Economics 103 Microeconomic Principles Section(s) Betty Johnson

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1 Page 1 UNIVERSITY OF VICTORIA Midterm 1 May 2016 Solutions NAME: STUDENT NUMBER: V00 Course Name & No. Economics 103 Microeconomic Principles Section(s) A01 CRN: Instructor: Betty Johnson Duration: 1 hour This exam has a total of _12_ pages including this cover page. Students must count the number of pages and report any discrepancy immediately to the Invigilator. This exam is to be answered: On the exam sheet. Marking Scheme: marks marks Materials allowed: Non-programmable calculator

2 Part I: Select the best answer: 1) The branch of economics that studies the choices of individuals and businesses is A) macroeconomics. B) microeconomics. C) positive economics. D) normative economics. E) social economics. Answer: B Econ 103 Summer 2016 Page 2 2) The fact that human wants cannot be fully satisfied with available resources is called the problem of A) opportunity cost. B) scarcity. C) normative economics. D) marginal cost. E) the big tradeoff. Answer: B 3) An outcome is considered efficient if A) it is the best available choice for an individual. B) as many people as possible are happy about the outcome. C) it is not possible to make someone better off without making anyone else worse off. D) everyone makes the same income. E) there is the smallest difference possible between the highest income earned and the lowest income earned. Answer: C 4) Opportunity cost is A) the value of your favourite activity. B) your value of leisure. C) the money you spend on food, shelter, and clothing. D) the marginal benefit from an activity. E) the highest-valued alternative that we give up to get something. Answer: E 5) Which one of the following is a necessary consequence of scarcity? A) no choices required B) high profits C) the requirement of making choices D) all wants are satisfied E) low profits Answer: C

3 Page 3 6) Monika will choose to eat a seventh pizza slice if A) the marginal benefit from the seventh slice is greater than its marginal cost. B) the marginal benefit from the seventh slice is less than its marginal cost. C) the total benefit from all seven slices is greater than their total cost. D) the total benefit from all seven slices is less than their total cost. E) she has enough money to pay for it. 7) A normative statement is A) about what ought to be. B) about what is. C) always true. D) always false. E) capable of evaluation, as true or false, by observation and measurement. 8) When Al makes the statement, "The cost of living has increased 10 percent over the past 10 years," he is A) making a positive statement. B) making a negative statement. C) making a normative statement. D) testing an economic model. E) identifying the standard of living-cost of living tradeoff. 9) Which one of the following concepts is not illustrated by a production possibilities frontier? A) scarcity B) monetary exchange C) opportunity cost D) attainable and unattainable points E) the tradeoff between producing one good versus another Answer: B Topic: Production Possibilities and Opportunity Cost 10) A point inside a production possibilities frontier A) indicates some unused or misallocated resources. B) is unattainable. C) is preferred to a point on the production possibilities frontier. D) indicates a point of production efficiency. E) illustrates the idea of opportunity cost. 11) A point inside a production possibilities frontier A) indicates some unused or misallocated resources. B) is unattainable. C) is preferred to a point on the production possibilities frontier. D) indicates a point of production efficiency.

4 Page 4 E) illustrates the idea of opportunity cost. 12) A tradeoff exists when A) we move from a point within the production possibilities frontier (PPF) to a point on the PPF. B) we move from a point on the PPF to a point within the PPF. C) the PPF shifts outward. D) we move along the PPF. E) the PPF shifts towards the origin. Answer: D Topic: Production Possibilities and Opportunity Cost Use the table below to answer the following questions. Table The following table gives points on the production possibilities frontier for goods X and Y. 13) Refer to Table The opportunity cost of increasing the production of X from 8 to 12 units is A) 4 units of X. B) 4 units of Y. C) 8 units of Y. D) 12 units of Y. E) 16 units of Y. Answer: D Use the figure below to answer the following questions.

5 Page 5 Figure ) In Figure 2.2.1, when 2,000 bicycles are produced each month, A) the marginal benefit from another bicycle is greater than the marginal cost of another bicycle. B) more bicycles must be produced to reach the efficient level of output. C) fewer bicycles must be produced to reach the efficient level of output. D) the economy is efficient at this level of production of bicycles. E) both A and B. Answer: E Topic: Using Resources Efficiently 15) In Figure 2.2.1, the curve labelled A is the curve and the curve labelled B is the curve. A) marginal cost; marginal benefit B) marginal cost; trade C) marginal benefit; trade D) production possibilities; trade E) marginal benefit; marginal cost 16) Debra has an absolute advantage in producing a good when she A) has a comparative advantage in producing that good. B) can produce the good at lower opportunity cost than anyone else. C) can produce more of that good than anyone else, using the same quantity of inputs. D) has exclusive rights to sell that good. E) has better technology than anyone else. Answer: C Fact 2.4.2

6 Page 6 Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. 17) Refer to Fact Which one of the following statements is true? A) Brenda has an absolute advantage over Agnes in the production of both goods. B) Agnes has a comparative advantage in the production of Y. C) Brenda has a comparative advantage in the production of X. D) Brenda will not gain from trade. E) Agnes will not gain from trade. Diff: 3 Type: MC Use the table below to answer the following questions. Table Production for one week by Sheila and Bruce 18) Given the information in Table 2.4.2, can Sheila and Bruce gain by specialization? A) Yes, but only if Bruce gets paid more than Sheila. B) No, not under the given circumstances. C) It depends on the wages each earns. D) Only if they are married to each other. E) Yes, if each specializes in the good in which he has a comparative advantage. Answer: E Topic: Gains from Trade 19) Given the information in Table 2.4.2, which one of the following is true? A) Sheila has a comparative advantage in good X. B) Bruce has a comparative advantage in good X. C) The opportunity cost to Bruce of an additional unit of X is 0.4 units of Y. D) A and B E) B and C Answer: E Diff: 3 Type: MC 20) The fundamental force that drives international trade is A) comparative advantage. B) absolute advantage.

7 Page 7 C) a countries' desire to increase their trade surplus. D) cheap labour in countries like China and India. E) unemployment of factors of production. Part II: Answer the following: 1) Provide two microeconomic statements and two macroeconomic statements. Classify your statements as positive or normative. Explain why. (6 marks) 2) Distinguish between comparative advantage and absolute advantage. (6 marks) 3) What is allocative efficiency and how does it relate to the production possibilities frontier? (6 marks) 4) In one hour Sue can produce 40 hats or 4 jackets and Tessa can produce 80 hats or 4 jackets. a) Calculate Sue s opportunity cost of producing a hat. (2 marks) b) Calculate Tessa s opportunity cost of producing a hat. (2 marks) c) Who has a comparative advantage in producing hats? (2 marks) d) If Sue and Tessa specialize in producing the good in which each of them has a comparative advantage, and they trade 1 jacket for 15 hats, who gains from the specialization and trade? (6 marks) Answers: #1

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