3. Pierre says that he will spend exactly $5.00 a day on candy bars, regardless of the price of candy bars. Pierre s demand for candy bars is:

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1 Each Multiple-Choice Question is worth 3 points (Total 60 points). 1. An economy s production of two goods is efficient if: a. both goods are unit elastic. b. all members of society consume equal portions of the goods. c. the goods are produced using only some of society s available resources. d. the opportunity cost of producing more of one good is zero. e. it is impossible to produce more of one good without producing less of the other. 2. A decrease in input costs to firms in a market will result in: a. a decrease in equilibrium price and an increase in equilibrium quantity. b. a decrease in equilibrium price and a decrease in equilibrium quantity. c. an increase in equilibrium price and a decrease in equilibrium quantity. d. an increase in equilibrium price and an increase in equilibrium quantity. e. no change in equilibrium price or equilibrium quantity. 3. Pierre says that he will spend exactly $5.00 a day on candy bars, regardless of the price of candy bars. Pierre s demand for candy bars is: a. irrational b. perfectly elastic c. perfectly inelastic d. indeterminate e. unit elastic 4. Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding? a. Improvements in production technology reduce the costs of producing laptop computers. b. The wage rate of laborers in the laptop industry increases. c. Consumers income decreases, and laptop computers are a normal good. d. Students are prohibited from bringing laptops to school. e. The price of printers increases. ECON 1110 Exam 1-A Fall 2014 Page 2

2 5. The numbers below reveal the maximum willingness to pay for a ticket to a Chicago Cubs vs. St. Louis Cardinal s baseball game at Wrigley Field. Buyer Jennifer $10 Bryce $15 Dan $20 David $25 Ken $50 Lisa $60 Willingness to Pay If tickets sell for $20 each, then what is the total consumer surplus in the market? a. $ 25 b. $ 35 c. $ 75 d. $ 95 e. $ Sunday morning church attendance (11:00 a.m. to noon) on the West Coast is much lower than on the East Coast during professional football season. You are much more likely to see West Coasters watching East Coast football than going to church. In economic language, this must mean: a. the opportunity costs of going to church at 11:00 a.m. for West Coasters, as measured by potential returns to watching football, were low. b. the opportunity costs of going to church at 11:00 a.m. for West Coasters, as measured by potential returns to watching football, were high. c. the opportunity costs of going to church at 11:00 a.m. and watching football for West Coasters were approximately the same. d. West Coasters smoke so much medicinal weed they are not rational. e. religion is an inferior good. ECON 1110 Exam 1-A Fall 2014 Page 3

3 7. The table below gives units of beef and precision tools that can be produced in the USA and the EU if both use the same amount of all relevant resources. Beef Tools USA EU Based upon the theory of comparative advantage the USA should: a. import tools and export beef. b. import beef and export tools. c. import nothing, because it has a comparative advantage in both. d. export both goods, because it has an absolute advantage in both. e. raise its tariffs on EU products to increase employment. 8. What will happen to the equilibrium prices and quantities of automobiles if the price of rubber increases, the price of gasoline increases, and the government requires that all new automobiles contain HDTVs in the rear seats to reduce distractive conversation in the car? a. Insufficient information is given to answer this question. b. Price will fall and the effect on quantity is ambiguous. c. Price will rise and the effect on quantity is ambiguous. d. Quantity will fall and the effect on price is ambiguous. e. Quantity will rise and the effect on price is ambiguous. 9. Suppose that the demand for light bulbs is elastic, and the supply of light bulbs is inelastic. A tax of $4 per bulb levied on light bulb buyers will increase the price paid by buyers of light bulbs by: a. less than $2. b. $2. c. between $2 and $4. d. $4. e. $5. ECON 1110 Exam 1-A Fall 2014 Page 4

4 10. Suppose the equilibrium price of a physical examination ( physical ) by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of this price ceiling, the: a. demand curve for physicals shifts to the right. b. supply curve for physicals shifts to the left. c. number of physicals performed stays the same. d. quantity demanded of physicals decreases, and the quantity supplied of physicals increases. e. quantity demanded of physicals increases, and the quantity supplied of physicals decreases. 11. Suppose that a negative externality is created by the production of good X. Which of the following statements is correct? a. The social cost of producing good X includes the private cost plus the cost to bystanders of the externality. b. The increased social cost can be graphed as a decrease in demand. c. The social cost of producing good X includes the private cost plus the benefits to bystanders of the externality. d. The market equilibrium quantity will be the socially optimal quantity as long as the government does not interfere. e. The market equilibrium quantity is the socially optimal quantity if the government subsidizes producers. 12. Which of the following statements best captures the concept of consumer surplus? a. I was willing to pay up to $80 for a used football and George was willing to sell it to me for at least $60, but a minimum selling price of $90 prevented the sale. b. I sold my used football for $40 last week. Today someone offered me $60 for it. c. I was willing to pay up to $80 for a used football, but I bought it for $60. d. I sold my used football for $60, but I was willing to go as low as $40 to sell it. e. The true cost of the used football I just bought was the six beers I could have purchased. 13. Mary owns a dog whose barking annoys Mary s neighbor Hugo. Suppose that the benefit of owning the dog is worth $700 to Mary and that Hugo bears a cost of $500 from the barking. Assuming Mary has the legal right to keep her dog, a possible solution to this problem is that: a. Mary pays Hugo $400 for his inconvenience. b. Mary pays Hugo $600 for his inconvenience. c. Hugo pays Mary $400 to give the dog to her parents who live on an isolated farm. d. Hugo pays Mary $800 to give the dog to her parents who live on an isolated farm. e. The current situation is efficient. ECON 1110 Exam 1-A Fall 2014 Page 5

5 14. All else equal, an increase in the price of steel used to make knives would increase the equilibrium price of knives to a greater degree: a. The closer the elasticity of demand is to unity. b. The closer the elasticity of demand is to the elasticity of supply. c. The more inelastic is the demand curve. d. The more elastic is the demand curve. e. An increase in the price of steel will not affect the price of knives. 15. Mad cow disease cuts the cattle herds in half. How will this affect the total revenue in the cattle market and in the shoe polish market? a. Total revenue will increase in both markets. b. Total revenue will decrease in both markets. c. Total revenue will decrease in the cattle market but may increase or decrease in the shoe polish market. d. Total revenue will increase in the shoe polish market but may increase or decrease in the cattle market. e. Total revenue will decrease in the shoe polish market but may increase or decrease in the cattle market. 16. Mary s Big-Bite is having a sale on raisin cookies. This leads to an increase in consumer surplus to: a. Existing customers who now get lower prices on the cookies they were already planning to purchase and no one else. b. New customers who enter the market because of the lower prices and no one else. c. Both of these existing customers and new customers. d. No one since the added calories results in poorer health for these consumers. e. Mary since she s now making greater profits. ECON 1110 Exam 1-A Fall 2014 Page 6

6 17. and 18. The diagram below concerns the demand by Cornell students for espresso in the Ithaca market. Use this diagram to answer the following two questions: P D B D A Y X Q 17. All else equal, an increase in the minimum wage to $15.00 per hour would cause a move: a. from D A to D B b. from D B to D A c. from Y to X d. from X to Y 18. All else equal, an increase in the price of Red Bull (a highly caffeinated drink) would cause a move: a. from D A to D B b. from D B to D A c. from Y to X d. from X to Y ECON 1110 Exam 1-A Fall 2014 Page 7

7 19. You are offered a free round-trip non-transferable bus ticket to New York City this weekend. You were going to buy an airplane ticket to the City at a cost of $300. You would have been willing to pay up to $350 for the airplane ticket. Assume there are no other costs of travel. Based on this information, at a minimum, how much would you have to value riding the bus to accept the free ticket and take the bus to NYC? a. $ 0. b. $ 50. c. $ 300. d. $ 350. e. You would never take the bus. 20. The table below is the cost schedule for Sulfur Dioxide Emissions. Per Unit Cost of Eliminating Firms A B C D First Unit $40 $35 $30 $25 Second Unit $65 $55 $60 $50 Third Unit $75 $70 $85 $60 Fourth Unit $80 $90 $100 $110 If the Federal Government wanted to reduce pollution from 16 units to 6 units, it should charge a per unit pollution fee of: a. $53. b. $58. c. $68. d. $73. e. $78. ECON 1110 Exam 1-A Fall 2014 Page 8

8 Name: Section Number: Essay Questions 1. (12 points) $P Q (gasoline powered motorboats) Consumer Surplus Producer Surplus Tax Revenues Total Surplus Without Tax With Tax Change Fill in the box and answer questions on the next page related to this diagram and box. ECON 1110 Exam 1-A Fall 2014 Page 9

9 a) (6 points) The preceding diagram represents the market for gasoline powered motorboats. If a tax of $1,000 were imposed on the seller of each gasoline powered motorboat, show how this would affect consumer and producer surplus as well as total tax revenues both on the diagram and in the box. In the space below using letters report the area of dead weight social loss as well as the amount of the total tax paid for by consumers and the amount paid for by producers. (Be sure to label all lines and areas.) Dead weight social loss Total tax paid by consumer Total tax paid by producer b) (3 points) What is the new equilibrium quantity of gasoline powered motorboats after the tax? Using letters, show this on the diagram and report the change in motorboat sales in the space below. Change in motorboat sales c) (3 points) Continuing from the facts in (a) and (b), suppose that the lifetime pollution cost of each gasoline powered motorboat was exactly $1,000. In this case what is the dead weight social loss? What is the efficient equilibrium quantity of motorboats produced? Using letters, show this on the diagram and report the amount in the space below. Dead weight social loss Efficient equilibrium quantity ECON 1110 Exam 1-A Fall 2014 Page 10

10 2. (28 points) Consider two countries: France and Chile. Each country produces two goods: laptop computers and baguettes. The following chart summarizes the production possibilities in each country. Assume that they are producing most efficiently using their limited resources at the starred levels of production of laptops and baguettes. Complete the missing details and answer the questions that follow. France Market Chile Market Joint Market Laptops Baguettes Laptops Baguettes Laptops Baguettes * 10* * 25* Using the data above, answer the questions on the next page and complete the diagram. ECON 1110 Exam 1-A Fall 2014 Page 11

11 a) (4 points) Fill in the box below with the maximum output of each commodity in each country. Use this to determine the opportunity cost for the production of laptops in each country and the opportunity cost of the production of baguettes in each country. Which country has a comparative advantage in the production of laptops? Which country has a comparative advantage in the production of baguettes? France Chile Laptops Baguettes Opportunity Cost of Laptops in France: Opportunity Cost of Laptops in Chile: Comparative Advantage in Laptops: Opportunity Cost of Baguettes in France: Opportunity Cost of Baguettes in Chile: Comparative Advantage in Baguettes: b) (4 points) After filling in the empty cells in the joint market column with trade, use the grid on the last page to draw a carefully labeled diagram of the production possibilities of France and Chile respectively. On the same graph draw the production possibilities with trade. c) (4 points) On the diagram on the last page, show the set of laptop and baguette production combinations which are possible and would make both countries better off compared to their no-trade outcomes. d) (4 points) If gains from trade exist, pick a single point in that new set of production possibilities with trade that will make both countries CLEARLY better off. (Many correct answers are possible. Please choose one that results in whole numbers in all cases.) In the box below report the number of laptops and baguettes produced in France and Chile before trade. Then show the after-trade production in France and Chile to get to your single point. Finally, show total production in France and Chile of laptops and baguettes in both cases. HINT: All these values can be found in the production possibility schedules you produced in (b) and graphed in (c) Production Laptops Baguettes Before Trade After Trade Before Trade After Trade France Chile Total ECON 1110 Exam 1-A Fall 2014 Page 12

12 e) (4 points) In the box below report the number of laptops and baguettes consumed in France and Chile before trade. Then show the after-trade consumption based on the point you chose in part (d). Finally, show the total consumption in France and Chile of laptops and baguettes in both cases. Consumption Laptops Baguettes Before Trade After Trade Before Trade After Trade France Chile Total f) (4 points) How do you know that the single point you chose clearly makes both countries better off? Use the numbers in box (e) to make your before and after case. g) (4 points) Given that both countries are better off over all, is any one worse off at least initially? Use the numbers you generated in box (d) to make your before and after case. CONTINUE ANSWER ON DIAGRAM PAGE IF NECESSARY ECON 1110 Exam 1-A Fall 2014 Page 13

13 Baguettes Laptops ECON 1110 Exam 1-A Fall 2014 Page 14