Econ 111 Practice Midterm 1 The exam has a total of 50 questions (100 points). You will have 75 minutes to complete the exam. Good Luck! Print your Name Sign the honor Pledge affirming that you have neither given nor received aid on this exam and have complied with all of the rules of this exam. Signature Turn this sheet and the scantron sheet in with your answers. Instructions: mark the letter for the best answer choice for each question on the computer readable (scantron) answer sheet. Each question is equally weighted (2.5 pts each). Read each question carefully 1. According to the cost-benefit principle, A. the lowest cost activity usually gives the lowest benefit. B. a person should always choose the activity with the lowest cost. C. a person should always choose the activity with the greatest benefit. D. the extra costs and benefits of an activity are more important considerations than the total costs and benefits. 2. The Governor of your state has cut the budget for the University and increased spending on Medicaid. This is an example of A. the pitfall of considering average costs instead of marginal costs. B. poor normative economic decision making. C. poor positive economic decision making. D. choice in the face of limited resources. 3. You save $10 on gas every week since you live close to the bus stop. You have class five days a week. What is your average benefit per day for living close to the bus stop? A. $10 B. $5 C. $2 D. $1.43 4. Suppose a retail store was offering 10% off all prices on all goods. The incentive to take advantage of the 10% savings is A. unrelated to the list price of one good. B. inversely related to the list price of the good. C. directly related to the list price of the good. D. independent of the list price. 1
5. The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is A. $1,500. B. $500. C. $50. D. $5. 6. The marginal cost of upgrading from a 700 to an 800 Mhz computer is A. $500. B. $400. C. $200. D. $100. 7. Application of the cost-benefit principle would lead one to purchase a computer because. A. 900 Mhz; the total benefit exceeds the total cost B. 700 Mhz; the marginal benefit is $500 and the marginal cost is $100 C. 600 Mhz; it is certainly fast enough D. 800 Mhz; the marginal benefits and marginal costs are equal 8. Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck, but she finds one for $12,000. Her is. A. benefit; $12,000 B. cost; $15,000 C. economic surplus; $3,000 D. economic surplus; $12,000 9. One thing that distinguishes normative principles from positive principles is that A. normative principles are pessimistic and positive principles are optimistic. B. normative principles reflect the social norms of the community, and positive principles reflect universal truths. C. normative principles tell us how people should make economic decisions, and positive principles tell us how people actually do make decisions. D. normative principles tell us how people actually make economic decisions, and positive principles tell us how people should make decisions. 10. The extra cost that results from an extra unit of an activity is the A. marginal benefit. B. marginal cost. C. reservation cost. D. same as the opportunity cost. 2
11. Dividing the total cost of n units of an activity by n reveals the A. average benefit. B. marginal cost. C. units per cost. D. average cost. 12. In general, individuals and nations should specialize in producing those goods for which they have a(n) A. absolute advantage. B. comparative advantage. C. absolutely comparative advantage. D. absolute and comparative advantage. Dent'nScratch Used Cars and Trucks employs 3 salesmen. Data for their sales last month: 13. has an absolute advantage for selling cars and has an absolute advantage for selling trucks. A. Joe; Joe B. Larry; Ralph C. Ralph; Larry D. Larry; Joe 14. Joe's opportunity cost of selling a car is than Ralph's, and Joe's opportunity cost of selling a car is than Larry's. A. less; more B. more; less C. less; less D. more; more 15. should specialize in truck sales and should specialize in car sales. A. Joe; Ralph B. Ralph; Larry C. Larry; Ralph D. Larry; Joe 3
16. If a linear, two-good production possibilities graph has a slope steeper than -1, A. you would have to give up more than one unit of the good measured on the horizontal axis to gain an additional unit of the good measured on the vertical axis. B. you would have to give up less than one unit of the good measured on the horizontal axis to gain an additional unit of the good measured on the vertical axis. C. by specializing in the good measured on the horizontal axis you would be able to make more total units than you would if you specialized in the good measured on the vertical axis. D. you have a comparative advantage in the good measured on the vertical axis. 17. Production Possibilities Curves for large economies generally have an outward bow shape because A. specialization gives some producers a comparative advantage. B. opportunity costs tend to decrease with increases in production. C. opportunity costs tend to increase with increases in production. D. as more resources are used to produce the same good, those resources become less and less expensive. Earth Movers and Shakers operates 3 iron ore mines. This table shows their daily production rates given the number of miners at each mine. All of the miners work for the same wage. 18. The opportunity cost of moving one miner from Mother Lode to Scraping Bottom is A. 2 Tons. B. 3 Tons. C. 4 Tons. D. 1 Ton. 19. The opportunity cost of moving one miner from Scraping Bottom to Middle Drift is A. less than 0. B. 3 Tons. C. 4 Tons. D. 5 Tons. 20. Earth Movers and Shakers needs to fill an order for 100 Tons of ore in a single day, and has no other orders to fill that day. It should A. take it all from Mother Lode. B. take 75 tons from Middle Drift and 25 tons from Mother Lode. C. take 75 tons from Middle Drift and 25 tons from Scraping Bottom. D. take 30 tons from Scraping Bottom and 70 tons from Mother Lode. 4
21. Autarky is a situation in which a country is economically A. dependent on trade. B. self-sufficient. C. underdeveloped. D. dependent on a single firm. 22. If domestic consumers benefit from free trade of a good, the country must that good. A. be a net importer of B. be a net exporter of C. have a comparative advantage in D. have inelastic demand for 23. Refer to the figure above. For Chris, the opportunity to removing one bag of trash is A. 25 bulbs that don't get planted. B. 5 bulbs that don't get planted. C. 3 bulbs that don't get planted. D. One-third of a bulb that doesn't get planted. 24. Refer to the figure above. If Pat and Chris were to specialize in the task for which each has a comparative advantage, A. Chris would plant bulbs and Pat would haul out trash. B. Chris would haul out trash and Pat would plant bulbs. C. Pat and Chris would each spend one hour on each task. D. both would plant bulbs as they both have an absolute advantage in that task. 25. If a point is attainable, A. it must be efficient. B. it might or might not be efficient. C. it is efficient only if it does not exhaust all currently available resources. D. it must completely exhaust all currently available resources. 5
26. Which of the following is NOT true of a demand curve? A. It has negative slope. B. It shows the amount consumers are willing and able to purchase at various prices, holding other factors constant. C. It relates the price of an item to the quantity demanded of that item. D. It shows how an increase in price leads to an increase in quantity demanded of a good. 27. As the price of a good rises, A. firms earn larger profits. B. more firms can cover their opportunity costs of producing the good. C. firms find they can raise price by even more. D. government regulation becomes more justified. 28. Whenever the quantity demanded is not equal to the quantity supplied, the quantity that is actually sold in the market is A. the quantity demanded. B. the quantity supplied. C. the smaller of the quantity demanded and the quantity supplied. D. the greater of the quantity demanded and the quantity supplied. 29. Suppose you bought a concert ticket from Ticketmaster for $50, but when you got to the concert scalpers were selling tickets in the same seating area as yours for $25. What is probably true? A. There is excess demand for this concert at the Ticketmaster price. B. The ticket you bought was under-priced for the market. C. There is an excess supply of tickets for this concert at the Ticketmaster price. D. The Ticketmaster price is an equilibrium price. 30. "As the price of personal computers continues to fall, demand increases." This headline is inaccurate because A. a change in the price of personal computers shifts the demand curve. B. a change in the price of personal computers shifts the supply curve. C. the statement is backwards: increased demand leads to lower prices. D. falling prices for personal computers increases quantity demanded, not demand. 31. If the price of computers increases and the demand for monitors decreases, then A. computers and monitors are complements. B. computers are a normal good and monitors are inferior. C. computers and monitors are substitutes. D. computers are an inferior good and monitors are normal. 6
32. Mad cow disease has been discovered in the United States. One likely result is A. an increase in buyers' reservation prices for beef. B. a decrease in demand for chicken. C. a decrease in demand for beef. D. a decrease in the quantity demanded of beef. 33. Which of the following would cause an increase in quantity supplied of wheat? A. The price farmers receive for their wheat rises. B. The price of fertilizer farmers' use in their fields decreases. C. The price firms pay for liability insurance falls. D. New, better technology for farming are introduced. 34. One observes that the equilibrium price of rice falls and the equilibrium quantity falls. Which of the following best fits the observed data? A. An increase in demand with supply constant B. An increase in demand coupled with a decrease in supply C. An increase in demand coupled with an increase in supply D. A decrease in demand with supply constant 35. Assume both the demand and the supply of beef decrease. Which of the following outcomes is certain to occur? A. The equilibrium price of beef will rise. B. The equilibrium quantity of beef will rise. C. The equilibrium price of beef will fall. D. The equilibrium quantity of beef will fall. 36. Refer to the figure above. At a price of $20, A. the market would be in equilibrium. B. there would be excess supply of approximately 25 units. C. there would be excess demand of approximately 25 units. D. there would be excess demand, but it is impossible to know by how much. 37. Refer to the figure above. Now suppose that the government imposes a price ceiling of $40. What is the most likely result? A. Many sellers would go out of business because $40 is above the equilibrium. B. There would be no change in the price. C. The market would reach a new equilibrium at a price of $40. D. An underground, or black, market would emerge where this product would be sold at a price above $40. 7
38. The most commonly used measure of an economy's output is: A. the rate of employment. B. the rate of inflation. C. gross domestic product. D. the Dow Jones stock market index 39. The value of unpaid childcare services provided by a stay-at-home dad included in GDP and the value of daycare services purchased from a licensed childcare provider included in GDP. A. is; is not B. is; is C. is not; is not D. is not; is 40. The four categories of final users of GDP are: A. businesses, firms, governments, and the foreign sector. B. households, the Federal Reserve, governments, and the foreign sector. C. businesses, corporations, firms, and farms. D. households, firms, governments, and the foreign sector. 41. Consumption expenditures include spending by households on: A. exports. B. inventories. C. residential housing. D. services. 42. If business inventories at the beginning of the year equal $40 billion and equal $55 billion at the end of the year, then GDP will: A. decrease by $15 billion. B. increase by $15 billion. C. increase by $40 billion. D. increase by $55 billion. 43. Which of the following would increase the net export component of U.S. GDP? A. A bottle of California wine is purchased in London. B. A car produced in Japan is purchased in California. C. A bottle of French wine is purchased in New York. D. A car produced in Michigan is purchased in Louisiana. 44. A measure of GDP in which quantities produced are valued at the prices of a fixed base year is called: A. real GDP. B. nominal GDP. C. base GDP. D. current GDP. 8
45. Bob's Barber Shop cut 3,000 heads of hair in the year 2005 and 3,100 in the year 2006. The price of a hair cut was $7 in 2005 and $8 in 2006. If the year 2005 is the base year, what was Bob's contribution to real GDP in the year 2005? A. $21,000 B. $21,700 C. $24,000 D. $24,800 46. Profits, rents, interest, and royalties are examples of: A. consumption. B. labor income. C. capital income. D. investment. 47. If two countries are identical except that citizens in one country have more leisure time, then the level of GDP: A. will be higher in the country with more leisure time. B. will be higher in the country with less leisure time. C. will be the same in both countries. D. will be greater than the level of economic well being in each country. 48. Which of the following is NOT a final good? A. New clothing purchased by a college student B. Fresh vegetables purchased by a restaurant C. A new house purchased by a family D. A new machine purchased by a business 49. Which of the following expenditures would increase the investment component of U.S. GDP? A. You purchase a new house. B. You purchase a new car. C. You purchase 1,000 shares of stock. D. You pay a commission to your stock broker for selling some sticks you owned. 50. Profits, rents, interest, and royalties are examples of: A. consumption. B. labor income. C. capital income. D. investment. 9
ANSWER KEY 1. D 2. D 3. C 4. C 5. B 6. B 7. D 8. C 9. C 10. B 11. D 12. B 13. B 14. A 15. B 16. B 17. C 18. C 19. B 20. B 21. B 22. A 23. C 24. B 25. B 26. D 27. B 28. C 29. C 30. D 31. A 32. C 33. A 34. D 35. D 36. C 37. B 38. C 39. D 40. D 41. D 42. B 43. A 44. A 45. A 46. C 47. C 48. B 49. A 50. C 10