name use scantron for questions 1 75. #76 83 on paper...

EC201 – Winter 2018 Midterm Exam - Jenkins

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Name _____________________

Use Scantron For Questions 1 – 75. #76 – 83 on paper exam.

1) The decision about what goods and services will be produced in a market economy is made by

A) lawmakers in the government voting on what will be produced.

B) workers deciding to produce only what the boss says must be produced.

C) producers deciding what society wants most.

D) consumers and firms choosing which goods and services to buy or produce.

2) Economists assume that individuals

A) behave in unpredictable ways.

B) will never take actions to help others.

C) prefer to live in a society that values fairness above all else.

D) are rational and respond to incentives.

3) Which of the following generates productive efficiency?

A) competition among sellers

B) competition among buyers

C) government inspectors

D) government production rules and regulations

4) Marginal analysis involves undertaking an activity

A) until its marginal costs start declining.

B) only when its marginal benefits are positive.

C) until its marginal benefits equal marginal costs.

D) only if its marginal costs are greater than its marginal benefits.

5) Which of the following is not an example of an economic trade-off that a firm faces?

A) whether it is cheaper to produce with more machines or with more workers

B) whether it makes sense to outsource the production of a good or service

C) whether or not consumers will buy its products

D) whether it should produce more or less of its product

6) Which of the following is a positive economic statement?

A) The standard of living in the United States should be higher.

B) If the price of iPhones falls, a larger quantity of iPhones will be purchased.

C) The government should revamp the health care system.

D) The U.S. government should not have bailed out U.S. auto manufacturers.

7) Economic models

A) make no assumptions in order to remain as accurate as possible.

B) are simplified versions of reality.

C) can not be used to analyze real-world issues.

D) magnify the complexity of economic issues in order to provide useful data.


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8) Which of the following statements about opportunity cost is true?

A) A perfectly rational consumer is able to reduce her opportunity costs to zero.

B) Marginal analysis involves comparing the marginal benefits and opportunity costs of an action.

C) The most efficient opportunities have negative costs.

D) Opportunity cost is the highest-value alternative that must be given up to engage in an activity.

9) A critical function of the government in facilitating the operation of a market economy is

A) producing goods and services for low-income households.

B) setting up and enforcing private property rights.

C) ensuring an equal distribution of income to all citizens.

D) controlling the market prices of food items.

10) Which of the following correctly describes the relationship between economic efficiency and economic

equity?

A) They are both automatically achieved in a free market economy.

B) They always call for opposite outcomes.

C) There is no conflict between the two goals.

D) There is often a trade-off between the two.

11) Which of the following is not a factor of production?

A) entrepreneurial ability

B) labor

C) bank loan

D) capital

True or False

12) In a mixed economy, the government decides how economic resources will be allocated.

13) Allocative efficiency is when a good or service is produced at the lowest possible cost.

14) Microeconomics is the study of the economy as a whole.

15) The basis for trade is the presence of both absolute and comparative advantages


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This Figure is the production possibilities frontier (PPF) of a country producing two goods: paper and

steel. Questions 16-20.

16) Which of the following combinations (of steel and paper) is efficient?

A) Combinations V and Y

B) Combinations V, W, and X

C) Combination Y

D) Combinations V, W, X, and Y

17) Which of the following combinations could result from economic growth in the country?

A) Combinations V, W and X

B) Combination Z

C) Combination Y

D) Combinations V, W, X, and Z

18) If the economy is currently producing at point W, what is the opportunity cost of moving to point X?

A) 3 million tons of steel C) 5 million tons of paper

B) 19 million tons of steel D) 9 million tons of paper

19) If the economy is currently producing at point Y, what is the opportunity cost of moving to point W?

A) 2 million tons of steel C) 9 million tons of paper

B) zero D) 16 million tons of paper

20) Which of the following explains why increasing steel production requires progressively greater decreases in

paper production (i.e., moving from U to V to X)?

A) Combinations U, V, and X

B) Decreasing marginal opportunity costs

C) Constant marginal opportunity costs

D) Increasing marginal opportunity costs

V

Z U


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This Figure represents the market for Good X in Oregon. Questions 21-24.

21) An increase in Oregon’s population would be represented by a movement from

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.

22) Tastes change and consumers lose interest in Good X. This would be represented by a movement from

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.

23) An increase in the price of a substitute for Good X would be represented by a movement from

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.

24) The raw material used to produce Good X becomes cheaper and the price for Good X decreases. This

would be represented by a movement from

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.


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25) One would speak of a change in the quantity of a good supplied, rather than a change in supply, if

A) supplier expectations about future prices change.

B) the price of the good changes.

C) the cost of producing the good changes.

D) prices of substitutes in production change.

26) In 2004, hurricanes damaged a large portion of Florida's orange crop. As a result of this, many orange

growers were not able to supply fruit to the market. If, following the hurricane, the price remained at its pre-

hurricane level, we would expect to see

A) a surplus of oranges.

B) the quantity demanded equal to the quantity supplied.

C) a shortage of oranges.

D) an increase in the demand for oranges.

Match each scenario with the appropriate diagram (may be used more than once)

Questions 27-30

27) Gradual global warming switches to intense global cooling and ice cream loses popularity. A quarter of the

ice cream shops in Portland close.

28) In response to lower world prices for pears, Aaron’s Unorthodox Orchards decides to decrease its output of

pears.

29) The minerals Wowsium and Yowsium are found in the same type of bedrock and thus tend to be mined

together. Wowsium has long been an additive to toothpaste. Yowsium has found a new application in Virtual

Reality (VR) systems and the price for Yowsium has gone up. Answer for supply/quantity supplied of

Wowsium.

30) A much-followed international consulting group publishes a new report in which it significantly lowers its

forecast for both the global economic growth rate and oil prices expected in the next year. Answer for

supply/quantity supplied of oil.

A B C D


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Use this Figure to answer questions 31-34.

31) What is the equilibrium price and equilibrium quantity? 35) ______

A) $25 and 500 C) $20 and 600

B) $20 and 500 D) $25 and 800

32) At a price of $10, how many units will be demanded and how many will be sold? 36) ______

A) 200 demanded; 200 sold

B) 800 demanded; 600 sold

C) 600 demanded; 200 sold

D) 800 demanded; 200 sold

33) At a price of $25, there is a(n) _________ of ______ units. 37) ______

A) surplus and 200

B) shortage and 600

C) equilibrium and 300

D) surplus and 300

34) Which of the following products comes closest to having a perfectly inelastic demand?

A) gasoline

B) life-saving medication

C) iPhones

D) bus rides


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Economists collected sales data for various products and estimated the following elasticities. Use the data

in the table to answer Questions 35-38.

Price elasticity of demand for Product Z -0.66

Cross-price elasticity of demand b/w Product Z & Product Y 0.97

Cross-price elasticity of demand b/w Product Z & Product X -1.18

Cross-price elasticity of demand b/w Product Z & Product W -0.44

Income elasticity of demand for Product Z 0.15

35) Product Z is a(n) ___________ good and a ____________.

A) inferior; necessity

B) normal; luxury

C) normal; necessity

D) significant; luxury

36) Product Z and Product Y are ____________ .

A) substitutes

B) complements

C) inferiorly complexed

D) normal

37) Product X and Product Z are ___________ and Product X has a _________ relationship with Product Z

than does Product W.

A) complements; weaker

B) substitutes; stronger

C) complements; more complicated

D) complements; stronger

38) If the price for Product Z declines, total revenues for Product Z would be expected to ______________ .

A) increase

B) stay the same

C) decrease

D) move in proportion to the price change


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39) In the figure above, as price falls from PA to PB, the quantity demanded increases most along D1; therefore

A) D1 is unit elastic.

B) D1 is more inelastic than D2 or D3.

C) D1 is more elastic than D2 or D3

D) D1 is elastic at PA but inelastic at PB.

40) Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose

the demand for a product decreases. Which of the following statements accurately predicts the resulting

decrease in price?

A) The decrease in price is not affected by the elasticity of the supply curve.

B) The more elastic the supply curve, the smaller the price decrease.

C) The more elastic the supply curve, the greater the price decrease.

D) The decrease in price will always be proportional to the magnitude of the demand shift.

41) The demand for all hot beverages as a whole is likely to be ________ than the demand for Pete’s coffee.

A) more elastic than

B) perfectly elastic compared to

C) less elastic than

D) perfectly inelastic compared to

42) If the income elasticity of demand is 1.5 and income increases by 20%, what would be the percentage

change in quantity demanded?

A) 3% C) 1.5%

B) 30% D) -7.5%


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43) Which of the following goods would have the most inelastic demand?

A) Vacation to Japan

B) Milk

C) Caviar

D) Tesla Roadster

True or False

44) A horizontal supply curve means supply is perfectly elastic.

45) A horizontal supply curve looks the same as a horizontal demand curve.

46) When demand is unit elastic, the price elasticity of demand equals 1.

47) A good with many close substitutes has less elastic demand than a good with few substitutes.

48) The supply curve for many products will be inelastic over a short period of time, but increasingly elastic

over longer periods of time.

Consumer Willingness to Pay

Billy Bob $24

Jerry Lee 21

Daisy Mae 15

Leigh Ann 12

Jethro 7

The table above lists the highest prices five consumers are willing to pay for a country music concert

ticket. They would only buy one ticket max.

49) If the price of one of the tickets is $18

A) Billy Bob and Leigh Anne will buy two tickets between them.

B) Jerry Lee will receive $3 of consumer surplus from buying one ticket.

C) Billy Bob and Daisy Mae receive a total of $18 of consumer surplus from buying one ticket each.

D) Daisy Mae, Leigh Ann, and Jethro will receive a total of $34 of consumer surplus since they will buy no

tickets.

50) Suppose price of a ticket is initially $25. Then, because ticket sales are slow, the price is

reduced from $25 to $12. Which of the following statements is accurate?

A) only two tickets will be sold.

B) consumer surplus decreases from $24 to $12.

C) consumer surplus increases from $0 to $24.

D) everyone will buy a ticket.


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The Figure shows the market for apartments in Salmon City. Recently, the government imposed rent

control at R0. Prior to the rent ceiling going into effect, the equilibrium price was R*.

51) When R* was the price for apartments, what was the area that represented consumer surplus?

A) A + B + D

B) A + B + C

C) A + B + D + F

D) A + B + C + D + E + F

52) After the imposition of the ceiling, what is the area that represents apartment owners’ producer surplus?

A) F + G

B) D + E + F

C) F

D) G

53) With rent control, the quantity supplied is Q1. Suppose apartment owners ignore the law and rent this

quantity for the highest rent they can get. What is the highest rent they can get?

A) R* C) R0

B) R1 D) more than R1

54) What area represents the deadweight loss after the imposition of the ceiling?

A) G + H

B) J + H

C) C + E + J + H

D) C + E


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Match term in Column B with the most appropriate one in Column A.

Column A Column B

55) Patents, copyrights A. Positive Externality

56) Flu vaccine B. Inferior Good

57) Ramen noodles C. Complements

58) Car & motor oil D. Property Rights

59) Toll road E. Nonrival & Excludable

60) If there is a positive externality in producing a product, then the market equilibrium price

A) is too high and equilibrium quantity is too low.

B) and equilibrium quantity are too low.

C) and equilibrium quantity are too high.

D) is too low and equilibrium quantity is too high.

61) The market demand for a public good can be determined by

A) adding up the total private benefits and external benefits that each quantity provides the citizens of a country.

B) adding up how much each citizen expects to consume at each possible price.

C) adding up how much each consumer is willing to pay for each unit of the public good.

D) estimating the value of the benefit that each unit provides and multiplying that by the number of consumers.

62) Private solutions to the problem of externalities are most likely to happen when

A) government actively encourages these solutions.

B) transactions costs are low and the number of bargaining parties is small.

C) transactions costs are low and the number of bargaining parties is large.

D) transactions costs are low and the monetary damages to third parties are high.

63) Which of the following is a source of market failure?

A) unforeseen circumstances which leads to the bankruptcy of many firms

B) a lack of government intervention in a market

C) incomplete property rights or inability to enforce property rights

D) an inequitable income distribution


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The graph above shows a market with a negative externality. Questions 64-66.

64) The private profit-maximizing quantity for the firm is

A) Qa. C) Qb - Qd.

B) Qb. D) Qd.

65) If the government were to apply a Pigovian tax to bring about the efficient level of production, what should

the value of the tax be?

A) (Pf- Pb) per unit of output

B) (Pa- Pb) per unit of output

C) (Pa- Pc) per unit of output

D) Pa per unit of output

66) The cost of the negative externality should be

A) no larger than the marginal private cost

B) less than the subsidy for the inverse positive externality

C) equal to the amount of tax imposed by the government

D) equal to marginal benefits minus marginal costs


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True or False

67) If social marginal cost is equal to private marginal cost in the production of a good, then there is no

externality.

68) At a competitive market equilibrium, marginal benefit and marginal cost are maximized.

69) Externalities affect consumers of goods whose production creates pollution.

70) Reducing pollution through a cap-and-trade system can be more economically efficient than other options

because it encourages pollution reduction to be done by the firms with the lowest reduction costs.

Match term in Column B with the most appropriate one in Column A.

Column A Column B

71) Free riding A. Common Resource

72) Tuna in ocean (outside

national boundaries) B. Public Good

73) Shortage C. Factor of production

74) Running shoes D. Price floor

75) Labor E. Excludable & Rival

76) Definitions & Examples – (2 pts each definition; 1 pt each example)

Provide a brief definition and relevant example (not found elsewhere on exam) for the following terms:

Substitutes

Definition: Goods or services that can be used for the same purpose

Example: Hot dog & hamburger; new car & used car

Negative externality

Definition: A cost that affects someone who is not directly involved in the production or consumption of a

good or service

Example: Air pollution from coal-fired electricity generation plant


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77) Fill in the 2 blanks for the equation for the Midpoint Formula for price elasticity of demand. (1 pt)

(Q2 - __ Q1___) (P2 – P1)

------------------- X 100 ÷ ------------------- X 100

(Q1 + Q2)/2 (P1 + P2)/__ 2__

78) Imagine you own a pizza parlor. Currently, you sell 1,500 slices per week for $4.00 per slice. Then you

reduce the price to $3.00 per slice and you sell 2,500 slices per week. Find the price elasticity of demand using

the Midpoint Formula. Show work. (3 pts)

2500−15001500+2500

2

= 1000/2000 * 100 = 50%

3−44+3

2

= -1/3.5 * 100 = -28.6% PED = 50%

−28.6% = - 1.75

79) A year later, you decide to increase the price per pizza slice from $3.00 back to $4.00 and, using the

resulting sales data, you find a price elasticity of demand of -2.0. What is the percentage change in quantity

demanded due to the price change? Show work as needed. (2 pts) 4−3

(4+3)/2 = 1/3.5 * 100 = 28.6%

PED = % Ch in Quantity Demanded / % Ch in Price

-2.0 = X/28.6%

X = 2.0 * 28.6% = 57.2%

80) Using the price increase scenario in #79, you would expect total revenue for selling pizza to (1.5 pts)

A) increase

B) stay the same

C) move in proportion to the price change

D) decrease

81) Using the usual price-quantity graph, draw what the demand curve for #79 would look like (don’t use exact

numbers) and label it D1. On the same graph, also draw a perfectly inelastic supply curve and label it S1. (1 pt

each curve)

D

SP

Q

S1

D1


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82)

Merlin Morgana

Rainbows Unicorns Rainbows Unicorns

0 12 0 18

4 8 2 12

8 4 4 6

12 0 6 0

Merlin and Morgana are medieval magicians who can produce 2 goods--rainbows and unicorns. The table

above displays their respective production schedules per month. Initially, they do not trade and Merlin

produces 4 rainbows and 8 unicorns and Morgana 4 rainbows and 6 unicorns per month. Morgana looks into

the future and sees that economists have shown that trade can be mutually beneficial. Merlin and Morgana

decide to specialize in the products they produce relatively better than the other and then trade half of the output

with the other. To help answer the questions, you might want make a table to track the trading. (1.5 pts each)

Who has the absolute advantage in producing rainbows? Merlin

What is Morgana’s opportunity cost for producing one rainbow? 3 unicorns

Who has the comparative advantage in producing unicorns? Morgana

To engage in trade, in what product does Merlin specialize? Rainbows

After trading, how many rainbows does Morgana have? 6 rainbows

How many unicorns, if any, did Merlin gain from trading (vs the initial situation)? 1 unicorn

In terms of rainbows and unicorns, what are the overall gains from trade (vs the initial situation)?

_____4 rainbows

_____4 unicorns


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83) Apply your demand and supply analysis to the iPhone market, given that: (a) The vast majority of iPhone production takes place in China. A new minimum wage law in China

raises labor costs at manufacturing plants throughout China, including those making iPhones.

(b) An ingenious hack of the App Store cuts in half the number of apps available for iPhones and the

price of iPhone apps rises markedly

Complete the graph below showing the initial equilibrium quantity (Q1) and price (P1), any changes in the

supply and demand curves (S2, D2) and the equilibrium quantities and prices (Q2, P2) related to this scenario.

REMEMBER – your graph must include labels for all six (Q1, P1, etc.) to get full credit.

(10 pts in total)

a) Can we use this information to be certain whether the equilibrium quantity of iPhones a) Yes No

will increase, decrease, or stay the same?

b) If Yes, how will the equilibrium quantity change? (Skip if No) b) Decrease

c) Can we use this information to be certain whether the equilibrium price of iPhones c) Yes No

will increase, decrease, or stay the same?

d) If Yes, how will the equilibrium price change? (Skip if No) d) ________

Price

iPhones

D1

S1

S2

D2

Q1 Q2

P1, P2

name use scantron for questions 1 75. #76 83 on paper...

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