Quiz # 1



Practice Midterm # 1

Econ 2610: Principles of Microeconomics, Spring 2010

Yogesh Uppal

|1) Which of the following is a normative economic statement? |

|A) Minimum wage causes unemployment. |

|B) Minimum wages is not a good policy. |

|C) Minimum wage policy creates both winners and losers. |

|D) None of the above |

|Answer: |

|2) If labor in the U.S. is more productive than labor in Germany in all areas of production, |

|A) then the U.S. has a comparative advantage in the production of all goods and services. |

|B) then the U.S. has an absolute advantage in the production of all goods and services. |

|C) then the U.S. should not trade with Germany. |

|D) all of the above |

|Answer: |

|3) Which of the following is a positive economic statement? |

|A) More educated people make better parents. |

|B) The children of more educated people are likely to be educated compared to children of uneducated people. |

|C) Education is waste of time. |

|D) None of the above |

|Answer: |

|4) The negative slope of a production possibilities frontier signifies |

|A) scarcity principle. |

|B) cost-benefit principle. |

|C) incentive principle |

|D) None of the above |

|Answer: |

|5) If a firm can produce a combination of 60 units of good X together with 80 units of good Y or a combination of 70 units of X |

|together with 50 units of Y, the opportunity cost of a unit of X is |

|A) 10 |

|B)5 |

|C) 3 |

|D) 1/3 |

|Answer: |

|6) Which of the following would NOT increase the demand for coffee and instead increase the quantity demanded? |

|A) Research findings that drinking coffee increases your life span |

|B) A drop in the price of coffee |

|C) A drop in the price of cream and sugar |

|D) An increase in the price of tea |

|Answer: |

|7) An increase in the quantity supplied (as opposed to increase in supply) is caused by : |

|A) an advance of technology. |

|B) a decrease in the price of inputs |

|C) a higher market price |

|D) a decrease in the incomes of buyers |

|Answer: |

|8) The market will have a surplus if the price is: |

|A) lower than the equilibrium price. |

|B) equal to the equilibrium price |

|C higher than the equilibrium price. |

|D) Need more information to answer the question. |

|Answer: |

Exhibit 1: Consider the following two countries:

|Resource Usage for one unit of |Manufacturing |Services |

|output | | |

|A |10 hours |5 hours |

|B |20 hours |15 hours |

|9) Refer to Exhibit 1. What is the opportunity cost of manufacturing for country A? |

|A) 0.5 units of services |

|B) 1 unit of services |

|C) 1.5 units of services |

|D) 2 units of services |

|Answer: |

|10) Refer to Exhibit 1. What is the opportunity cost of services for country B? |

|A) 0.5 units of manufacturing |

|B) 0.75 units of manufacturing |

|C) 1 unit of manufacturing |

|D) 1.34 units of manufacturing |

|Answer: |

|11) Refer to Exhibit 1. Suppose country A has 100,000 hours per day, how much it produces of the product it specializes in? |

|A) 10,000 units |

|B) 20,000 units |

|C) 5,000 units |

|D) 6,700 units |

|Answer: |

|12) Refer to Exhibit 1. Suppose country B has 100,000 hours per day, how much it produces of the product it specializes in? |

|A) 10,000 units |

|B) 20,000 units |

|C) 5,000 units |

|D) 6,700 units |

|Answer: |

|13) Comparative advantage means: |

|A) a producing unit can produce more of all goods or services with the same amount of resources than any other producing unit. |

|B) a producing unit can produce a good or service at a lower opportunity cost than any other producing unit. |

|C) Both A and B |

|D) None of the above |

|Answer: |

|14) Which of the following would shift the nation's production possibilities frontier inward? |

|A) An increase in the unemployment rate |

|B) Producing more capital equipment |

|C) Discovering a cheap way to convert sunshine into electricity |

|D) A law requiring workers to retire at age 50 |

|Answer: |

|15) If the quantity demanded for a good decreases by 10% when its price rises by 5%, the price elasticity of demand for this good |

|is: |

|A) 0.5 |

|B) 1 |

|C) 1.5 |

|D) 2 |

|Answer: |

|16) The elasticity of demand for good A is 1.5. This implies that |

|A) quantity demanded for good A decreases by 1.5% when its price rises by 1%. |

|B) quantity demanded for good A rises by 1.5% when its price rises by 1%. |

|C) quantity demanded for good A decreases by 1.5% when its price decreases by 1%. |

|D) None of the above. |

|Answer: |

|17) The elasticity of demand for good A with respect to price of good B is 1.5. The two goods, A and B, are |

|A) substitutes. |

|B) complements. |

|C) normal. |

|D) inferior |

|Answer: |

|18) Suppose price elasticity of demand for a good is 2, how much would be the change in quantity demanded as a result of a 10 |

|percent change in the price: |

|A) 5 percent |

|B) 10 percent |

|C) 15 percent |

|D) 20 percent |

|Answer: |

|19) Suppose the government lowers the income tax rate. As a result, the average income of residents of a town increases by 10 |

|percent. However, the demand for good A increases only by 2 percent. The income elasticity of demand for good A is: |

|A) positive and good A is normal. |

|B) negative and good A is normal. |

|C) positive and good A is inferior. |

|D) negative and good A is inferior. |

|Answer: |

20. How does a market in surplus reach equilibrium? Explain both using a diagram and words.

21. Define normal and inferior goods and an example of each.

22. Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each.

a. Calculate the price elasticity of demand using the midpoint formula.

b. Calculate the change in revenue as a result of the price cut.

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