ECON1001: Introduction to Economics Fall 2006 University of Hong Kong. Mid-term exam #1. Saturday, October 14, :00a.m. 11:00a.m.

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1 This is version B. ECON1001: Introduction to Economics Fall 2006 University of Hong Kong Mid-term exam #1 Saturday, October 14, :00a.m. 11:00a.m. PLEASE READ THIS COVER PAGE CAREFULLY. UNLESS THE INVIGILATOR TELLS YOU TO DO SO, DO NOT TURN THE PAGE, DO NOT READ THE EXAM QUESTIONS, AND DO NOT START WRITING. A note from the instructors: We expect students to finish all the 68 multiple choice questions in 60 minutes, i.e., slightly less than one minute per question on average. Try not to allocate more than 2 minutes on any single question. Please also try to work on the apparently easier questions first. This strategy should help you lower the risk of losing a lot of marks by getting stuck in one or two of the more difficult questions. If you are done early, try to double check your answers. To avoid disturbance to other students, please do not leave early. Please mark the best answer to each multiple choice question on the answer sheet provided. On the answer sheet, please write down: Course code: ECON1001X, where X should be one of A/B/C/D/E/F/G/H. Title of the paper: Introduction to Economics I. University ID number: xxxxxx (also fill in the boxes on the upper right corner) Date: 14 October Please turn off your mobile phone. NO CHEATING PLEASE!! To help reduce the temptation to cheat, the proctors will keep close watch of students during the exams. For students who must use the washroom during the exam, the proctor will keep a record of their names and student IDs and take away their mobile phones during the their washroom visit.

2 1. Which version of the exam paper do you have? A) version A. B) version B. 2. Which class are you in? A) ECON1001A. B) ECON1001B. C) ECON1001C. D) ECON1001D. E) ECON1001E. F) ECON1001F. G) ECON1001G. H) ECON1001H. 3. The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number of screens available: Number of Total number Screens of patrons 1 50, , , , ,000 After paying the movie distributor and meeting all other non-interest expenses, the owner expects to net $2.00 per ticket sold. Construction costs are $1,000,000 per screen. How many screens should be built if the real interest rate is 7% A) 1 B) 2 C) 3 D) 4 E) 5 4. High Tech, Inc. produces plastic chairs that sell for $10 each. The following table provides information about how many plastic chairs can be produced per hour. For simplicity assume that labor is the only input. Number of Chairs Produced Workers per Hour How many workers will be hired, if the hourly wage for workers is $50? A) 1 B) 2 C) 3 D) 4 E) 5 5. Mike gives a non-refundable $100 to ACE adventure to reserve a raft for a group whitewater rafting trip in the New River. The raft has room for 5 people. In the past, Mike usually sells 4 tickets at $25 each and he can go on the trip for free. However, this time, he is able to sell only 3 rafting tickets at $25 each for a total of $75. Should Mike cancel the trip? A) Yes, because he will lose his $100. B) No, because he is making $75 C) Yes if Mike values going on the trip at less than $25. D) No, because losing $25 is better than losing $100 E) Yes, because he will lose $25 on the venture

3 6. According to cost-benefit principle, A) the lowest cost activity usually gives the lowest benefit. B) a person should always choose the activity with the lowest cost. C) a person should always choose the activity with the greatest benefit. D) the extra costs and benefits of an activity are more important considerations than the total costs and benefits. E) the activity with greatest total benefit always provides the greatest extra benefit. 7. Pat earns $25,000 per year (after taxes), and Pat s spouse, Chris, earns $35,000 (after taxes). They have two pre-school children. Childcare for their children costs $12,000 per year. Pat has decided to stay home and take care of the children. Pat must A) be irrational. B) value spending time with the children by more than $25,000. C) value spending time with the children by more than $12,000. D) value spending time with the children by more than $13,000. E) value spending time with the children more than does Chris. 8. You paid $8.00 to see a movie. Half an hour into the movie, you realize that it is a terrible movie and is not going to get any better. You should A) stay until the end because you already paid for it. B) wait another half hour because spending $8.00 for an hour is better than spending $8.00 for half an hour. C) leave immediately and do something more enjoyable. D) leave immediately only if you can get a partial refund of the ticket price. E) complain loudly to everyone around you. 9. What is the opportunity cost of living in a house that you already own? A) Zero, because you already own it. B) That mostly depends on current mortgage rates. C) The rent you could receive if you rented the house out to someone else. D) The taxes you pay your local government. E) That depends on how much you like living there. 10. Janie must either mow the lawn or wash clothes, earning her a benefit of $30 or $45, respectively. She dislikes both equally and they both take the same amount of time. Janie will therefore choose to because the economic surplus is. A) mow; greater D) wash; smaller B) wash; greater E) mow; the same as for washing C) mow; smaller 11. Ginger bought an MP3 player that came with a $10 rebate. Ginger should fill out and mail in the rebate form if A) $10 is more than 10% of the price of the MP3 player. B) the opportunity cost of the time and trouble of sending in the rebate forms is less than $10. C) the opportunity cost of the time and trouble of sending in the rebate forms is more than $10. D) no condition because she would have bought the MP3 player without the rebate. E) Ginger s surplus from purchasing the MP3 player was less than $

4 12. Matt has decided to purchase his textbooks for the semester. His options are to purchase the books via the Internet with next day delivery to his home at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16. Assume the minimum that Matt would be willing to accept to drive to the university campus is equal to the amount he saved on the concert ticket. What would be the amount of his economic surplus if he bought his textbooks at the university bookstore rather than via the Internet? A) $5 B) $1 C) $50 D) $20 E) There would be no economic surplus from purchasing the books at the university bookstore. 13. The cost that we can not avoid whether or not an action is taken, is called A) opportunity cost B) average cost C) sunk cost D) marginal cost E) total cost of the action 14. Tony notes that an electronics store is offering a flat $20 off all prices in the store. Tony reasons that if he wants to buy something with a price of $50 it is a good offer, but if he wants to buy something with a price of $500 it is not a good offer. This is an example of A) inconsistent reasoning; saving $20 is saving $20. B) the proper application of the cost-benefit principle. C) rational choice because in the first case he saves 40% and in the second case he saves 4%. D) marginal cost equals marginal benefit thinking. E) opportunity costs. 15. The introduction of refrigerators into Chinese homes: A) decreased the short run own price elasticity of demand for raw meat. B) did not affect the short run own price elasticity of demand for raw meat. C) increased the short run own price elasticity of demand for raw meat. D) decreased the short run price elasticity of demand for smoked meats. 16. An important determinant of the amount of grains harvested next year by Ethiopian farmers is the amount of seeds planted this year. Given that Western nations have guaranteed to donate five hundred tons of grain next year, this year the Ethiopian farmers will: A) plant more seeds as the food aid established a minimum price for grain. B) plant more seeds as the farmers confidence is restored. C) plant the same amount of seeds as they would have without the food aid. D) plant less seeds as consumers demand for grain is completely price elastic. E) plant less seeds as the price of grain will be lower with the food aid. 17. Suppose that, at the market equilibrium price of natural gas, the price elasticity of demand is -1.2 and the price elasticity of supply is 0.6. What will result from a price ceiling that is 10 percent below the market equilibrium price? A) A shortage equal to 1.8 percent of the market equilibrium quantity. B) A shortage equal to 0.6 percent of the market equilibrium quantity. C) A shortage equal to 18 percent of the market equilibrium quantity. D) A shortage equal to 6 percent of the market equilibrium quantity

5 18. Forest is a mountain man living in complete isolation in Montana. He is completely self- sufficient through hunting, fishing, and farming. He has not been in the city to buy anything in five years. One can infer A) the scarcity principle does not apply to Forest. B) Forest is not required to make choices. C) the scarcity principle still applies because more hunting means less fishing and farming. D) Forest is very satisfied. E) Forest is not rational. 19. Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck, but she finds one for $12,000. Her is. A) benefit; $12,000 D) economic surplus; $12,000 B) cost; $15,000 E) economic surplus; $0 C) economic surplus; $3, The production possibilities curve shows A) the relationship between inputs and output. B) the minimum production of one good for every possible production level of the other good. C) how increasing the inputs used for one good increases the production of the other good. D) the maximum production of one good for every possible production level of the other good. E) how increasing the production of one good allows production of the other good to also rise. 21. The diagram shows Sven s Production Possibilities for one day. Hours studying per day Hours at work per day Sven could move from the bold PPC to the dashed PPC by A) finding a job that pays a higher wage. B) studying fewer hours but more effectively per hour. C) devoting fewer hours to sleeping D) spending more time on leisure activities. E) spending more time on the activity for which he has a comparative advantage. 22. When the price of a NBA ticket is $25 each, 30,000 tickets are sold every game. After increasing the price to $30 each, 20,000 tickets are sold every game. At the original price, what is the price elasticity of demand for NBA games? A) 2000 B) 1.67 C) 1 D) 0.6 E)

6 Use the following to answer questions 23-24: You need a TV, VCR, and CD player. The sale flyer you got in the mail shows the TV that you want to buy is 10% off regular price this week. VCRs and CD players are 20% off next week. Last week you drove downtown to save $30 on some concert tickets, a 15% savings. The regular prices for TVs, VCRs, and CD players are respectively $300, $120 and $200: 23. Should you drive downtown to buy the TV this week? A) Yes, because you will save $30. B) No, because next week s discount on the VCR and CD player will save you even more. C) Yes, because you will save $60. D) Yes, because it is always worth it to drive downtown to earn a 10% discount. E) No, because it is never worth it to drive downtown to earn a 10% discount. 24. Suppose instead that the VCR is 20% off and the CD player is 5% off regular price. Should you drive downtown to buy the VCR and the CD player? A) Yes, because you will save $24. B) Yes, because you will save $34. C) Yes, because you will save $64. D) Yes, because it is always worth it to drive downtown to earn a 20% discount. E) No, because it is never worth it to drive downtown to earn a 20% discount. 25. What might cause a demand function to shift to the right? A) An increase in the price of a substitute. B) An increase in the product s own price. C) An increase in the price of a complement. D) A decrease in the price of a substitute. E) An expectation that the product s own price will fall in the future. 26. As the price of flour (an input into the cookie production process) increases, firms that produce cookies will A) increase the supply of cookies. D) decrease the quantity of cookies supplied. B) increase the quantity of cookies supplied. E) leave their production unchanged. C) decrease the supply of cookies. 27. Starting with column A, it appears that column B represents. Price/Unit Column A Units/year Column B Units/year $ $ $ $ $ A) an increase in quantity demanded D) an increase in quantity supplied B) an increase in demand E) a change in supply C) a decrease in quantity supplied - 5 -

7 28. If the demand for a good is elastic, that good is likely to have A) many close complements. D) few close substitutes. B) few close complements. E) none of the above. C) many close substitutes. 29. To say that an individual possesses an absolute advantage in the production of software means that that individual A) has a lower opportunity cost of producing software. B) can produce more and/or higher quality software in a given amount of time. C) was the first to create the software. D) charges the lowest price for software. E) has the most venture capital. 30. Which of the following statements is always true? A) Comparative advantage implies absolute advantage. B) Absolute advantage implies comparative advantage. C) Comparative advantage does not require absolute advantage. D) Absolute advantage requires comparative advantage. E) Comparative advantage requires absolute advantage. 31. Ginger and Maryann are lost in the jungle, where the only things to eat are mangoes and fish. Ginger can gather mangoes faster than Maryann and can also catch more fish per hour than can Maryann. Therefore, A) Ginger should specialize in mango gathering because they are more nutritious and Maryann should specialize in fishing B) Ginger should specialize in fishing because it is harder than gathering mangoes, and Maryann should specialize in gathering mangoes. C) Ginger should strike out on her own, because Maryann is of no use. D) Maryann should specialize in the activity for which she has a comparative advantage. E) Ginger should specialize in the activity for which she has an absolute advantage. Use the following to answer questions 32-33: IBM employs Pam to assemble personal computers. Pam can assemble 1 computer if she works 1 hour, 4 computers in 2 hours, 8 computers in 3 hours, 10 computers in 4 hours, and 11 computers in 5 hours. Each computer consists of a motherboard that costs $200, a hard drive that costs $100, a case that costs $20, a monitor that costs $200, a keyboard at $60 and a mouse that costs $20. The cost of employing Pam is $40 per hour. 32. IBM sells each computer for $620. How many hours should IBM employ Pam to maximize its benefit from her employment? A) 1 hour B) 2 hours C) 3 hours D) 4 hours E) 5 hours 33. IBM sells each computer for $640. How many hours should IBM employ Pam to maximize its benefit from her employment? A) 1 hour B) 2 hours C) 3 hours D) 4 hours E) 5 hours - 6 -

8 34. Economic growth can result from a(n) A) increase in the amount of productive resources. B) increase in number of the minimum wage jobs. C) increase in the amount of consumer goods produced. D) decrease in the number of workers available. E) None of the above. Use the following to answer questions 35-37: You are the Minister of Trade for a small island country in the South Pacific with the following annual production possibilities curve: Coconuts Fish You are negotiating a deal with a neighboring island that has the following annual PPC: Coconuts Fish 35. You arrive with 300 coconuts to trade. The minimum number of fish you would be willing to accept in exchange for those coconuts A) depends on whether the islanders prefer fish to coconuts. B) is 1500 fish, because that s how many you can catch without trade. C) is 1200 fish, because that is just enough to offset the opportunity cost of harvesting the coconuts. D) is 301 fish, because anything better than a one-for-one trade benefits your island. E) is 901 fish, because that is just a little more than the opportunity cost of harvesting the coconuts. 36. If you offer to give the other island 400 coconuts in exchange for 1500 fish, A) they will refuse your offer because it makes them worse off than producing on their own. B) they will accept your offer because it keeps them on their original PPC, and so is efficient. C) they will accept your offer because it gives them 800 coconuts, which is more than they can make on their own. D) they will accept your offer because it allows them to consume a combination of fish and coconuts that would be unattainable on their own. E) they will accept your offer because they feel sorry for the poor citizens of your island. 37. Both countries specialize exclusively in the product for which they have a comparative advantage. You have agreed to sell them 350 coconuts in exchange for 1300 fish. After trade, the other country has a total of coconuts and fish. A) 850; 1200 B) 500; 1200 C) 350; 1500 D) 350; 1200 E) None of the above - 7 -

9 38. Generally, on a linear two-good production possibilities curve, the opportunity cost of the good measured on the vertical axis is A) one minus the opportunity cost of the good measured on the horizontal axis. B) the reciprocal of the opportunity cost of the good measured on the horizontal axis. C) the slope of the production possibilities line. D) the reciprocal of the slope of the production possibilities line. E) Both B and D. 39. Jody has purchased a non-refundable $25 ticket to attend a Savage Garden concert on Friday evening. Subsequently, she is asked to go to dinner and dancing at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going on the date, she should A) include only the entertainment value of the concert in the opportunity cost of going on the date. B) include the cost of the ticket plus the entertainment value of the concert in the opportunity cost of going on the date. C) include only the cost of concert ticket in the opportunity cost of going on the date. D) include neither the cost of the ticket plus the entertainment value of the concert in the opportunity cost of going on the date. E) have a psychiatric evaluation because dates cannot be evaluated using cost-benefit analysis. 40. In general, it is true that A) more specialization is always better. D) more specialization is always worse. B) less specialization is always better. E) less specialization is always worse. C) specialization imposes costs as well as benefits. 41. Which of the following is NOT true of a demand curve? A) It has negative slope. B) It shows the amount consumers are willing and able to purchase at various prices, holding other factors constant. C) It relates the price of an item to the quantity demanded of that item. D) It shows how an increase in price leads to an increase in quantity demanded of a good. E) It shows that consumers tend to purchase less of a good as its price rises. 42. The quantity of Revlon nail polish demanded by Jen decreased after the price of Revlon nail polish increased. Jen decides to find a cheaper brand of nail polish. This is called a(n) A) substitution effect of a price change. D) increase in buyer s reservation price. B) income effect of a price change. E) shift in the supply curve. C) decrease in buyer s reservation price. 43. A market in disequilibrium would feature A) a stable price. B) consumers able to purchase all they wish at the market price. C) a stable quantity. D) either excess supply or excess demand. E) firms able to sell all they wish at the market price. 44. If the demand for a good decreases as income decreases, it is a(n) A) complementary good. D) substitute good. B) normal good. E) consumer good. C) inferior good

10 Use the following to answer questions 45-47: Jeff has 4 hours that he can choose to spend either studying for a test or playing a new video game. If he spends all his time studying, he can score a 92 on the test. If he plays for 1 hour, his test score falls by 5 points. For playing a second hour, his score falls by another 7 points. Playing for a third hour will lower his score by another 10 points. 45. Jeff s PPC for test score versus hours playing his new video game is A) upward sloped. D) first downward and then upward sloped. B) downward sloped. E) None of the above C) first upward and then downward sloped. 46. The opportunity cost of the 2nd hour of playing the video game is A) 10 points in the test. D) 2.5 points in the test. B) 5 points in the test. E) 3.5 points in the test. C) 7 points in the test. 47. The opportunity cost of playing video games A) decreases the longer Jeff plays. B) increases the longer Jeff plays. C) is greater than the value of earning a higher grade on the test. D) Is equal to the value of earning a higher grade on the test. E) Is less than the purchase price of the video game. Use the following to answer questions 48-49: Bushels of wheat 1, Bushels of corn 48. It is for this farmer to grow 1,000 bushels of wheat and no corn relative to growing 500 bushels of corn and no wheat. A) not efficient B) more efficient C) less efficient D) equally efficient E) less attainable 49. It is more efficient for this farmer to A) specialize in growing wheat. B) specialize in growing corn. C) grow 500 bushels of wheat and 250 bushels of corn. D) grow 1000 bushels of wheat and 500 bushels of corn. E) none of the above is correct

11 Use the following to answer questions 50-51: Price of a cup of coffee $ Original Supply New Supply $.50 0 New Demand Original Demand Cups sold in an hour 50. In the original market equilibrium A) 50 cups of coffee are sold for $1.00 each. D) 60 cups of coffee are sold for $1.50 each. B) 50 cups of coffee are sold for $2.50 each. E) 30 cups of coffee are sold for $1.50 each. C) 40 cups of coffee are sold for $2.00 each. 51. Suppose the coffee lobby convinced the legislature to impose a price control requiring that coffee prices must be at least $2.50 at a time when the original (bold) demand function and supply function were applicable. The most likely result would be A) a short term excess demand for coffee, followed by an increase in price. B) a short term excess supply of coffee, followed by a decrease in price. C) excess demand for coffee that would not correct itself because price is set by law. D) excess supply of coffee that would not correct itself because price is set by law. E) new equilibrium at a price of $2.50 and a quantity of 50 cups. 52. Suppose that both the equilibrium price and quantity of mustard rise. The most consistent explanation for these observations is A) a decrease in demand for mustard with no change in supply. B) a decrease in the supply of mustard with no change in demand. C) a decrease in demand for mustard and a decrease in the supply of mustard. D) an increase in demand for mustard with no change in supply. E) an increase in the supply of mustard with no change in demand. 53. An outcome is socially optimal if it A) follows from a market equilibrium. B) follows from collective action. C) leaves no money on the table. D) maximizes total economic surplus. E) minimizes the difference between the buyer s surplus and the seller s surplus. 54. The demand for a good is inelastic with respect to price, if the price elasticity of demand A) equals one. D) equals negative one. B) is greater than one. E) is greater than negative one. C) is less than one

12 Use the following to answer question 55: 50 S 40 Price D Quantity 55. At a price of $45, the market will experience in the amount of. A) excess demand; 50 unit D) excess demand; 400 units B) excess supply; 300 units E) excess supply; 250 units C) equilibrium; 200 units 56. What might cause a supply function to shift to the left? A) An increase in the product s own price B) An expectation that the product s own price will fall in the future. C) Endorsement of the product by a popular celebrity. D) An expectation that the product s price will rise in the future. E) A decrease in the price of one of the inputs to making the product. 57. Chris had been charging a dollar a pound for potatoes. Suppose Chris faced a linear demand curve. When Chris lowered the price to 90 cents, total revenue fell. When Chris raised the price to $1.10, total revenue also fell. Why? A) $1.00 is the equilibrium price for potatoes. B) At 90 cents, there is excess demand for potatoes. C) $1.10 is more than Chris s customers reservation prices. D) Price elasticity of demand is unitary at $1.00. E) Both A and D must be true. 58. To increase total revenues, firms with demand should lower price and firms with demand should increase price. A) elastic; elastic D) inelastic; inelastic B) elastic; inelastic E) elastic; unitary elastic C) inelastic; elastic 59. As one moves down along a linear demand curve (i.e., from high price, low quantity pairs to low price, high quantity pairs), the price elasticity of demand A) becomes more elastic. D) remains constant. B) becomes larger. E) becomes smaller in absolute value. C) becomes negative

13 60. If the slope of the demand curve is infinity, the price elasticity of demand will be A) zero. B) less than one. C) one. D) greater than one. E) infinite. 61. Which of the following pairs of goods are most likely to have a negative cross price elasticity of demand? A) hotdogs and hotdog buns B) Coke and Pepsi C) Rail tickets and plan tickets D) a Luciano Pavarotti compact disc and a Placido Domingo compact disc (both Pavarotti and Domingo are opera stars) E) Both A and D must be true. 62. Suppose the demand for gourmet coffee can be represented by a linear demand curve. At the prevailing market price the income elasticity of demand for gourmet coffee is 2. When income rises the demand for gourmet coffee: A) becomes less elastic at every price. B) becomes less elastic at the price that prevailed before the change in income. C) becomes more elastic at every price. D) becomes more elastic at price that prevailed before the change in income E) Both A and B are both correct. Use the following to answer questions 63-64: P A B C Q 63. At point A, demand is A) price inelastic. B) price elastic. C) unitary elastic. D) perfectly elastic. E) perfectly inelastic. 64. The price elasticity of demand at point B is A) 2. B) 4/3. C) 1. D) 3/4. E) 1/ Other things being equal, the increase in rents that occur after rent control are abolished is smaller when A) the own price elasticity of demand for rental homes is price inelastic. B) the own price elasticity of demand for rental homes is price elastic. C) the own price elasticity of demand for rental homes has unitary price elasticity. D) rented homes and owned homes are substitutes. E) rented homes and owned homes are complements

14 Use the following to answer questions 66-67: Suppose that in one working day, Bobby Jo and Mary Lou can produce the following: Jugs of Apple cider Apple pie Bobby Jo 9 3 Mary Lou Bobby Jo s opportunity cost of producing an extra apple pie is and Mary Lou s is. A) 1/3 fewer jugs; 3 fewer jugs D) 1/2 fewer jugs; 9/2 fewer jugs B) 3 fewer jugs; 3 fewer jugs E) 2 fewer jugs; 3 fewer jugs C) 3 fewer jugs; 1/3 fewer jugs 67. If Bobby Jo and Mary Lou choose to efficiently produce fewer apple pies and more apple cider, devotes more time to apple cider because. A) Mary Lou; her absolute advantage is larger B) Bobby Jo; his absolute advantage is smaller C) Bobby Jo; his opportunity costs are lower D) Mary Lou; her opportunity costs are lower E) Mary Lou; her comparative advantage is smaller 68. A decrease in the demand for bananas with no concurrent change in the supply of bananas will result in a equilibrium price and a(n) equilibrium quantity. A) higher; lower B) lower; lower C) higher; unchanged D) higher; higher E) lower; higher - END