement space that has been converted into a workroom.

Implicit

3. Wages paid to a part-time helper.

Explicit

4. A van that they inherited and use only for transporting furniture.

Implicit

5. The job at a larger furniture restorer that Karma gave up in order to run the business.

Implicit