Exam#1 PrinciplesofMicroeconomicsEcon1014 Fall2012 Blueversion

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1. (1 point) Because of scarcity: 1. People must make choices. 2. The United States has to choose between eliminating poverty and exploring space. 3. Society has limited resources and, therefore, cannot meet all its wants. 4. We dont have enough resources to solve all our social problems. 5. All of the above. 2. (1 point) Drought this summer in the U.S. has reduced the supply of corn. Suppose this summer the American Medical Association announced that corn consumption can help dieters lose weight. Which of the following effects would we expect from these two events occurring together? 1. Corn will be scarcer than before. 2. The market equilibrium price of corn will increase. 3. The demand for corn will increase. 4. All of the above 5. None of the above 3. (1 point) Because we can be at only one place at a time we have to make choices between activities that we would like to participate in. For example, if we decide to spend the weekend on the ski slopes with friends we cant spend the weekend working. This is an example of: 1. The income effect 2. Voting with dollars 3. The substitution effect 4. Limited resources 5. All of the Above 4. (1 point) Since pollution is something generally considered undesirable, as a society we should: 1. Try to completely eliminate pollution, whatever the cost. 2. Try to eliminate pollution down to the level where the marginal benefit of more pollution reduction is equal to the marginal cost of more pollution reduction. 3. Try to eliminate pollution as long as the marginal benefit of more pollution reduction is less than the marginal cost of more pollution reduction. 4. Try to produce without creating any pollution, whatever the cost. 5. None of the above. 5. (1 point) Suppose a local restaurant selling Italian food declares bankruptcy this year and shuts down. As an economist you would: 1. Be concerned that this represents a market failure that requires government assistance. 2. Not necessarily be concerned by this business failure because it likely indicates that the firm was simply not the most efficient producer in the market. 3. Be concerned that this represents a reduction in market efficiency as well as in social equity. 4. Be concerned that this represents a reduction in market efficiency, but no reduction in social equity. 5. None of the above.

6. (1 point) The Russellville School District is trying to increase the number of students attending summer school and to increase the attendance rate during summer school in order to qualify for additional government money for the school. In order to do this they have decided to offer $100 to every elementary school student who attends summer school with perfect attendance. As a result of this new policy, applications for summer school have drastically increased. This story best illustrates which of the following economic principles? 1. People make decisions on the margin. 2. Equity and efficiency are often at odds. 3. People respond to incentives. 4. Education increases our human capital and makes us better workers, resulting in the creation of greater wealth for society. 5. All of the above are illustrated by this story. 7. (1 point) Suppose you have completed three years of a 4 year degree in business but over the summer you participated in a volunteer teaching program in Armenia and have discovered a love for teaching English overseas. You now have to decide whether to complete your last year of the business degree or switch to an education major to pursue your new career choice. Which of the following factors should be included in your decision? 1. The cost of the three years of school spent studying for a business degree. 2. The value of the three years of your time spent pursuing the business degree. 3. The marginal cost of room and board during the three years spent pursuing the business degree. 4. All of the above 5. None of the above. 8. (2 points) The Environmental Protection Agency (EPA), when determining the economic benefit of pollution control, estimates the number of lives saved by pollution control and multiplies that by the dollar value of each life saved. Recently they proposed changing their formula so that the value of saving an older person's life counted for less than the value of a younger person's life saved. Which of the following would be a valid economic justification for this change in how lives are valued? 1. Older people have higher incomes than younger people, so saving their lives is more costly than saving the life of a young person. 2. Older people are more susceptible to pollution, so saving their lives is more costly than saving the life of a young person. 3. Older people have fewer years left to produce wealth for society, so their lives should be worth less than the lives of younger people. 4. All of the above are valid justifications for this policy change. 5. None of the above is a valid justification for this policy change. 9. (1 point) Which of the following is referred to as the Voting with Dollars criticism of the capitalist system which relies on the free market system? 1. The capitalist system allows the rich to buy the vote of politicians through their control of vast amounts of wealth. 2. The rich get more votes than the poor and are able to gain control of more of the output we produce. 3. The free market system guarantees equity but doesnt guarantee efficiency. 4. All of the above are typical Voting with Dollars criticisms of the capitalist system. 5. None of the above is a typical Voting with Dollars criticism of the capitalist system.

10. (1 point) Economists believe that people respond to incentives, both positive and negative. Which of the following involves someone using incentives to get you to do what they want? 1. The City of New York bans the sale of extra large sweetened drinks. 2. The new health care law requires all Americans purchase health insurance. 3. The state will make you pay a fine if you are caught exceeding the speed limit. 4. All of the above involve incentives to try to influence your behavior. 5. None of the above involves an incentive to try to influence your behavior. 11. (1 point) Economists use the term market failure to mean: 1. A situation in which markets fail to efficiently allocate scarce resources. 2. A situation where equilibrium price is higher than consumers are willing and able to pay. 3. A situation which must be caused by an externality. 4. All of the above. 5. None of the above. 12. (1 point) The most important feature of a good economic model is that: 1. It is able to make good predictions. 2. It is easy to use. 3. It is able to be illustrated with an equation and a graph. 4. It is based on assumptions that are always realistic. 5. All of the above. 13. (1 point) Which of the following is an example of a normative economic statement? 1. The free market system is flawed because allowing consumers to vote with their dollars is unfair and shouldnt be allowed. 2. Because of the current economic recession, government policy has focused on trying to stimulate business activity and decrease unemployment. 3. Minimum wage laws cause unemployment by forcing employers to pay workers more than they may be worth to the employer. 4. All of the above are examples of normative economic statements. 5. None of the above is an example of a normative economic statement. 14. (1 point) If a free market is characterized by a positive consumption externality, then: 1. Too little of the good is being produced. 2. The government should provide consumers with a subsidy to encourage greater levels of consumption of the good. 3. The government should use a Pigovian Subsidy to internalize the externality. 4. All of the above 5. None of the above. 15. (1 point) Which of the following explains why the demand curve is downward sloping? 1. Consumers get less and less happiness from each successive unit of a good consumed. 2. Some consumers are willing to pay a lot for a good while other consumers are only willing to pay an average amount and others are only willing to pay a small amount, 3. Consumers are willing to pay more for the first units of a good than for each successive unit of a good. 4. All of the above. 5. None of the above.

16. (1 point) Consumers reduce their quantity demanded when price rises because: 1. As the good becomes more expensive, the value they place on the good falls. 2. As the good becomes more expensive, their income cannot stretch as far and they have to reduce purchases to keep purchases of other goods and services. This is called the income effect. 3. As the good becomes more expensive, the endowment effect kicks in. 4. All of the above. 5. None of the above. 17. (1 point) Which of the following would we predict would happen if the price of textbooks rises? 1. The demand for textbooks will fall. 2. The supply of textbooks will rise. 3. The quantity of textbooks demanded will rise. 4. The quantity of textbooks supplied will rise. 5. The demand for textbooks will rise and this will cause the price to rise even further. 18. (1 point) Suppose an economy contains only 4 consumers. If each of these consumers is willing to purchase 2 TVs when the price of a TV is $400, then: 1. The market demand curve is a vertical line going straight up from the 2 TV mark on the horizontal axis. 2. The market quantity of TVs demanded when price is $400 is 8. 3. The market quantity of TVs demanded when price is $400 is 16. 4. The market demand curve is a horizontal line going straight to the right from the $400 mark on the vertical axis. 5. The market equilibrium price of TVs will be $400. 19. (1 point) Suppose the government engages in a public service information campaign to convince more consumers to get a flu shot this winter. Which of the following could we expect to occur if the government campaign is effective? 1. Higher equilibrium price and higher equilibrium quantity of flu immunizations. 2. Higher equilibrium price and lower equilibrium quantity of flu immunizations. 3. Lower equilibrium price and lower equilibrium quantity of flu immunizations. 4. Lower equilibrium price and higher equilibrium quantity of flu immunizations. 5. Higher equilibrium price, resulting in a decrease in the quantity of flu immunizations. 20. (1 point) According to the Wall Street Journal, bad weather this summer has significantly negatively impacted the supply of wheat produced by farmers in the US. How would you expect this to impact the market for wheat? 1. The supply of wheat has decreased, leading to an increase in the equilibrium price and an increase in the equilibrium quantity of wheat. 2. The supply of wheat has decreased, leading to an increase in the equilibrium price and a decrease in the equilibrium quantity of wheat. 3. The supply of wheat has shifted to the right, leading to an increase in the equilibrium price and a decrease in the equilibrium quantity of wheat. 4. The supply of wheat has shifted to the right, leading to a decrease in the equilibrium price and an increase in the equilibrium quantity of wheat. 5. None of the above is a possible result of the bad weather in the US.

21. (1 point) If the demand for a product fell at the same time that the supply of the product rose, what would be the likely impact on the market for that product? 1. Higher price and higher quantity bought and sold 2. Higher price and lower quantity bought and sold 3. Lower price and higher quantity bought and sold 4. Lower price and indeterminate change in quantity bought and sold 5. None of the above 22. (1 point) According to the articles on cost benefit analysis, which of the following is true with respect to how government agencies value a human life saved? 1. They each place the same value on a life saved. 2. They each use the same method of calculating the value of a life saved. 3. They sometimes determine that the value of a life saved is priceless, although they sometimes place a monetary value on improving a persons health or reducing injury. 4. They each use a different method of calculating the value of a life saved and as a result place a different value on a life saved. 5. None of the above. 23. (1 point) According to the article How Much Is Your Time Worth, when you make a decision about doing a project yourself rather than hiring a professional to do the project, what should be taken into account? 1. How much you earn per hour. 2. How many hours of time you will save if you hire a professional. 3. How much would it cost to hire a professional. 4. How much you enjoy or dislike doing the project yourself. 5. All of the above. 24. (1 point) According to the textbook, when people make decisions on the margin: 1. They consider only those costs that are sunk. 2. They consider all costs, including external costs. 3. They consider only those costs that are incurred when they make the decision but are avoided if they do not make the decision. 4. All of the above. 5. None of the above. 25. (1 point) According to the article EPA Knocks $900,000 off Value of a Life, the Environmental Protection Agency (EPA) reduced the value of saving a human life by $900,000. What is the economic significance of this reduction? 1. It means more human lives will be saved through environmental protection regulations. 2. It means the EPA believes it is now less costly to save a human life and more environmental protection regulations will now pass the cost benefit analysis test. 3. It means that fewer environmental protection regulations will be found to be economically advisable through cost benefit analysis. 4. All of the above 5. None of the above

26. (2 point) According to the article Jim Manzi Makes the Case for Higher Petrol Taxes, the author argues that higher gasoline prices will encourage the development of alternative energy technologies. What is the economic reasoning behind his argument? 1. Higher prices indicate that gasoline consumption results in external costs to society. This signals the government to ban the use of gasoline and to subsidize the development of alternative energy. 2. Higher gasoline prices encourage consumers to look for vehicles using other energy sources. This increases the demand for these other sources which increases their market price and signals firms that there is an increased demand that needs to be met. 3. His argument is flawed. Higher gasoline prices have no effect on development of alternative technologies. 4. Only stable gasoline prices allow development of alternative technologies. 5. None of the above. 27. (1 point) What is the invisible hand as described by Adam Smith in "An Inquiry into the Nature and Causes of the Wealth of Nations? 1. Government 2. Externalities 3. Pigovian Taxes and Subsidies 4. Consumers 5. None of the above 28. (1 point) Which of the following could result in a market failure? 1. Imperfect information 2. Externalities 3. Imperfect competition 4. All of the above 5. None of the above 29. (1 point) The main point of the article Asian Demand Helps Drive Up the Price of Dairy, is that: 1. World markets are connected, so changes around the world have an impact on prices paid by consumers in any single country. 2. American dairy producers are doing a good job of convincing Asian consumers to drink more milk. 3. Asian consumers place a higher value on milk than do American consumers. 4. Higher Asian demand for milk is leading to more profits for American dairy farmers. 5. All of the above. 30. (1 point) According to the article The Economic Organisation of a P.O.W. Camp: 1. Even though products were not produced in the camp, an upward sloping supply developed. 2. Markets naturally develop whenever there is a need to allocate limited resources. 3. Markets work better when there is more information available to potential buyers and sellers. 4. All of the above 5. None of the above 31. (1 point) If a product is advertised at a price greater than the market equilibrium price: 1. We know that there will be an excess supply (surplus) of the product. 2. We know Qs will exceed Qd. 3. We know price will tend to fall in a free market resulting in increased Qd and decreased Qs. 4. We know that we will not be in equilibrium. 5. All of the above 7

32. (1 point) If consumers and producers are responsive to price changes, then what can we expect to happen to the market equilibrium price and quantity bought and sold if a market is hit by a simultaneous decrease in both demand and supply? 1. Both Pe and Qe decrease 2. Pe decreases and Qe increases 3. We cannot predict the change in either Pe or Qe 4. We cannot predict the change in Pe, but Qe increases 5. None of the above

Paragraph A Use the following information to answer the next 4 questions. Do your calculations in the space provided. Suppose you have been offered the opportunity to travel to Paris next summer with your aunt. She is a fashion executive and will be in Paris for the summer doing research for her company. She asks you to come along as her informal assistant. You will not be paid, but all your travel and living expenses will be free. She advises you to bring along some extra spending money for souvenir purchases. You expect you will spend $800 on these extra purchases. If you go on the trip with your aunt you will have to tell your boss that you will be unable to work for the summer. You normally work full-time during the summer earning an expected $3000. While working you live at home with your parents who house and feed you for free, but you expect to spend $1200 on entertainment and incidental expenses. You cannot think of any other information that might be relevant to this decision.

Expected MB $1200 saved spending Total=$1200

Expected MC $800 spending money in Paris $3000 lost earnings Total=$3800

$3800-$1200=$2600. You would have to value the trip to Paris for the summer at $2600 to be indifferent and at more than $2600 to choose to go.

33. (2 points) How much would the trip have to be worth to you to make you clearly decide to go with your aunt to Paris for the summer? In other words, how much pure enjoyment would you have to get from spending the summer in Paris? 1. More than $3800 2. More than $2600 3. More than $4800 4. More than $5000 5. None of the above 34. (2 points) Suppose the trip is worth $2000 to you. What would be the rational decision to make? 1. Go on the trip to Paris for the summer. 2. Stay home and work for the summer. 3. Impossible to decide because you are indifferent. 4. Impossible to decide because there is not enough information given. 5. None of the above 8

35. (2 points) Suppose you have made a good private decision to go on the trip to Paris for the summer. Which of the following would be the good decision from societys point of view? 1. If there are no externalities you should go on the trip. 2. If there are positive externalities you should go on the trip. 3. If there are negative externalities we dont know whether or not you should go on the trip. 4. All of the above 5. None of the above 36. (1 point) Suppose you made a rational decision to go on the trip to Paris for the summer. Based on this information, which of the following must also be true? 1. It is also a good decision to go on the trip to Paris. Rational decisions are always good decisions. 2. It is also a good social decision for you to go on the trip to Paris. Since you are a member of society, anything that is good for you must be good for society overall. 3. It is also an economically efficient decision for you to go on the trip to Paris. Private decisions always increase the size of the social economic pie. 4. All of the above 5. None of the above 37. (1 point) Why does a firm need to understand consumer demand for its product if it tries to maximize its sales revenues? 1. Because consumer demand helps to determine producer supply. 2. Because of the endowment effect. 3. Because when the firm raises its product price, consumer quantity demanded falls. 4. Because when the firm raises its product price, consumer demand falls. 5. None of the above 38. (2 point) Suppose you are trying to get a ticket for the next home football game but tickets have sold out. You and many of your friends are disappointed because you were all willing to buy a ticket but you are unable to get in. What does this tell us about the economics of this football game? 1. The official ticket price is below the market equilibrium price. 2. The market is not in equilibrium. 3. It is likely the market is not producing the greatest possible economic surplus for society. 4. All of the above 5. None of the above 39. (1 point) Which of the following is necessary for an economy to achieve economic efficiency? 1. Goods produced go to the consumers who value them the most. 2. All business failures must be eliminated. 3. All profits must be eliminated. 4. The consumption of goods cannot have an impact on anyone but the person consuming them. 5. Pollution must be completely eliminated.

Figure B Suppose the following figure represents the market for gasoline. Use this figure to answer the following 3 questions. PriceinU.S.dollars
14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

MarketSupply

MarketDemand

Quantityinmillionsofgallons 40. (1 point) This market will have a predicted equilibrium price of _____ for a gallon of gasoline and a predicted equilibrium sales of ______. 1. Pe=$7; Qe= 60 million gallons 2. Pe=$10; Qe= 150 million gallons 3. Pe=$7; Qe= 60 gallons 4. Impossible to determine with the information given 5. None of the above 41. (2 points) Which of the following will happen if this market has an advertised price of $3 per gallon? 1. There will be an excess demand of 120 million gallons. 2. Market price will try to rise and quantity demanded will fall. 3. Market price will try to rise and quantity supplied will rise. 4. All of the above 5. None of the above

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42. (2 points) Suppose an increase in the minimum wage causes the supply of gasoline to decrease and concerns about global warming cause the demand for gasoline to decrease. Which of the following is the best prediction about the impact on the gasoline market from these two simultaneous shifts in demand and supply? 1. Pe will end up below $7 per gallon and there will be a shortage of gasoline 2. Pe will end up above $7 per gallon and there will be a surplus of gasoline. 3. Pe will remain unchanged and we will remain at the old equilibrium quantity of gasoline bought and sold. 4. Pe might end up above, below or at $7 per gallon but we can be sure that fewer than 60 million gallons will be bought and sold. 5. None of the above 43. (1 point) The Federal Reserve has just announced plans to increase the money supply in the United States over the next several months. Which of the following is a possible reason two economists might disagree over this policy? 1. They might disagree over the impact this policy will have on the unemployment rate; a normative disagreement. 2. They might disagree over the fairness of this policy; a normative disagreement. 3. They might disagree over whether this policy will result in greater income inequality; a normative disagreement. 4. All of the above 5. None of the above 44. (1 point) Which of the following would be an example of a natural experiment? 1. Students are put into groups, given $20 each, and asked to contribute to a common pot of money to see if they will cooperate or cheat and retaliate when making decisions. 2. A recession hits the East Coast but does not hit the West Coast. Economists gather data from each coast to see how income changes affect saving decisions. 3. Park Service employees clear out the underbrush from one part of the national park but do not clear out the underbrush from another part of the national park so they can see how this impacts the health of wildlife living in the park. 4. All of the above 5. None of the above 45. (1 point) Suppose the government releases a report this month that shows that average household income has fallen by 10%. They also report that demand for used cars has risen by 20%. If these are the only two relevant economic changes that occurred in that time period, then what does this tell us about used cars? 1. They are a luxury good. 2. They are a necessity. 3. They are a normal good. 4. They are a substitute good. 5. They are an inferior good. 46. (1 point) What is another way of saying economic efficiency? 1. Maximum economic surplus for society 2. Largest possible economic pie for society. 3. Best allocation of societys scarce resources. 4. All of the above 5. None of the above 11

47. (1 point) Which of the following could lead to a market failure? 1. The producer of dog food is hiding from consumers the information that the dog food contains harmful pesticides. 2. Consumers consider ramen noodles to be an inferior good. 3. The income effect is larger than the substitution effect. 4. Hamburger exhibits diminishing marginal utility of consumption. 5. All of the above 48. (1 point) Suppose you own a cell phone and you are trying to decide how much benefit you get from the cell phone. You could figure this out best from answering the following question: 1. How much did you pay for the cell phone? 2. How much is someone willing to pay you for the cell phone? 3. What is the most money you would have to be paid in order to get you to sell the cell phone? 4. What is the least money you would have to be paid in order to get you to sell the cell phone? 5. What are similar cell phones currently selling for?

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