Economics Midterm Exam
Name: ___________________________________
First Midterm Examination
Economics 101
October 13, 2010
This exam has 33 questions.
Unless a question explicitly says otherwise, assume that all demand curves slope downward, all supply curves slope upward, and there are no externalities.
True/False.
Mark box A for True and box B for False.
Each blank answer gives you 1 point.
Each correct answer adds 2 points to your score.
1. In the presence of a negative externality in the market for a good, a tax reduces both consumer and producer surplus in that market.
2. A company in a competitive market can increase its producer surplus by selling below the equilibrium price.
3. If there are risks associated with drilling for oil in the Gulf, …show more content…
economic analysis suggests drilling should be completely suspended until all of the risks are eliminated.
4. If demand is price inelastic, then a decrease in its price causes total expenditure on that good to decrease.
5. A PPF has a negative slope because of tradeoffs in the production process.
6. A competitive company’s producer surplus is maximized when it produces the level of output at which P=MC.
7. Mary is willing and able to pay at most $5 for her first bagel, $3 for her second bagel, and $1 for her third bagel. As she consumes more bagels, her total benefit from bagel consumption declines.
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Page 1
8. If the marginal external benefit of a flu vaccine is always $20, then the marginal social benefit curve is drawn by shifting the marginal private benefit curve to the right by $20.
9. A technological advance in the production of cotton causes an increase in the supply of cotton. 10. When there is an increase in demand for a product, supply increases to adjust to a new equilibrium. Multiple Choice.
Mark the box corresponding to the best answer. score. Each blank answer gives you 1 point.
Each correct answer adds 5 points to your
11. Consider the following demand and supply schedules for insulin pills, a life-saving drug. If the government decides to impose a $5 tax on each pill, then what is resulting price consumers pay for a pill?
A) $25
B) $22.50
C) $30
D) $20
E) $15
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Page 2
12. At the same time the government requires higher interest rates and down payments on mortgages to buy a house, the government builds new houses. If these two events happening at the same time cause the equilibrium quantity of houses purchased to decrease, then you know:
A) the effect of the change in demand on the equilibrium price dominates the effect of the change in supply.
B) the effect of the change in supply on the equilibrium quantity dominates the effect of the change in demand.
C) the effect of the change in demand on the equilibrium quantity dominates the effect of the change in supply.
D) the demand and supply of houses must both be changing in the same direction.
E) the effect of the change in supply on the equilibrium price dominates the effect of the change in demand.
13. Which of the following statements correctly describes why the equilibrium outcome in the competitive market for gasoline, where consumption generates a negative externality, is inefficient?
A) The social cost of the last gallon is greater than its benefit.
B) The marginal external cost of the last gallon is less than its marginal benefit.
C) The marginal external cost of another gallon is greater than the marginal external benefit. D) The marginal external cost of the last gallon is greater than the marginal private cost. E) The social cost from all gasoline consumption is greater than the total benefit.
14. Which of the following occurs if the price elasticity of demand for a product is greater than one?
A) If the price of the product increases, then producers’ total revenue from the sale of the product will also increase.
B) If the price of the product increases by 1%, then the quantity demanded will decrease by more than one 1%.
C) If demand for the product increases, then consumers’ total expenditure on it will decrease. D) If the price of the product increases, then the quantity demanded will also increase.
E) More than one of the above is correct.
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15. The demand curve for cigarettes is shown in the graph below. Smokers adversely affect the health of people around them and impose healthcare costs on society. The marginal external cost of a pack of cigarettes in the efficient outcome is $6. If the government taxes each pack of cigarettes to achieve that efficient outcome, the price of a pack of cigarettes increases from $2 to $7. Cigarette producers’ total revenue in this efficient outcome is _______.
A)
B)
C)
D)
E)
$14 million
$2 million
$10 million
$12 million
$4 million
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Page 4
16. Industrial activity releases the pollutant sulfur dioxide (SO2), which causes acid rain and health problems. Current regulations permit the emission of a maximum of 14 million tons of SO2. More restrictive regulations are introduced that permit the emission of a maximum of only 10 million tons of SO2. According to the diagram below, what is the change in the total cost of abatement due to the new regulations?
A)
B)
C)
D)
E)
Increases by $16 million
Increases by $4 million
Increases by $8 million
Increases by $7 million
Increases by $24 million
17. The market for corn is in equilibrium and then there is a decrease in supply. Which of the following statements correctly describes movement to the new equilibrium? After supply decreases, there must be ________________.
A) a decrease in the quantity of corn supplied
B) an initial surplus of corn
C) a decrease in the demand for corn
D) a decrease in the quantity of corn demanded
E) more than one of the above is correct
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Page 5
18. Aaron and Evan read the tabloids. Unfortunately, this means they produce a lot of hot air that the rest of the GSIs must deal with. Aaron currently produces 60 units and Evan produces 20, and their marginal cost of abatement curves are shown in the graph below.
The rest of the GSIs band together and give Aaron and Evan an equal number of permits that allow them to produce only half of the original quantity of hot air. Aaron and
Evan may trade permits.
Who buys permits, and what is the equilibrium price?
A) Evan buys permits. The equilibrium price is $2.
B) Aaron buys permits. The equilibrium price is $2.
C) Evan buys permits. The equilibrium price is $1.
D) Aaron buys permits. The equilibrium price is $1.
E) Aaron buys permits. The equilibrium price is $3
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Page 6
19. The mayor of Melgar, a small town in Colombia, read an article about the health benefits of drinking a bottle of orange juice per day. As a result, the mayor decided to provide a subsidy of $2 for each bottle of orange juice produced to help the members of the community improve their health. The graph below shows the market prior to introduction of the subsidy. At the new equilibrium, what is the government subsidy payment to producers, and what is the new price that consumers pay?
Price!per!bottle!($)
S
7
6
5
4
3
D
2
1
10
25
40
55
70
Bottles!of!Orange!Juice
A)
B)
C)
D)
E)
$110; $6
$220; $4
$50; $6
$110; $4
$330; $6
20. You observe an increase in the equilibrium price and at the same time a decrease in equilibrium quantity of tulips. Which of the following events in the competitive market for tulips could explain your observations?
A) Scientists develop a cheaper and more effective fertilizer for tulips, while biologists discover that smelling tulips causes memory loss.
B) Growers allocate more land to tulip production.
C) The price of roses, a substitute for tulips, increases, while half of the tulips produced are destroyed by a hurricane.
D) Many women develop an allergic reaction to tulips.
E) More than one of the above is correct.
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Page 7
21. A tanning salon has only four potential customers, whose marginal benefit schedules are listed below. If the salon sells exactly eleven hours of tanning, then which of the following could be the price for each hour of tanning?
A)
B)
C)
D)
E)
$5 per hour
$1 per hour
$4 per hour
$2 per hour
$3 per hour
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Page 8
22. A severe drought in Russia caused a 200 thousand bushel decrease in the supply of wheat. According to the diagram below, what is the change in total revenue caused by this drought?
A)
B)
C)
D)
E)
An increase of $1,800 thousand
A decrease of $200 thousand
A decrease of $800 thousand
An increase of $1,600 thousand
An increase of $200 thousand
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Page 9
23. Fred’s marginal benefit schedule for pencils is shown below. Suppose that initially the price of a pencil is $2, but then a generous benefactor of the University decides to donate an endless amount of pencils to students and therefore pencils become free. What areas represent the CHANGE in Fred’s consumer surplus as a result of this donation?
A)
B)
C)
D)
E)
A+B+C+D+E+F
C+D+E+F+G
A+B+C+D+E+F+G
C+D+E+F
E+F
24. Consider an outward bowed PPF showing the tradeoff between the production of Guns and Butter in an economy. Which of the following statements best describes the increasing opportunity cost of Guns in this economy?
A) The resources best used in Gun production have priority in the production of
Butter.
B) When Gun production is greater, resources are more easily switched from the production of Butter to the production of Guns.
C) If there is an increase in the production of Guns, less Butter can be produced.
D) The sacrifice of Butter necessary to produce another Gun is always the same.
E) As more Guns are produced, the sacrifice of Butter necessary to produce another
Gun is greater.
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Page 10
25. Late-night TV advertisements are an input in the production of Snuggies. An increase in the price of late-night TV advertisements causes the equilibrium price and quantity of
Snuggies to change. If demand is price elastic at both the original and new equilibrium, then which of the following (comparing the new equilibrium outcome to the original) MUST be correct?
A) Total revenue from Snuggies sales has increased
B) The market price has fallen
C) Producer surplus has increased
D) Late-night advertising has increased
E) Consumer expenditure on Snuggies has fallen
26. The demand for meatball subs is price inelastic when the price falls from $4 to $2. At a price of $4, the quantity demanded is 40 meatball subs. At a price of $2, which of the following quantities of meatball subs could be demanded?
A) 80 subs
B) 160 subs
C) 60 subs
D) 120 …show more content…
subs
E) 30 subs
27. In the market for Swiss watches, both fake and real watches exist with some probability.
The table below gives the highest price a buyer will pay, and the minimum price a seller will accept to sell each type of watch. What is the greatest probability of a fake watch that still allows for an equilibrium in which both fake and real Swiss watches are traded? A)
B)
C)
D)
E)
50 percent
25 percent
40 percent
10 percent
75 percent
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Page 11
28. This winter is predicted to be very cold, which will cause the demand for natural gas to increase. The supply curve for natural gas is shown below. As a result of the change in demand, the equilibrium price of natural gas will rise from $2 to $4 per unit. What is the resulting effect on producer surplus in this market?
A)
B)
C)
D)
E)
a decrease of $30 an increase of $50 an increase of $62.50 an increase of $80 cannot be determined
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Page 12
29. The graph below shows supply curves for wheat, with the initial supply curve labeled S.
There is a change in the market and the resulting new supply curve is labeled S’.
Which of the following correctly states the change that occurred? There was
__________. !
!
A)
B)
C)
D)
E)
an increase in the quantity of wheat supplied an increase in the price of wheat a decrease in the price of wheat an decrease in the quantity supplied of wheat a decrease in the supply of wheat
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Page 13
30. The Ann Arbor branch of Dunder-Mifflin can produce boxes of paper and fire-prone printers, according to the PPF shown below. Suppose the CEO would like to increase production of boxes of paper from 600 to 1300. As the company's economist, you explain that the opportunity cost of producing another box of paper for this production increase is:
A)
B)
C)
D)
E)
0.36 boxes of paper per printer
0.036 printers per box of paper
25 printers per box of paper
0.36 printers per box of paper
28 boxes of paper per printer
31. Which of the following statements define efficiency in the competitive market for coffee? A) The benefit from the last cup of coffee consumed equals the cost of the last cup of coffee produced.
B) The benefit to the last consumer to purchase coffee equals the price of coffee.
C) The cost to the last seller to produce coffee equals the price of coffee.
D) (B) and (C) are both statements defining market efficiency.
E) (A), (B), and (C) are all statements defining market efficiency.
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32. Beer drinkers like to drink beer. When they drink, they sing cheesy ‘80s songs that keep their neighbors up all night. The graph below shows the marginal private benefit curve and the marginal social cost curve for the beer market. The price of a bottle of beer is $3. If a new tax increases the price that consumers pay for a bottle of beer to
$4, then which of the following areas represent the deadweight loss eliminated by this tax? A)
B)
C)
D)
E)
F+G
C+D
A+B+I
C+D+E+F+G+H
E+F+G+H
33. When we discussed the demand curve in lecture, an example that we highlighted was:
A) the effect of violence in Mexico on tourism.
B) expansion of trade with China and the effect on pirated software prices.
C) the effect of recent airline mergers on holiday airfares.
D) the effect of the recession on the demand for diamond engagement rings.
E) the effect of the recession and higher prices in the market for movies.
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Page 15
Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
True
False
False
True
True
True
False
False
True
False
A
C
A
B
B
A
D
B
D
C
C
B
D
E
E
C
B
B
E
B
A
E
E
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Page 16
First Midterm Examination
Economics 101
October 13, 2010
This exam has 33 questions.
Unless a question explicitly says otherwise, assume that all demand curves slope downward, all supply curves slope upward, and there are no externalities.
True/False.
Mark box A for True and box B for False.
Each blank answer gives you 1 point.
Each correct answer adds 2 points to your score.
1. In the presence of a negative externality in the market for a good, a tax reduces both consumer and producer surplus in that market.
2. A company in a competitive market can increase its producer surplus by selling below the equilibrium price.
3. If there are risks associated with drilling for oil in the Gulf, …show more content…
economic analysis suggests drilling should be completely suspended until all of the risks are eliminated.
4. If demand is price inelastic, then a decrease in its price causes total expenditure on that good to decrease.
5. A PPF has a negative slope because of tradeoffs in the production process.
6. A competitive company’s producer surplus is maximized when it produces the level of output at which P=MC.
7. Mary is willing and able to pay at most $5 for her first bagel, $3 for her second bagel, and $1 for her third bagel. As she consumes more bagels, her total benefit from bagel consumption declines.
Version 1
Page 1
8. If the marginal external benefit of a flu vaccine is always $20, then the marginal social benefit curve is drawn by shifting the marginal private benefit curve to the right by $20.
9. A technological advance in the production of cotton causes an increase in the supply of cotton. 10. When there is an increase in demand for a product, supply increases to adjust to a new equilibrium. Multiple Choice.
Mark the box corresponding to the best answer. score. Each blank answer gives you 1 point.
Each correct answer adds 5 points to your
11. Consider the following demand and supply schedules for insulin pills, a life-saving drug. If the government decides to impose a $5 tax on each pill, then what is resulting price consumers pay for a pill?
A) $25
B) $22.50
C) $30
D) $20
E) $15
Version 1
Page 2
12. At the same time the government requires higher interest rates and down payments on mortgages to buy a house, the government builds new houses. If these two events happening at the same time cause the equilibrium quantity of houses purchased to decrease, then you know:
A) the effect of the change in demand on the equilibrium price dominates the effect of the change in supply.
B) the effect of the change in supply on the equilibrium quantity dominates the effect of the change in demand.
C) the effect of the change in demand on the equilibrium quantity dominates the effect of the change in supply.
D) the demand and supply of houses must both be changing in the same direction.
E) the effect of the change in supply on the equilibrium price dominates the effect of the change in demand.
13. Which of the following statements correctly describes why the equilibrium outcome in the competitive market for gasoline, where consumption generates a negative externality, is inefficient?
A) The social cost of the last gallon is greater than its benefit.
B) The marginal external cost of the last gallon is less than its marginal benefit.
C) The marginal external cost of another gallon is greater than the marginal external benefit. D) The marginal external cost of the last gallon is greater than the marginal private cost. E) The social cost from all gasoline consumption is greater than the total benefit.
14. Which of the following occurs if the price elasticity of demand for a product is greater than one?
A) If the price of the product increases, then producers’ total revenue from the sale of the product will also increase.
B) If the price of the product increases by 1%, then the quantity demanded will decrease by more than one 1%.
C) If demand for the product increases, then consumers’ total expenditure on it will decrease. D) If the price of the product increases, then the quantity demanded will also increase.
E) More than one of the above is correct.
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Page 3
15. The demand curve for cigarettes is shown in the graph below. Smokers adversely affect the health of people around them and impose healthcare costs on society. The marginal external cost of a pack of cigarettes in the efficient outcome is $6. If the government taxes each pack of cigarettes to achieve that efficient outcome, the price of a pack of cigarettes increases from $2 to $7. Cigarette producers’ total revenue in this efficient outcome is _______.
A)
B)
C)
D)
E)
$14 million
$2 million
$10 million
$12 million
$4 million
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Page 4
16. Industrial activity releases the pollutant sulfur dioxide (SO2), which causes acid rain and health problems. Current regulations permit the emission of a maximum of 14 million tons of SO2. More restrictive regulations are introduced that permit the emission of a maximum of only 10 million tons of SO2. According to the diagram below, what is the change in the total cost of abatement due to the new regulations?
A)
B)
C)
D)
E)
Increases by $16 million
Increases by $4 million
Increases by $8 million
Increases by $7 million
Increases by $24 million
17. The market for corn is in equilibrium and then there is a decrease in supply. Which of the following statements correctly describes movement to the new equilibrium? After supply decreases, there must be ________________.
A) a decrease in the quantity of corn supplied
B) an initial surplus of corn
C) a decrease in the demand for corn
D) a decrease in the quantity of corn demanded
E) more than one of the above is correct
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Page 5
18. Aaron and Evan read the tabloids. Unfortunately, this means they produce a lot of hot air that the rest of the GSIs must deal with. Aaron currently produces 60 units and Evan produces 20, and their marginal cost of abatement curves are shown in the graph below.
The rest of the GSIs band together and give Aaron and Evan an equal number of permits that allow them to produce only half of the original quantity of hot air. Aaron and
Evan may trade permits.
Who buys permits, and what is the equilibrium price?
A) Evan buys permits. The equilibrium price is $2.
B) Aaron buys permits. The equilibrium price is $2.
C) Evan buys permits. The equilibrium price is $1.
D) Aaron buys permits. The equilibrium price is $1.
E) Aaron buys permits. The equilibrium price is $3
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Page 6
19. The mayor of Melgar, a small town in Colombia, read an article about the health benefits of drinking a bottle of orange juice per day. As a result, the mayor decided to provide a subsidy of $2 for each bottle of orange juice produced to help the members of the community improve their health. The graph below shows the market prior to introduction of the subsidy. At the new equilibrium, what is the government subsidy payment to producers, and what is the new price that consumers pay?
Price!per!bottle!($)
S
7
6
5
4
3
D
2
1
10
25
40
55
70
Bottles!of!Orange!Juice
A)
B)
C)
D)
E)
$110; $6
$220; $4
$50; $6
$110; $4
$330; $6
20. You observe an increase in the equilibrium price and at the same time a decrease in equilibrium quantity of tulips. Which of the following events in the competitive market for tulips could explain your observations?
A) Scientists develop a cheaper and more effective fertilizer for tulips, while biologists discover that smelling tulips causes memory loss.
B) Growers allocate more land to tulip production.
C) The price of roses, a substitute for tulips, increases, while half of the tulips produced are destroyed by a hurricane.
D) Many women develop an allergic reaction to tulips.
E) More than one of the above is correct.
Version 1
Page 7
21. A tanning salon has only four potential customers, whose marginal benefit schedules are listed below. If the salon sells exactly eleven hours of tanning, then which of the following could be the price for each hour of tanning?
A)
B)
C)
D)
E)
$5 per hour
$1 per hour
$4 per hour
$2 per hour
$3 per hour
Version 1
Page 8
22. A severe drought in Russia caused a 200 thousand bushel decrease in the supply of wheat. According to the diagram below, what is the change in total revenue caused by this drought?
A)
B)
C)
D)
E)
An increase of $1,800 thousand
A decrease of $200 thousand
A decrease of $800 thousand
An increase of $1,600 thousand
An increase of $200 thousand
Version 1
Page 9
23. Fred’s marginal benefit schedule for pencils is shown below. Suppose that initially the price of a pencil is $2, but then a generous benefactor of the University decides to donate an endless amount of pencils to students and therefore pencils become free. What areas represent the CHANGE in Fred’s consumer surplus as a result of this donation?
A)
B)
C)
D)
E)
A+B+C+D+E+F
C+D+E+F+G
A+B+C+D+E+F+G
C+D+E+F
E+F
24. Consider an outward bowed PPF showing the tradeoff between the production of Guns and Butter in an economy. Which of the following statements best describes the increasing opportunity cost of Guns in this economy?
A) The resources best used in Gun production have priority in the production of
Butter.
B) When Gun production is greater, resources are more easily switched from the production of Butter to the production of Guns.
C) If there is an increase in the production of Guns, less Butter can be produced.
D) The sacrifice of Butter necessary to produce another Gun is always the same.
E) As more Guns are produced, the sacrifice of Butter necessary to produce another
Gun is greater.
Version 1
Page 10
25. Late-night TV advertisements are an input in the production of Snuggies. An increase in the price of late-night TV advertisements causes the equilibrium price and quantity of
Snuggies to change. If demand is price elastic at both the original and new equilibrium, then which of the following (comparing the new equilibrium outcome to the original) MUST be correct?
A) Total revenue from Snuggies sales has increased
B) The market price has fallen
C) Producer surplus has increased
D) Late-night advertising has increased
E) Consumer expenditure on Snuggies has fallen
26. The demand for meatball subs is price inelastic when the price falls from $4 to $2. At a price of $4, the quantity demanded is 40 meatball subs. At a price of $2, which of the following quantities of meatball subs could be demanded?
A) 80 subs
B) 160 subs
C) 60 subs
D) 120 …show more content…
subs
E) 30 subs
27. In the market for Swiss watches, both fake and real watches exist with some probability.
The table below gives the highest price a buyer will pay, and the minimum price a seller will accept to sell each type of watch. What is the greatest probability of a fake watch that still allows for an equilibrium in which both fake and real Swiss watches are traded? A)
B)
C)
D)
E)
50 percent
25 percent
40 percent
10 percent
75 percent
Version 1
Page 11
28. This winter is predicted to be very cold, which will cause the demand for natural gas to increase. The supply curve for natural gas is shown below. As a result of the change in demand, the equilibrium price of natural gas will rise from $2 to $4 per unit. What is the resulting effect on producer surplus in this market?
A)
B)
C)
D)
E)
a decrease of $30 an increase of $50 an increase of $62.50 an increase of $80 cannot be determined
Version 1
Page 12
29. The graph below shows supply curves for wheat, with the initial supply curve labeled S.
There is a change in the market and the resulting new supply curve is labeled S’.
Which of the following correctly states the change that occurred? There was
__________. !
!
A)
B)
C)
D)
E)
an increase in the quantity of wheat supplied an increase in the price of wheat a decrease in the price of wheat an decrease in the quantity supplied of wheat a decrease in the supply of wheat
Version 1
Page 13
30. The Ann Arbor branch of Dunder-Mifflin can produce boxes of paper and fire-prone printers, according to the PPF shown below. Suppose the CEO would like to increase production of boxes of paper from 600 to 1300. As the company's economist, you explain that the opportunity cost of producing another box of paper for this production increase is:
A)
B)
C)
D)
E)
0.36 boxes of paper per printer
0.036 printers per box of paper
25 printers per box of paper
0.36 printers per box of paper
28 boxes of paper per printer
31. Which of the following statements define efficiency in the competitive market for coffee? A) The benefit from the last cup of coffee consumed equals the cost of the last cup of coffee produced.
B) The benefit to the last consumer to purchase coffee equals the price of coffee.
C) The cost to the last seller to produce coffee equals the price of coffee.
D) (B) and (C) are both statements defining market efficiency.
E) (A), (B), and (C) are all statements defining market efficiency.
Version 1
Page 14
32. Beer drinkers like to drink beer. When they drink, they sing cheesy ‘80s songs that keep their neighbors up all night. The graph below shows the marginal private benefit curve and the marginal social cost curve for the beer market. The price of a bottle of beer is $3. If a new tax increases the price that consumers pay for a bottle of beer to
$4, then which of the following areas represent the deadweight loss eliminated by this tax? A)
B)
C)
D)
E)
F+G
C+D
A+B+I
C+D+E+F+G+H
E+F+G+H
33. When we discussed the demand curve in lecture, an example that we highlighted was:
A) the effect of violence in Mexico on tourism.
B) expansion of trade with China and the effect on pirated software prices.
C) the effect of recent airline mergers on holiday airfares.
D) the effect of the recession on the demand for diamond engagement rings.
E) the effect of the recession and higher prices in the market for movies.
Version 1
Page 15
Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
True
False
False
True
True
True
False
False
True
False
A
C
A
B
B
A
D
B
D
C
C
B
D
E
E
C
B
B
E
B
A
E
E
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Page 16