MIDTERM I. GROUP A Instructions: November 20, 2013

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1 EC101 Sections 03 Fall 2013 NAME: ID #: SECTION: MIDTERM I November 20, 2013 GROUP A Instructions: You have 60 minutes to complete the exam. There will be no extensions. The exam consists of 30 multiple choice questions. Each multiple choice question is worth 1 point for a total of 30 points. Use a pencil to mark your answers on the answer sheet. Make sure you write your name and ID number on the answer sheet as well. Please mark the group of your test on the answer sheet under Test Form. No calculators, dictionaries or formula sheets are allowed. The use of cell phones is strictly prohibited. Make sure your cell phone is turned off and inside your bag. Do NOT use your cell phone even for timekeeping purposes. This is a closed books/notes exam. Choose only one answer for each question. TWO WRONG ANSWERS WILL TAKE AWAY ONE CORRECT ANSWER. There is absolutely no talking during the exam. The proctors will NOT answer any questions. There are 8 pages in this exam booklet. Version A, Page 1

2 1. If a country specializes according to its own comparative advantage and then trades with other nations: a. it will operate at a point inside its production possibility frontier. b. it can consume at a higher level than the domestic production possibility frontier. c. its production possibility frontier will shift or rotate inward. d. it can consume at the same level as the domestic production possibility frontier. 2. What do you have to know to calculate the price elasticity of demand? a. how much of the good was purchased at each of two different prices b. the price elasticity of supply c. how many firms supply the good d. the portion of income the typical consumer spends on the good 3. Some proponents of an excise tax on cigarettes argue that it will discourage smoking. Others argue that it will collect revenue for the government. Given the economic model of supply and demand, which of the following is true? a. The more elasticity there is in the supply of, and demand for cigarettes, the more revenue will be collected from the tax. b. The less elasticity there is in the supply of and demand for cigarettes, the more revenue will be collected from the tax. c. A tax that discourages smoking will not cause a deadweight loss. d. The more the tax discourages smoking, the more revenue it will collect for the government. Version A, Page 2

3 4. Which of the following would not cause the demand curve for Pepsi to shift? a. an increase in the price of Coke. b. a decrease in the price of Didi Ice Tea. c. an increase in the price of Pepsi d. a drop in student incomes 5. Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. 6. If the government places a price ceiling of $1.20 on a good with an equilibrium price of $1.00 then a. there will be excess demand of the good b. there will be excess supply of the good c. there will be neither excess demand nor excess supply of the good d. None of the above Version A, Page 3

4 7. Assume that Ali and Ayşe can produce goods X and Y according to the following Table: Hours needed to produce 1 unit of X Hours needed to produce 1 unit of Y Ali 8 5 Ayşe What is the opportunity cost for Ali in production of X? a. 8/5 X b. 5/8 Y c. 5/8 X d. 8/5 Y 8. Refer to the Table above. Who has absolute advantage in production of X? Who has comparative advantage in production of X? a. Ali has absolute advantage and Ali has comparative advantage. b. Ali has absolute advantage and Ayşe has comparative advantage. c. Ayşe has absolute advantage and Ali has comparative advantage. d. Ayşe has absolute advantage and Ayşe has comparative advantage. 9. Consumer surplus is the: a. difference between the quantity of a good demanded and the quantity supplied. b. quantity of a good that remains on the market in instances of market failure. c. amount of revenue collected from a tax. d. difference between the price that consumers are willing to pay for a good and the price they actually pay. 10. An efficient outcome is one in which: a. all consumers who desire the good can afford it at the current price. b. no individual buyer could be made better off. c. no individual seller could be made better off. d. no individual can be made better off without making someone else worse off. Version A, Page 4

5 Figure 1: 11. Refer to Figure 1. The movement from point A to point B on the graph would be caused by a. a decrease in the price of the good. b. an increase in the price of the good. c. an advance in technology. d. a decrease in input prices. 12. Consider a sales tax imposed on buyers (buyers are responsible for paying the tax amount to the government). Suppose now that the sellers of the good, rather than the buyers, are required to pay the tax to the government. Then, relative to initial case where buyers pay the tax: a. the burden on buyers will be larger and the burden on sellers will be smaller. b. the burden on buyers will be smaller and the burden on sellers will be larger. c. the burden on buyers will be same and the burden on sellers will be same. d. The relative burdens in the two cases cannot be determined without further information. Version A, Page 5

6 Figure 2: 13. Refer to Figure 2. If the price decreases from $22 to $16, consumer surplus increases by a. $120. b. $360. c. $480. d. $ When Bogazici University reduced the fare for riding intercampus shuttle to zero, two interesting phenomena was observed. At 12:20 and 12:30, the buses were circulating with 50 percent of the seats empty. At 12:40 and 12:50, there were twice as many riders as could get onto each bus. Then, with time, the riders adjusted; some of the riders shifted to the earlier buses, so that all these buses were full. Two questions: Does this represent an equilibrium in the market for bus rides? Is riding the bus costless for all riders? a. Yes. Yes. b. Yes. No. c. No. Yes. d. No. No. Version A, Page 6

7 15. The graphical result of a binding price ceiling is: a. quantity demanded at the price ceiling exceeds the amount at the equilibrium price, and quantity supplied is less than the amount at the equilibrium price. b. quantity supplied at the price ceiling exceeds the amount at the equilibrium price, and quantity demanded is less than the amount at the equilibrium price. c. quantity demanded and quantity supplied at the price ceiling are equal at the equilibrium price. d. quantity demanded at the price ceiling is less than the amount at the equilibrium price, and quantity supplied is also less than the amount at the equilibrium price. 16. The following table contains a demand schedule for a good: Price Quantity demanded $ $20? If the law of demand applies to this good, then? could be: a. 0 b. 100 c. 200 d Consider the market for kayaks. What happens when the process of manufacturing kayaks becomes less costly through the use of new technology? a. The demand curve for kayaks will shift to the left. b. The demand curve for kayaks will shift to the right. c. The supply curve for kayaks will shift to the left. d. The supply curve for kayaks will shift to the right. Version A, Page 7

8 18. Milk has an inelastic demand and beef has an elastic demand. Suppose that a mysterious increase in bovine fertility increases both the population of dairy cows and the population of beef cattle by 50 percent. The revenues will: a. increase in both the milk and beef markets. b. increase in the milk market and decrease in the beef market. c. decrease in the milk market and increase in the beef market. d. decrease in both the milk and beef markets. 19. Suppose that the price of overnight package delivery service is $18 before a $5 excise tax is imposed. With the tax, the price rises to $20. What is the producer's burden of the tax? a. $2 b. $3 c. $5 d. $ Graciela is willing to sell a dozen roses for $50, while Giuseppe is willing to sell a dozen roses for $60. Carlos is willing to buy a dozen roses for $60, while Yuriko is willing to pay $50. If the market price is $52, how many roses are sold and what is the sum total of consumer and producer surplus after the transaction(s)? a. One dozen roses will be sold, and the total consumer and producer surplus will be $10. b. One dozen roses will be sold, and the total consumer and producer surplus will be $16. c. Two dozen roses will be sold, and the total consumer and producer surplus will be $16. d. No roses will be sold, and consequently the total consumer and producer surplus will be $0. Version A, Page 8

9 21. Economists typically depict the PPF as a bowed-out curve rather than as a straight line in order to show that: a. the opportunity cost of producing a good rises as more is produced. b. the opportunity cost of producing a good declines as more is produced. c. resources used in the production of one good cannot be used in the production of another. d. the opportunity cost is always present. 22. Consider gas stations. As a result of an economic recession and a decrease in consumer incomes, there will be a: a. rightward shift in the station's supply curve and lower gas prices. b. leftward shift in the station's supply curve and higher gas prices. c. rightward shift in the station's demand curve and higher gas prices. d. leftward shift in the station's demand curve and lower gas prices. 23. Upon graduation you found a job and your income increased from TL 3000 a year to 60,000 a year. After receiving your first paycheck you gave away your bike and purchased a new car. Therefore, a. bicycles are a normal good for you b. automobiles are an inferior good for you c. automobiles are a normal good for you d. bicycles and automobiles are complementary goods for you 24. The demand for a good becomes relatively more elastic as: a. substitutes for the good become more available. b. substitutes for the good become less available. c. the good becomes more of a necessity. d. the time allowed for adjustment is shortened. Version A, Page 9

10 25. The opportunity cost of any activity can be measured by: a. price (or monetary cost) of the activity b. level of technology c. time needed to select among various alternatives. d. value of the best alternative that is given up 26. In 1990, the U.S. government imposed a special sales tax on yachts with a price of at least $100,000. The tax was repealed in 1993, since it generated far less revenue than expected and led to significant job losses in the yacht building industry. The sales tax might have been unsuccessful because: a. the supply and the demand for yachts were relatively elastic. b. the supply and the demand for yachts were relatively inelastic. c. the tax rate was too low. d. yachts are luxury goods. 27. You land a marketing job with Canon after graduation in the digital camera division. After introducing a new digital camera, you estimate that the price elasticity of demand for cameras equals 2 and the income elasticity is equal to 0.5. Furthermore, the cross-price elasticity with a similar Kodak camera is equal to Using this information, you would conclude: a. the product demand is elastic and if your firm (Canon) increases the price of its new camera, total revenues will increase. b. the product demand is elastic and if your firm (Canon) decreases the price of its new camera, total revenues will increase. c. the product demand is inelastic and if your firm (Canon) increases the price of its new camera, total revenues will increase. d. the product demand is inelastic and if your firm (Canon) decreases the price of its new camera, total revenues will increase. Version A, Page 10

11 28. For good X, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. When good X is taxed, the area on the relevant supply-anddemand graph that represents a. government s tax revenue is a rectangle. b. the deadweight loss of the tax is a triangle. c. the loss of consumer surplus caused by the tax is neither a rectangle nor a triangle. d. All of the above are correct. 29. Under what circumstances does the burden of an excise tax fall mainly on producers? a. when the supply is relatively inelastic and demand is fairly elastic b. when the supply is relatively elastic and demand is fairly inelastic c. when consumers do not have many substitutes for the good d. when it is easy for suppliers to expand production of the good 30. If the price elasticity of demand for an annual magazine subscription is 1.6 in the range between $26 and $30, what happens in the market when the subscription price rises from $26 to $30? a. There will be an increase in the total revenue the magazine collects on its subscriptions. b. There will be a decrease in the total revenue the magazine collects on its subscriptions. c. Magazines will become a normal good. d. Magazines will become an inferior good. Version A, Page 11