Name Framingham State College Department of Economics and Business Principles of Microeconomics 1 st Midterm Practice Exam Fall 2006 This exam provides questions that are representative of those contained on your exam. This test should in no way be considered a facsimile of your exam. All topics, problems, key words, and class discussion are fair game for the exam whether or not they are contained on this practice exam. ----------------------------------------------------------------------------------------------------------- Directions: Provide the best answer to the following: 10 Multiple Choice Questions each worth 4 points 10 True/False Questions each worth 2 points 5 Short Answer Questions each worth 8 points for a total of 100 points. You will be given 110 minutes to complete the exam. If you finish early, you may quietly turn in your exam and leave. The exam is closed book and closed note, please place everything other than your calculator and writing tools at the front of the class. You may not share a calculator. Ensure that you label your graphs comprehensively. Show the before state and the after state where appropriate and label the two states in a way that is unambiguous You are expected to use full sentences in your answers to the Short Answer Questions. Incomplete sentences will be penalized in the grade awarded. ------------------------------------------------------------------------------------------------------------ Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. An example of an externality is the impact of a. bad weather on the income of farmers. b. the personal income tax on a person's ability to purchase goods and services. c. pollution from a factory on the health of people in the vicinity of the factory. d. increases in health care costs on the health of individuals in society. The impact of pollution from a factory on the health of people in the vicinity of the factory is an externality, so Answer c.
2. In the United States, incomes have historically grown about 2% per year. At this rate incomes will double every a. 10 years. b. 25 years. c. 35 years. d. 50 years. 35 years. After one year 100 dollars would grow to 102 dollars. 102 dollars would be 104.04 dollars by the end of the second year and by the 35 th year the amount would have doubled. Answer c. 3. Senator Smith wants to increase taxes on people with high incomes and use the money to help the poor. Senator Jones argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that a. we should agree with Senator Smith. b. we should agree with Senator Jones. c. a good decision requires that we recognize both viewpoints. d. there are no tradeoffs between equity and efficiency. An economist would say that a good decision requires that we recognize both viewpoints. Answer c. 4. What would be the best statement about a theory based on assumptions that are not true? a. If the assumptions underlying the theory are not true, the theory must be false. b. The ideas may be good in theory, but not in practice. c. The theory is a good one if it helps us to understand how the world works. d. The theory is a good one if no logical mistakes were made in developing it. The theory is a good one if it helps us to understand how the world works. Answer c. 5. Economists use models in order to a. learn how the economy works. b. make their profession appear more precise. c. make economics difficult for students. d. make sure that all of the details of the economy are included in their analysis. Economists use models in order to learn how the economy works. Answer a.
Figure 2-3 6. Refer to Figure 2-3 at the foot of the previous page. The economy can produce at which point or points? a. B, D, E b. A, B, D, E c. D, C d. D Neither C nor a are feasible so the economy could produce at points B, D or E. Answer a. 7. One way to determine the direction of causality is to a. assume the 2 variables move in the same direction. b. assume the 2 variables move in opposite directions. c. determine which variable moves first. d. determine which variable is the dependent variable and which variable could be the independent variable. One way to determine the direction of causality is to determine which variable moves first. Answer d. 8. If Jane receives a decrease in her pay, we would expect a. Jane's demand for each good she purchases to remain unchanged. b. Jane's demand for normal goods to increase. c. Jane's demand for luxury goods to increase. d. Jane's demand for inferior goods to increase. If Jane receives a decrease in her pay we would expect her demand for inferior goods to increase. Answer d.
9. Suppose that a decrease in the price of X results in less of good Y sold. This would mean that X and Y are: a. complementary goods. b. normal goods. c. inferior goods. d. substitute goods. X and Y are substitute goods if the decrease in the price of one of them leads to less of the other one being sold. Answer d. 10. When it comes to people's tastes, economists generally believe that a. tastes are based on forces beyond the realm of economics. b. tastes are based on historical and psychological forces. c. tastes can only be studied through well-constructed, real-life models. d. since tastes do not directly affect demand, there is little need to explain people's tastes. Economists generally believe that tastes are based on historical and psychological forces. Answer b. True/False: Indicate whether the sentence or statement is true or false. 11. Tuition is the single-largest cost of attending college for most students. False, the opportunity cost of lost income is the single largest cost of attending college for most students 12. Inflation increases the value of money. False, inflation decreases the value of money. 13. In the markets for goods and services, as in the markets for the factors of production, households are buyers and firms are sellers. Households are not generally the buyers in the markets for the factors of production. They generally sell their labor in such markets. Hence False. 14. Jonathan can make a bird house in 3 hours. He can make a bird feeder in 1 hour. The opportunity cost to Jonathan of making a bird house is 1/3 bird feeder. Jonathan can make 3 bird feeders for every bird house that he makes. The opportunity cost of a bird feeder is 1/3 of a bird house. The opportunity cost of a bird house on the other hand is 3 bird feeders. Hence False. 15. The computer software industry is an example of monopolistic competition. True. See Section 4.1
16. A local cable TV company might be a monopolist. True. See Section 4.1 17. Baseballs and baseball bats are substitute goods. False, baseballs cannot be used in place of baseball bats. The game needs both so the goods are complements. Hence False. 18. If there is an improvement in the technology of producing a product, the supply curve for that product will shift to the left. A shift to the left is a decrease in supply. An improvement in technology will lead to an increase in supply. Hence False. 19. Surpluses drive price up while shortages drive price down. False, the price of goods in surplus tend to be driven down and the price of goods in short supply tend to be driven up. 20. The behavior of buyers and sellers drives markets toward equilibrium. True. See Section 4.4. Short Answer: Your answers should be given in complete sentences. 21. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time. For most students this would be the income the student gives up by not working. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.) 22. Draw a production possibilities frontier showing increasing opportunity cost for hammers and horseshoes.
a. On a graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that's efficient as point "E" and a point that inefficient as point "I". c. On a graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy. d. On a graph for hammers and horseshoes, illustrate the effect a new computerized assembly line in the production of hammers would have.
23. Use the following demand curve to answer the following questions. a. How would point A be represented as an ordered pair? (20, 24) b. What type of curve is this? a demand curve c. Does this curve show a positive or negative correlation between price and quantity? a negative correlation between price and quantity d. Compute the slope of the D 1 between points A and C. -8/20 or -2/5. e. What is the slope of D 1 between points C and E? Why would you not have to calculate this answer? -2/5; because the slope of a straight line is constant. f. What is it called if we move from D 1 to D 2? an increase in demand. g. How do you know that the slope of D 2 is the same as the slope of D 1? The 2 lines are parallel.
24. The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers. a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. Alpha would be producing 125 units of peanuts and 75 units of popcorn (point A on its PPF) and Omega would be producing 50 units of peanuts and 150 units of popcorn (point A on its PPF). b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts? The total world production of peanuts would be 175 units and the total world production of popcorn would be 225 units. c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now? The total world production of peanuts would now be 250 units and the total world production of popcorn would now be 300 units. d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B. Alpha would be producing 250 units of peanuts and would trade 100 of them to Omega, leaving Alpha with 150 units of peanuts. Alpha would then receive 100 units of popcorn from Omega. Omega would be producing 300 units of popcorn and would trade 100 of them to Alpha, leaving Omega with 200 units of popcorn. Omega would then receive 100 units of peanuts from Alpha.
25. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Eric can fix the same kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and Eric be better off if she pays him $45 per meal to fix her meals? Explain. Since Julia's opportunity cost of preparing a meal is $50, and Eric s opportunity cost of preparing a meal is $40, each of them will be better off by $5 per meal if this arrangement is made.