Mallory decides to spend 3 hours working overtime rather ...



ETP Economics Midterm Examination

Fall Term 2007

1. Mallory decides to spend 3 hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is

a. the $24 she earns working.

b. the $24 minus the enjoyment she would have received from watching the video.

c. the enjoyment she would have received had she watched the video.

d. nothing, since she would have received less than $24 of enjoyment from the video.

2. If the average income of an Australian is higher than the average income of a Russian, it is most likely because

a. productivity is higher in Australia than in Russia.

b. Australia has a more industrial economy than Russia.

c. there is more competition in Australia than in Russia.

d. labor unions are more aggressive in Australia than in Russia.

3. In a circular-flow diagram,

a. taxes flow from households to firms, and transfer payments flow from firms to households.

b. income payments flow from firms to households, and sales revenue flows from households to firms.

c. resources flow from firms to households, and goods and services flow from households to firms.

d. inputs and outputs flow in the same direction as the flow of dollars, from firms to households.

4. On the production possibilities frontier shown, the opportunity cost to the economy of getting 30 additional toothbrushes by moving from point A to point D is

a. 10 toasters.

b. 15 toasters.

c. 20 toasters.

d. 25 toasters.

5. On the production possibilities frontier shown, the opportunity cost of getting 15 additional toasters by moving from point D to point C is

a. 10 toothbrushes.

b. 20 toothbrushes.

c. 30 toothbrushes.

d. It is impossible for the economy to move from point D to point C.

6. On the production possibilities frontier shown, the opportunity cost in terms of toothbrushes of getting 10 additional toasters by moving from point B to point A is

a. 20 toothbrushes.

b. 10 toothbrushes.

c. 5 toothbrushes.

d. zero, since the economy has the additional resources to produce 10 additional toasters.

7. The difference between production possibilities frontiers that are bowed out and those that are linear is that

a. bowed out production possibilities frontiers illustrate tradeoffs where linear production possibilities frontiers do not.

b. bowed out production possibilities frontiers show increasing opportunity cost where linear ones show constant opportunity cost.

c. bowed out production possibilities frontiers are the result of perfectly shiftable resources where linear production possibilities frontiers are not.

d. linear production possibilities frontiers illustrate real world conditions more than bowed out production possibilities frontiers.

For the following question(s), use the accompanying table.

|Labor Hours needed to make one unit of: |Amount produced in 160 hours: |

| |Quilts |Dresses |Quilts |Dresses |

|Helen |40 |10 |4 |16 |

|Carolyn |80 |16 |2 |10 |

8. According to the table, Helen has an absolute advantage in

a. dresses and Carolyn has an absolute advantage in quilts.

b. quilts and Carolyn has an absolute advantage in dresses.

c. neither good and Carolyn has an absolute advantage in both goods.

d. both goods and Carolyn has an absolute advantage in neither good.

9. According to the table, Helen and Carolyn both could benefit by Helen specializing in

a. dresses and Carolyn specializing in quilts.

b. neither good and Carolyn specializing in both goods.

c. quilts and Carolyn specializing in dresses.

d. both goods and Carolyn specializing in neither good.

10. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. Which of the following statements is true?

a. Both countries could gain from trade with each other.

b. Neither country would gain from trade because Cornland has an absolute advantage in both goods.

c. Neither country would gain from trade because neither one has a comparative advantage.

d. Only Oatland could possibly gain from trade.

11. Two goods are complements if a decrease in the price of one good

a. increases the quantity demanded of the other good.

b. reduces the demand for the other good.

c. reduces the quantity demanded of the other good.

d. raises the demand for the other good.

12. You love peanut butter. You hear on the news that 50 % of the peanut crop in the South has been wiped out, which will cause the price to double by the end of the year. As a result,

a. your demand for peanut butter will increase by the end of the year.

b. your demand for peanut butter increases today.

c. your demand for peanut butter falls as you look for a substitute good.

d. you decide to give up peanut butter completely.

13. When quantity demanded has increased at every price, it might be because

a. the number of buyers in the market has decreased.

b. income has increased and this good is an inferior good.

c. the consumer prefers another good more than this good.

d. the price of a substitute good has increased.

14. If a surplus exists in a market we know that the actual price is

a. above equilibrium price and quantity supplied is greater than quantity demanded.

b. above equilibrium price and quantity demanded is greater than quantity supplied.

c. below equilibrium price and quantity demanded is greater than quantity supplied.

d. below equilibrium price and quantity supplied is greater than quantity demanded.

15. An early frost in the vineyards of Napa Valley would cause

a. an increase in the demand for wine, increasing price.

b. an increase in the supply of wine, decreasing price.

c. a decrease in the demand for wine, decreasing price.

d. a decrease in the supply of wine, increasing price.

16. Suppose that the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?

a. The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous.

b. The equilibrium price would decrease, but the impact on the amount sold in the market would be ambiguous.

c. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.

d. Both equilibrium price and equilibrium quantity would increase.

17. Music compact discs are normal goods. What will happen to the equilibrium price and quantity of music compact discs if musicians accept lower royalties, compact disc players become cheaper, more firms start producing music compact discs and music lovers experience an increase in income?

a. Price will fall and the effect on quantity is ambiguous.

b. Price will rise and the effect on quantity is ambiguous.

c. Quantity will fall and the effect on price is ambiguous.

d. Quantity will rise and the effect on price is ambiguous.

18. If a 15 percent increase in price causes a 30 percent decrease in quantity demanded, this product might

a. have no close substitute.

b. be a luxury.

c. be part of a broadly defined market.

d. be in a short time horizon.

19. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly

a. elastic and will be horizontal.

b. inelastic and will be horizontal.

c. elastic and will be vertical.

d. inelastic and will be vertical.

20. How does total revenue change as one moves down a linear demand curve?

a. It increases.

b. It decreases.

c. It first increases, then decreases.

d. It is unaffected by a movement along the demand curve.

21. When demand is elastic in the current price range,

a. an increase in price would increase total revenue because the decrease in quantity demanded is less than the increase in price.

b. an increase in price would decrease total revenue because the decrease in quantity demanded is greater than the increase in price.

c. a decrease in price would decrease total revenue because the increase in quantity demanded is smaller than the decrease in price.

d. a decrease in price would not affect the total revenue.

22. Food and clothing tend to have

a. small income elasticities because consumers, regardless of their incomes, choose to buy these goods.

b. small income elasticities because consumers will buy proportionately more at higher income levels than they will at low income levels.

c. large income elasticities because they are necessities.

d. large income elasticities because they are relatively cheap.

23. If wheat farmers know that the demand for wheat is inelastic, and they want to increase their total revenue, they should all

a. plant more wheat so that they would be able to sell more each year.

b. increase spending on fertilizer in an attempt to produce more on the acres they farm.

c. reduce the number of acres they plant in wheat.

d. use better machinery.

24. Binding price ceilings in a market cause quantity demanded to be

a. greater than quantity supplied.

b. equal to quantity supplied.

c. less than quantity supplied.

d. Any of the above are possible.

25. According to the graph shown, with a price ceiling present in this market, when the supply curve for gasoline shifts from S1 to S2

a. the price will increase to P3.

b. a surplus will occur at the new market price of P2.

c. the market price will stay at P1 due to the price ceiling.

d. a shortage will occur at the price ceiling of P2.

26. Without the price ceiling in this market for gasoline, when the supply curve shifts from S1 to S2 the price will

a. increase to P3, but a shortage will still exist.

b. increase to P3 and the market will clear.

c. remain at P1 and a shortage will still exist.

d. eventually move to P2 without government assistance.

27. A minimum wage imposed above a market’s equilibrium wage will result in the quantity

a. supplied of labor being greater than the quantity demanded of labor and unemployment will occur.

b. demanded of labor being greater than the quantity supplied of labor and unemployment will occur.

c. supplied of labor being greater than the quantity demanded of labor and a shortage of workers will occur.

d. demanded of labor being greater than the quantity supplied of labor and a shortage of workers will occur.

28. A tax placed on kite buyers will shift

a. supply upward, causing equilibrium price to rise and equilibrium quantity to fall.

b. demand upward, causing both equilibrium price and quantity to rise.

c. supply downward, causing equilibrium price to fall and equilibrium quantity to rise.

d. demand downward, causing both equilibrium price and quantity to fall.

29. If a tax is imposed on a market with inelastic demand and elastic supply,

a. buyers will bear most of the burden of the tax.

b. sellers will bear most of the burden of the tax.

c. the burden of the tax will be shared equally between buyers and sellers.

d. it is impossible to determine how the burden of the tax will be shared.

30. Suppose there is an early freeze in California that ruins the lemon crop. What happens to consumer surplus in the market for lemons?

a. It increases.

b. It decreases.

c. It is not affected by this change in market forces.

d. It increases very briefly then decreases.

31. Dallas buys strawberries, and would be willing to pay more than he now has to pay. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then

a. Dallas’s consumer surplus would be unaffected.

b. Dallas’s consumer surplus would increase.

c. Dallas’s consumer surplus would decrease.

d. Dallas would be wise to buy fewer strawberries than before.

32. Which of the following is NOT correct?

a. consumer surplus = value to buyers – amount paid by buyers

b. producer surplus = amount received by sellers – cost of sellers

c. total surplus = value to buyers – amount paid by buyers + amount received by sellers – costs of sellers

d. total surplus = value to sellers – costs of sellers

33. Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for widgets to $4,

a. consumer surplus would necessarily increase even if the lower price resulted in a shortage of widgets.

b. consumer surplus would necessarily decrease because the lower price would create a shortage of widgets.

c. consumer surplus might increase or decrease.

d. consumer surplus would be unaffected.

34. Orange juice and apple juice are substitutes. Bad weather that sharply reduced the orange harvest would

a. increase consumer surplus in the market for orange juice but decrease producer surplus in the market for apple juice.

b. increase consumer surplus in the market for orange juice and increase producer surplus in the market for apple juice.

c. decrease consumer surplus in the market for orange juice but increase producer surplus in the market for apple juice.

d. decrease consumer surplus in the market for orange juice and decrease producer surplus in the market for apple juice.

35. A tax on a good

a. raises the price buyers pay and lowers the price sellers receive.

b. raises both the price buyers pay and the price sellers receive.

c. lowers both the price buyers pay and the price sellers receive.

d. lowers the price buyers pay and raises the price sellers receive.

36. When a tax is imposed on a good we know that the losses to buyers and sellers

a. are equal to the revenue raised by the government.

b. are less than the revenue raised by the government.

c. exceed the revenue raised by the government.

d. cannot be compared to the tax revenue raised by the government since the amount of the tax will vary from good to good.

37. If the supply of land is fixed, a tax on land would be paid

a. entirely by the landowners.

b. entirely by the renters or users of the land.

c. partly by landowners and partly by land users.

d. only by workers.

38. A tax placed on land (fixed) would cause

a. a huge deadweight loss.

b. no deadweight loss.

c. landlords to not bear any of the burden of the tax.

d. enough tax revenue so that all other taxes could be eliminated.

39. When a country is on the downward-sloping side of the Laffer curves, cutting tax rates will

a. lower tax revenues and increase deadweight loss.

b. lower both tax revenues and deadweight loss.

c. increase tax revenues and decrease deadweight loss.

d. increase both tax revenues and deadweight loss.

40. If the supply of a good is relatively elastic, changing the price causes

a. a relatively small change in the amounts that buyers are willing to buy.

b. a relatively small change in the amounts sellers are willing to sell.

c. a relatively large change in the amounts sellers are willing to sell.

d. no change in the amounts sellers are willing to sell.

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