Economics E201 (Professor Self) Sample Questions for Exam Two, Fall 2013

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1 , Fall 2013 Your exam will have two parts covering the topics in chapters 4 (page 91 through end of chapter), 5 and 6 from the Parkin chapters and chapter 10 (up to page 317, up to but not including the income and substitution effect) from Hubbard that are found in your textbook and any material we discussed in class that is not in your text. Part one will have between 20 and 25 multiple choice questions and part two will have short answer questions. Part One (MULTIPLE CHOICE): On your answer sheet darken in the letter of your choice for each question. You should choose the suggested answer that BEST completes the statement or answers the question. 1. Robinson spends all his income on mangos and bananas. Mangos cost $3 per pound and bananas cost $2 per pound. The marginal utility is 30 for the last pound of mangos purchased and 10 for the last pound of bananas. If Robinson could buy any amount of bananas and mangos to include only small pieces of each fruit, then to maximize his utility, Robinson should buy A) more mangos and fewer bananas. B) more bananas and fewer mangos. C) only mangos. D) the present combination of goods. 2. The income elasticity of demand for vacations is 5. If incomes increase by 3 percent next year, the quantity of vacations demanded at today's price will increase by percent. A) 5 B) 3 C) 15 D) 5/3 3. You are the new vice president in charge of advertising at Taco Bell. In your upcoming advertising campaign, you plan to degrade the fast food competitor whose product is the closest substitute for Taco Bell's tacos. That would be the fast food chain whose cross elasticity of demand with your tacos is equal to A) negative B) positive C) negative D) positive Last year, Jack's income was $15,000 and he bought 50 bags of potato chips. This year his income is $18,000 and he buys 55 bags of potato chips. Therefore, Jack's A) price elasticity of demand for potato chips is B) income elasticity of demand for potato chips is C) income elasticity of demand for potato chips is D) price elasticity of demand for potato chips is

2 5. A negative value for the cross elasticity of demand between two goods indicates that A) one of the goods is normal and the other is inferior. B) the goods are complements. C) the goods are substitutes. D) each good is price inelastic. 6. When the Smith's were shopping for their present home, the asking price from the previous owner was $250,000. The Smith's had decided they would pay no more than $245,000 for the house. After negotiations, the Smith's actually purchased the house for $239,000. Therefore, the previous owner earned a producer surplus of A) -$6,000. B) $5,000. C) $11,000. D) $239,000. E) an amount unknown given the information in the question. 7. When the competitive market is producing at an allocative efficient quantity, A) only the total amount of producer surplus is maximized. B) only the total amount of consumer surplus is maximized. C) the sum of the total amount of consumer surplus plus the total amount of producer surplus equals zero. D) the total amount of surplus is maximized. E) consumer and producer surplus is maximized but total surplus is minimized. 8. Adam Smith argued that each person in a competitive market is led to promote the A) efficient use of society's resources, even though it is no person's intention to make society better off. B) efficient use of society's resources, because each person's intention is to make society better off. C) inefficient use of society's resources, because it is no person's intention to make society better off. D) inefficient use of society's resources, even though each person's intention is to make society better off. 2

3 9. Using the "It's not fair if the result isn't fair" principle of fairness, an income tax designed to transfer income from the rich to the poor A) decreases efficiency and presumably increases equity. B) increases efficiency and does not affect equity. C) decreases efficiency and equity. D) increases efficiency and equity. E) does not change efficiency but presumably increases equity. 10. Competitive markets with their marginal cost equal to the marginal social costs, their marginal benefits equal to the marginal social benefits, and no government price ceilings, floors, taxes or subsidies efficient. According to the "It's not fair if the rules aren't fair" idea of fairness, competitive markets fair. A) are not; are B) are not; are not C) are; are not D) are; are 11. An effective minimum wage creates A) inefficiency because it decreases productive unemployment. B) efficiency because it increases most workers' wages. C) inefficiency because it causes a surplus of labor hours. D) efficiency because few workers lose their jobs. E) efficiency because it increases wages and labor hours. 12. In the market for hats the supply curve is defined as Ps = Q and the demand curve is defined as Pd = Q where P equals price and Q equals quantity. If a $20 tax is imposed on the sellers then the economic incidence of the tax to sellers is and to buyers it is. A) 67% of the tax; 33% of the tax B) 50% of the tax; 50% of the tax C) 100% of the tax; 0% of the tax D) 0% of the tax; 100% of the tax E) There is not enough information to answer this question. 13. If a rise in the price of oranges from $7 to $9 a bushel, caused by a shift of the demand curve, increases the quantity of bushels supplied from 4,500 to 5,500 bushels, the A) supply of oranges is elastic. B) supply of oranges is inelastic. C) demand for oranges is inelastic. D) demand for oranges is elastic. 3

4 14. A determinant of the price elasticity of supply is the extent to which A) the demand for the good is relatively elastic. B) consumers like the quality of the good. C) production of the good uses commonly available resources. D) the good has many consumer substitutes. 15. An important determinant of the price elasticity of supply is A) the time period firms have to adjust to a new price. B) whether the good is a durable or a nondurable. C) how well consumers like the commodity. D) the proportion of the consumer's total budget spent on the good. 16. Adhira buys chocolates and almonds. She has 3 bars of chocolates and 4 bags of almonds. The marginal utility of the third chocolate bar is 18 and the marginal utility from the fourth bag of almonds is also 18. Is Adhira maximizing her utility? A) No, she must buy 1 more chocolate bar to equate her quantities of the two goods. B) Yes, the marginal utility from the last unit of each good is equal. C) No, without information on her income and the prices of the two goods, we cannot answer the question. D) No, she must cut back to 3 bags of almonds to equate her quantities of the two goods. 17. The demand for corn increases. As a result, the price of corn will, and the less elastic the supply of corn, the will be the effect on the price. A) rise; smaller B) fall; smaller C) fall; greater D) rise; greater 4

5 18. In the above figure, the price elasticity of supply at any given quantity is A) highest along S1, next highest along S2, and lowest along S3. B) equal to one on each of the three supply curves. C) equal to zero on each of the three supply curves. D) highest along S3, next highest along S2, and lowest along S1. 5

6 19. In the above figure, what does the consumer surplus equal when the market is producing the efficient quantity of hotdogs? (Hint: You will need to find the vertical intercept of the curve you are using to calculate your answer.) A) $4,000 B) $2,000 C) $1,000 D) $1,500 E) There is not enough information to determine consumer surplus. 6

7 20. The figure above shows the market for milk in Cowland. If a subsidy paid to producers of $1 per gallon of milk is introduced, how many gallons are sold per year? A) 200 million B) 350 million C) 250 million D) 300 million 21. The figure above shows the market for milk in Cowland. If a subsidy paid to producers of $1 per gallon of milk is introduced, what is the price that consumers pay? A) $3.50 a gallon B) $4.00 a gallon C) $4.50 a gallon D) $3.00 a gallon 22. The figure above shows the market for milk in Cowland. A subsidy paid to producers of $1 per gallon of milk is introduced. If there are no external costs and no external benefits, the marginal cost of the last gallon of milk produced is A) $3.00 a gallon. B) $4.00 a gallon. C) $3.50 a gallon. D) $4.50 a gallon. 7

8 23. The figure above shows the market for cotton in Georgestan. The government regulates the market with a production quota set at 8 million pounds per year. With the quota in place, the amount of cotton produced in Georgestan is because the marginal social cost of a pound of cotton is the marginal social benefit of a pound of cotton. A) efficient; equal to B) inefficient; less than C) inefficient; greater than D) efficient; less than 24. The figure above shows the market for cotton in Georgestan. The government regulates the market with a production quota set at 8 million pounds per year. The price of cotton in Georgestan is A) 30 cents per pound. B) 60 cents per pound. C) 40 cents per pound. D) 50 cents per pound. 8

9 25. What area in the above figure is the producer surplus at the efficient quantity? A) C + E B) F C) A + B + C D) A E) D + E + F 26. In the figure above, if there is a price ceiling at $2, then the deadweight loss in this market is correctly depicted with the areas of A) e + k. B) h + i. C) b + g. D) c + d. E) l + h 9

10 27. In the figure above, if the demand for apartments increases from D0 to D1 and there is a strictly enforced rent ceiling of $150 per apartment, then the new quantity supplied will be A) less than the initial quantity supplied before the increase in demand. B) the same as the initial quantity supplied before the increase in demand. C) greater than the initial quantity supplied before the increase in demand, but the rent will be unchanged. D) greater than the initial quantity supplied before the increase in demand, and the rent will increase. 10

11 28. In the above figure, CBL is the fine levied for breaking the law. If it is illegal to buy, but not illegal to sell, then the price consumers act on will be however the visible street price would be. You can find the equation for the linier demand curve by using the to points shown in the diagram, A) $500; $300 B) $400; $200. C) $600; $200. D) $300; $200. E) $400; $500 11

12 Price (cents per brownie) demanded (per day) supplied (per day) 0 1, , , , , In the above table, when 200 brownies are produced, A) marginal benefit is less than marginal cost, and there is a deadweight loss. B) marginal benefit equals marginal cost, and resource use is efficient. C) marginal benefit is greater than marginal cost, and resource use is efficient. D) marginal benefit is greater than marginal cost, and there is a deadweight loss. E) marginal benefit is less than marginal cost, and there is a producer surplus that is greater than the consumer surplus. 12

13 Price (dollars per packet) demanded (packets per week) supplied (packets per week) The table gives the demand and supply schedules for cookies. The government now levies a $0.30 tax on cookies. As a result, the price of a packet of cookies increases by and the tax revenue collected is a week. A) $0.30; $30 B) $0.20; $20 C) $0.10; $9 D) $0.20; $24 Marginal utility of Marginal utility of DVD rentals movies Becky decides to spend $50 per month on DVD rentals and movie tickets. Her marginal utility schedules from these two goods are shown in the table above. The price of a DVD rental is $2.50. If the price of a movie ticket is $7.50, Becky watches movies per month and if the price of a movie ticket falls to $5.00, Becky watches movies per month. A) 4; 6 B) 3; 5 C) 4; 7 D) 5; 6 13

14 Milkshakes Sodas Total Total utility utility The table above shows Tom's total utility from milkshakes and sodas. Tom's total budget for milkshakes and sodas is $10.00 per week. Milkshakes cost $2.00 each and sodas cost $1.00 each. What combination of milkshakes and sodas maximizes Tom's utility? A) 2 milkshakes and 6 sodas B) 5 milkshakes and 0 sodas C) 3 milkshakes and 4 sodas D) 4 milkshakes and 2 sodas 14

15 Clara's Marginal Benefit Schedule Marginal Benefit (in dollars) The figure above shows Clara's discrete demand schedule for hats. The market price for a hat is $16. Which statement is true? A) Clara receives a total of $ of consumer surplus. B) Clara receives a total of $102 of consumer surplus. C) Clara receives a total of $99 of consumer surplus. D) Clara receives a total of $4 of consumer surplus. E) Clara receives a total of $98 of consumer surplus. Part Two (SHORT ANSWER). Write the word or phrase that best completes each statement or answers the question. 34. Suppose Jenny's marginal utility of fish is 40 and her marginal utility from chips is 20. The price of fish is $10 and the price of chips is $1. What should Jenny do to maximize her utility? Explain your answer. 15

16 Price (dollars per gallon) demanded in July (gallons per day) demanded in November (gallons per day) supplied (gallons per day) The table gives the demand and supply schedules for ice cream in Sweetsville in July and November. Assume that the only people who benefit from ice cream are the people who consume it and the only people who bear the cost of ice cream are the people who produce it. a) Draw the demand and supply curves. What are the equilibrium price and equilibrium quantity of ice cream in July and November? Is the allocation of resources efficient in July? Is it efficient in November? Explain. b) What is the maximum price that consumers are willing to pay for the 100th gallon of ice cream in July? In November? What is the minimum price that producers are willing to accept for the 100th gallon in July and November? Explain. c) What happens to consumer surplus and producer surplus in November compared to July? Why? Price (dollars per pound) demanded (pounds per day) supplied (pounds per day) The table above shows the demand and supply schedules for the market for coffee in Roastville. A tax on coffee of 75 cents per pound is proposed and the local government asks you to examine the effects of the tax. a) Draw the demand and supply curves. If there is no tax on coffee, what is the price and how many pounds are sold? b) With the tax, what is the price that consumers pay? What is the price that sellers receive? How many pounds of coffee are sold? c) What is the government's total tax revenue? How much of the 75 per pound tax is paid by buyers? How much is paid by sellers? d) If there are no external costs and benefits, what is the efficient level of coffee production? e) If the tax is imposed, will the level of production be efficient? Why or why not? 16

17 37. John likes to spend Thursday nights playing pool and drinking soda. John's budget for Thursday nights is $10, a soda costs $2, and one game of pool costs $1. a) Draw a graph of John's budget line in the figure above. b) In your graph, label the affordable and unaffordable areas. (cones per week) Total utility Marginal utility 0 0 X The table above gives the utility Andy receives from different quantities of vanilla ice cream cones. Complete the table. 17

18 Answer Key Testname: SAMPLE_E201_QUESTIONS_FOR_EXAM_2_FALL A 2. C 3. D 4. B 5. B 6. E 7. D 8. A 9. A 10. D 11. C 12. A 13. B 14. C 15. A 16. C 17. D 18. B 19. B 20. B 21. A 22. D 23. B 24. B 25. E 26. C 27. B 28. C 29. D 30. D 31. C 32. D 33. C 34. Jenny should buy more chips and fewer fish. Her marginal utility per dollar from chips is 20 and her marginal utility per dollar from fish is 4. If Jenny decreases her purchases of fish by $1, she loses 4 units of utility. But if she spends the dollar on chips, she gains 20 units of utility. Because her gain in utility exceeds her loss, Jenny's total utility increases as she buys more chips and fewer fish. 18

19 Answer Key Testname: SAMPLE_E201_QUESTIONS_FOR_EXAM_2_FALL a) The figure is shown above. In July, the equilibrium price is $3.00 and the equilibrium quantity is 200 gallons of ice cream a day. In November, the equilibrium price is $2.50 and the equilibrium quantity is 10 gallons a day. The allocation of resources is efficient in both July and November because the demand curve is the marginal social benefit (MSB) curve and the supply curve is the marginal social cost (MSC) curve, so at equilibrium MSB = MSC, which is the efficiency condition. b) The demand curve shows consumers willingness to pay. If 100 gallons of ice cream are produced, the maximum price that consumers are willing to pay for the last gallon is $4.00 in July and $2.50 in November. The supply curve shows the minimum price that producers are willing to accept to produce a certain quantity. Because the supply curve remains the same, the minimum price that producers are willing to accept to produce the 100th gallon of ice cream is $2.50 in both July and November. c) Consumer surplus is the value that consumers receive minus the price they pay summed over the quantity bought. Both the surplus received from each gallon of ice cream bought and the quantity bought decreased in November compared to July. Therefore, consumer surplus decreased from $200 in July to $50 in November. Producer surplus is the price of ice cream minus the marginal cost of producing it, summed over the quantity sold. Because the market price of ice cream fell while the marginal costs remained the same, both the surplus received from each gallon of ice cream sold and the quantity sold decreased in November compared to July. Therefore, producer surplus decreased from $100 in July to $25 in November. 19

20 Answer Key Testname: SAMPLE_E201_QUESTIONS_FOR_EXAM_2_FALL a) The figure is above. With no tax, the equilibrium price is $3 and 240 pounds of coffee per day are sold b) The tax shifts the supply curve upward by $0.75. The new equilibrium price that consumers pay is $3.50. Sellers receive the price that consumers pay minus the tax, or $ $0.75 = $2.75. With the tax, 180 pounds of coffee per day are sold. c) The government's tax revenue is the tax per pound, 75, multiplied by the number of pounds sold, 180. So the government's total tax revenue is , which is $135 per day. With the tax, the price that buyers pay is 50 higher than with no tax, so the buyers pay 50 of the tax. Sellers pay the rest of the tax, 25. d) The efficient level of production is 240 pounds of coffee per day. At this level, the marginal social benefit ($3.00) equals the marginal social cost. e) If the tax is imposed, the level of production is not efficient. The marginal benefit from the last pound of coffee ($3.50) is greater than the marginal cost ($2.75). The underproduction is 60 pounds of coffee per day. 20

21 Answer Key Testname: SAMPLE_E201_QUESTIONS_FOR_EXAM_2_FALL a) The budget line is in the figure above. b) The affordable area is the lighter area and the budget line itself. The unaffordable area is the darker area. 38. (cones per week) Total utility Marginal utility 0 0 X The completed table is above. 21