1) Which is the most accurate definition of the study of ...



ECON 101 Name:..........................

1st Sample Midterm

PART 1

1) What is economics?

a) Economics is a natural science that studies the resources that nature and previous generations have provided.

b) Economics is the study of business.

c) Economics is a behavioral science that studies how people make choices.

d) Economics is the study of money and financial systems.

2) Which of the following is a positive statement?

a) Turkey’s trade deficit is the most important economic issue today.

b) Unemployment rate increases when the percentage of the labor force without jobs increases.

c) Unemployment should be kept below a level of 6 percent.

d) An increase in interest rates will have undesirable economic effects.

3) Which of the following statements applies to macroeconomics:

a) The unemployment rate in France was 4.2 percent in January 2001.

b) Arçelik laid off 15 workers last month.

c) Sudden shift in interest from skiing to skating increased the price of skateboards.

d) As a profit-maximizing firm, Dardanel is producing 2000 cans of food per month.

4) The two major type of markets in the circular flow of income are

a) public markets and private markets

b) product markets and factor markets

c) markets for labor and markets for capital

d) free markets and controlled markets

5) Refer to the graph below. At which points are resources fully and efficiently employed in the curves shown?

[pic] 

a) At points A, B, C, D, F, and E.

b) At points B, C, and D only.

c) At points A, F, and E only.

d) At point G only

6) Suppose the rent for apartments in Balçova is 750 YTL. İzmir municipality is worried about rents being excessive, and so it passes a law declaring that rents cannot exceed 600 YTL.

a) The effects of this price ceiling will be to create apartment shortages.

b) The price floor will create excess supply of apartments and high vacancy rates.

c) The policy will have no effect.

d) The price floor will result in excess demand for apartments.

7) If the total revenue of tractor producers increases when the price of tractors rises, the price elasticity of demand is

a) unit elastic

b) inelastic.

c) elastic.

d) perfectly elastic

8) When there is a fall in input prices, the result is

a) a leftward shift of the supply curve

b) a rightward shift of the demand curve

c) movement to the left along the demand curve

d) a fall in the equilibrium price of the product

9) In moving along a demand curve which of the following is not held constant

a) the price of the product for which the demand curve is relevant

b) consumer incomes

c) the prices of complementary goods

d) the prices of substitute goods

10) The substitution effect refers to the change in quantity demanded that occurs as a

result of a change in

a) purchasing power

b) income

c) marginal utility

d) a good’s relative price

11) All points on or below a budget constraint

a) are attainable with the given income.

b) Are equally desirable.

c) Represent bundles that exactly exhaust the income available.

d) are unattainable.

PART 2

1) Berk is trying to decide how much cakes, chocolates and biscuits to buy. Cakes cost 3 TL each, biscuits cost 4 TL each. Suppose he has an income of 24 TL.

| |Cakes |Biscuits |

|# of each |TU |MU |MU/P |TU |MU |MU/P |

|1 |30 |30 |10 |56 |56 |14 |

|2 |54 |24 |8 |92 |36 |9 |

|3 |72 |18 |6 |112 |20 |5 |

|4 |87 |15 |5 |124 |12 |3 |

|5 |96 |9 |3 |132 |8 |2 |

|6 |99 |3 |1 |132 |0 |0 |

a) Fill in the table above.

b) How many units of each should he purchase to maximize total satisfaction.

MUcakes / Pcakes = MUbiscuits / Pbiscuits=5 when Berk buys 4 cakes and 3 biscuits. This is an available combination since 4 cakes and 3 biscuits cost exactly 24 TL.

4*3 TL + 3*4 TL= 24 TL

MUcakes / Pcakes = MUbiscuits / Pbiscuits=3 when Berk buys 5 cakes and 4 biscuits. But this is not an available combination since 5 cakes and 4 biscuits cost 31 TL, which is higher than his available income.

5*3 TL + 4*4 TL= 31 TL

c) Draw the budget constraint (with cakes on the horizontal axis) and identify the optimal combination of cakes and biscuits as point A.

P

6

8 Q

24/3=8, if Berk spends all his income on cakes, he can buy 8 cakes.

24/4=6, if Berk spends all his income on biscuits, he can buy 6 biscuits.

d) If Berk’s money income were increased to 31 TL, how many units of each should he purchase to maximize total satisfaction

MUcakes / Pcakes = MUbiscuits / Pbiscuits=3 when Berk buys 5 cakes and 4 biscuits. Now this is an available combination since 5 cakes and 4 biscuits cost exactly 31 TL.

5*3 TL + 4*4 TL= 31 TL

2) Suppose the demand and supply curves for microeconomics textbooks are described by the following equations

Qd=150 - 4P

Qs=25 + P,

where Qd is the number of microeconomics textbooks purchased each year, Qs is the number of microeconomics textbooks sold each year and P is the price per book.

a) Find the equilibrium price and quantity.

Qd= Qs

150 - 4P= 25 + P

P=$25

Q= 150-4*25

Q= 50 microeconomics textbooks

b) Graph the demand and supply curves, and identify the equilibrium price and quantity.

Biscuits S

37,5

A

25 D

25 50 150 Cakes

A is the equilibrium point where supply and demand curves intersect. At A equilibrium price is $25 and equilibrium quantity is 50.

c) Explain what happens if the price of microeconomics textbooks is $36. Support your answer by using the diagram.

Biscuits S

37,5

36 A

25 D

25 50 150 Cakes

When price is $36;

Qd=150 – 4*36=6 books

Qs=25 + 36=61 books

Since quantity supplied is higher than quantity demanded, there is excess supply. Excess supply is (61-6) 55 books.

I cannot draw the graphs properly in word. Please indicate prices and respective quantities properly in the exam!

3) The following chart shows some information about the demand function for beef. Three distinct sets of information were gathered on three separate occasions.

|  |Qbeef |Pbeef |Pfish |income |

|date 1 |10 |5YTL |10YTL |100YTL |

|date 2 |15 |2YTL |20YTL |200YTL |

a) Compute the price elasticity of demand, income elasticity of demand and cross elasticity of demand using the values given in the table.

Price elasticity of demand for beef =%change in quantity of beef demanded / %change in price of beef

[pic]= [pic]= [pic]

Beef has inelastic demand since price elasticity of demand in absolute terms is lower than 1.

Income elasticity of demand for beef =%change in quantity of beef demanded / %change in income

[pic]= [pic]= [pic]

Cross price elasticity of demand =%change in quantity of beef demanded / %change in price of fish

[pic]= [pic]= [pic]

b) Are the two goods substitutes or complements? Why?

Two goods are substitutes. Because cross price elasticity of demand is positive.

c) Is beef a normal good or an inferior good? Why?

Beef is a normal good. Because income elasticity of demand is positive.

PART 3

Do you agree or disagree with each of the following statements? Briefly explain your answers and support your answers by drawing graphs.

a) The price of good A rises. This causes an increase in demand for good B. Goods A and B are therefore complements.

I do not agree. A rise in good A’s price causes an increase in demand for good B, if Goods A and B are substitutes. . A rise in good A’s price causes a decrease in demand for good B, if Goods A and B are complements.

P D S

Q

Market for good A (Quantity of Music CDs purcased per month)

P D1 D2 S

Q

Market for a substitute good (Quantity of MP3s purchased online per month)

P D2 D1 S

Q

Market for a complement good (Quantity of CD players purchased per month)

b) Development of a new technology in the production of computers causes a rightward shift of the demand curve for computers.

I do not agree. Development of a new technology in the production of computers causes a rightward shift of the supply curve. At the same price level firms can supply more computers.

P D S1

S2

Q

c) A minimum wage causes excess labor supply (unemployment).

P D S

Q

Look at chapter 4, page 78 (Demand and supply applications, price floor).

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