FIRST HOURLY EXAMINATION ECON 200 Spring 2006 STUDENT'S SOCIAL SECURITY NUMBER: DAY AND TIME YOUR SECTION MEETS:

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1 FIRST HOURLY EXAMINATION ECON 200 Spring 2006 STUDENT'S NAME: STUDENT'S SOCIAL SECURITY NUMBER: PLEASE CIRCLE YOUR TEACHING ASSISTANT'S NAME: Robin Banerjee Owen Haaga Fernando Im Andrew Weaver Alex Whalley DAY AND TIME YOUR SECTION MEETS: ENTER THE NUMBER UNDER "SPECIAL CODES" ON THE SCANTRON SHEET BEFORE YOU BEGIN PLEASE MAKE SURE THAT YOUR EXAMINATION HAS BEEN DUPLICATED AND CORRELATED CORRECTLY. THERE SHOULD BE 22 MULTIPLE CHOICE QUESTIONS AND THREE PROBLEMS. THE EXAM HAS NINE PAGES INCLUDING THIS COVER SHEET. ANSWER THE MULTIPLE CHOICE PROBLEMS ON THE SCANTRON SHEET. ANSWER THE PROBLEMS ON THIS EXAMINATION SHEET. BE SURE TO FILL-IN YOUR NAME (LAST NAME FIRST) AT THE TOP OF THE SCANTRON SHEET. FILL IN YOUR STUDENT IDENTIFICATION NUMBER UNDER "INDENTIFICATION NUMBER" ON THE SCANTRON SHEET. WRITE YOUR TA'S NAME IN THE UPPER-RIGHT HAND CORNER OF YOUR SCANTRON SHEET. MULTIPLE CHOICE: PROB1: PROB2: PROB3: TOTAL: University of Maryland Honor Pledge The University is committed to Academic Integrity, and has a nationally recognized Honor Code, administered by the Student Honor Council. In an effort to affirm a community of trust, the Student Honor Council proposed and the University Senate approved Honor Pledge. The University of Maryland Honor Pledge reads: "I pledge on my honor that I have not given or received any unauthorized assistance on this examination (or assignment)." Please rewrite the exact wording of the pledge, followed by your signature in the space below: Pledge: Your Signature:

2 Question 1 (20 points) Mini and Maxi are partners in a business. After all other tasks are completed, they each have 2 hours available for filing and bookkeeping. Mini can accomplish 15 units of filing in an hour and 10 units of bookkeeping. Maxi can accomplish 75 units of filing in an hour and 150 units of bookkeeping. (a) Construct a production possibility frontier for each partner (using two diagrams) illustrating what each can produce in terms of units of bookkeeping and filing. (b) Who has the absolute advantage in filing? (c) Who has the comparative advantage in filing? (d) Suppose they both spent the same amount of time in each task. What is the maximum amount of bookkeeping and filing their firm can accomplish this way? (e) Suggest a different division of labor that would yield the firm more units of bookkeeping and more units of fil ing. (f) What division of labor between the two would allow them to achieve the same level of bookkeeping as in d) but get the most amount of filing accomplished?

3 Question 2 (16 Points) Throughout this question, you should assume that (i) demand is neither perfectly elastic nor perfectly inelastic and (ii) supply is neither perfectly elastic nor perfectly inelastic. Flash memory cards are bought and sold in a perfectly competitive market. They are used to expand the memory capabilities of computers, digital cameras and other portable electronic devices. (a) Draw the demand and supply curve for flash memory cards. Show the equilibrium price and quantity. (b) What will happen to the equilibrium price and quantity of flash memory cards if a new generation of digital cameras requiring significantly more memory is introduced in the market? Present and discuss a supply and demand diagram as part of your answer. (c) Suppose that, AT THE SAME TIME (i) a new generation of digital cameras requiring significantly more memory is introduced in the market AND (ii) a supply shortage raises the cost of an important input in the production of flash memory cards. What will happen to the equilibrium price and quantity of flash memory cards? Present and discuss a SINGLE supply and demand diagram as part of your answer. (d) An alternative to flash memory cards for use in computers (but not cameras) is tape memory. As in part (c), suppose that, AT THE SAME TIME (i) a new generation of digital cameras requiring significantly more memory is introduced in the market AND (ii) a supply shortage raises the cost of an important input in the production of flash memory cards (but not of tape memory). What will happen to the equilibrium price and quantity of tape memory? Present and discuss a supply and demand diagram as part of your answer.

4 Question 3 (14 points) Present and discuss a separate demand and supply diagram for each of the three parts of this question. Assume throughout that the laws of supply and demand hold in the gasoline market. Suppose that under a Democratic government, a per gallon tax of 25 cents was imposed on gasoline. The equilibrium price paid by consumers was $3.25 (including the tax) and the price received by producers was $3.00. The equilibrium quantity sold in each day was 100 million gallons (a) Suppose immediately after a new election, a Republican government followed through on a major promise in their election campaign and reduced the tax on gasoline to 10 cents a gallon. What will happen to the equilibrium price paid by consumers (including the new tax)? What will happen to the price received by suppliers (excluding the tax)? Will the quantity of gasoline sold be greater or lower than before? (b) After the reduction in tax, has producer surplus gone up or down? Have tax revenues gone up or down? (c) Consider the market for gasoline one day before the election. All the polls suggest a Republican victory. Describe in a supply and demand diagram what is likely to happen in the market for gasoline. Defend your answer. (You may assume, possibly contrary to reality, that the public believes that the Republican candidate will keep his promise.)

5 Multiple Choice (Each question is worth 2.3 points. Please select THE BEST answer.) 1. The demand for Good A rises when income rises. It must be true that a. the demand for A is elastic. b. the demand for A is complementary c. A is a normal good. d. A is an inferior good. 2. An increase in the price of oranges would lead to a. a shift to the right in the supply curve of oranges. b. a reduction in the prices of inputs used in orange production. c. a shift to the right in the demand curve for oranges. d. a movement up the supply curve for oranges. 3. When the price of a good or service changes, a. supply shifts in the opposite direction. b. demand shifts in the opposite direction. c. demand shifts in the same direction. d. there is a movement along a stable demand curve. 4. If a study found that brown sugar caused weight loss while white sugar caused weight gain, we would see a. an increase in demand for brown sugar and a decrease in demand for white sugar. b. no change in either demand because weight loss is a non-price determinant of demand. c. an increase in demand for brown sugar but no change in the demand for white sugar. d. a decrease in the demand for white sugar, but no change in the demand for brown sugar. 5. Mike and Sandy are woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, and Sandy can make 6 tables or 18 chairs. a. Mike has an absolute advantage in chairs. b. Mike has a comparative advantage in tables. c. Sandy has an absolute advantage in chairs. d. Sandy has a comparative advantage in chairs. 6. In the housing market, rent controls cause quantity supplied (in the long run) to a. fall and quantity demanded to fall. b. fall and quantity demanded to rise. c. rise and quantity demanded to fall. d. rise and quantity demanded to rise.

6 These figures illustrate the production possibilities available to Firehouse Bakery and Steamboat Pies respectively for any 8 hour day. Firehouse Steamboat Loaves Loaves of Bread Pies Pies 7. According to the graphs shown, the opportunity cost of 1 loaf of bread for Firehouse is a. ¼ pie b. ½ pie c. 1 pie d. 2 pies 8. According to the graphs shown, Firehouse has an absolute advantage in a. both goods and Steamboat has an absolute advantage in neither good. b. loaves of bread and Steamboat has an absolute advantage in pies. c. neither good and Steamboat has an absolute advantage in both goods. d. pies and Steamboat has an absolute advantage in both goods. 9. Holding all else constant, if a pencil manufacturer increases production by 20 percent when the market price of pencils increases from $0.50 to $0.60 then the price elasticity of supply using the midpoint method must be a. elastic, since elasticity is equal to 1.11 b. inelastic, since elasticity is equal to 1.11 c. inelastic, since elasticity is equal to 0.90 d. elastic, since elasticity is equal to 0.90

7 10. If a tax is imposed on a market with elastic demand and inelastic supply, a. buyers will bear most of the burden of the tax. b. sellers will bear most of the burden of the tax c. the burden of the tax will be shared equally between buyers and sellers. d. it is impossible to determine how the burden of the tax will be shared. Questions concern the following graph: Price $24 S 16 Tax 10 D Quantity 11. In the graph shown above, the equilibrium price before the $14 tax is a. $24 b. $16 c. $10 d. $8 12. In the graph shown, the per unit burden of the tax on buyers is a. $16 b. $14 c. $8 d. $6 13. In the graph shown above, the price received by sellers after the tax is a. $24 b. $14 c. $10 d. $8

8 Income Quantity of Good X Purchased Quantity of Good Y Purchased $30, $40, According to the table, using the midpoint method, what is the income elasticity of good Y? a b c d According to the table, a. Goods X and Y are complements b. Goods X and Y are substitutes c. Goods X and Y are inferior goods d. Good X is a normal good. 16. Total revenue is the highest on a linear demand curve at a. the top of the curve where prices are higher b. the center of the curve c. the lower end of the curve where quantity is higher d. any point on the curve, total revenue will be the same since increases in price are offset by decreases in quantity. 17. In the U.S. the federal minimum wage is a. $5.15 an hour b. $4.15 an hour c. $6.30 an hour d. $7.00 an hour 18. In economics, positive analysis refers to what a. is or will be. b. should be c. is nonnegative. d. is politically correct. 19. If a consumer is willing and able to pay $20.00 for a particular good but only has to pay $14.00, the consumer surplus is a. $6.00 b. $14.00 c. $20.00 d. $34.00

9 20. What happens to consumer surplus if the price of a good increases? a. It increases. b. It decreases. c. It is unchanged d. It may increase or decrease or remain unchanged. 21. Workers with high skills and much experience are not usually affected by the minimum wage because a. they belong to unions. b. they are not legally guaranteed the minimum wage. c. The minimum wage is binding on them. d. The minimum wage is not binding on them. 22. When OPEC raised the price of crude oil in the 1970s, it caused the (short run) a. demand for gasoline to increase. b. demand for gasoline to decrease c. supply of gasoline to increase. d. supply of gasoline to decrease.