# ECO201: PRINCIPLES OF MICROECONOMICS FIRST MIDTERM EXAMINATION

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2 P a g e 2 Suppose there is a small island economy with 20 Redhawks and 20 Bobcats. The production possibilities curves for one Redhawk and one Bobcat are given below. Number of fish Bobcat Redhawk 5 10 Bushels of berries 1) The comparative advantage in fish is held by the and the comparative advantage in berries is held by the. a. Redhawks; Bobcats b. Redhawks; Redhawks c. Bobcats; Redhawks d. Bobcats; Bobcats 2) The absolute advantage in fish is held by the group of and the absolute advantage in berries is held by the group of. a. Redhawks; Bobcats b. Redhawks; Redhawks c. Bobcats; Redhawks d. Bobcats; Bobcats 3) If the economy is organized efficiently and produces 180 bushels of berries per day, what is the maximum amount of fish it can produce in a day? a. 320 b. 380 c. 400 d. none of the above.

3 P a g e 3 Suppose there is a small island economy with 20 Redhawks and 20 Bobcats. The production possibilities curves for one Redhawk and one Bobcat are given below. Number of fish Bobcat Redhawk 5 10 Bushels of berries 4). Suppose the economy is operating on its production possibilities frontier and producing 180 bushels of berries per day. If it increases berry production by 1 bushel, the opportunity cost of the extra bushel of berries will be fish. a. 1/2 b. 1.5 c. 2 d. none of the above 5). For the economy described, a combination of 200 berries and 450 fish would be: a. productively inefficient b. productively efficient c. impossible to produce without more resources or better technology d. it is impossible to determine whether it is productively efficient without more information.

4 P a g e 4 6) Suppose there is a news release today that the production of gasoline will fall sharply next month due to a refinery that will be shut down. Given the likely impact on the market for gasoline NEXT month, how will this affect the market for gasoline today? a. the equilibrium price of gasoline should rise, but the equilibrium quantity could rise, fall, or be unchanged. b. the equilibrium quantity of gasoline should rise, but the equilibrium price could rise, fall, or be unchanged. c. the equilibrium price and quantity of gasoline should both rise. d. the equilibrium price and quantity of gasoline should both fall. 7) Which of the following would be the best explanation for a simultaneous increase in the equilibrium price and quantity of electricity? a. an increase in the cost of generating electricity. b. an increase in temperatures that causes homeowners to run their air conditioners more. c. a decrease in consumer income assuming electricity is a normal good. d. a decrease in the price of a complement in production for electricity. To answer the next 2 questions, note that ranchers can produce both beef and leather from cattle. 8) Based on this information, beef and leather are a. complements in production b. complements in consumption. c. substitutes in production. d. substitutes in consumption. 9) If the demand for beef rises, we should expect the equilibrium price of leather to and the equilibrium quantity of leather to. a. rise; fall b. fall; rise c. rise; rise d. fall; fall 10) Suppose that the U.S. imposes a gun tax that requires a person to pay \$50 per year to register each gun they own. Which of the following would be a likely consequence of this gun tax? a. a decrease in the equilibrium price and an increase in the quantity of bullets sold. b. a decrease in the equilibrium quantity of guns and a higher price for guns. c. an increase in the equilibrium price and quantity of knives (an alternative to a gun as a method of defense) d. all of the above

5 P a g e 5 The federal government provides a subsidy to companies that purchase and use wind turbins to produce electricity. These subsidies will pay up to 30% of the cost of buying a wind turbin. Suppose that, in the absence of the subsidy, the typical wind turbin sells for \$100,000 and the government offers a subsidy of \$30,000 to anyone that buys a wind turbin. Also, keep in mind that electricity producers have a variety of ways to produce electricity. For example, they can use natural gas, coal, solar, or hydro. 11) The introduction of this subsidy should cause the equilibrium price of wind turbins received by the sellers to and the equilibrium quantity to a. fall; rise b. fall; fall c. rise; fall d. rise; rise 12) The introduction of the subsidy should cause the equilibrium price of coal (which is also used to produce electricity) to and the equilibrium quantity of coal to. a. fall; rise b. fall; fall c. rise; fall d. rise; rise 13) Many wind turbins are built on agricultural property. With wind turbins, farmers can lease some of their land for a turbin and stop growing crops (e.g. corn) on that land. Given this fact, introduction of the subsidy for wind turbins should cause the equilibrium price of corn to and the equilibrium quantity to. a. fall; rise b. fall; fall c. rise; fall d. rise; rise 14) The introduction of the subsidy should cause the equilibrium price of electricity to and the equilibrium quantity of electricity to. a. fall; rise b. fall; fall c. rise; fall d. rise; rise

6 P a g e 6 15) Suppose that the equilibrium price of bananas is currently \$1 per pound. Which of the following would be TRUE? a. a price floor of \$1 would lead to a surplus if the demand for bananas falls b. a price floor of \$1 would lead to a surplus if the supply of bananas rises c. a price ceiling of \$1 would lead to a shortage if the demand for bananas rises d. all of the above. 16) A hotel discovered that when it cut room prices from \$140 to \$120 that the number of rooms rented rose from 100 to 120. Based on this information, the price elasticity of demand for the hotel s rooms is: a. 1.2 b. 1.0 c..9 d..7 17) Suppose that when a firm cuts the price of its rooms by 10%, its total revenue from room sales rises by 5%. Based on this, we can conclude that the price elasticity of demand for the rooms is: a. 0.5 b. 1.0 c. 1.5 d. 2.0 To answer the next 4 questions, suppose that the price elasticity of demand for Bird scooters is.6, that the cross-price elasticity of demand between Bird and Lime scooters (competitors in Oxford) is.8, and that the income elasticity of demand for both Bird and Lime Scooters is ) Based on the above information, if the price of a ride on a Bird scooter is increased by 10%, the demand for Lime rentals should: a. increase 8% b. decrease 8% c. increase 2% d. none of the above 19) Based on the above information, if the price of a ride on a Bird scooter is increased by 10%, the total revenue from Bird rentals should: a. rise 6 percent b. fall 6 percent c. rise 4 percent d. none of the above 20) If a third scooter company enters the Oxford market, we would expect that: a. the income elasticity of demand for all scooters would become more negative. b. the income elasticity of demand for all scooters would become less negative. c. the price elasticity of demand for each type of scooter would become larger d. none of the above. 21) Based on the above information, a. Lime and Bird scooters are complements in consumption b. Lime and Bird scooters are inferior goods c. Lime and Bird scooters are luxury goods d. none of the above

7 P a g e 7 To answer the next 2 questions, refer to the diagram below describing the market for golfing. 22) In the above figure, if the golf market was not originally regulated and a price ceiling of \$10 was imposed, producer s surplus would and consumer s surplus would. a. decrease \$300; increase \$100 b. decrease \$300; increase \$200 c. decrease \$200; increase \$200 d. none of the above 23) In the above figure, if there was no price ceiling but the government imposed a monthly tax of \$10 on golfers for each round of golf, the equilibrium price paid (including the tax) by golfers would a. not change b. rise by \$10 c. rise by \$5 d. fall by \$10 24) If the demand curve for golf was more inelastic, the golfer s share of the tax burden would be and the tax revenue from the tax would be. a. greater; greater. b. greater; smaller. c. smaller; greater. d. smaller; smaller. 25) In the above figure, if there was no price ceiling but the government imposed a monthly tax of \$10 on golfers for each round of golf, the daily tax revenue generated would be: a. \$100 b. \$200 c. \$300 d. \$400

8 P a g e 8 To answer the next 4 questions, refer to the diagram below describing the market for golfing. 26) In the above figure, if the number of golf rounds increased from 20 to 40 per day, the additional cost of supplying the rounds of golf would be and the additional benefits to golfers would be. a. \$150; \$300 b. \$200; \$200 c. \$100; \$100 d. \$300; \$500 27) In the above figure, if the price of a round of golf is \$30, producer s surplus would be: a. \$100 b. \$200 c. \$300 d. none of the above 28) In the above figure, if the price of a round of golf is \$30, consumer s surplus would be: a. \$100 b. \$200 c. \$300 d. none of the above 29) In the above figure, if there was price ceiling of \$10 imposed on the golf market, a. there would be a shortage of 40 rounds of golf b. there would be a shortage of 20 rounds of golf c. there would be a surplus of 20 rounds of golf d. there would not be a shortage or a surplus since the price ceiling would not be binding.

9 P a g e 9 30) Ben is willing to pay \$3 for his first slice of pizza and \$2 for his second slice of pizza. If the market price is \$1 and Ben buys two slices of pizza, he receives a total consumer surplus of a. \$5. b. \$4. c. \$3. d. \$2 31) If production is at the allocatively efficient level, a. there is no deadweight loss b. the sum of consumer and producer surplus is maximized c. the social marginal benefit of another unit of the good equals the social marginal cost d. all of the above 32) An increase in storage costs will make supply (more, less) elastic and cause the price of the product to be (more, less) responsive to a change in demand. a. more; more b. more; less c. less; more d. less; less 33) If a government wants to minimize the deadweight loss from its tax system, it should tax commodities where demand is (more, less) elastic and supply is (more, less) elastic. a. more; more b. more; less c. less; more d. less; less 34) Given how elasticity affects the incidence of a tax, we would expect that the golfer s share of a city tax on golf would be greater if: a. there are no golf courses that are just outside of city limits. b. golfers have lower incomes. c. golfers consider tennis a good substitute for golf. d. all of the above. 35) If the supply curve for golf was more inelastic, the golfer s share of the tax burden would be and the tax revenue from the tax would be. a. greater; greater. b. greater; smaller. c. smaller; greater. d. smaller; smaller.

10 P a g e 10 36) Which of the following government policies could improve efficiency (i.e. total surplus in society)? a. a tax on carbon emissions since they create a negative externality. b. a subsidy for wind turbins since they create a positive externality. c. a tax on rich people s incomes since they are more able to afford taxes. d. all of the above. To answer the next 3 questions, refer to the diagram below describing the market for flu shots S=PMC D=PMB # of flu shots per day l (in 1000s) 37) If a person receiving a flu shot creates a positive externality of \$3 for others, the market will produce (more, less) than the allocatively efficient quantity and there will be a deadweight loss of. a. less; \$75,000 b. less; \$150,000 c. more; \$75,000 d. more; \$150,000 38) If a person receiving a flu shot creates a positive externality of \$3 for others, a. the SMB curve will be \$3 above the PMB curve. b. the SMC curve will be \$3 above the PMC curve. c. the SMB curve will be \$3 below the PMB curve. d. the SMC curve will be \$3 below the PMC curve. 39) If a person receiving a flu shot creates a positive externality of \$3 for others, the market could be moved to the allocatively efficient outcome with a (subsidy, tax) of. a. subsidy; \$3 b. tax; \$3 c. subsidy; \$6 d. tax; \$6

11 P a g e 11 To answer the next 3 questions, consider the market for medical doctors (MDs) provided in the graph below. Assume that the federal government works with the American Medical Associate to limit the number of MDs to 40,000. This is the equivalent of a quota. 40) The effect of limiting the number of medical doctors is to increase surplus for doctors by. a. \$2 billion b. \$1.4 billion c. \$1.0 billion d. \$0.6 billion 41) The deadweight loss from the quota is a. \$1 billion b. \$0.6 billion c. \$0.4 billion d. \$0.2 billion 42) The effect of limiting the number of medical doctors is to decrease surplus for doctors patients by. a. \$1 billion b. \$2 billion c. \$3 billion d. \$4 billion Be sure that you have filled in your uniqueid and form number correctly on your scantron. Turn in your scantron to the proctor and put your exam in the pile that matches the row that you sit in during class (not the exam).