MICROECONOMICS Midterm Test (sample)

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1 Student Name:.. MICROECONOMICS Midterm Test (sample) Time: 60 minutes Student Number:. Total Mark:... /50 Class:. Converted Mark:../10 Section A: QUIZ 20 marks Show your answers on the ANSWER SHEET at the end of this section. T-F Questions 1. A movement along a supply curve is called a change in supply while a shift of the supply curve is called a change in quantity supplied. 2. Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand. 3. If Belgium exports chocolate to the rest of the world, then Belgian chocolate producers benefit from higher producer surplus, Belgian chocolate consumers are worse off because of lower consumer surplus, and total surplus in Belgium increases because of the exports of chocolate. 4. Joel has a 1966 Mustang, which he sells to Susie, an avid car collector. Susie is pleased since she paid $8,000 for the car but would have been willing to pay $11,000 for the car. Susie's consumer surplus is $2, When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax. 6. Producing a soccer ball costs Jake $5. He sells it to Darby for $35. Darby values the soccer ball at $50. For this transaction, the total surplus in the market is $ If the income elasticity of demand for a good is negative, then the good must be an inferior good. 8. The market demand curve shows how the total quantity demanded of a good varies as the income of buyers varies, while all the other factors that affect how much consumers want to buy are held constant. 9. The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on that market, and the more likely it is that a tax cut in that market will raise tax revenue. 10. Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

2 Multiple Choices 11. For any country, if the world price of zinc is higher than the domestic price of zinc without trade, that country should a. export zinc, since that country has a comparative advantage in zinc. b. import zinc, since that country has a comparative advantage in zinc. c. neither export nor import zinc, since that country cannot gain from trade. d. neither export nor import zinc, since that country already produces zinc at a low cost compared to other countries. 12. If a tax shifts the supply curve upward (or to the left), we can infer that the tax was levied on a. buyers of the good. b. sellers of the good. c. both buyers and sellers of the good. d. We cannot infer anything because the shift described is not consistent with a tax. 13. A demand curve reflects each of the following except the a. willingness to pay of all buyers in the market. b. value each buyer in the market places on the good. c. highest price buyers are willing to pay for each quantity. d. ability of buyers to obtain the quantity they desire. 14. Which of the following is likely to have the most price inelastic demand? a. mint-flavored toothpaste b. Toothpaste c. Colgate mint-flavored toothpaste d. a generic mint-flavored toothpaste 15. Which of the following is not a determinant of demand? a. the price of a resource that is used to produce the good b. the price of a complementary good c. the price of the good next month d. the price of a substitute good 16. If a consumer places a value of $20 on a particular good and if the price of the good is $25, then the a. consumer has consumer surplus of $5 if he buys the good. b. consumer does not purchase the good. c. price of the good will rise due to market forces. d. market is out of equilibrium. 17. Which of the following quantities decrease in response to a tax on a good? a. the equilibrium quantity in the market for the good, the effective price of the good paid by buyers, and consumer surplus b. the equilibrium quantity in the market for the good, producer surplus, and the wellbeing of buyers of the good c. the effective price received by sellers of the good, the wedge between the effective price paid by buyers and the effective price received by sellers, and consumer surplus d. None of the above is necessarily correct unless we know whether the tax is levied on buyers or on sellers. 18. When a nation first begins to trade with other countries and the nation becomes an importer of corn, a. this is an indication that the world price of corn exceeds the nation s domestic price of corn in the absence of trade. b. this is an indication that the nation has a comparative advantage in producing corn. c. the nation s consumers of corn become better off and the nation s producers of corn become worse off.

3 d. All of the above are correct. 19. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is a. 0. b. 1. c. 6. d Figure 7-1 Price A P2 P1 B C D F Q2 Q1 Demand Quantity Refer to Figure 7-1. Area C represents the a. decrease in consumer surplus that results from a downward-sloping demand curve. b. consumer surplus to new consumers who enter the market when the price falls from P2 to P1. c. increase in producer surplus when quantity sold increases from Q2 to Q1. d. decrease in consumer surplus to each consumer in the market when the price increases from P1 to P2. ANWER SHEET Question Answer Question Answer Question Answer Question Answer 1 F 6 F 11 A 16 B 2 F 7 T 12 B 17 B 3 T 8 F 13 D 18 C 4 F 9 F 14 B 19 B 5 F 10 T 15 A 20 B

4 Section B: ANALYTICAL QUESTIONS 30 marks 1. Use the following graph shown to fill in the table that follows. (6 marks) P4 P3 Price A Supply P2 P1 B D F C G Q2 Q1 Demand Quantity Consumer surplus Producer surplus Tax revenue Total surplus WITHOUT TAX WITH TAX CHANGE Calculate the deadweight loss and tax revenue if P1 = 10, P2 = 14, P3 = 20, Q1 = 30 & Q2 = 20 (4 marks)

5 2. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions given this information. (10 marks) a. What is the domestic price and quantity demanded of hammers after the tariff is imposed? b. What is the quantity of hammers imported before the tariff? c. What is the quantity of hammers imported after the tariff? d. What would be the amount of consumer surplus before the tariff? e. What would be the amount of consumer surplus after the tariff? f. What would be the amount of producer surplus before the tariff? g. What would be the amount of producer surplus after the tariff? h. What would be the amount of government revenue because of the tariff? i. What would be the total amount of deadweight loss due to the tariff?......

6 3. Look at the following table and answer the questions. (10 marks) Price ($) Quantity Demanded Quantity Supplied a. Graph the information of this market on a demand and supply graph and indicate the equilibrium price and quantity. (2 marks) b. Explain how the market would operate if the price was 7 (2 marks) c. Suppose that the supply for this product changes so that 9 fewer units are supplied at each price. What is the new equilibrium price and quantity? Show them on the same diagram. (2 marks) d. Calculate the elasticity of demand using the point method in the price range $7 to $9? Interpret your elasticity figure and your classification of it as elastic, inelastic, or unitary. (2 marks) e. If you were the supplier, would you increase your price from $7 to $9? Why/why not? (2 marks) XX. Suppose good A has a highly sloped (inelastic) demand curve, and the consumers are primarily poor persons. Good A has a highly elastic (flat) supply curve, and the producers are large corporations. The government wishes to tax the products to raise much tax revenue. a. Draw graph for the market, make sure to name equilibrium price and quantity before and after the tax, areas show consumer, producer surpluses and tax revenue. (4 marks) b. Discuss the size of deadweight loss created by the tax and whether producers or consumers bear greater part of the tax burden? (4 marks)