Economics 101-300

Winter 2006
Midterm Examination
Form 1
February 23rd, 2006
I am the person registered for this class and I am filling in my own scantron form and no
other.
I have not conversed, exchanged notes, looked at other forms, allowed another student to
look at my form, or in any other way cheated while taking this examination.
I have not used a graphing calculator during this examination. I have used an arithmetic
calculator only (or none). I am not sharing calculators.
This examination, and the scantron form I am submitting, is solely my work.
_____________________________________________
Your first and last name, printed
_____________________________________________
Your signature
__________________________________
Your section number

GSI
Patrick
Estelle
Ryan
Brian
Phot

Section Information
Section Number
305
301, 302
303, 311
304, 306
307, 310

Economics 101-300
Winter, 2006
Midterm Examination
February 23rd, 2006
Form 1
READ ME
INSTRUCTIONS: Please do not talk with any other students and do not share
papers or calculators. Please remember to fill out the honor code form and detach it
from your exam. You will turn in only the honor code form and your scantron
form. You may use the pages of the exam as scratch paper. Please read each
question carefully. Using the scantron form, fill in the letter that you choose to be
the correct answer. Please make sure that all of the appropriate identifying
information has been filled in on the scantron form. We will not grade scantrons
without names, UM id numbers, form numbers, and section numbers (between
301 and 311). If you have a question, raise your hand and we will do our best to get
to you quickly and answer your question (if we can). Grades will be posted after
spring break, sooner if it is possible.
Take your time, and good luck!
1) Which of the following is a positive (as opposed to a normative) statement?
a) Cigarette taxes should be increased.
b) Cigarette consumption is immoral.
c) Special health education seminars must be offered and made compulsory for
cigarette smokers.
d) Increasing cigarette tax rates could reduce the amount of revenue produced by
these taxes.
e) Higher cigarette taxes ought to be accompanied by higher liquor taxes.
2) For years the belief was that a low fat diet would improve life expectancy because it
reduces the probability of heart disease and cancer, and that vitamin D and calcium
would prevent the broken bones that are common in old age. Last weeks newspapers
were filled with research news. Two major research studies reported that first, low fat
diets showed no effect in reducing heart disease or cancer, and second, that vitamin D
and calcium showed no effect on broken bones. The effect of the publication of these
studies on the equilibrium price and quantity of Special K (a vitamin fortified cereal
and part of a fat free diet ) is:
a)
b)
c)
d)
e)

nothing
the equilibrium price rises and the equilibrium price falls
the equilibrium price falls and the equilibrium price goes up
The equilibrium price falls and the equilibrium quantity falls
The equilibrium price rises and the equilibrium quantity rises

3) Helen owns a dry cleaning store. The dry cleaning machine, a fixed cost to Helens
business, was $400. The total variable cost schedule of dry cleaning is presented in
the following table. The current market price of a small load of dry cleaning is $36,
and Helen operates her store in a competitive market. Take a look at the table below.
When Helen produces at her profit maximization level, what is her producer surplus?
a)
b)
c)
d)
e)

164
36
52
92
202

# of loads per day

1
2
3
4
5
6
7
8

Total variable cost

15
35
60
92
132
180
238
308

4) Spring is coming and the vendors who disappeared over the winter will come back to
the Diag to sell hotdogs. The graph below shows the revenue and cost of selling hotdogs in the Diag for El Perro Sabroso, a small vendor in Ann Arbor. The
competitive market equilibrium price is $2 per hot dog. At that price, El Perro
Sabroso will sell 120 hot dogs a day to maximize profits. Take a look at the graph
below. What will those daily profits be?
a)
b)
c)
d)
e)

140
110
120
240
0

Revenue,$
Cost

Variable Cost
Total Revenue

360
240
100
30

Fixed Cost
Quantity
120

180

5) Recently, the U.S. government granted a $20 million subsidy per jetliner to all
American companies in the jetliner market. The supply and demand curves in the
graph below represent the US market for jetliners before any subsidy is granted. What
is the consumer surplus (in millions of $) and the price to consumers of jetliners (in
millions of $) after the subsidy?
a)
b)
c)
d)
e)

900, 140
400, 160
900, 150
400, 140
625, 150

Price (in
million $)
200

Supply

170
160
150
140
130
100

Demand
15

20

25 30

35

50

Quantity

6) Lauren Hill spends her income only on pizza and vitamin water. The price of pizza is
$1 per slice, and the price of vitamin water is $2 per can. For the last slice of pizza
that Lauren consumes, her marginal utility from pizza consumption (MUP) is equal to

5 utils/slice. For the last can of Vitamin Water that she consumes, her marginal utility
(MUc) is equal to 6 utils/can. Assuming that there is diminishing marginal utility in
pizza and Vitamin Water, then in order to maximize utility, Lauren should:
a) continue to consume the same amount of pizza and Vitamin Water, as she is
already maximizing utility.
b) increase consumption of pizza and decrease consumption of Vitamin Water.
c) decrease consumption of pizza and increase consumption of Vitamin Water.
d) increase consumption of both pizza and Vitamin Water.
e) decrease consumption of both pizza and Vitamin Water.
7) The price of oil rose to a record high in the last quarter of 2005. At the same time oil
refining companies experienced record increases in their revenues. If the income of
US households did not change in that time period, which of the following must be
correct?
a)
b)
c)
d)
e)

The slope of the demand curve for oil is less than 1 in absolute value.
The slope of the supply curve for oil is less than 1 in absolute value.
The price elasticity of demand for oil is less than 1 in absolute value
The price elasticity of demand for oil is greater than 1 in absolute value
The price elasticity of demand for oil did not change when the price rose

8) Michigan produces cars and beet sugar. The production possibility curve for the
economy in Michigan is given by the graph below. Assume the graph is drawn to
scale. Which of the following statements is true about the production possibilities in
Michigans economy?
a) Point A is more efficient than point B.
b) It is most inefficient to produce at point C.
c) The opportunity cost of producing sugar is lower moving from A to B than
moving from B to C.
d) The opportunity cost of producing sugar is lower moving from B to C than from A
to B.
e) It would be most efficient if the economy produced at point D
Cars
(millions)
A
B
D
C
Sugar (millions of pounds)

9) Max takes four friends to a Japanese restaurant and orders a six-piece sushi for
dinner. Since everyone but Max has enough appetite only for one piece, he gives
each of his friends a piece but doesnt know whether to have one or two for himself.
He hasnt eaten lunch, so hes hungry, but Max decides to have only one because it is
a Pareto efficient division of consumption. Is this correct?
a)
b)
c)
d)
e)

No, because his friends are at a marginal utility of zero.

Yes, because it is a fair division of the sushi.
Yes, because he has to pay for it anyway.
No, because he can eat the last piece without making his friends worse off.
It depends on comparative advantage.

10) Many companies that sell bottled water have been digging down into the aquifer and
siphoning off large amounts of the underground fresh water in Michigan. Governor
Granholm, alerted by environmentalists, and people and companies whose wells have
gone dry, has been frustrated by an inability to get the companies to practice
reasonable preservation. She has pressed for a per bottle tax on producers of bottled
water in Michigan. Assume that consumer demand is downward sloping and
producer supply is upward sloping. If the tax passes, then which of the following
statements is not true?
a) The new equilibrium quantity of bottled water sold in the market will be lower
than the equilibrium quantity without the tax.
b) Producers revenues will equal total consumers expenditures minus the tax
payments to the government.
c) Both consumers and producers will share the burden of the tax.
d) The new equilibrium price is the old equilibrium price plus the per bottle tax.
e) The vertical shift in the supply curve is equal to the amount of the per bottle tax.
11) Assume that the demand curve is a standard downward sloping curve and the supply
curve is a standard upward sloping curve. Compared to the competitive equilibrium,
when the government levies a tax on a good, the consumer surplus
, the
producer surplus
, and the new price paid by consumers is
the
competitive equilibrium price.
a)
b)
c)
d)
e)

Rises, Rises, Higher than

Falls, Rises, Lower than
Falls, Falls, Higher than
Rises, Falls, Lower than
Falls, Falls, equal to

12) The demand curve for gold is downward sloping. There is a fixed world supply of
gold because there is a certain amount of gold underground that we can dig up, but we
cannot produce any new gold. Given this information, which of the following must
be true?

a)
b)
c)
d)
e)

The equilibrium price of gold is infinite.

The equilibrium quantity of gold is zero.
The equilibrium price of gold is zero.
The supply curve of gold is perfectly inelastic.
The supply curve of gold is perfectly elastic.

13) As you know from our articles in special documents, the U.S. government has
maintained a binding price floor and buys the surplus in the market for milk since the
depression. Many people in congress claim that this price support is no longer
needed. Suppose that the price floor is eliminated by congressional action. As a
result the market for milk moves to a competitive equilibrium. Which of the
following statements about the new equilibrium must be true?
a) The new market equilibrium price will be above the price floor.
b) The new market equilibrium quantity will be less than the quantity supplied at the
price floor.
c) The consumer surplus will be smaller at the new market equilibrium.
d) The producer surplus will be bigger at the new market equilibrium.
e) We cant tell if the market equilibrium price will be above or below the price
floor.
14) The Ann Arbor News had an article titled High tide of wine is coming in the paper
two weeks ago (February 14th). They noted in the article that Californias summer
was perfect for growing wine grapes (like it never has been before) and, as a result,
the wine industry crushed a record volume of fruitjust over 4.3 million tons. They
also noted that it is a time of changing wine demand in the United States. More
people like wine. The article hinted that, as a result, wine prices would fall. Is this a
correct implication of these changes?
a) Yes, because these two shifts necessarily mean that the equilibrium price of wine
will fall.
b) No, because these two shifts necessarily mean that the equilibrium price of wine
will rise.
c) No, because these two shifts must cancel out each other and the equilibrium price
of wine will stay the same.
d) Yes, because when the demand curve shifts out, the equilibrium price of wine will
fall.
e) Yes, it is possible the equilibrium price of wine will fall, but it cant be
determined without more information.
15) In last Sundays Ann Arbor News, Comp USA advertised a Presidents Day sale that
offered 36 months, no payments, no interest for three years. They have a 50 inch
Zenith plasma TV offered for $3000. If you take Comp USA up on its offer, you will
pay them $3000 in three years. You have money and you want to put enough in a
savings account today to pay for the TV in three years. If the interest rate on savings

accounts is 7%, which of the following amounts, if you put in the bank today, would
be the least amount that would cover the $3000 in three years?
a)
b)
c)
d)
e)

$1000
$2000
$2500
$3000
$3200

16) Teenagers worry about buying cars. Alex, a typical teenager, really wants to buy a car
in two years. His mom says she has just the deal for him. She tells him that if he puts
a certain amount of money in the bank this year, shell put the same amount of money
in the bank next year. Since the interest rate is 100%, Alex will then have $4800
toward his purchase at the end of two years. How much does she tell him he should
put in the bank that first year?
a)
b)
c)
d)
e)

$400
$800
$1200
$2000
$2400

17) The graph below shows the market for cigarettes in Michigan in 2003. At that time,
the per pack tax on cigarettes was $1.25. Governor Granholm proposed increasing
the per pack tax to $2.00 (i.e. by another $0.75 per pack) to increase government
revenue and to improve health. After the imposition of the new tax, what is the price
per pack that consumers in Michigan will pay for a pack of cigarettes?
a)
b)
c)
d)
e)

$5.75
$5.50
$5.25
$5.00
$4.75

price
5.75
S (with tax of
$1.25)

5.50
5.25
5.00
4.75
D
12

16

20 24

28

quantity (in millions)

18) Which of the following statements is false?

a) The budget constraint indicates the different combinations of two goods that can
be purchased with ones income.
b) A consumer will maximize utility where the indifference curve is tangent to the
budget constraint, which is where the slope of an indifference curve is equal to the
slope of the budget constraint.
c) Income determines the slope of the budget constraint.
d) When the price of a normal good rises, the substitution effect encourages less
consumption of that good.
e) When the price of a normal good falls, the income effect encourages more
consumption of that good.
19) Consider three goods: milk, juice and cocoa. Suppose milk and juice are substitutes,
whereas milk and cocoa are complements. Milk is a normal good. All of the following
events will raise the equilibrium price of milk except:
a)
b)
c)
d)
e)

an increase in consumers' incomes.

the price of juice rises.
production costs of milk increase.
cocoa becomes cheaper.
the cost of producing juice falls.

20) Back in 2003, many Americans called for consumers to boycott all French products
because France did not support the U.S. led invasion of Iraq. In response, the French
put a tax on wine exported to the United States. If this boycott effort was successful,
and the tax was enacted, then what would happen in the market for French wine in the
United States?

a) The equilibrium price that consumers pay would rise and the equilibrium quantity
would fall
b) The equilibrium price that consumers pay would fall and the equilibrium quantity
would rise
c) We cant determine what would happen to equilibrium price that consumers pay
but the equilibrium quantity would fall
d) The equilibrium price that consumers pay would rise and the equilibrium quantity
would rise
e) The equilibrium price that consumers pay would rise but we cant determine what
happens to equilibrium quantity.
21) Kwame Kilpatrick, the mayor of Detroit, has debated for some time about how to
revitalize the city. He has enlisted the help of Jennifer Granholm, Michigans
governor, and asks her to consider ways to reduce the number of new homes built in
the suburbs to prevent urban sprawl. She considers two options for reducing the
equilibrium quantity of new suburban homes to the desired level (and both lead to the
same quantity). a) a per unit tax on new homes or b) a binding price floor on new
homes. Which of the following statements about these two options is correct?
a)
b)
c)
d)
e)

both the producers of new homes and buyers prefer the price floor
both the producers of new homes and buyers are indifferent
producers of new homes are indifferent, but buyers prefer the tax
producers of new homes prefer the price floor, but buyers are indifferent
producers of new homes prefer the tax, but buyers prefer the price floor

22) The Ann Arbor city government announces that it will impose a $1 tax on each cup of
cappuccino (Oh no!) sold in the city. Assume a downward-sloping demand curve and
an upward-sloping supply curve for cappuccino. The income elasticity of demand for
cappuccino is 0.2. As a result of the tax, the substitution effect will ________ the
quantity demanded for cappuccino and the income effect will ______ the quantity
demanded for cappuccino.
a)
b)
c)
d)
e)

increase, increase
reduce, reduce
increase, reduce
reduces, increase
there is not enough information to answer the question

23) Because of riots in Nigeria (an oil producer) , the price of oil has risen dramatically in
the past week, and the price of gasoline has climbed from $2.00 to $2.75 a gallon. As
a result, the quantity of gasoline demanded has fallen from 6 million gallons per day
to 5.7 million gallons per day. Over this range (using the midpoint formula), the price
elasticity of demand is _________ (in absolute value), and can be described as
_________.

a)
b)
c)
d)
e)

2.07, inelastic
6.15, elastic
0.16, inelastic
0.48, inelastic
0.48, elastic

24) The US and Sweden both produce two kinds of athletes: luge-runners and slalomskiers. Both countries have a fixed Olympic training budget: the U.S. has $50 million
and Sweden has $30 million. In the US, it costs $5 million to train a luge-runner
guaranteed to win a Gold medal, while training a slalom-skier guaranteed to win a
Gold medal costs $10 million. In Sweden, a Gold-guaranteed luge-runner costs $10
million, while a Gold-guaranteed slalom-skier costs $3 million to train. The two
countries decide to field a combined SwedUS team, where a Gold won by either
country is shared by both. How can the SwedUS team maximize its Gold medals?
a) Both US and Sweden spend all their budgets to train luge-runners
b) US spends its whole budget to train luge-runners, and Sweden spends its budget
to train slalom-skiers
c) US spends its whole budget to train slalom-skiers, and Sweden spends its whole
budget to train luge-runners
d) Both US and Sweden spend all their budgets to train slalom-skiers
e) The US should train a mix of luge-runners and slalom-skiers, while Sweden
should just train slalom-skiers
25) Michele bought a two year US savings bond with a face value of $1000 and a yield of
10%. He paid $900 for this bond. What was the coupon of the bond?
a)
b)
c)
d)
e)

more than $100 and less than $900

more than $900
more than $50 and less than $100
more than $1 and less than $50
It is impossible to determine with this information.

Have a great spring break everyone!