Reference no: EM131019885

First Midterm-

I. Binary Choice Questions:

1. Susie has collected data on stock prices from local companies traded on the New York Stock Exchange, interest rates, and employment numbers for a project describing her local economy. Her data includes measurements from the first of each month for a five year period. This information is an example of

a. Cross sectional data since Susie is collecting information about many different companies and many different interest rates.

b. Time series data since Susie is collecting information about different variables and their values at different points in time.

2. In the mid 1990s welfare reform resulted in the implementation of a program offering support to poor families with young children. Families that qualified for this program were allowed to receive aid from the government for a limited amount of time and then they had to find work to support their families. Which of the following statements is a positive statement given this information?

I. This welfare program should reduce the number of people who stay on welfare even though they are capable of working.

II. This welfare program resulted in a reduction in the number of welfare recipients.

a. Statement I is positive.

b. Statement II is positive.

3. Suppose George is considering his options for Friday night. He can either pay $5 and go to a movie or he can join some friends for pizza and a card game. What is the opportunity cost of going to the movie for George?

a. The opportunity cost of going to the movie for George is equal to $5 plus the pizza and card game he must give up if he goes to the movie. 

b. The opportunity cost of going to the movie for George is equal to the pizza and card game he must give up if he goes to the movie.

4. Popcorn is an inferior good. If the price of corn (a necessary input in the production of popcorn) increases while at the same time people's incomes decrease then the price of popcorn will

a. Increase.

b. Decrease.

5. Popcorn is an inferior good. If people's incomes decrease at the same time that the price of soda decreases (assume soda is a complement to popcorn) then the quantity demanded of popcorn will

a. Be indeterminate since there are two changes occurring and we do not know the magnitude of the changes.

b. Increase relative to its initial level. 

6. A price ceiling is imposed by the government on the price of housing. This price ceiling is effective and results in an excess demand for housing of 20 units. If the demand for housing is given by the equation P = 100 - 2Q and the supply of housing is given by the equation P = 2Q, then the price ceiling must be equal to

a. $40

b. $30

7. Gilligan's Island, a small economy, knows that its current domestic price of wheat is greater than the world price of wheat. If Gilligan's Island opens its wheat market to trade

a. Consumer surplus will increase while producer surplus will decrease.

b. Consumer surplus will decrease while producer surplus will increase.

8.  Air conditioners and fans are substitutes.  If the price of air conditioners goes up, what will happen to the demand curve for fans?

a. Demand for fans shifts left

b. Demand for fans shifts right

9. In a model with two countries and two goods, it is possible for one country to have a comparative advantage in the production of both goods.

a. True

b. False

10. A certain market has perfectly elastic demand and an upward sloping supply curve.  If the government imposes an excise tax on producers in this market, who bears the economic incidence of the tax?

a. Producers

b. Consumers

II. Multiple Choice Questions:

11. Fruitland currently produces cherries and peaches. A new organic compound is discovered in Fruitland that enables Fruitland to increase its production of cherries by 50%. This compound does not alter Fruitland's ability to produce peaches. Which of the following statements is true given this information?

a. Fruitland's production possibility frontier is unaffected by this change since its resources and the time of production of cherries and peaches has not been changed.

b. The production possibility frontier will shift out away from the origin along both axes since Fruitland with this new compound will be able to produce more cherries and more peaches.

c. The production possibility frontier will shift out away from the origin along the axis measuring cherries since Fruitland can now produce more cherries than it could initially.

d. The production possibility frontier will shift in toward the origin along the axis measuring cherries since Fruitland can now produce more cherries than it could initially.

12. The demand for Campbell's soup is given by the equation P = 30 - 3Q.  If Campbell's wishes to maximize the revenue they receive from soup sales, what price should they set per can of soup?

a. $9

b. $15

c. $21

d. $27

13. Consider the market for shirts, which is currently in equilibrium.  Suppose the population increases and, at the same time, the invention of a new sewing machine increases the productivity of all firms which make clothing.  Which of the following describes what will happen to the equilibrium price and quantity in the shirt market?

a. Equilibrium price goes up, equilibrium quantity is ambiguous

b. Equilibrium price goes down, equilibrium quantity is ambiguous

c. Equilibrium price is ambiguous, equilibrium quantity goes up

d. Equilibrium price is ambiguous, equilibrium quantity goes down

14.  In the market for cereal, demand is given by D: P = 10 - Q and supply is given by S: P = Q + 2.  If the government institutes a price support at a price of $4, then the cost to the government of this program will be

a. $0

b. $16

c. $24

d. $40

15. Which of the following changes will NOT result in a shift of a country's PPF?

a. An increase in the country's population

b. A decrease in the country's land area

c. A technological advantage which improves worker productivity

d. An increase in the country's amount of international trade

Use the graph below to answer the next two questions.

The graph portrays the production possibility frontier for Sam for 2006. Sam produces novels and oil paintings.

16. The opportunity cost of Sam choosing to produce at Point D instead of Point E is equal to

a. X3 - X4

b. X4 - X3

c. Y4 - Y5

d. Y5 - Y4

17. Given the points in the above graph, the most efficient point for Sam to produce at is

a. Point D since it includes about the same amount of oil paintings as novels.

b. Point E since Sam's oil paintings often sell for more than his novels.

c. Point C since Sam's novels are artistically superior to Sam's oil paintings.

d. any of the points on his production possibility frontier since all of these points are equally efficient.

18. Mary and Allen both clean houses and mow lawns. Mary can clean a house in three hours or mow a lawn in 1.5 hours. Allen can clean a house in four hours or mow a lawn in 2 hours. Mary and Allen have available the same amount of labor time for mowing lawns and cleaning houses. Furthermore, the production possibility frontiers for Mary and Allen with respect to mowing lawns and cleaning houses are linear. Currently Mary and Allen work separately and both produce some cleaned houses as well as some mowed lawns. Which of the following statements is correct?

a. Mary and Allen will be able to increase the total production of mowed lawns and cleaned houses from their available resources by specializing in producing that good that they can produce at lower opportunity cost and then trading with one another.

b. Mary and Allen will be able to increase the total production of mowed lawns and cleaned houses from their available resources by specializing in producing that good that they can produce at higher opportunity cost and then trading with one another.

c. Mary and Allen will not be able to benefit from specialization and trade in this example since their opportunity costs of producing mowed lawns or clean houses is the same for both of them.

d. Trade is always beneficial and so Mary and Allen will find that a decision to trade will help both of them.

19. Mary and Allen both clean houses and mow lawns. Mary can clean a house in three hours or mow a lawn in 1.5 hours. Allen can clean a house in four hours or mow a lawn in 2 hours. Mary and Allen have available the same amount of labor time for mowing lawns and cleaning houses. Furthermore, the production possibility frontiers for Mary and Allen with respect to mowing lawns and cleaning houses are linear. Currently Mary and Allen work separately and both produce some cleaned houses as well as some mowed lawns. Which of the following statements is correct?

a. Since Mary can absolutely clean more houses than Allen in the available time, Mary should clean houses and Allen should mow lawns.

b. Since Allen can absolutely clean more houses than Mary in the available time, Allen should clean houses and Mary should mow lawns.

c. Although Mary can absolutely clean more houses and mow more lawns than Allen in the available time, Mary does not have a comparative advantage in cleaning houses or mowing lawns.

d. Although Allen can absolutely clean more houses and mow more lawns than Mary in the available time, Allen does not have a comparative advantage in cleaning houses or mowing lawns.

20. Which of the following statements is true?

I. Two goods are substitutes for one another if the quantity demanded of Good Y increases when the price of good X increases.

II. Two goods are complements for one another if an increase in the price of Good A reduces the quantity demanded of Good B.

III. A good is an inferior good if an increase in the price of Good C causes the individual to demand more of Good D.

a. Statement I is true.

b. Statement II is true.

c. Statements I and II are true.

d. Statements I, II and III are true.

21. Suppose a market for mangoes is composed of three consumers: Joe, Mary, and Hon Ho. Joe's demand for mangoes is equal to QJ = 10 - P; Mary's demand for mangoes is equal to QM = 5 - (1/2)P; and Hon Ho's demand for mangoes is equal to QHH = 20 - 2P. Which of the following equations is the market demand equation for the mango market?

a. The market demand curve that results will have three linear segments: P = 10 - (1/2)Q for quantities less than 10 units; P = 20 - Q for quantities between 10 and 20 units; and P = 10 - (1/4)Q for quantities greater than 20 units.

b. The market demand curve that results will have three linear segments: P = 30 - 2Q for quantities less than 5 units; P = 25 - Q for quantities between 5 and 15 units; and P = 40 - 2Q for quantities greater than 15 units.

c. The market demand curve will be equal to Hon Ho's demand curve, or P = 10 - (1/2)Q, since Hon Ho's demand curve is further from the origin than either Joe or Mary's demand curve.

d. The market demand curve is equal to P = 10 - (2/7)Q.

22. Suppose you are told that Sarah is willing to spend $40 to purchase a sweater; Suzie is willing to spend $35 to purchase a sweater; Jean is willing to spend $25 to purchase a sweater; and Rosie is willing to spend $20 to purchase a sweater. Suppose these four girls are the only consumers in the sweater market and that sweaters currently sell for $28. What is the value of consumer surplus in this market?

a. It is impossible to calculate consumer surplus in this market without being told the market demand curve.

b. Consumer surplus is equal to $19.

c. Consumer surplus is equal to $16.

d. Consumer surplus is equal to $8.

Use the graph below to answer the next two questions.

The graph depicts the market for corn in Sweetcorn, a small economy. The government of Sweetcorn is debating instituting a price support program with a price floor of P1 or a price subsidy program with a guaranteed price of P1. Assume this graph accurately depicts both the demand and supply curves for corn in Sweetcorn: base your answer solely on your interpretation of this graph. Furthermore, assume that there is no cost to storing corn in Sweetcorn.

23. The cost to the government of implementing the subsidy program is

a. Greater than the cost of the price support program and the subsidy per unit of corn will be equal to (P1 - P2).

b. Greater than the cost of the price support program and the subsidy per unit of corn will be equal to (P1 - P3).

c. Less than the cost of the price support program and the subsidy per unit of corn will be equal to (P1- P2).

d. Less than the cost of the price support program and the subsidy per unit of corn will be equal to (P1 - P3).

24. The cost of the price support program (excluding any storage costs) for the government of Sweetcorn is equal to

a. (P1 - P3)(Q3)

b. (P1 - P2)(Q3)

c. (1/2)(P1 - P3)(Q3 - Q1)

d. (P1)(Q3 - Q1)

25. Suppose the demand for a good is perfectly inelastic (that is, the market demand curve for this product is a vertical line) and the supply of the good is upward sloping. If an excise tax is placed on this good and producers are legally responsible for paying the tax then

a. The economic incidence of the tax will fall solely on producers of this good and the deadweight loss due to this tax will be equal to zero.

b. The economic incidence of the tax will fall solely on consumers of this good and the deadweight loss due to this tax will be equal to zero.

c. The economic incidence of the tax will fall solely on producers of this good and the deadweight loss due to this tax will be some positive number since excise taxes result in an efficiency cost measured by this deadweight loss.

d. The economic incidence of the tax will fall solely on consumers of this good and the deadweight loss due to this tax will be some positive number since excise taxes result in an efficiency cost measured by this deadweight loss.

26. Suppose the absolute value of the percentage change in the quantity demanded of a good is greater than the absolute value of the percentage change in income. Which of the following statements is true?

a. The good is a normal good.

b. The good is an inferior good.

c. We cannot know whether the good is a normal or an inferior good without knowing the direction of change in the quantity demanded and in the level of income. If income increases and the quantity demanded decreases then the good is an inferior good.

d. We cannot know whether the good is a normal or an inferior good without knowing the direction of change in the quantity demanded and in the level of income. If income increases and the quantity demanded increases then the good is an inferior good.

27. Suppose the city of Madison is currently losing money operating the bus system. The directors of the bus system meet to discuss the financial crisis that they are facing. Several directors argue that the bus system should increase the price of a bus ticket since the bus system is losing money. A few directors argue that the bus system should decrease the price of a bus ticket since the bus system is losing money. Which of the following statements is true, holding everything else constant?

a. The bus system should increase the price of the bus tickets if the quantity effect of a change in the price of a bus ticket is greater than the price effect of a change in the price of a bus ticket.

b. The bus system should increase the price of the bus tickets if the quantity effect of a change in the price of a bus ticket is positive.

c. The bus system should increase the price of the bus tickets if the extra revenue from selling the tickets at a higher price is greater than the loss in revenue from selling fewer tickets.

d. The bus system could never improve their financial position by raising the price of the bus tickets.

28. Suppose a country knows that if it opens its economy to trade that it will import bananas. Which of the following statements is true?

I. The world price of bananas must currently be lower than the domestic price of bananas when this country has a closed economy.

II. Both domestic consumers and domestic producers will benefit from opening this economy to trade since trade is always beneficial.

III. Domestic consumers will be better off if this country opens to trade.

a. Statement I is true.

b. Statement II is true.

c. Statement III is true.

d. Statements I and III are true.

e. Statements I, II, and III are true.

III. Problems:

1. The chart below shows a production function for wine and cloth for England and Portugal.  In both England and Portugal, wine and cloth are made using labor as the only input.

	England	Portugal
Wine	2 bottles/labor hour	0.75 bottles/labor hour
Cloth	3 yards/labor hour	1 yard/labor hour

Assume that both countries have the same total number of labor hours available for producing these two goods.

a) Assume that if England devotes all its available resources to cloth production, it can make 60 total yards of cloth. How many labor hours does Portugal have available for production?

b) Which country has the absolute advantage in the production of wine?  Which country has the absolute advantage in the production of cloth?

c) Which country has the comparative advantage in the production of wine?  Which country has the comparative advantage in the production of cloth?

d) An ambassador from England approaches Portugal with the following offer: England will give Portugal 7 yards of cloth in exchange for 6 bottles of wine.  Will Portugal accept the offer?  Explain why or why not.

e) Portugal's ambassador counters with an offer for England: Portugal will give England 5 yards of cloth in exchange for 3 bottles of wine.  Will England accept the offer?  Explain why or why not.

2. The market for TVs in Wisconsin is described by the following supply and demand curves:

Demand: P = 280 - 5Q

Supply: Q = P - 40

a) Find the equilibrium price and quantity in this market using the given supply and demand curves.

b) Find the elasticity of demand at the equilibrium point using the point elasticity of demand definition.

c) In order to encourage people to spent more time exercising, the government imposes an excise tax of $60 per television purchased which must be paid by consumers.  On a well-labeled graph, illustrate the market for TVs after the tax has been imposed.  Your graph should clearly indicate the areas on the graph which correspond to consumer and producer surplus, the revenue raised by the tax, and the deadweight loss caused by the tax, and you should be sure to label the price paid by consumers, the price received by sellers, and the quantity sold after the tax is imposed.  Also label all axes and curves.  Feel free to use a qualitative graph - it's not important to put numbers on everything you label, but it is important to make your graph clear and easily readable.

d) Compute the numerical values of the tax revenue and deadweight loss caused by the tax.

3. The nation of Lewistan is a small, closed economy.  In Lewistan, the domestic market for baseballs is given by the following equations:

Domestic Demand: P = 30 - 2Q

Domestic Supply: P = 3 + Q

a) Find the equilibrium price and quantity in this market using the given domestic supply and domestic demand curves.

b) The world price of baseballs is $6.  If the Lewistan government allows free trade in baseballs, determine how many baseballs Lewistan will import or export.  Be sure to indicate in your answer whether Lewistan will be importing or exporting in the equilibrium under free trade.

c) The Lewistan government decides to help producers by charging a $2 tariff on every baseball imported.  Find the new level of imports or exports under the tariff and calculate the revenue raised by the tariff.

d) Eventually the Lewistan government decides to replace the tariff with a quota.  However, they wish to impose a quota which will not change the level of consumer or producer surplus which exists under the tariff. Find the size of the quota which the government should impose, as well as the level of consumer and producer surplus under the quota.