# Econ : Principles of Microeconomics Midterm practice problems

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1 Econ : Principles of Microeconomics Midterm practice problems The following four questions consider the market for widgets. For each of the following situations, determine what happens to the equilibrium quantity (Q widget ) and equilibrium price (P widget ) of widgets. 1. The price of smidgets increases. Assume smidgets and widgets are substitutes. a) Q widget and P widget. b) Q widget and P widget. c) Q widget and P widget. d) Q widget and P widget. 2. Income increases. Assume the income elasticity for widgets is greater than one. a) Q widget and P widget. b) Q widget and P widget. c) Q widget and P widget. d) Q widget and P widget. 3. There is technological change that increases labor productivity in the widget industry. a) Q widget and P widget. b) Q widget and P widget. c) Q widget and P widget. d) Q widget and P widget. 4. Two things happen: (i) income increases (when the income elasticity is greater than one) and (ii) labor productivity increases.. a) Q widget and we can t tell what happens to P widget. b) Q widget and we can t tell what happens to P widget. c) P widget and we can t tell what happens to Q widget. d) P widget and we can t tell what happens to Q widget. 5. Consider the widget industry. Suppose income increases, and as a consequence, Q widget remains unchanged while P Widget increases.. Which of the following is a possible explanation for why this happened? a) Widgets are inferior and supply is perfectly elastic. b) Widgets are inferior and supply is perfectly inelastic. c) Widgets are inferior and demand is perfectly elastic. d) Widgets are normal and supply is perfectly elastic. e) Widgets are normal and supply is perfectly inelastic.

2 6. In an industry, (1) demand is perfectly inelastic and (2) supply is perfectly elastic. If a tax is imposed in this industry, bear the entire burden of the tax and equilibrium quantity. (Pick an answer to fill in the blanks.) a) Buyers, decreases. b) Buyers, is unchanged. c) Sellers, decreases. d) Sellers, is unchanged. Reservation Prices and Costs in Econland for a Widget Name of D Person Reservation price for one widget (dollars) Cost to make one widget (dollars) Name of S Person D1 9 1 S1 D2 8 2 S2 D3 7 3 S3 D4 6 4 S4 D5 5 5 S5 D6 4 6 S6 D7 3 7 S7 D8 2 8 S8 D9 1 9 S9 D S10 7. The table above provides reservation prices and costs for the inhabitants of Econland. Suppose we have an allocation where S1 and S2 each produce a widget and D1 and D2 each consume a widget. This is not Pareto efficient because a) S6 can sell a widget to D6 for \$5 and both are better off. b) D2 can sell his widget to D4 for \$3 and both are better off. c) S3 can produce a widget and give it to D3 in exchange for \$6 and both would be better off. d) S2 can pay \$1.50 to S3 to outsource production of the widget to S3, and both are better off. e) None of the above. 8. Suppose there is a price floor of \$7. What inefficiency might result? a) D5 might end up consuming a widget while D3 does not.. b) D2 might end up consuming a widget while D1 does not. c) S9 might end up producing a widget while S1 does not d) S6 might end up producing a widget while S2 does not e) None of the above

3 \$ Quantity S D The above diagram gives information about demand and supply for widgets in Econland. The next few questions ask you to determine the impact of a tax of \$2 in Econland. To answer the questions, it is recommended that you first fill out the table below and then use the table to answer the questions. Variable Free Market Q 5 \$2 Tax Change P D 5 P S 5 CS 12.5 PS 12.5 Gov't Surplus 0 TS The equilibrium consumer price P D under the \$2 tax is a) 5 b) 6 c) 7 d) 8 e) 9

4 10. Producer surplus under the \$2 tax is a) 4.5 b) 6 c) 8 d) 10 e) The tax revenue collected by the \$2 tax is a) 0 b) 4 c) 6 d) 8 e) The change in total surplus from the \$2 tax is a) 0 b).5 c) 1 d) 2 e) Assume the same demand and supply curve in the diagram above, but consider a different policy. The government implements a supply management policy in the industry, limiting industry quantity to some amount Q, through use of a tradable quota system. The total market value of the quota equals the quantity of quota times the price of quota. Which of the alternative quota quantities below maximizes the total market value of quota? a) Q = 1 b) Q = 3 c) Q = 4 d) Q = 5 e) Q = The states that the is if the market structure is perfect competition and there are no externalities. a) Pareto Efficiency Doctrine, subsidized market, perfectly elastic b) Pareto Efficiency Doctrine, unregulated market, perfectly inelastic c) First Welfare Theorem, unregulated market, Pareto efficient d) First Welfare Theorem, subsidized market, Pareto efficient e) Adam Smith Theorem, unregulated market, equitable

5 15. If price equals \$9 in the above market there is excess supply. Consider a policy where the government buys up all the excess supply, to prevent the price from falling below \$9. What will be the total expenditures of the government on the program? a) \$9 b) \$18 c) \$36 d) \$45 e) \$ Compared to the free market, the change in producer surplus from this policy equals a) +ABGE b) +ACHE. c) +ACHE. d) +AC0 e) +ACGE 17. Now use the same graph above to consider a different policy. Suppose a subsidy of \$3 is introduced. Relative to the free market, the change in producer surplus equals a) 0 b) +ACGE. c) +ACHE d) +EGMK e) +EHNK. 18. The change in consumer surplus from the \$3 subsidy equals a) 0 b) +ACGE. c) +EGMK d) +ABGE e) +EGNK.

6 19. Which of the following are rivalrous in consumption? (i) A banana (ii) Premium TV channels (e.g. HBO) (iii) FM radio (iv) Timber from an unregulated forest a) (i) and (ii) b) (i) and (iii) c) (i) and (iv) d) (ii) and (iv) e) (ii) and (iii) 20. Suppose that when the price of a good increases from \$5 to \$6, the quantity demanded decreases from 2 units to 1 units. From this information, we can say that a) demand is perfectly inelastic b) demand is perfectly elastic c) demand is elastic d) demand is inelastic e) none of the above

7 The questions on this page and the next page refer to the graph below. Wolverine consumes pizza and soda and the graph illustrates his indifference curves. 21. From Wolverine s indifference curves, we can determine that Wolverine is indifferent between having (10 pizzas, 10 sodas) and a) (8 pizzas, 12 sodas) b) (8 pizzas, 22 sodas) c) (6 pizzas, 6 sodas) d) (32 pizzas, 4 sodas) e) (24 pizzas, 2 sodas) 22. Suppose Wolverine has an income of \$60, that P Pizza =\$4, and that P Soda =\$2. Draw Wolverine s budget constraint in the above figure. From this we can see that the opportunity cost of one more slice of pizza equals a) ½ soda b) 1 soda c) 2 sodas d) 3 sodas e) 4 sodas

8 23. At this income and prices of soda and pizza, the optimal consumption bundle for Wolverine is a) (7.5 pizza, 15 sodas) b) (4 pizza, 22 sodas) c) (15 pizza, 0 sodas) d) (10 pizza, 10 sodas) e) (14 pizza, 2 sodas) 24. Suppose the price of pizza falls from \$4 to \$2. The change in the demand for pizza equals a) 0 b) 4 c) 8 d) 10 e) 12

9 Robinson works 5 hours a day. He can make 8 apples per hour or 2 oranges per hour. Friday works 10 hours a day. He can make 1 apple per hour or 4 oranges per hour. The figures below show the indifference curves for Robinson and Friday O r 25 a 20 n g 15 e s Apples Robinson U2 U3 U O r 25 a n 20 g e 15 s Apples Friday U2 U3 U1 Illustrate Robinson s and Friday s production possibility frontiers (ppf) in the graphs above and then answer the following questions. 25. has an absolute advantage in making apples and has a comparative advantage in making apples. (Fill in the blanks) a) Friday, Friday b) Robinson, Robinson c) Friday, Robinson d) Robinson, Friday 26. Suppose trade is impossible, so each is in autarky. For each, production equals consumption. At the utility maximizing choice, Robinson produces and consumes a) (40 apples, 0 oranges) b) (0 apples, 10 oranges) c) (20 apples, 20 oranges) d) (20 apples, 5 oranges) e) (5 apples, 20 oranges) 27. Suppose trade is possible and that the price of one apple in terms of oranges equals one orange. In this case, Robinson produces apples and consumes apples. a) 5, 20 b) 10, 40 c) 40, 20 d) 20, 20 e) 30, 15

10 The above graph illustrates the supply and demand for widgets in Econland. Widgets can be obtained in world markets at a price P World = R as illustrated. Suppose initially Econland is in aurtarky. Then it opens to free trade with the rest of the world. 28. Relative to autarky, free trade results in a change in Econland producer surplus of and a change in Econland total surplus of. a) GHL, CHL b) FHLK, +RLNY c) 0, 0 d) FHR, +RHY e) KLR, +BENK 29. Suppose the instead of free trade, the government of Econland sets a tariff on widgets equal to the length FR. Total tariff revenue collected then equals a) FRXJ b) FRWH c) GVXJ d) LNXV e) Suppose the instead of free trade, the government of Econland sets a quota on widgets imports equal to the length YR. Assume import quota are tradable. The total market value of all of the quota together equals a) LNXV b) FLNY c) GJUS d) RYZ0 e) 0

11 31. Suppose there is an industry that has two externalities. There is a negative externality on the production side, so the social marginal cost (SMC in the figure) exceeds private marginal cost (S in the figure). There is a positive externality on the consumption side so the social marginal benefit (SMB in the figure) exceeds private marginal benefit (D in the figure). The market equilibrium quantity equals and the socially efficient quantity equals (fill in the blanks) a) T, U b) T, S c) S, S d) T, T e) U, U 32. The government decides to put a subsidy in this market. Which of the following is true? a) Doing so will increase the total surplus of Econland b) Doing so will bring Econland to the socially efficient quantity c) Doing so will increase quantity above the socially efficient quantity d) Nothing happens because there s a negative externality in the market e) The deadweight loss resulting from the subsidy is erased by the negative externality

13 Gas Price (\$ per gallon) 37. If toilet paper is a necessity good, it means that as your income increases, a) your total spending on toilet paper goes down b) you buy less toilet paper c) you don t buy any toilet paper d) the share of income you spend on toilet paper decreases e) the share of income you spend on toilet paper increases 38. When calculating elasticity, we use percentage changes instead of actual changes because a) Using percentage changes will get rid of the negative sign b) Using percentage changes will get rid of the units problem c) Using actual changes will always overestimate elasticity d) Using actual changes will always underestimate elasticity e) None of the above Gas Taxes and Gas Prices y = x Gas Tax (\$ per gallon) 39. The above figure plots average retail gasoline prices and gas tax rates in dollars per gallon for eight countries. a) It is evidence that consumers, not producers bear the primary burden of gas taxes. b) It is consistent with what economic theory predicts will happen to the price consumers pay when a country imposes a tax and the supply of gasoline to the country is perfectly elastic. c) (a) and (b) are both true. d) (a) and (b) are both false. 40. In one study, the elasticity of demand is estimated to be.1, while in another study it is estimated to be 1.0. This makes sense of the first study is estimating the elasticity, while the second studi is estimating the elasticity (Fill in the blanks). a) Short-run, long-run b) Long-run, short-run c) Long-run, medium-run d) Medium-run, short-run

15 47. Using the new rates (Mark making 10 drawings per hour or 5 puzzles per hour, and James making 4 drawings per hour or 10 puzzles per hour), suppose the two decide to specialize on the good that he has a comparative advantage in. The lowest price of drawings such that trade will happen is and the highest price of drawings such that trade will happen is. a) b) c) d) 1 2 puzzles, 1 2 puzzles 1 2 puzzles, 5 2 puzzles 5 2 puzzles, 1 2 puzzles 5 2 puzzles, 5 2 puzzles 48. Using the new rates (Mark making 10 drawings per hour or 5 puzzles per hour, and James making 4 drawings per hour or 10 puzzles per hour), and with both Mark and James working two hours per day, if drawings is the good on the X-axis and puzzles is the good on the Y axis, then the slope of the PPF for Mark is, which is the of obtaining one more drawing in terms of puzzles. a) 2, opportunity cost b) 2, marginal rate of substitution c) ½, marginal rate of substitution d) ½, opportunity cost e) None of the above 49. What is the intuition behind the right-angled indifference curves of perfect complements (fixed proportions) indifference curves? a) Because the two goods are consumed in a set proportion, the demand curve is perfectly inelastic for one good and perfectly elastic for the other, which creates right-angled indifference curves b) If one good is not consumed and the other one is consumed, then the person will be infinitely happy, which creates right-angled indifference curves c) Having more of one good but not of the other will mean nothing, as far as utility goes, for the person, which creates right-angled indifference curves d) The opportunity cost is increasing with the number of each good consumed, which creates rightangled indifference curves e) The opportunity cost is decreasing with the number of each good consumed, which creates right-angled indifference curves 50. What does it mean when countries exhibit increasing returns in production of a good? a) The opportunity cost of producing a good is increasing, the more that it is produced b) The opportunity cost of producing a good is decreasing, the more that it is produced c) The fixed cost of producing a good is increasing, the more that it is produced d) The fixed cost of producing a good is decreasing, the more that it is produced

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