Eastern Mediterranean University Faculty of Business and Economics Department of Economics Fall Semester

Transcription

1 Eastern Mediterranean University Faculty of Business and Economics Department of Economics Fall Semester ECON101 Introduction to Economics I Midterm Exam Duration: 90 minutes Type A Answer Key 27 November 2015 Name: Student ID: Group No: Part A: Multiple Choice Questions (2 points each, total 50 points) Please mark your answers on both the exam paper and the optic sheet. 1. Economics is the study of how society manages its A) limited wants and unlimited resources. B) unlimited wants and unlimited resources. C) limited wants and limited resources. D) unlimited wants and limited resources. 2. The study of the decisions of individual units in the economy is known as A) macroeconomics. B) microeconomics. C) the study of incentives. D) ceteris paribus study. 3. When the government redistributes income from the wealthy to the poor, A) efficiency is improved, but equality is not. B) equality is improved, but efficiency is not. C) both efficiency and equality are improved. D) neither efficiency nor equality are improved. 4. The loss of the highest valued alternative defines the concept of A) marginal benefit. B) scarcity. C) entrepreneurship. D) opportunity cost. 5. In terms of dollars, the marginal benefit of working five days a week instead of four days a week is A) the wages received for the fifth day of work. B) the wages received for 5 days of work. C) the wages received for 4 days of work. D) None of the above answers is correct. 6. A cost due to an increase in activity is called A) an incentive loss. B) a marginal cost. C) a negative marginal benefit. D) the total cost. 7. The production possibilities frontier is the boundary between those combination of goods and services that can be A) produced and those that can be consumed. B) consumed domestically and those that can be consumed by foreigners. C) produced and those that cannot be produced. D) consumed and those that cannot be produced. Page 1 of 8

2 8. Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks. Which of the following is not possible? A) Jim has an absolute advantage in the production of baseball bats and in the production of hockey sticks. B) Jim has an absolute advantage in the production of baseball bats and a comparative advantage in the production of hockey sticks. C) Jim has an absolute advantage in the production of hockey sticks and a comparative advantage in the production of baseball bats. D) Jim has a comparative advantage in the production of baseball bats and in the production of hockey sticks. 9. Refer to the production possibilities frontier on the right. What is the opportunity cost of one unit of capital goods from the combination d to a. A) 20 unit of capital goods B) 0.5 unit of consumer goods C) 2 units of consumer goods D) 10 units of consumer goods 10. Refer to the PPF on the right. Production point represents an production point. A) b; unattainable. B) c; unattainable. C) e; inefficient. D) c; inefficient. 11. Which is the most accurate statement about trade? A) Trade can make every nation better off. B) Trade makes some nations better off and others worse off. C) Trading for a good can make a nation better off only if the nation cannot produce that good itself. D) Trade helps rich nations and hurts poor nations. 12. A tax on gasoline encourages people to drive smaller, more fuel efficient cars. Which principle of economics does this illustrate? A) People face tradeoffs. B) The cost of something is what you give up to get it. C) Rational people think at the margin. D) People respond to incentives. 13. If the price of product X falls and this change increases the demand for product Y, then A) X and Y are complements. B) X and Y are substitutes. C) X is an inferior good. D) Y is an inferior good. 14. If the price of chicken falls, then in the market for beef, A) the demand curve for beef shifts rightward. B) the demand curve for beef shifts leftward. C) there is a movement downward along the demand curve for beef. D) there is a movement upward along the demand curve for beef. 15. The demand curve for a normal good shifts leftward if income or the expected future price. A) decreases; falls B) decreases; rises C) increases; falls D) increases; rises Page 2 of 8

3 16. If shoes rise in price, the demand curve for shoes and the quantity of shoes demanded. A) shifts leftward; decreases B) shifts leftward; does not change C) does not shift; decreases D) does not shift; does not change 17. The statement that demand increased means that there is a A) movement to the right along a demand curve. B) movement to the left along a demand curve. C) rightward shift of the demand curve. D) leftward shift of the demand curve. 18. In the figure on the right, point D is A) less production efficient than point C. B) production efficient and point A is not production efficient. C) not production efficient and point B is production efficient. D) production efficient and point B is not production efficient. 19. In the figure on the right, point A is undesirable because A) there is an inefficient use of resources. B) too much health care is being produced. C) the opportunity costs of health care is too high. D) point E is a more realistic option in this economy. 20. At a price of $10 in the figure on the right, there is A) a surplus of 200 units. B) a shortage of 200 units. C) a surplus of 400 units. D) a shortage of 400 units. 21. Based on the figure on the right, which of the following is true? A) At a price of $6, quantity demanded is equal to quantity supplied. B) At a price of $4, quantity demanded is greater than quantity supplied. C) At a price of $8, quantity demanded is less than quantity supplied. D) All of the above answers are correct. 22. If the good in the above figure is a normal good and income rises, then the new equilibrium quantity A) is less than 300 units. B) is 300 units. C) is more than 300 units. D) could be less than, equal to, or more than 300 units. 23. The price elasticity of demand for furniture is estimated at 1.3. This value means a one percent increase in the A) price of furniture will increase the quantity of furniture demanded by 1.3 percent. B) price of furniture will decrease the quantity of furniture demanded by 1.3 percent. C) quantity of furniture demanded will decrease the price of furniture by 1.3 percent. D) quantity of furniture demanded will increase the price of furniture by 1.3 percent. Page 3 of 8

4 24. Toothpaste and toothbrushes are complements, so the elasticity of demand is. A) cross; positive B) income; negative C) cross; negative D) income; positive 25. Demand is income elastic if A) a large percentage increase in income results in a small percentage increase in quantity demanded. B) a small percentage increase in income results in a large percentage increase in quantity demanded. C) an increase in income does not affect the quantity demanded. D) the good in question has close substitutes. Bonus Multiple Choice Questions (2 points each, total 10 points) 26. The above figures show the market for oranges. Which figure shows the effect of changing consumer preferences for more orange juice and less coffee in the morning? A) Figure A B) Figure B C) Figure C D) Figure D 27. The above figures show the market for oranges. Which figure(s) shows the effect of an increase in the price of bananas, a substitute for oranges? A) Figure C B) Figure D C) Figure A D) Figure A and C 28. The above figures show the market for oranges. Which figure(s) shows the effect of new successful advertising campaigns to eat more oranges? A) Figure B B) Figure A C) Figure D D) Figures A and D 29. The above figures show the market for oranges. Which figure(s) shows the effect of a nationwide consumer boycott of eating oranges? A) Figure B B) Figure C C) Figures B and C D) Figures A and D 30. The above figures show the market for oranges. Which figure shows the effect of great growing conditions that produce an above average sized crop? A) Figure A B) Figure B C) Figure C D) Figure D Page 4 of 8

5 Part B: Essay Questions (50 points) Question 1. Suppose that business travelers and leisure travelers have the demand schedules for airline tickets from Atlanta to Philadelphia given in the table below. (18 points) Price (dollars per ticket) Quantity demanded business travelers (tickets per week) Quantity demanded leisure travelers (tickets per week) 0 1,800 1, ,600 1, , , , A. Draw the demand curves of business and leisure travelers on the same graph below. (Use the same x and y axes to draw two demand curves) (6 points) B. As the price of tickets rises from $200 to $300, what is the price elasticity of business travelers demand? What is the price elasticity of leisure travelers demand? (Use the midpoint method in your calculations.) (4+4 points) Answer: The percentage change in price is the change in price, $100, divided by the average price, $250, multiplied by 100 or ($100/$250) 100, which is 40.0 percent. For business travelers, the percentage change in the quantity of tickets demanded is the change in the quantity demanded, 200, divided by the average quantity, 1,300, multiplied by 100, or (200/1,300) 100, which is 15.4 percent. So for business travelers the price elasticity of demand is 15.4 percent/40.0 percent, which equals For leisure travelers, the percentage change in the quantity of tickets demanded is the change in the quantity demanded, 400, divided by the average quantity, 600, multiplied by 100, or (400/600) 100, which is 66.7 percent. So for leisure travelers, the percentage change the price elasticity of demand is 66.7 percent/40.0 percent, which equals Page 5 of 8

6 C. Why do business travelers and leisure travelers have different price elasticities of demand for airline tickets? Explain using the concepts of demand being elastic/inelastic, necessities vs. luxuries, among others. (4 points) Answer: Business travelers schedules are usually less flexible than those of leisure travelers. Therefore, leisure travelers are more likely to choose driving or taking the train if the price of airline tickets rises, which means their demand for airline tickets is more elastic. Also, leisure travelers demand is likely to be more elastic because the price of business travelers tickets is often paid by the company. Question 2. Suppose Country A and Country B can switch between producing toothbrushes and producing hairbrushes at a constant rate. The table below illustrates the amount of time each country requires to produce 1 unit of each good. (16 points) Machine Minutes Needed to Make 1 Toothbrush Hairbrush Country A 3 10 Country B 5 6 A. Which country has absolute advantage in the production of toothbrush? Why? (3 points) Answer: The table above shows that the Country A requires less machine minutes than Country B in order to produce 1 toothbrush. That is to say that, relative to Country B, Country A needs less inputs to produce the same amount of the product. In other words, with the same amount of inputs, Country A can produce more unit of toothpaste. Therefore, we conclude that Country A has an absolute advantage in the production of toothbrush. B. Which country has comparative advantage in the production of toothbrush? Why? (5 points) Answer: In order to find which country has a comparative advantage in a particular good, we should calculate the opportunity cost of the production of the product of interest. If we modify the table above by finding the share of machine minutes needed by each country to produce 1 toothbrush in that needed to produce 1 hairbrush, we obtain the following table: dividing the machine minutes needed by Country A (Country B) to produce 1 hairbrush by 3 (5), we obtain the following table: Machine Minutes Needed to Make 1 Toothbrush Hairbrush Country A 3/3 = 1 3/10 = 0.3 Country B 5/5 = 1 5/6 = 0.8 The table above shows that in order to produce 1 toothbrush, Country A (B) must give up 0.3 (0.8) hairbrush. Therefore, we conclude that Country A has a lower opportunity cost of producing 1 toothbrush relative to Country B. Page 6 of 8

7 C. Assume that Country A and Country B each has 60 machine minutes available. Calculate the maximum amount of toothbrush and hairbrush each country can produce. According to your calculation, draw the production possibilities frontier (PPF) for each country separately. (Place the toothbrush on the x axis for both graphs) (2+6 points) Answer: If both countries have 60 machine minutes available that they can devote to the production of toothbrush and hairbrush, given the number of machine mintes given in the question above, we find out that the countries can produce the following amounts of either product in an hour: Maximum amount of products countries can produce in 60 minutes (toothbrush or hairbrush) Toothbrush Hairbrush Country A 60/3 = 20 60/10 = 6 Country B 60/5 = 12 60/6 = 10 We see from the table that while Country A can produce either 20 units of toothbrush or 6 units of hairbrush in an hour, Country B can produce either 12 units of toothbrush or 10 units of hairbrush. According to these maximum amounts, we can draw the following PPFs: We can see from the PPFs that in an hour while Country A gives up 6 units of hairbrush in order to obtain 20 units of toothbrush, Country B has to give up 10 units of hairbrush for only 12 units of toothbrush. (Supports our finding in the previous part of the question). Page 7 of 8

8 Question 3. The figure below is the market demand curve for a particular shoe brand in Famagusta. Use the figure in order to answer the following questions. (16 points) A. If the price of a pair of shoes is 10 TL, then how much is the consumer surplus of the market? (4 points) Answer: Given that the consumer surplus is the area between the demand curve (which measures consumers willingness to pay) and the market price, when a pair of shoes costs 10 TL, the consumer surplus is the area of X: (30 10)*100/2 = 1,000 TL. B. If the price falls to 8TL per pair of shoes, what will be the new consumer surplus? (4 points) Answer: If the price falls to 8 TL per pair of shoes, the new consumer surplus becomes the area of X+Y+Z: (30 8)*120/2 = 1,320 TL. In other words, the additional consumer surplus (Y+Z) is equal to 320 TL. C. Did consumer surplus increase or decrease? Briefly explain. (1+1 points) Answer: Because the decrease in price not only makes the existing consumers to enjoy higher consumer benefits but also increase the number people enjoying consumer surplus (as the quantity demanded increases), the consumer surplus increases (by 320 TL). D. As the price of shoe falls from 10 TL to 8 TL, what do the areas of X, Y, and Z represent? Briefly explain each of the areas. (No calculation is needed, explain verbally) (2+2+2 points) Answer: The area of X is the initial consumer surplus in the market when the price is equal to 10 TL per pair. When price decreases to 8 TL per pair: the area of Y represents the additional consumer surplus enjoyed by the existing consumers (who were buying shoes even when the price was equal to 10 TL); and the area of Z represents the consumer surplus enjoyed by the new consumers who now find the price below their maximum willingness to pay. Page 8 of 8