Izmir University of Economics Name:

Department of Economics Student ID #:

ECON 100 — Principles of Economics

Mid-term Exam I
Note: The duration of the exam is 90 minutes. Good luck!
MULTIPLE CHOICE: Each question is worth 2 points. The whole section is
worth 40 points.
1) Which is NOT a key institution, which plays an important role in Capitalism?
a. Private Property
b. Markets
c. Firms
d. Government

2) A(n) ________ is capable of producing the same amount of output as the alternative
technology with less of at least one input, and not more of any input.
a. Diminishing average product of labour
b. Incentives
c. Economic Rent
d. Dominant Technology

3) When two variables are positively correlated, this implies that:

a. As one goes up, the other tends to go down.
b. As one goes up, the other tends to go up.
c. As one goes down, the other tends to go up.
d. None of the above.

4) The term "capital goods" refers to:

a. goods produced and provided by the government.
b. bonds bought or sold only on Wall Street.
c. bonds or funds traded anywhere.
d. the machines and buildings used in production.

5) Economists often simplify analysis by setting aside things that are thought to be of less
importance. The literal meaning of the expression is "other things equal". This
expression is
a. Equilibrium
b. Ceteris paribus
c. Entrepreneur
d. Relative prices

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 32,000

16,000

CHINA
Ratio scale: GDP per capita

8,000

4,000 INDIA

2,000
ITALY

1,000 CHINA

BRITAIN
500
JAPAN

250
1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

2000
6) The figure shows the evolution of GDP per capita in the period 1000-2000 in five
countries. Which of the following statement is NOT correct?

a. For a very long time living standards did not grow in any sustained way.
b. Sustained growth occurred at a different time in each country
c. Growth began first in England.
d. Industrial revolution started in France.

7) During the 20th century, we saw rising wages and falling work hours. Why might this
occur?
a. Wage rise increased the incentive to work long hours
b. Workers’ willingness to substitute free time for goods did not increase much
c. The income effect began to outweigh the substitution effect
d. The substitution effect began to outweigh the income effect

8) Select the correct statement regarding the Gini coefficient:

a. The larger the area between the Lorenz curve and the perfect inequality line, the
higher the equality.
b. A decreasing gini coefficient means higher inequality
c. The coefficient takes the value 0 if there is perfect equality,
d. A lower gini coefficient implies a wealthier nation

9) 9. A(n) ________ is capable of producing the same amount of output as the alternative
technology with more of at least one input, and not less of any input.

e. Diminishing average product of labour

f. Dominated Technology
g. Economic Rent
h. Dominant Technology

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10) Currently you work for 30 hours per week at the wage rate of £10 an hour. Your free
hours are defined as the number of hours not in work per week, which in this case is 24 hours
× 7 days – 30 hours = 138 hours per week. Suppose now that your wage rate has increased by
50%. If you are happy to keep the total weekly income constant, then:

Select one answer.

a. Your total number of working hours per week will fall by 50%.
b. Your total number of working hours per week will be 20 hours.
c. Your total number of free hours per week will increase by 25%.
d. Your total number of free hours per week will increase by 6,25%.

11) A firm’s unit cost of production is £15 per output good. Let P be the unit price of the
output good and Q be the total output level. Which of the following statements is correct?

Select one answer.

a. Point (Q, P) = (2,000, 20) is on the isoprofit curve representing the profit level
£20,000.
b. Point (Q, P) = (2,000, 20) is on a lower isoprofit curve than point (Q, P) =
(1,200, 24).
c. Points (Q, P) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve.
d. Point (Q, P) = (5,000, 15) is not on any isoprofit curve.

12) The employment rent depends on the followings except,

a. Wage
b. Disutility of effort
c. Profit
d. Unemloyment duration

13) If the quantity demanded increases by 20% as a response to decline in price by 10% then,

a. Elasticity is -1
b. Elasticity is -2
c. Demand is unit elastic
d. Demand is inelastic

14) If there is a fixed cost as well as the variable cost then the total cost function

a. Slopes downwards
b. Reaches maximum when average cost is at its minimum
c. Starts at a positive level on the y-axis
d. Starts to decline when marginal cost intersects the average cost

15) Deadweight loss is greatest when

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 a. Perfect competition prevails
b. Market price is equal to market marginal cost (supply curve).
c. Monopoly prevails
d. Demand is elastic

16) With regards to principal-agent relations in a firm, which of the following statements is
incorrect

a. Owners can be principles

b. Managers can be principles
c. Workers can be principles
d. Managers can be agents

17) Workers’ best response function refers to the relationship between

a. Effort and unemployment rate

b. Profit and effort
c. Effort and wage
d. Profit and unemployment rate

18) Which of the following statements is true

a. If unemployment benefits are increased, the minimum cost of a unit of effort for the
employer will rise
b. If the wage doesn’t change, employees will work harder in periods of low
unemployment.
c. If an employee’s disutility of effort increases, the reservation wage will rise.
d. If disutility of effort goes down employment rent will decrease with a given wage

19) Which of the following statement is incorrect

a. Budget constraint does not play any role in optimal consumption choice
b. Budget constraint does not change if one of the price of the consumption good
increases
c. Budget constraint shifts outwards if the individual gets a transfer payment from
government
d. Budget constraint is steeper if indifference curves are flatter

20) You value hanging with your friends at 40$. There is a certificate program that you want to
attend and it costs you 50$. Your benefit from the program is 80$. Opportunity cost of
attending the certificate program is

a. 90$
b. 40$
c. 50$

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 d. 10$

Essay Questions: Answer all of the questions. This section is worth 60 points. Read the
questions carefully, and show all your work where asked, otherwise you will not be given
full credit for the question.

1) (20 pts, 5 pts each) The following diagram is the feasible set of a student of the
combinations of her final grade and the hours of free time per day.

A C
Free time 13 14 19 20
Grade 84 81 57 50
100 MRT 3 7

90
84 A
81
D B
70
Final grade

57
C
50

0
0 10 13 14 19 20 24
Hours of free time per day

a. Which point(s) is (are) feasible for the student? Which is (are) not? Discuss.

All the points on and within the feasible set, except B.

b. How many percentage points does the student obtain when she gives up one hour of
free time when she has 20 hours of free time? Calculate.

57-50=7 points. That’s 14% = 7/50

c. How many percentage points does the student obtain when she gives up one hour of
free time when she has 14 hours of free time? Calculate.

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 84-81= 3. That’s %3.7 = 3/81

For b. and c. Both the absolute numbers and the percentages can be regarded as correct.

d. Are your answers in (b) and (c) the same. Explain why or why not.

No. As the feasibility set is the mirror image of the production function, diminishing
marginal product implies that answer to c. (when study hours are higher) should be less than
the answer to b. (when study hours are lower).

2)

100
Feasible frontier
90
B
D

E
Final grade

57 MRS = MRT

C
IC4
IC3
IC2
A
IC1

0
0 19 24
Hours of free time per day

(10 pts) The graph depicts the feasibility set and a set of indifference curves for a student.

Which point represents the combination of free time and final grade that would yield this
student the maximum utility? In other words, what is the optimal combination? Give a sound
reasoning for your choice and do not forget compare to the point you choose with the other
points.

E represents the optimal; since MRS=MRT.

C inefficient. A,B and D give less utility as they lie on lower indifference curves.

Any point on IC4 is infeasible.

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3) (10 points) Why did industrial revolution start in England?

The real wages were much higher in England than in France. As the firms innovate to
substitute capital for labor they also increased profits. Institutions in England made sure that
real wages remained relatively high so that the firms had to keep up innovating to sustain
profitability.

4) (20 points)

a. What is the profit maximization point? Explain why.

At E, since MR=MC

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 At E, marginal profit (MR-MC) is zero but the total profit is maximized as the profit is
the sum of the marginal profits and until E marginal profits are positive and after E marginal
profits turn out to be negative.

b. Calculate the total consumer surplus given that at E the quantity is 32, marginal cost is
3000 $ and the price is 4800 $.

CS = (8000-4800) x 32 /2 = 51200