Multiple Choice questions /60 Problem 1 /20 Problem 2 /20

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1 Econ 200 Summer 2011 Dr. Alan and Prof. Crossley Midterm Solutions ANSWERS IN BOLD Multiple Choice questions /60 Problem 1 /20 Problem 2 /20 Part I: Multiple Choice Questions Instructions: Circle one and only one answer for each question. Circling more than 1 answer will be treated as a wrong answer. Each question in this section is worth 4 points if your answer is correct, 0 point if it is wrong, and 1 point if you unambigously leave it blank. 1. An important element of the market process is that a. although people trade voluntarily, one party "wins" and the other party "loses." b. the government determines the extent of market activity in order for all parties to benefit. c. people are better off if they are self-sufficient than if they trade with others in the market. d. people trade voluntarily and all parties expect to benefit. 2. Suppose you are considering going to the cinema, and you place a 12 value on your anticipated enjoyment of the film. The ticket price is 6 and you would be giving up two hours of work, where you earn 5 per hour. You would go to a. work; the opportunity cost of the movies exceeds the expected benefit. b. the see the film; your incentive is the 6 excess expected benefit. c. the see the film; your enjoyment will exceed the lost wages by 2. d. the see the film; the benefit of 18 exceeds the lost wages. 3. Refer to the figure below. Suppose an economy has the production possibilities frontier shown in the diagram and is operating at position A. Which of the statements below is false? Name 1 / 10

2 a. This economy could produce more of both capital and consumption goods. b. This economy is experiencing full employment. c. This economy could produce more capital goods without decreasing the quantity of consumption goods produced. d. This economy could produce more consumption goods without decreasing the quantity of capital goods produced. 4. If Poland can produce each unit of steel using fewer resources than Germany does, a. Poland has an absolute advantage in steel production. b. Germany has an absolute advantage in steel production. c. Poland has a comparative advantage in steel production. d. Germany has a comparative advantage in steel production. 5. If England can produce two rugs or 100 spy novels in an hour, and Turkey can produce one rug or 50 spy novels in an hour a. Turkey should produce both rugs and spy novels. b. Turkey should produce only rugs. c. England should produce only rugs. d. there are no gains from trade between these two countries with these two goods. 6. Suppose that a large dairy farmer is able to raise the market price of milk by restricting milk supply to the market. In this case, a. the milk market is perfectly competitive. b. buyers will decrease their demand for milk. c. buyers will increase their demand for milk. d. the milk market is imperfectly competitive. 7. Refer to the figure below. This diagram shows the market for roller skates. Which of the following would cause a move from point A to point B? a. an increase in the price of bicycles b. a decrease in the price of bicycles c. a decrease in consumer incomes d. a popular new movie that convinces teens that skateboards are really cool Name 2 / 10

3 8. Suppose that the price elasticity of supply of home cleaners is 1.5. If the price of home cleaners rises 5 per cent, the quantity supplied of home cleaners would a. decline 7.5 per cent. b. rise 7.5 per cent. c. rise 1.5 per cent. d. rise 0.3 per cent. 9. When the minimum wage is set above the equilibrium market wage, a. there will be an excess demand for labour at the minimum wage. b. it will have no effect on the quantity of labour employed. c. the unemployment rate will rise. d. the quality of the labour force will rise. 10. Taxes levied directly on consumers a. always hurt consumers rather than producers. b. always hurt producers rather than consumers. c. generate more revenue than taxes levied on producers. d. have the same effect as taxes directly levied on producers. 11. Refer to the Figure below. Consider the impact of a tax on sellers, shown in this diagram of the market for whisky. In this case, the total tax revenue collected by the government is a. 3 b c. 13,500 d. 40,500 Name 3 / 10

4 12. Refer the figure below. This diagram shows the market for fish, in equilibrium at 20 per kilo. At this price consumer surplus is a b c d If marginal cost is greater than average total cost then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing. 14. Miller Technologies has average variable costs of 6 and average total costs of 10 when it produces 1,000 units of output. The firm's total fixed costs equal Name 4 / 10

5 a. 2,000. b. 3,000. c. 4,000. d. 5, Refer to the table below. This table describes the relationship between output, marginal revenue, and marginal cost. If the firm is currently producing 14 units, what would you advise them to do? a. decrease quantity to 13 b. increase quantity to 15 c. remain at 14 units d. increase quantity to 16 units Unit Marginal Marginal Quantity Cost Revenue Name 5 / 10

6 Part II: Short Answer Instructions: Show your work but do not exceed the space provided. Problem 1: There is a market with 8 buyers and 8 sellers. Each buyer can buy at most 1 unit, each seller can produce at most 1 unit. Buyer Willingness to Pay Seller Cost a) What is the quantity demanded when price is 50? What is the quantity supplied when price is 50? There is an excess of units when price is 50. When price is 50, 7 are supplied, 5 are demanded, and there is an excess supply of 2 units. b) Compute the equilibrium price and quantity. The equilibrium price is 45 and the equilibrium quantity is 6. c) Compute the consumers surplus and producer surplus at the equilibrium price. CS = (95-45) + (85-45) + (85-45) +(70-45) +(50-45) +(45-45) = 160 PS = (45-45) + (45-30) + (45-30) +(45-25) +(45-25) +(45-25) = 90 d) The government puts a minimum price (PRICE FLOOR) of 70. How many units of the good will be bought and sold with the minimum price? Compute the consumers surplus with the minimum price. 4 units are bought and sold (suppliers would like to sell 8 but buyers will only buy 4). CS = (95-70) + (85-70) + (85-70) +(70-70) = 55 Name 6 / 10

7 Problem 2: Suppose there are 20 million workers in Canada, and 40 million workers in the Turkey. Each of these workers in both countries can be employed either in car or wheat production. Workers to be employed to make 1 Car Workers to be employed to make 1 ton of Wheat Canada 20 2 Turkey 20 5 When there is no trade, each country prefers to distribute its workforce equally between the two industries a) Canada has an absolute advantage in the production of wheat. Turkey has comparative advantage in the production of cars. b) Fill in the follow table of opportunity costs Opportunity cost of 1 Car (in terms of tons of wheat) Opportunity cost of 1 ton of wheat (in terms of cars) Canada Turkey c) Draw the Production Possibilities Frontiers for Canada and Turkey, and indicate their final consumption of wheat and cars in the absence of trade. (all quantities in millions) Canada: PPF linear from (cars, wheat) = (1,0) to (0, 10). With workforce equally split, final consumption is (0.5, 5). Turkey: PPF linear from (cars, wheat) = (2,0) to (0, 8). With workforce equally split, final consumption is (1, 4). d) Suppose each country spends all its time producing the good in which it has a comparative advantage and trades half of its production with the other country at the price of 5 tons of wheat for 1 car. What are the final consumptions of Canada and the Turkey? Which countries benefit from trade, if any? Canada produces 10 (million tons) wheat and trades 5 for 1 (million) cars, giving final consumption with trade of (cars, wheat) = (1, 5). Turkey produces 2 (million) cars and trades 1 (million) for 5 (million tons) of wheat, giving final consumption with trade of (cars, wheat) = (1, 5). Canada has the same wheat consumption as without trade but more cars, so it is better off. Turkey has the same car consumption as without trade, but more wheat, so it is better off. Name 7 / 10