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

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1 Eastern Mediterranean University Faculty of Business and Economics Department of Economics Fall Semester ECON101 Introduction to Economics I Quiz 1 Duration: 50 minutes Type A Answers 13 November 2015 Name: Student ID: Group No: Part A: Multiple Choice Questions (4 points each, total 52 points) 1. Which of the following is correct? a. The word economy comes from the Greek word for rational thinker. b. Economists study the management of scarce resources. c. Because economists believe that people pursue their best interests, they are not interested in how people interact. 2. The adage, "There is no such thing as a free lunch," means a. even people on welfare have to pay for food. b. the cost of living is always increasing. c. people face tradeoffs. d. all costs are included in the price of a product. 3. Efficiency means that a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. d. society is getting the maximum benefits from its scarce resources. 4. The opportunity cost of an item is a. the number of hours needed to earn money to buy the item. b. what you give up to get that item. c. usually less than the dollar value of the item. d. the dollar value of the item. 5. Which of the following steps does an economist take when studying the economy? a. devise theories b. collect data c. analyze data Page 1 of 5

2 6. The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good, a. has a low opportunity cost of producing that good, relative to the opportunity costs of other producers. b. has a comparative advantage in the production of that good. c. has an absolute advantage in the production of that good. d. should be the only producer of that good. 7. In a given market, how are the equilibrium price and the market clearing price related? a. There is no relationship. b. They are the same price. c. The market clearing price exceeds the equilibrium price. d. The equilibrium price exceeds the market clearing price. 8. A surplus exists in a market if a. there is an excess demand for the good. b. quantity demanded exceeds quantity supplied. c. the current price is above its equilibrium price. 9. The circular flow diagram a. is an economic model. b. incorporates two types of decision makers: households and firms. c. represents the flows of inputs, outputs, and dollars. 10. Which of the following is a correct statement about production possibilities frontiers? a. An economy can produce only on the production possibilities frontier. b. An economy can produce at any point inside or outside a production possibilities frontier. c. An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier. d. An economy can produce at any point inside the production possibilities frontier, but not on or outside the frontier. 11. The famous observation that households and firms interacting in markets act as if they are guided by an invisible hand that leads them to desirable market outcomes comes from whose 1776 book? a. David Ricardo b. Thorstein Veblen c. John Maynard Keynes d. Adam Smith 12. In a market economy, a. households decide which firms to work for and what to buy with their incomes. b. firms decide whom to hire and what to make. c. a central planner makes decisions about production and consumption. d. Both a and b are correct. 13. A rational decisionmaker a. ignores marginal changes and focuses instead on the big picture. b. ignores the likely effects of government policies when he or she makes choices. c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action. d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that action and previous actions. Page 2 of 5

3 Part B: Essay Questions (60 points) 1. The table below gives the demand and supply schedules for cat food. (30 points) Price (dollars per pound of cat food) Quantity demanded (tons of cat food per year) Quantity supplied (tons of cat food per year) A. On the same diagram draw the demand and supply curves (label them D 0 and S 0 respectively) (5+5 points) B. What are the equilibrium price and quantity? (2+2 points) Answer: The equilibrium price and quantity are $2.5 and 40 tons of cat food, respectively, as shown by the point E 0 on the graph above. C. If the price is $3 per unit, is there a (shortage, surplus), and what is the amount of it? (1+2 points) How does the price adjust? Briefly explain. (2 points) Answer: If the price is $3 per unit, there is a surplus because while the quantity demanded is 35 units at this price level, the quantity supplied is equal to 44 units. Therefore, there is 9 units of surplus in the economy. This level of surplus will create a downward pressure on the price. As the suppliers reduce the price of cat food, there will an increase (decrease) in the quantity demanded (supply) along the demand (supply) curve. This downward pressure and decrease in price will continue until the equilibrium price of $2.5 is reached which clears the market. Page 3 of 5

4 D.Suppose a technological advance (improvement) increases the quantity of cat food supplied at each price by 9 tons per year. Write down the new supply schedule after the technological improvement. (2 points) Price (dollars per pound of cat food) Quantity supplied (tons of cat food per year) E. On the graph above, draw the new supply curve and label it S 1. (5 points) Answer: See the graph above. F. What are the new equilibrium price and quantity? (2+2 points) Answer: The new equilibrium price and quantity are respectively $2 and 43 units of cat food. It is shown on the graph above as point E 1. The rise in supply due to the technological improvement causes the equilibrium price to decrease and equilibrium quantity to increase. 2. A. Briefly explain what a production possibility frontier (PPF) curve refers to for an economy. (5 points) Answer: PPF is the curve that shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed. B. Draw below a PPF curve for an economy that produces only cars and computers. (Note that the opportunity cost between the production of the goods is not constant) (Place Cars on the x axis, and Computers on the y axis). (10 points) Answer: PPF is the curve that shows the maximum possible output combinations of cars and computers where an economy can achieve when all inputs are fully used. As we can see from the figure above, the PPF curve is not a straight line due to the opportunity cost between cars and computers being not constant but increasing. Page 4 of 5

5 C. Illustrate on the diagram inefficient, efficient, unattainable/ infeasible points. (5 points) Answer: As indicated on the chart above, points A, B and C represent combinations where production of computers and cars is efficient. Point X demonstrates a combination at which resources are not being used efficiently in the production of both cars and computers. That is to say that, a better use or allocation of the given resources of the economy leads to higher production of either cars or computers or both. Point Y demonstrates a production combination that is not attainable with the current level of resources and technology level. D. What happens to the PPF curve if a technological improvement causes the economy to grow? Show it on the same graph above and briefly explain below. (10 points) Answer: The technological improvement allows the economy to produce more output given the current level of inputs (resources). As we can see from the graph above, the technological enhancement now makes it possible to produce the combination Y which was unattainable before the technological improvement. Page 5 of 5