Introduction to Microeconomics Spring 2011 Exam 1

Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. The following diagram shows a budget constraint for a particular consumer.
y 40 30 20 10 10 20 30 40 50 60 70 80 90 x

If the price of X is $10, what is the price of Y? a. $70 b. $25 c. $15 d. $35 Table 3-3 Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a constant rate. Machine Minutes Needed to Make 1 Toothbrush Hairbrush 3 10 5 6

Zimbabwe Portugal ____

____

____

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2. Refer to Table 3-3. Zimbabwe has an absolute advantage in the production of a. hairbrushes and a comparative advantage in the production of toothbrushes. b. toothbrushes and a comparative advantage in the production of toothbrushes. c. hairbrushes and a comparative advantage in the production of hairbrushes. d. toothbrushes and a comparative advantage in the production of hairbrushes. 3. Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is a. nothing, since she would have received less than $24 of enjoyment from the video. b. the enjoyment she would have received had she watched the video. c. the $24 she earns working. d. the $24 minus the enjoyment she would have received from watching the video. 4. The law of demand states that, other things equal, a. when the price of a good rises, the quantity demanded of the good rises. b. when the price of a good falls, the demand for the good rises. c. when the price of a good falls, the quantity demanded of the good rises. d. when the price of a good rises, the demand for the good falls. 5. The demand curve for hot dogs

a. does not shift when the price of hot dogs changes because the quantity demanded of hot dogs is measured on the horizontal axis of the graph. b. shifts when the price of hot dogs changes because the price of hot dogs is measured on the vertical axis of the graph. c. shifts when the price of hot dogs changes because the quantity demanded of hot dogs is measured on the horizontal axis of the graph. d. does not shift when the price of hot dogs changes because the price of hot dogs is measured on the vertical axis of the graph. Table 3-4 Assume that the farmer and the rancher can switch between producing meat and producing potatoes at a constant rate. Labor Hours Needed to Make 1 Pound of Meat Potatoes 10 2 4 8 Pounds Produced in 40 Hours Meat Potatoes 4 20 10 5

Farmer Rancher ____

____

6. Refer to Table 3-4. Assume that the farmer and the rancher each has 40 labor hours available. If each person spends all his time producing the good in which he has a comparative advantage, then total production is a. 14 pounds of meat and 25 pounds of potatoes. b. 24 pounds of meat and 15 pounds of potatoes. c. 4 pounds of meat and 5 pounds of potatoes. d. 10 pounds of meat and 20 pounds of potatoes. 7. In a market economy, economic activity is guided by a. corporations. b. central planners. c. the government. d. self-interest and prices. Figure 5-6
22 20 18 16 14 12 10 8 6 4 2 C B A Price

Demand
100 200 300 400 500 600 700 800 900 Quantity

____

8. Refer to Figure 5-6. If the price decreased from $18 to $6, a. total revenue would decrease by $800, and demand is inelastic between points A and C. b. total revenue would increase by $800, and demand is elastic between points A and C. c. total revenue would increase by $1,200, and demand is elastic between points A and C. d. total revenue would decrease by $1,200, and demand is inelastic between points A and C. Figure 5-14
10 9 8 7 6 5 4 3 2 1 5 10 15 20 25 30 35 40 Quantity Price

Supply

____

9. Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply between $4 and $6? a. 1.00 b. 1.25 c. 1.20 d. 0.75 ____ 10. Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country? a. Drug interdiction shifts the supply curve of drugs to the left. b. Drug interdiction raises prices and total revenue in the drug market. c. Drug interdiction shifts the demand curve for drugs to the left. d. Drug interdiction can increase drug-related crime. ____ 11. The labor supply curve may have a backward bending portion because at higher wages the a. income effect is smaller than the substitution effect. b. income effect is negative. c. income effect is larger than the substitution effect. d. Any of the above could result in a backward-bending supply curve. ____ 12. To improve living standards, policymakers should a. impose tougher immigration policies. b. provide tax breaks for the middle class. c. formulate policies designed to increase productivity. d. impose restrictions on foreign competition. Scenario 5-3 Milk has an inelastic demand and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent.

____ 13. Refer to Scenario 5-3. Total consumer spending on milk will a. increase, and total consumer spending on beef will decrease. b. increase, and total consumer spending on beef will increase. c. decrease, and total consumer spending on beef will decrease. d. decrease, and total consumer spending on beef will increase. Figure 21-9

____ 14. Refer to Figure 21-9. Bundle C represents a point where a. MRSxy = Px/Py. b. MRSxy < Px/Py. c. MRSxy > Px/Py. d. MRSxy > Py/Px. Figure 2-8 Panel (a) Panel (b)

7 6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5

cups of coffee

7 6.5

cups of coffee

6 5.5 5 4.5 K L 4 3.5 3 2.5 N 2 1.5 1 0.5 M 1 2 3 4 5 6 donuts 1 2 3 4 5 6 donuts

____ 15. Refer to Figure 2-8, Panel (a). The opportunity cost of moving from point J to point L is a. 2 cups of coffee. b. 2 donuts. c. 2 donuts and 2 cups of coffee. d. 6 cups of coffee. ____ 16. Over time, housing shortages caused by rent control a. increase, because the demand for and supply of housing are less elastic in the long run. b. increase, because the demand for and supply of housing are more elastic in the long run. c. decrease, because the demand for and supply of housing are less elastic in the long run. d. decrease, because the demand for and supply of housing are more elastic in the long run. Figure 21-8
y

(a)

(b)

(c)

____ 17. Refer to Figure 21-8. Which of the graphs shown represent indifference curves for perfect complements? a. graph a b. graph c c. graph b d. All of the above are correct. ____ 18. Suppose you make jewelry. If the price of gold falls, then we would expect you to

____ 19.

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____ 21.

____ 22.

a. face a greater demand for your jewelry. b. face a weaker demand for your jewelry. c. be willing and able to produce more jewelry than before at each possible price. d. be willing and able to produce less jewelry than before at each possible price. Which of the following is not held constant in a supply schedule? a. technology b. expectations c. the price of the good d. the prices of inputs Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. c. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. Buyers and sellers who have no influence on market price are referred to as a. monopolists. b. price makers. c. price takers. d. market pawns. The following diagram shows two budget lines: A and B.
10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 x A B y

Which of the following could explain the change in the budget line from A to B? a. a decrease in income and a decrease in the price of X b. an increase in income and a decrease in the price of X c. a decrease in income and an increase in the price of X d. an increase in income and an increase in the price of X ____ 23. When we move upward and to the left along a linear, downward-sloping demand curve, price elasticity of demand a. first becomes larger, then smaller. b. first becomes smaller, then larger.

____ 24.

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____ 26.

____ 27.

____ 28.

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c. always becomes larger. d. always becomes smaller. People are willing to pay more for a diamond than for a bottle of water because a. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices. b. water prices are held artificially low by governments, since water is necessary for life. c. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water. d. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1.00 per hour, then it is likely that the a. supply of bicycles will shift to the left. b. supply of bicycles will shift to the right. c. firm must increase output to maintain profit levels. d. demand for bicycle assembly workers will increase. A minimum wage that is set above a market's equilibrium wage will result in a. an excess supply of labor, that is, unemployment. b. an excess demand for labor, that is, a shortage of workers. c. an excess demand for labor, that is, unemployment. d. an excess supply of labor, that is, a shortage of workers. If the cross-price elasticity of two goods is negative, then those two goods are a. necessities. b. complements. c. normal goods. d. inferior goods. When the price of a normal good increases, a. both the income and substitution effects encourage the consumer to purchase more of the good. b. both the income and substitution effects encourage the consumer to purchase less of the good. c. the income effect encourages the consumer to purchase less of the good, and the substitution effect encourages the consumer to purchase more of the good. d. the income effect encourages the consumer to purchase more of the good, and the substitution effect encourages the consumer to purchase less of the good. Which of the following expressions represents a cross-price elasticity of demand? a. percentage change in quantity demanded of bread divided by percentage change in income b. percentage change in quantity demanded of bread divided by percentage change in quantity supplied of bread c. percentage change in quantity demanded of bread divided by percentage change in price of butter d. percentage change in price of bread divided by percentage change in quantity demanded of bread Suppose buyers of computers and printers regard those two goods as complements. Then an increase in the price of computers will cause a. a decrease in the demand for printers and a decrease in the quantity supplied of printers. b. a decrease in the supply of printers and a decrease in the quantity demanded of printers. c. a decrease in the equilibrium price of printers and an increase in the equilibrium quantity of printers.

____ 31.

____ 32.

____ 33.

____ 34.

d. an increase in the equilibrium price of printers and a decrease in the equilibrium quantity of printers. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 40 percent decrease in the quantity demanded. d. 4 percent decrease in the quantity demanded. Two goods are complements when a decrease in the price of one good a. decreases the demand for the other good. b. increases the quantity demanded of the other good. c. increases the demand for the other good. d. decreases the quantity demanded of the other good. Senator Smith argues that replacing the income tax with a national sales tax would increase the level of output. Senator Wells objects that this policy would benefit the rich at the expense of the poor. a. Senator Smiths argument is primarily about efficiency, while Senator Wells argument is primarily about equality. b. Both Senators arguments are primarily about equality. c. Both Senators arguments are primarily about efficiency. d. Senator Smiths argument is primarily about equality, while Senator Wells argument is primarily about efficiency. Which of the following statements is correct? a. The demand for natural gas is more elastic over a short period of time than over a long period of time. b. The demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general. c. The demand for smoke alarms is more elastic than the demand for Persian rugs. d. All of the above are correct. Figure 4-10
50 45 40 35 30 25 20 15 10 5 price

D
100 200 300 400 500 600 700 800 900 quantity

____ 35. Refer to Figure 4-10. If the price is $10, then there would be a a. surplus of 600 and price would rise. b. surplus of 400 and price would rise. c. shortage of 400 and price would rise. d. shortage of 600 and price would rise.

____ 36. Which of the following would not shift the supply curve for mp3 players? a. an improvement in the technology used to produce mp3 players b. a decrease in the number of sellers of mp3 players c. an increase in the price of mp3 players d. an increase in the price of plastic, an input into the production of mp3 players ____ 37. Which of the following descriptions best depicts the substitution effect? a. the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to change b. the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant c. the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant d. the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant ____ 38. You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf course in order to meet expenses. The mayor advises you to decrease the price of a round of golf. The city manager recommends increasing the price of a round of golf. You realize that a. both the mayor and the city manager think that demand is elastic. b. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic. c. the mayor thinks demand is elastic, and the city manager thinks demand is inelastic. d. both the mayor and the city manager think that demand is inelastic. ____ 39. When a shortage exists in a market, sellers a. lower price, which increases quantity demanded and decreases quantity supplied, until the shortage is eliminated. b. raise price, which decreases quantity demanded and increases quantity supplied, until the shortage is eliminated. c. lower price, which decreases quantity demanded and increases quantity supplied, until the shortage is eliminated. d. raise price, which increases quantity demanded and decreases quantity supplied, until the shortage is eliminated. ____ 40. Suppose the government has imposed a price ceiling on cellular phones. Which of the following events could transform the price ceiling from one that is binding to one that is not binding? a. Traditional land line phones become more expensive. b. Cellular phones become more popular. c. The components used to produce cellular phones become more expensive. d. A technological advance makes cellular phone production less expensive. ____ 41. Which of the following events will definitely cause equilibrium quantity to rise? a. demand decreases and supply increases b. demand increases and supply decreases c. demand and supply both decrease d. demand and supply both increase ____ 42. Which of the following is an example of a normative, as opposed to positive, statement? a. If the government were to set a maximum legal price on gasoline, then there would be a shortage of gasoline. b. The price of gasoline came down sharply during the second half of 2006. c. The federal government obtains much of its revenue from income taxes. d. Income taxes should be reduced. ____ 43. The rate at which a consumer is willing to exchange one good for another, and maintain a constant level of satisfaction, is called the

a. b. c. d.

value of marginal product. marginal rate of substitution. relative expenditure ratio. relative price ratio.

Figure 4-3
price

D'

D quantity

____ 44. Refer to Figure 4-3. The movement from D to D could be caused by a. a technological advance. b. a decrease in the price of a complement. c. a decrease in the price of a substitute. d. an increase in price. ____ 45. A production possibilities frontier is bowed outward when a. the rate of tradeoff between the two goods being produced depends on how much of each good is being produced. b. an economy is self-sufficient instead of interdependent and engaged in trade. c. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good. d. the rate of tradeoff between the two goods being produced is constant. ____ 46. Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then a. Germany will produce more cars than it would produce in the absence of trade. b. the two countries combined output of both goods will be higher than it would be in the absence of trade. c. Greece will produce more fish than it would produce in the absence of trade. d. All of the above are correct. Table 5-2 The following table shows a portion of the demand schedule for a particular good at various levels of income. Price $24 $20 Quantity Demanded (Income = $5,000) 2 4 Quantity Demanded (Income = $7,500) 3 6 Quantity Demanded (Income = $10,000) 4 8

$16 $12 $8 $4

6 8 10 12

9 12 15 18

12 16 20 24

____ 47. Refer to Table 5-2. Using the midpoint method, at a price of $16, what is the income elasticity of demand when income rises from $5,000 to $10,000? a. 0.00 b. 1.00 c. 0.50 d. 1.50 Figure 4-7
price

S'

quantity

____ 48. Refer to Figure 4-7. If the supply curves that are drawn represent supply curves for single-family residential houses, then the movement from S to S could be caused by a. an increase in the price of apartments (a substitute for single-family houses for many people looking for a place to live). b. a newly-formed expectation by house-builders that prices of houses will increase significantly in the next six months. c. a decrease in the price of lumber. d. All of the above are correct. ____ 49. A market supply curve is determined by a. horizontally summing individual supply curves. b. vertically summing individual supply curves. c. finding the average price at which sellers are willing and able to sell a particular quantity of the good. d. finding the average quantity supplied by sellers at each possible price.

Introduction to Microeconomics Spring 2011 Exam 1 Answer Section

MULTIPLE CHOICE 1. ANS: NAT: MSC: 2. ANS: NAT: TOP: 3. ANS: NAT: TOP: 4. ANS: NAT: MSC: 5. ANS: NAT: MSC: 6. ANS: NAT: TOP: 7. ANS: NAT: TOP: 8. ANS: NAT: MSC: 9. ANS: NAT: MSC: 10. ANS: NAT: MSC: 11. ANS: NAT: MSC: 12. ANS: NAT: MSC: 13. ANS: NAT: TOP: MSC: 14. ANS: NAT: MSC: D PTS: 1 DIF: 3 REF: 21-1 Analytic LOC: Utility and consumer choice TOP: Budget constraint Analytical B PTS: 1 DIF: 2 REF: 3-2 Analytic LOC: Gains from trade, specialization and trade Absolute advantage | Comparative advantage MSC: Applicative B PTS: 1 DIF: 3 REF: 1-1 Analytic LOC: Scarcity, tradeoffs, and opportunity cost Opportunity cost MSC: Applicative C PTS: 1 DIF: 1 REF: 4-2 Analytic LOC: Supply and demand TOP: Law of demand Definitional D PTS: 1 DIF: 2 REF: 4-2 Analytic LOC: Supply and demand TOP: Demand curve Applicative D PTS: 1 DIF: 2 REF: 3-2 Analytic LOC: Gains from trade, specialization and trade Specialization MSC: Applicative D PTS: 1 DIF: 1 REF: 1-2 Analytic LOC: Markets, market failure, and externalities Market economies MSC: Definitional C PTS: 1 DIF: 2 REF: 5-1 Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand Applicative B PTS: 1 DIF: 3 REF: 5-2 Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply Analytical C PTS: 1 DIF: 2 REF: 5-3 Analytic LOC: Elasticity TOP: Government | Demand | Supply Applicative C PTS: 1 DIF: 2 REF: 21-4 Analytic LOC: Utility and consumer choice TOP: Labor supply Interpretive C PTS: 1 DIF: 2 REF: 1-3 Analytic LOC: Productivity and growth TOP: Productivity | Standard of living Applicative A PTS: 1 DIF: 3 REF: 5-3 Analytic LOC: Elasticity Equilibrium | Price elasticity of demand | Total consumer spending Analytical A PTS: 1 DIF: 3 REF: 21-3 Analytic LOC: Utility and consumer choice TOP: Optimization Analytical

15. ANS: NAT: TOP: 16. ANS: NAT: MSC: 17. ANS: NAT: MSC: 18. ANS: NAT: MSC: 19. ANS: NAT: MSC: 20. ANS: NAT: 21. ANS: NAT: MSC: 22. ANS: NAT: MSC: 23. ANS: NAT: MSC: 24. ANS: NAT: MSC: 25. ANS: NAT: MSC: 26. ANS: NAT: MSC: 27. ANS: NAT: MSC: 28. ANS: NAT: MSC: 29. ANS: NAT: MSC: 30. ANS: NAT: 31. ANS: NAT: MSC:

A PTS: 1 DIF: 2 REF: 2-1 Analytic LOC: Understanding and applying economic models Production possibilities frontier | Opportunity cost MSC: Applicative B PTS: 1 DIF: 2 REF: 6-1 Analytic LOC: Supply and demand TOP: Rent control | Long run | Elasticity Interpretive C PTS: 1 DIF: 1 REF: 21-2 Analytic LOC: Utility and consumer choice TOP: Perfect complements Interpretive C PTS: 1 DIF: 2 REF: 4-3 Analytic LOC: Supply and demand TOP: Input prices Applicative C PTS: 1 DIF: 2 REF: 4-3 Analytic LOC: Supply and demand TOP: Supply schedule Interpretive A PTS: 1 DIF: 2 REF: 4-4 Analytic LOC: Equilibrium TOP: Equilibrium MSC: Interpretive C PTS: 1 DIF: 1 REF: 4-1 Analytic LOC: Perfect competition TOP: Perfect competition Definitional D PTS: 1 DIF: 3 REF: 21-1 Analytic LOC: Utility and consumer choice TOP: Budget constraint Analytical C PTS: 1 DIF: 2 REF: 5-1 Analytic LOC: Elasticity TOP: Price elasticity of demand Interpretive C PTS: 1 DIF: 2 REF: 1-1 Analytic LOC: Marginal costs & benefits TOP: Marginal changes Interpretive A PTS: 1 DIF: 2 REF: 4-3 Analytic LOC: Supply and demand TOP: Input prices Applicative A PTS: 1 DIF: 2 REF: 6-1 Analytic LOC: Labor markets TOP: Minimum wage | Unemployment Interpretive B PTS: 1 DIF: 2 REF: 5-1 Analytic LOC: Elasticity TOP: Cross-price elasticity of demand Interpretive B PTS: 1 DIF: 2 REF: 21-3 Analytic LOC: Utility and consumer choice TOP: Income effect | Substitution effect Analytical C PTS: 1 DIF: 1 REF: 5-1 Analytic LOC: Elasticity TOP: Cross-price elasticity of demand Definitional A PTS: 1 DIF: 2 REF: 4-4 Analytic LOC: Equilibrium TOP: Equilibrium MSC: Applicative C PTS: 1 DIF: 2 REF: 5-1 Analytic LOC: Elasticity TOP: Price elasticity of demand Applicative

32. ANS: NAT: MSC: 33. ANS: NAT: MSC: 34. ANS: NAT: MSC: 35. ANS: NAT: 36. ANS: NAT: MSC: 37. ANS: NAT: MSC: 38. ANS: NAT: MSC: 39. ANS: NAT: 40. ANS: NAT: MSC: 41. ANS: NAT: 42. ANS: NAT: TOP: 43. ANS: NAT: MSC: 44. ANS: NAT: MSC: 45. ANS: NAT: TOP: 46. ANS: NAT: TOP: 47. ANS: NAT: MSC: 48. ANS: NAT: MSC: 49. ANS:

C PTS: 1 DIF: 1 REF: 4-2 Analytic LOC: Supply and demand TOP: Complements Definitional A PTS: 1 DIF: 1 REF: 1-1 Analytic LOC: Efficiency and equity TOP: Equality | Efficiency Interpretive B PTS: 1 DIF: 2 REF: 5-1 Analytic LOC: Elasticity TOP: Price elasticity of demand Interpretive D PTS: 1 DIF: 2 REF: 4-4 Analytic LOC: Equilibrium TOP: Shortages MSC: Applicative C PTS: 1 DIF: 2 REF: 4-3 Analytic LOC: Supply and demand TOP: Supply curve Applicative C PTS: 1 DIF: 2 REF: 21-3 Analytic LOC: Utility and consumer choice TOP: Substitution effect Definitional C PTS: 1 DIF: 2 REF: 5-1 Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand Applicative B PTS: 1 DIF: 2 REF: 4-4 Analytic LOC: Equilibrium TOP: Shortages MSC: Interpretive D PTS: 1 DIF: 3 REF: 6-1 Analytic LOC: Supply and demand TOP: Price ceilings Analytical D PTS: 1 DIF: 2 REF: 4-4 Analytic LOC: Equilibrium TOP: Equilibrium MSC: Interpretive D PTS: 1 DIF: 2 REF: 2-2 Analytic LOC: The study of economics and definitions in economics Normative statements MSC: Applicative B PTS: 1 DIF: 1 REF: 21-2 Analytic LOC: Utility and consumer choice TOP: Marginal rate of substitution Definitional C PTS: 1 DIF: 2 REF: 4-2 Analytic LOC: Supply and demand TOP: Substitutes Interpretive A PTS: 1 DIF: 2 REF: 3-1 Analytic LOC: Understanding and applying economic models Production possibilities frontier MSC: Interpretive D PTS: 1 DIF: 2 REF: 3-2 Analytic LOC: Gains from trade, specialization and trade Specialization MSC: Applicative B PTS: 1 DIF: 2 REF: 5-1 Analytic LOC: Elasticity TOP: Income elasticity of demand Analytical C PTS: 1 DIF: 2 REF: 4-3 Analytic LOC: Supply and demand TOP: Input prices Applicative A PTS: 1 DIF: 2 REF: 4-3

NAT: Analytic MSC: Interpretive

LOC: Supply and demand

TOP: Market supply