Multiple Choice questions /60 Problem 1 /20 Problem 2 /12 Problem 3 /8

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1 Econ 200 Midterm 1 Spring 2011 March Instructions : 1-) The exam is 65 minutes 2-) You have to provide detailed solution to each problem 3-) Any form of cheating (Peeking to other s exam, use your cell phone or calculator, talking for any reason, exchange eraser ) is strictly prohibited. It will result in an F grade AND a disciplinary action. 4-) You can only have your pen, pencil and eraser with you. Put everything else to a place that you cannot reach. 5-) You cannot leave the classroom for any reason during the exam. Good Luck. Multiple Choice questions /60 Problem 1 /20 Problem 2 /12 Problem 3 /8 Name: Section:

2 Part I: Multiple Choice Questions Explanation: Each question in this section is worth 4 points if your answer is correct, 0 point if it is wrong, and 1 point if you unambigously leave it blank. 1) Mary decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is a. the $24 she earns working. b. the $24 minus the enjoyment she would have received from watching the video. c. the enjoyment she would have received if she had watched the video. d. nothing, since she would have received less than $24 of enjoyment from watching the video. 2) A farmer needs to work 8 hours to make 1 kg of meat, and 2 hours to make 1 kg of potatoes. The opportunity cost of 1 kg of meat for the farmer is a. 1/4 hour of labor. b. 4 hours of labor. c. 4 kgs of potatoes. d. 1/4 kg of potatoes. 3) Suppose that the incomes of buyers in a market for a normal good decline and there is also a decrease in the input prices. What will happen in this market? a. The equilibrium price will increase but the impact on the amount sold in the market would be ambiguous. b. The equilibrium price will decrease but the impact on the amount sold in the market would be ambiguous. c. Both equilibrium price and equilibrium quantity will increase. d. Equilibrium quantity will increase but the impact on the equilibrium price is ambiguous. 4) Suppose that the price of Twinkies is reduced from $1.50 to $1.30 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method what is the price elasticity of demand (absolute value) for Twinkies in the given price range a b c d ) Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. As a result your income will be higher in January. You have no plans to purchase hot dogs in January. For you, hot dogs are a. a substitute good. b. a normal good. c. an inferior good. d. a law-of-demand good.

3 6) Two goods are complements if a decrease in the price of one good a. decreases the quantity demanded of the other good. b. decreases the demand for the other good. c. increases the quantity demanded of the other good. d. increases the demand for the other good. 7) 9) Suppose Lauren, Lesliee and Lydia all purchase bulletin boards for their rooms for $15 each. Lauren s willingness to pay was $35, Leslie s willingness to pay was $25, and Lydia s willingness to pay was $30. Total consumer surplus for these three is a. $15. b. $30. c. $45. d. $90. 8) The picture above shows four different demand curves. Which of the graphs shows a demand curve that is perfectly inelastic? a. graph A b. graph B c. graph C d. graph D 9) Which of the following would NOT shift the demand curve for a good or service? a. a change in income b. a change in the price of a related good c. a change in the price of the good or service d. a change in expectations about the price of the good or service

4 10) A competitive market is one in which a. there is only one seller, but there are many buyers. b. there are many sellers and each seller has the ability to set the price of his product. c. there are many sellers and they compete with one another in such a way that some sellers are always being forced out of the market. d. there are so many buyers and so many sellers that each has a negligible impact on the price of the product. 11) Which of the following would not be a determinant of the demand for a particular good? a. prices of related goods b. income c. tastes d. the prices of the inputs used to produce the good 12) If Murat s income decreases, we expect that, as a result, Murat s demand for a. each good he purchases will remain unchanged. b. normal goods will decrease. c. luxury goods will increase. d. inferior goods will decrease. 13) A supply curve slopes upward because a. a decrease in input prices decreases supply. b. an increase in input prices increases supply. c. as more is produced, per-unit costs of production fall. d. an increase in price gives producers incentive to supply a larger quantity. 14) If there are very few good substitutes for good A, then a. supply of good A will be price elastic. b. demand for good A will be price inelastic. c. demand for good A will be price elastic. d. demand for good A will be income elastic. 15) Demand is elastic if the absolute value of elasticity is a. equal to 0. b. equal to 1. c. less than 1. d. greater than 1.

5 Problem 1: There is a market with 8 buyers and 8 sellers. Each buyer can buy at most 1 unit, each seller can produce at most 1 unit. Buyer Willingness to Pay Seller Cost A 100 A 20 B 90 B 20 C 80 C 25 D 60 D 25 E 50 E 30 F 40 F 35 G 30 G 40 H 20 H 50 a. What is the quantity demanded when price is 45? b. What is the quantity supplied when price is 45? c. There is an excess of units when price is 45. d. Compute the equilibrium price. e. Compute the equilibrium quantity. f. Compute the consumers surplus at the equilibrium price.

6 g. Compute the producers surplus at the equilibrium price. h. The government puts a minimum price (PRICE FLOOR) of 55. What is the quantity demanded with the minimum price? i. How many units of the good will be bought and sold with the minimum price? j. Compute the consumers surplus with the minimum price. k. Compute the producers surplus with the minimum price.

7 Problem 2: Suppose there are 10 million workers in India, and 20 million workers in the US. Each of these workers in both countries can be employed either in car or wheat production. When there is no trade, each country prefers to distribute its workforce equally between the two industries. Workers to be employed to make 1 Car Workers to be employed to make 1 ton of Wheat India 50 2 US a. The US has an absolute advantage in the production of. b. India has a comparative advantage in the production of. c. Draw Production Possibilities Frontier for India. d. Suppose each country spends all its time producing the good in which it has a comparative advantage and trades half of its production with the other country at the price of 5 tons of wheat for 1 car. What are the final consumptions of India and the US? Which countries do benefit from trade, if any?

8 Problem 3: Because bagels and cream cheese are often eaten together, they are complements. We observe that both the equilibrium price and the equilibrium quantity of bagels have risen. What could be responsible for this pattern a fall in the price of flour, a fall in the price of milk, or both? Illustrate (= draw well-labeled graphs) and explain your answer.