1 - University of Wisconsin–Madison



Midterm 1 Morning Exam 10/10/06

Use the following information to answer the next two questions.

Macro Island and Small Island produce Grapes and Cherries and have linear PPFs. Both Islands have the same level of resources. The following table shows how many units can be produced in each country per week at two different production points.

|Macro Island |Small Island |

| | |

|Grapes |Grapes |

|Cherries |Cherries |

| | |

|30 |X |

|0 |0 |

| | |

|0 |0 |

|25 |5 |

| | |

1. The opportunity costs are the same for the two Islands when X equals

a. 25/6.

b. 6.

c. 25.

d. 30.

2. Macro Island has an absolute advantage in the production of both goods when X is

a. greater than 6.

b. smaller than 6.

c. greater than 30.

d. smaller than 30.

3. Suppose an economy is engaged in growing corn and drilling for oil. Imagine the economy strikes oil in two new fields with expected output of 10 million barrels of oil per day from these two new oil fields. There is no change in corn production. If the PPF is linear with corn on the y axis and oil on the x axis, what will happen to the PPF given this discovery?

a. The PPF will remain unchanged.

b. The PPF will shift out but the y intercept will remain the same.

c. The PPF will experience a parallel shift outwards from its original position.

d. The PPF will shift inwards towards the origin.

4. A price ceiling set above the market equilibrium price creates ________ in that market.

a. a surplus

b. a shortage

c. no change

d. a demand shift

Use the following information to answer the next two questions.

Consider the market for microwaves in Ohio, with demand given by P = 100 – 10Qd and supply given by P = 5Qs + 10.

5. Lobbyists for microwave manufacturers convince the Ohio state government to set a price floor of $50 in the market. Which of the following statements is true?

a. There will be a surplus of 3 microwaves.

b. There will be a surplus of 5 microwaves.

c. There will be a shortage of 3 microwaves.

d. There will be a shortage of 5 microwaves.

6. Now assume that the state government decides to keep the price floor in place and start a subsidy program which guarantees sellers a price of $50 for every microwave. How much will this subsidy cost the state? The total cost of this subsidy program is

a. $60.

b. $180.

c. $240.

d. $400.

Use the following figure, which depicts the demand and supply curves for soccer balls, to answer the next two questions.

[pic]

7. Suppose this country is not open to international trade. If the government wants Q3 soccer balls to be sold, and they decide to use a price subsidy to achieve this goal, what is the cost to the government?

a. (Q3- Q1) * ( P3- P1)

b. (Q3- Q1) * P3

c. Q3 * (P3- P1)

d. Q3 * P3

8. Assume instead that the government uses a price support to allow producers to sell Q3 units. How much will this policy cost the government?

a. (Q3- Q1) * ( P3- P1)

b. (Q3- Q1) * P3

c. Q3 * (P3- P1)

d. Q3 * P3

Use the following information to answer the next two questions.

Sports Country produces balls and bats. The PPF is given in the following graph.

[pic]

9. The opportunity cost of 1 Bat is

a. .5 units of balls.

b. 1.5 units of balls.

c. .3 units of balls.

d. 2 units of balls.

10. Which of the following points of production is efficient?

a. 6 Bats and 12 Balls

b. 2 Bats and 20 Balls

c. 12 Bats and 8 Balls

d. 30 Bats and 1 Ball

11. You have information about the supply of and the demand for bread in the city of Madison. Consider an increase in the price of butter (butter and bread are complements), holding everything else constant. In the market for bread, which of the following statements are correct?

I. The equilibrium price decreases.

II. The equilibrium quantity increases.

III. The equilibrium price increases.

IV. The equilibrium quantity decreases.

a. I and II are correct.

b. I and IV are correct.

c. II and III are correct.

d. II and IV are correct.

12. For which of the following pairs of goods is the cross-price elasticity of demand positive?

a. Tennis balls and tennis rackets

b. Videotapes and laundry detergent

c. Airline trips and textbooks

d. Beef and chicken

Use the following information to answer the next two questions.

On the island of Relaxia there is production and consumption of only one good, hammocks. The domestic demand curve for hammocks is P = 250 – 2Q. The domestic supply curve is P = 50 + 3Q. The world equilibrium price for hammocks is 140.

13. If Relaxia opens its shores to international trade what will happen?

a. Relaxia will export 15 hammocks.

b. Relaxia will import 15 hammocks.

c. Domestic production falls to 30 hammocks.

d. Domestic production falls to 0 hammocks.

14. Now the leader of Relaxia imposes a tariff of 20 on each imported hammock. Holding other factors constant,

a. Domestic production increases.

b. Domestic production remains unchanged.

c. Relaxia begins exporting hammocks.

d. International trade stops.

15. Assume that domestic automobile producers use foreign steel in the production of their vehicles. The government imposes a tariff on imported steel. What happens to the equilibrium price and quantity in the US automobile market?

a. price decreases, quantity increases

b. price decreases, quantity decreases

c. price increases, quantity decreases

d. price increases, quantity increases

16. Read both of the statements below and then determine which of the following answers is correct.

A.) Inflation during the four quarters of this year has been higher than in the corresponding quarters of last year.

B.) This rise in inflation is the root cause of all macroeconomic woes for the country.

a. A and B are both positive statements.

b. A is a positive statement and B is a normative statement.

c. B is a positive statement and A is a normative statement.

d. A and B are both normative statements.

Use the following information to answer the next three questions.

The countries of Dowland and Nasland are both engaged in the production of corn and oranges. The PPF of Dowland is given by the equation c + 2o = 1000 and that of Nasland by 4c + 5o = 4000. “c” represents ears of corns and “o” number of oranges.

17. Which of the following is true?

a. The opportunity cost of producing an ear of corn in Nasland is 5/4 oranges.

b. The opportunity cost of producing an ear of corn in Nasland is 3 oranges.

c. The opportunity cost of producing an orange in Nasland is 3 ears of corn.

d. The opportunity cost of producing an orange in Nasland is 5/4 ears of corn.

18. Based on the data provided, which of the following statements is true?

a. Nasland has a comparative advantage over Dowland in the production of corn.

b. Dowland has a comparative advantage over Nasland in the production of oranges.

c. Dowland has a comparative advantage over Nasland in the production of corn.

d. Neither of these two countries has a comparative advantage over the other in the production of corn.

19. Suppose Nasland and Dowland agree to trade corn and oranges with each other. Which of the following would be an acceptable price in order for trade to occur between the two countries?

a. 1 orange for 3 ears of corn.

b. 1 orange for 3/2 ears of corn.

c. 1 orange for 4/5 ears of corn.

d. 1 orange for 1 ears of corn.

Use the following graph to answer the next two questions.

[pic]

20. In the graph above Pw is the world price and Pq is the price with tariffs. Suppose this country decides to institute a quota instead of a tariff. What would the quota need to equal in order for the quota to generate the same result as the tariff?

a. Q3 – Q2

b. Q4 – Q3

c. Q3 – Q1

d. Q2 – Q4

21. Assume this country institutes the proposed quota. What is the revenue earned by the quota license holder?

a. Pq * Q2

b. (Pq – Pw) * Q2

c. (Pq – Pw) * (Q3 – Q2)

d. (Pq – Pw) * (Q4 – Q1)

22. Imagine you are dealing with hamburgers and ketchup. Holding everything else constant, your income goes up. Therefore, the demand for hamburgers will _________, if hamburgers are a __________ good. Instead of a change in income, suppose the price of ketchup goes up while holding everything else constant. The demand for hamburgers will ___________, if hamburgers and ketchup are __________.

a. Increase / normal / decrease / complements

b. Decrease / normal / decrease / complements

c. Increase / normal / decrease / substitutes

d. Increase / normal / increase / complements

23. Consider the market for Coke and Pepsi. These two goods are clearly substitutes. Suppose that the price of Coke increases while simultaneously the cost of producing Pepsi increases. In the market for Pepsi, which of the following statements is correct?

a. The change in the equilibrium price is ambiguous and the equilibrium quantity increases

b. The change in the equilibrium quantity is ambiguous and the equilibrium price increases.

c. The equilibrium quantity increases and the equilibrium price decreases.

d. The equilibrium quantity decreases and the equilibrium price decreases.

Use the following information for the next two questions.

Suppose that the demand for Cheerios cereal is given by P=12-2Q and the price in the market is currently $8.

24. The point elasticity of demand at the equilibrium is:

a. 1/8, therefore demand is currently inelastic.

b. 1/2, therefore demand is currently unit elastic.

c. 2, therefore demand is currently elastic.

d. 8, therefore demand is currently elastic.

25. Cheerios cereal producers could increase their total revenue by:

a. increasing the price of Cheerios cereal.

b. decreasing the price of Cheerios cereal.

c. holding price constant, but selling more boxes of cereal.

d. including an expensive toy inside the cereal box as a free gift to consumers.

26. A 10 percent increase in the price of corn increases the demand for rice by 60 percent. Thus the cross-price elasticity of demand between corn and rice is

a. 60

b. 0.6

c. 6

d. 0.2

Use the following information for the next three questions.

Suppose the demand for widgets is given by P=12-Q, and supply is given by P=2. Furthermore, suppose the government has decided to impose a tax of $3 per widget on producers.

27. The new equilibrium price in this market after the imposition of the tax will be:

a. $4.

b. $5.

c. $6.

d. $7.

28. What part of the tax incidence is covered by consumers?

a. Consumers pay 33% of the tax incidence.

b. Consumers pay 67%of the tax incidence.

c. Consumers pay 80% of the tax incidence.

d. Consumers pay 100% of the tax incidence.

29. What is the deadweight loss resulting from the imposition of the tax?

a. $9

b. $4.50

c. $3

d. $18

30. Consider the market for bagels. You are told that the price of bagels increases, holding everything else constant. This result could be because of

a. An increase in the buyers’ income (bagels are an inferior good).

b. A decrease in the production cost of bagels.

c. An increase in the price of bread (bread and bagels are substitutes).

d. An increase in the price of cream cheese (cream cheese and bagels are complements).

Use the following information for the next two questions.

The demand for cheese in Madison is determined by Qd = 100 – P. The supply for cheese is Qs = (½) P – 20.

31. In this market, the equilibrium price and quantity are, respectively

a. 60 and 40.

b. 40 and 60.

c. 80 and 20.

d. 50 and 5.

32. Assume that the unit of prices is US$. What do the consumer surplus (CS) and producer surplus (PS) equal?

a. CS= $400, PS= $600

b. CS= $200, PS= $400

c. CS= $800, PS=$200

d. CS= $600, PS=$400

33. When the government pays producers the difference between the market price and a guaranteed price, we call this a

a. price ceiling.

b. price support.

c. price subsidy.

d. price floor.

Answers:

1b, 2d, 3b, 4c, 5a, 6c, 7c, 8b, 9a, 10d, 11b, 12d, 13c, 14a, 15c, 16b, 17d, 18c, 19b, 20a, 21c, 22a, 23b, 24c, 25b, 26c, 27b, 28d, 29b, 30c, 31c, 32b, 33c

-----------------------

8

6

Bats

20

12

Balls

Q2

Q1

P1

P2

P3

S

D

Q

P

Q3

Q

Domestic Supply

Pq

Q1 Q2 Q3 Q4

Pw

P

Domestic Demand

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