# MIDTERM I. GROUP A Instructions: November 3, 2010

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1 EC101 Sections 04 Fall 2010 NAME: ID #: SECTION: MIDTERM I November 3, 2010 GROUP A Instructions: You have 60 minutes to complete the exam. There will be no extensions. Students are not allowed to go out of the exam room during the exam. Those students who leave the exam room will not be readmitted. The exam consists of 30 multiple choice questions. Each multiple choice question is worth 1 point for a total of 30 points. Use a pencil to mark your answers on the answer sheet. Make sure you write your name and ID number on the answer sheet as well. Please mark the group of your test on the answer sheet under Test Form. No calculators, dictionaries or formula sheets are allowed. The use of cell phones is strictly prohibited. Make sure your cell phone is turned off and inside your bag. Do NOT use your cell phone even for timekeeping purposes. This is a closed books/notes exam. Choose only one answer for each question. TWO WRONG ANSWERS WILL TAKE AWAY ONE CORRECT ANSWER. There is absolutely no talking during the exam. The proctors will NOT answer any questions. There are 8 pages in this exam booklet. Version A Page 1

2 Figure 1: 1. The current equilibrium price of wheat is \$4 per bushel. Suppose that the US Government agrees to support the price of wheat at a price level of \$6 per bushel by buying and storing any surplus that cannot be sold on the free market. The quantity of wheat purchased by the US Government will be greater A) the greater the inelasticity of demand for wheat. B) the greater the income elasticity of wheat. C) the greater the elasticity of supply of wheat. D) the greater the inelasticity of supply of wheat. 2. In 1984, the market for human kidneys saw an equilibrium market price of \$20,000 per kidney. At that price, the equilibrium market quantity demanded and supplied was 12,000 kidneys. However, in 1984 Congress passed the National Organ Transplantation Act (NOTA) which stated that people do not have the right to sell parts of their bodies. NOTA effectively prohibits the sale of kidneys for a price -- meaning organs can only be donated. But, this law did not make kidneys and other organs valueless in terms of consumer surplus. Figure above depicts the above information. The figure also indicates that when the market price for kidneys has been legally set to P=0, 8,000 kidneys are still supplied to the market in form of donation. What is the change in consumer surplus, the change in producer surplus, and the deadweight loss resulting from the regulation. A) 140 million, -200 million, 60 million B) -100 million, 160 million, 60 million C) -140 million, 140 million, 0 D) 100 million, -120 million, 20 million 3. If the owner of an ice cream store charges \$1.20 for an ice cream cone her total revenue is \$540 per day. If she lowers the price to \$1.00, total revenue falls to \$500 per day. The demand for ice cream is A) unitary elastic B) Elastic C) can not tell with provided information D) Inelastic Version A Page 2

3 4. If an excise tax is imposed on automobiles and collected from consumers: A) the supply curve will shift upward by the amount of the tax. B) the equilibrium quantity demanded will increase relative to the pre-tax level. C) the demand curve will shift downward by the amount of the tax. D) the equilibrium quantity supplied will increase relative to the pre-tax level. 5. Which of the following correctly describes how price adjustment eliminates a shortage? A) As the price falls, the quantity demanded decreases while the quantity supplied increases. B) As the price rises, the quantity demanded decreases while the quantity supplied increases. C) As the price falls, the quantity demanded increases while the quantity supplied decreases. D) As the price rises, the quantity demanded increases while the quantity supplied decreases. 6. When Joe's income is \$100 per week, he spends \$20 per week on pizza. When his income rises to \$110 per week, he spends \$25 per week on pizza. If the price of pizza remains constant, this information implies that for Joe: A) pizza is an inferior good. B) pizza is a normal good and a luxury. C) demand for pizza is price elastic. D) pizza is a normal good and a necessity. 7. Suppose that Iranians have a growing concern that too much of the country s limited natural gas resources are being sold to other countries. Using conventional supply and demand analysis, what would have been the most likely effect on the price of natural gas in Iran if the Iranian government had imposed a quota reducing out-ofcountry sales of natural gas? The price of natural gas in Texas would have tended to: A) rise, and the price in the other countries would have tended to fall. B) fall, and the price in the other countries would have tended to rise. C) fall, as would the price in other countries. D) rise, as would the price in other countries. 8. If a \$20 per-unit tax on CD players raises the equilibrium price paid by consumers by \$4, then the supply curve is A) shifted downward by \$4. B) less elastic than the demand curve. C) more elastic than the demand curve. D) shifted upward by \$4. 9. An ambiguous change in price and a decrease in quantity is most likely caused by: A) a shift to the right in supply and a shift to the left in demand. B) a shift to the left in supply and a shift to the right in demand. C) a shift to the left in supply and a shift to the left in demand. D) no shift in supply and a shift to the left in demand. Version A Page 3

4 10. During Vietnam War in the US recommendation of registering women for the draft raised an uproar around the country. One opponent of this proposal stated: "Women are needed at home to rear the children, let the men fight the wars." As a naive economist you would interpret this statement as: A) the opportunity cost associated with drafting men is higher than the opportunity cost of drafting women. B) the opportunity cost associated with drafting women is higher than the opportunity cost of drafting men. C) the opportunity cost associated with drafting men and women is irrelevant, because if women are drafted they cannot be at home rearing the children. D) the opportunity cost of drafting men and women is equal. 11. Joanna and David are farmers who produce beef and corn. In a year, Joanna can produce 10 tons of beef or 60 bushels of corn, while David can produce 10 tons of beef or 50 bushels of corn. To maximize their total output of beef and corn, A) Joanna and David each spend half of their time producing beef and half of their time producing corn. B) only Joanna produces because she has an absolute advantage over David. C) David produces beef and Joanna produces corn. D) Joanna produces beef and David produces corn. 12. Considering demand only, a tax on which of the following goods would cause a larger deadweight loss? A) restaurant meals B) Tobacco C) Medicine D) Gasoline 13. Consider the market for milkshakes. An increase in the consumer surplus may most likely result from: A) an increase in the supply of milkshakes. B) a decrease in the demand for milkshakes. C) an increase in the demand for milkshakes. D) none of the above. 14. Suppose that a consumer's annual income decreased by \$300, causing a 15% decrease in the units of prime rib the consumer demands. If the consumer has an income elasticity of demand of 1 for prime rib, what is her new income (according to mid-point elasticity calculation)? A) \$3000 B) \$1850 C) \$3300 D) \$2700 Version A Page 4

5 Use the following to answer question 15: Figure: Market for Lattes 15. (Figure: Market for Lattes) If, in the market for lattes shown in the accompanying figure, the government assesses a tax of \$0.75 on each latte, the price the consumer pays for a latte after the tax will: A) increase from \$2 to \$2.25. B) change, but we cannot determine by how much. C) increase from \$2 to \$2.50. D) increase from \$2 to \$ Assume that you are scheduled to take 3 exams next week. Because you want to go to the Medrano Circus this Saturday (and thus take the day off from studying), you only have 7 hours available on Sunday to study for all three exams. If your goal is to maximize the combined point total from all three exams, given the information contained in the following table, how should you distribute scarce study time? History Mathematics Spanish Hours Expected Hours Expected Hours Expected Studied Score Studied Score Studied Score A) 2 hours history, 2 hours mathematics, 3 hours Spanish B) 1 hour history, 4 hours mathematics, 2 hours Spanish C) none of the above. D) 3 hours history, 3 hours mathematics, 1 hour Spanish Version A Page 5

6 Use the following to answer questions 17-19: Table: Market for Benim'O Market for Benim'O Price (unit) Quantity demanded (units) Quantity supplied (units) ,000 3, ,000 5, ,000 7, ,000 9, ,000 11, (Table: Market for Benim'O) Considering addictive nature of this product, suppose the government decides to reduce Benim'O consumption as part of a War on Obesity. After careful study, the government decides to limit production (i.e., the government imposes a quota on production through licenses for free to lowest cost producers) of Benim'O to 5,000 for the current calendar year. Using this table, what price will producers charge, if they obey the quota law? A) 1.50 B) The answer cannot be determined with this information. C) 1.30 D) (Table: Market for Benim'O) If the government imposes a quota on the fried Benim'O market of 5,000, using this table, the quota rent (per Benim'O) collected by the Benim'O producers will be: A) B) C) D) (Table: Market for Benim'O) In response to popular anger over the high price of Benim'O and the extreme wealth of Benim'O producers, the government imposes a price ceiling of 1.20 per Benim'O (along with the quota of 5000). From this table, the price ceiling causes: A) a surplus of 3,000 packs of Benim'O. B) a surplus of 8,000 packs of Benim'O. C) a shortage of 3,000 packs of Benim'O. D) a shortage of 5,000 packs of Benim'O. 20. This year the demand for new homes increases while at the same time the supply also increases. As a result of these changes in the market for new homes you can conclude that: A) the equilibrium number of new homes sold will decrease. B) the equilibrium number of new homes sold will increase. C) the equilibrium price of new homes will fall. D) the equilibrium price of new homes will rise. Version A Page 6

7 21. The number of seats in a football stadium is fixed at 50,000. The city decides to impose a ticket tax of \$5 per ticket. In response, the team management raises the ticket price from \$30 to \$35 and still sells all 50,000 tickets. The tax caused a change in the consumer surplus of, a change in the producer surplus of, and a deadweight loss of. A) \$250,000; \$0; \$0 B) \$5; \$0; \$5 C) \$250,000; \$0; \$250,000 D) \$250,000; \$250,000; \$0 22. Suppose the government imposes a \$10 excise tax on the sale of sweaters by charging suppliers \$10 for each sweater sold. We would predict that A) the price of sweaters will increase by less than \$10. B) tax will be ineffective. C) consumers of sweaters will bear the entire burden of the tax. D) the price of sweaters will increase by \$ Suppose the United States removes the current sugar quotas and the market price of sugar drops. In the candy bar market, we would expect: A) the deadweight loss to increase. B) the consumer surplus to be unchanged. C) the consumer surplus to increase. D) the consumer surplus to decrease. 24. After you graduate from college, you open a business selling computers. There are many other businesses in your city that sell similar computers. Based on this information, the price elasticity of demand for the computers that your business sells will be: A) highly inelastic. B) one. C) zero. D) highly elastic. 25. If an individual s demand for frozen dinners increases when the price of steak rises, we would infer that: A) steak and frozen dinners are substitutes for this person. B) steak and frozen dinners are complements for this person. C) steak is a normal good and frozen dinners an inferior good for this person. D) this individual s limit prices for steak have fallen. 26. The total producer surplus for a good can be calculated in all except one of the following ways. Which is the exception? A) the sum, for all sellers of the good, of the difference between what each seller receives and the minimum amount he or she is willing to accept for selling the good B) the area above the supply curve and below the price at which the good is being sold C) the sum of the individual producer surpluses for all sellers of the good D) the area below the supply curve for the good up to the quantity of the good sold Version A Page 7

8 Use the following to answer question 27: Figure: Production Possibilities Curve for Tealand 27. (Figure: Production Possibilities Curve for Tealand) In the accompanying figure, Tealand can only produce at point E if the government: A) raises the age for mandatory retirement. B) lowers the cost of production by providing subsidies to industry. C) raises taxes. D) eliminates unemployment. 28. As part of an anti-obesity program, the government places an excise tax on high-fat foods. We would expect consumers to pay almost all of this tax if: A) demand is inelastic and supply is elastic. B) demand is elastic and supply is inelastic. C) demand is inelastic and supply is inelastic. D) demand is elastic and supply is elastic. 29. Which of the following is a correct statement about markets for prohibited goods? A) Penalizing only the buyers of an illegal good increases the quantity bought. B) Taxing a good at a sufficiently high rate can achieve the same consumption levels as prohibition. C) Penalizing sellers of an illegal good increases demand for the good and reduce the price. D) Penalizing sellers of an illegal good decreases demand for the good and reduce the price. 30. Suppose the government imposes a \$4 excise tax on good X. If the demand for good X is perfectly elastic and the supply curve is elastic, then the price of good X paid by consumers will: A) remain constant. B) increase by more than \$4. C) increase by exactly \$4. D) increase, but by less than \$4. Version A Page 8

9 Answer Key 1. C 2. A 3. D 4. C 5. A 6. B 7. B 8. B 9. C 10. B 11. C 12. A 13. A 14. B 15. A 16. D 17. A 18. D 19. C 20. B 21. A 22. A 23. C 24. D 25. A 26. D 27. A 28. A 29. B 30. A Version A Page 9

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