# ECON 251 Exam 1 Pink Spring 2012

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1 ECON 251 Exam 1 Pink Spring Which of the following is an example of the economic resource of capital? a. A \$20 bill b. A corporate bond c. a government savings bond d. none of the above 2. John went to Super Bowl Village to ride the zip line. The value he gets from one ride on the zip line is \$50. To ride the zip line, John must buy a ticket. A ticket for one zip line ride is \$10. Because the zip line is a very popular attraction John must wait in line for 3 hours to ride the zip line. Instead of waiting in line to buy a zip line ticket John could have been writing which he values at \$45. What is John s opportunity cost to ride the zip line? a. \$40 b. \$50 c. \$55 d. Negative \$5 Jill and Aiden operate a donut shop together. If Jill uses all of her resources to bake donuts, she can bake 300 donuts per hour. If Jill uses all of her resources to glaze donuts, she can glaze 450 donuts per hour. If Aiden uses all of his resources to bake donuts, he can bake 150 per hour. If Aiden uses all of his resources to glaze donuts, he can glaze 200 per hour. This data is summarized in the following table. Baked Donuts/hour Glazed Donuts/hour Jill Aiden Jill s marginal cost of baking 1 donut is. a. 300 baked donuts b. 450 glazed donuts c. 3/2 = 1.5 glazed donuts d. 9/4 = 2.25 glazed donuts Exam 1 PINK Page 1 of 10

2 4. Based on the table in the previous problem, has the comparative advantage in baking donuts and has the absolute advantage in glazing donuts: a. Jill, Jill b. Aiden, Aiden c. Jill, Aiden d. Aiden, Jill 5. On the combined Production Possibility Frontier for Jill and Aiden shown below, which of the following is true? (Not necessarily drawn to scale) a. A = 150 b. B = 200 c. C = -3/2 d. D = The point (B,A) on Jill and Aiden s combined PPF above satisfies a. Production efficiency b. Allocative efficiency c. Equilibrium d. All of the above For the following two questions, assume peanut butter and jelly are complements in consumption: 7. If the price of peanut butter increases, which of the following occurs? a. Quantity demanded of peanut butter increases b. Quantity demanded of peanut butter decreases c. Demand for peanut butter shifts right d. Demand for peanut butter shifts left Exam 1 PINK Page 2 of 10

3 8. If the price of jelly increases, which of the following occurs? a. Equilibrium quantity of peanut butter increases b. Demand for peanut butter decreases c. Demand for jelly increases d. Demand for jelly decreases 9. Given that peanut butter and jelly are complements in consumption, which of the following is a possible cross-price elasticity between the two goods? a. 1.3 b. 0.2 c d. Either a or b 10. Suppose potential buyers and sellers expect house prices to decrease in the future. How would this effect the current price of houses? a. It would have no effect on the current house prices b. Current house prices will increase c. Current house prices will decrease d. The effect on current house prices is indeterminate 11. Craig just received a \$50 per month raise from \$2,500 to \$2,550. Before the raise, he would go to the theater once a month and rent a movie twice a month. After the raise, he would go to the theater three times a month and no longer rent any movies. Based on this information, which of the following is most likely to be true? a. Theater tickets are a normal good for Craig b. Movie rentals are a normal good for Craig c. Theater tickets and movie rentals are complementary goods for Craig d. Craig s demand for movie rentals is perfectly inelastic 12. Based on the information in the problem above, Craig s income elasticity for theater tickets is equal to a = -3/2 b. -50 c. 2/50 = 0.04 d = 101/2 13. Fishers is a town in Indiana that is expanding rapidly. As a result, the demand for home ownership in the region has increased. Assuming no other changes, we would expect this to cause a(n) in the price of housing in Fishers and a(n) in the equilibrium quantity of houses in Fishers. a. Increase; increase b. Increase; decrease c. Decrease; increase d. Decrease; decrease Exam 1 PINK Page 3 of 10

5 A sports store was selling 25 basketballs a day at \$10 each. Recently, they changed the price to \$20 each, and they are now selling 15 basketballs per day. Use this information to answer the next two questions. 17. What is the price elasticity of demand for basketballs in this price range? a = 4/3 b = 3/4 c. 1.5 = 3/2 d = 2/3 18. How does the firm s revenue change when price rises from \$10 to \$20, and how does this relate to the price elasticity of demand? a. Revenues falls from \$250 to \$150, implying that demand was elastic. b. Revenue rises from \$500 to \$300, implying that demand was elastic. c. Revenue rises from \$250 to \$300, implying that demand was inelastic. d. Revenue rises from \$300 to \$350, implying that demand was elastic. 19. A perfectly elastic demand curve is represented graphically by a a. Vertical line b. Horizontal line c. Upward sloping line d. Downward sloping line 20. When demand is perfectly elastic, the price elasticity of demand is equal to a. 0 b. 1 c. -1 d. Infinity 21. Which of the following would increase the price elasticity of demand for the iphone? a. The introduction of a new Android-based smartphone b. An increase in consumers income holding the price of the iphone constant c. An decrease in the amount of time a consumer is willing to wait to purchase the iphone d. All of the above 22. When a market achieves allocative efficiency, which of the following is true? a. Marginal benefit is maximized b. Marginal benefit equals marginal cost c. Output is maximized d. Consumer surplus is maximized Exam 1 PINK Page 5 of 10

6 23. Given the following demand and supply equations in the market for wheat, what level of production is necessary for allocative efficiency to occur? (Prices are in dollars, and quantities are measured in bushels.) Demand: P = 12 (4/3) Q d a. 4 b. 12 c. 8/6 d. 6 Supply: P = 2 + (1/3 ) Q s 24. At equilibrium, what is the total surplus in the market for wheat above? a. \$30 b. \$60 c. \$24 d. \$ Of the total surplus in the wheat market at equilibrium above, how much is consumer surplus and how much is producer surplus? a. Consumer surplus is \$24, and producer surplus is \$36. b. Consumer surplus is \$12, and producer surplus is \$12. c. Consumer surplus is \$24, and producer surplus is \$6. d. Consumer surplus is \$48, and producer surplus is \$ Based on the same market for wheat above, how many bushels of wheat would the government have to buy to support a price floor of \$6 per bushel? a. 4.5 b. 6 c. 7.5 d Starting from equilibrium in the market for wheat above, if a tax of \$1 is imposed on wheat producers, what will happen to the price consumers pay for wheat? a. Wheat prices for consumers will rise by \$1. b. Wheat prices for consumers will rise by \$0.50. c. Wheat prices for consumers will rise by \$0.80. d. Wheat prices for consumers will fall by \$1. Exam 1 PINK Page 6 of 10

7 28. If wheat and alfalfa are substitutes in production, then an increase in the price of wheat will result in in the alfalfa. a. a decrease; supply of b. an increase; demand for c. an increase; supply of d. a decrease; demand for Consider the demand for and supply of a Purdue education below. Tuition (\$) Quantity Demanded Quantity Supplied 0 100, ,000 92,000 12,000 8,000 84,000 24,000 12,000 76,000 36,000 16,000 68,000 48,000 20,000 60,000 60,000 24,000 52,000 72,000 28,000 44,000 84,000 32,000 36,000 96,000 36,000 28, ,000 40,000 20, , What is the marginal benefit of education for the 68,000 th student? a. \$16,000 b. \$4,000 c. \$20,000 d. \$12, Equilibrium in the market for Purdue education is at a price of and an enrollment of. a. \$40,000; 20,000 b. \$20,000; 60,000 c. \$12,000; 36,000 d. \$32,000; 36,000 Exam 1 PINK Page 7 of 10

8 31. In an effort to help make college more affordable for students, the government imposes a price ceiling of \$12,000. Which of the following would occur as a result of the price ceiling? a. A surplus of 40,000 b. A shortage of 40,000 c. Total surplus in the market would increase because students will be paying a lower price d. Both b and c 32. What deadweight loss would result from a price ceiling set at \$12,000 in the market for college education above? a. \$20 million b. \$24 million c. \$120 million d. \$240 million 33. If the price ceiling on tuition is set at \$32,000 instead of \$12,000, which of the following will result? a. Deadweight loss will be even greater than it was at \$12,000. b. There will be a surplus of 60,000 c. Allocative efficiency will be achieved. d. The marginal benefit of the last unit supplied will be equal to \$32, The goal of utilitarianism is a. The greatest happiness for the greatest number b. Equal happiness for all workers c. Equal pay for equal work d. The greatest pay for the greatest number Exam 1 PINK Page 8 of 10

9 35. The graph below represents the market for snow shovels. If the current price in the market is \$10, which of the following is true? P S 10 D Q show shovels a. There is a surplus of 5 snow shovels b. There is a shortage of 5 snow shovels c. There is pressure for price to rise d. There is pressure for price to fall 36. Suppose the price elasticity of demand for glow sticks is 3.2 and the price elasticity of supply for glow sticks is 1.8. Which of the following statements is NOT true? a. Consumers are more responsive to changes in the price of glow sticks than suppliers. b. If a tax is imposed on glow sticks, suppliers will pay more of the tax. c. If the price of glow sticks increases by 10% the quantity demanded of glow sticks will increase by 32%. d. Demand is more elastic than supply. Exam 1 PINK Page 9 of 10

10 37. Suppose you are member of a budget committee on taxation. In an effort to collect tax revenue for your town, the budget committee agrees to implement a 10-cent per-unit tax on the sellers of ice cream cones. Currently the equilibrium quantity of ice cream cones traded in your town is 100,000 per year. The members of the board estimate that this tax will yield \$10,000 of tax revenue. Are the board members correct in their estimate? a. Yes, tax revenue will be \$10,000 because 10 cents of tax on 100,000 ice cream cones will yield \$10,000 of tax revenue. b. Yes, tax revenue will be \$10,000 because the tax is imposed on sellers only and will not affect the number of ice cream cones consumers purchase. c. No, tax revenue will be more than \$10,000 because consumers will purchase more ice cream cones after the tax is imposed. d. No, tax revenue will be less than \$10,000 because the quantity of ice cream cones traded after the tax will be less than 100, Suppose the price elasticity of demand for ice cream cones is 0.2, and the price elasticity of supply is 0.8. If the government imposes this 10-cent tax per ice cream cone, which of the following is a possible outcome? a. Suppliers pay 10 cents of the tax, Consumers pay none of the tax b. Suppliers pay none of the tax, Consumers pay 10 cents of the tax c. Suppliers pay 6 cents of the tax, Consumers pay 4 cents of the tax d. Suppliers pay 2 cents of the tax, Consumers pay 8 cents of the tax 39. When demand is perfectly elastic, which of the following is true if an excise tax is imposed in that market? a. An excise tax will result in no deadweight loss. b. Consumers will bear the entire burden of the tax. c. Producers will bear the entire burden of the tax. d. The burden of the tax will be shared equally between consumers and producers. 40. Under which of the following circumstances would a market achieve allocative efficiency? a. A price ceiling is set below equilibrium b. A tax is imposed in a market where supply is perfectly inelastic c. A price floor is set above equilibrium d. Allocative efficiency is achieved in all of the above Exam 1 PINK Page 10 of 10

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