VANCOUVER ISLAND UNIVERSITY ECON100: Principles of Economics, MIDTERM EXAM I Name (Last, First): ID #: Signature: THIS EXAM HAS TOTAL 10 PAGES INCLUDING THE COVER PAGE Instructions: Total marks 65 and you have 75 Minutes to complete the exam. Please answer your MCQs in the table provided on the last page and short questions in the space provided. For short answer questions You must show your all work to get full marks. If you do not show work, you may not get full marks even for a correct answer. Use the marks assigned to each question as a guide to allocating your time across questions. Good Luck on Your Exam
2 PART A (There are 30 MCQ in this section, worth 30 marks) 1. The problem of scarcity a) exists because all human wants cannot be satisfied with limited time, money and energy b) would disappear if we did not have to make choices c) can be solved in a market economy d) exists because the limited human expectations cannot be satisfied with available knowledge 2. Which of the following is one of the three steps to smart choices? a) The choice is smart when total benefits are greater than total costs b) The choice is smart when benefits are greater than additional opportunity costs c) The choice is smart when measurable benefits are greater than measurable costs d) Be sure to count all benefits and costs, excluding implicit costs or externalities 3. An increase in the number of pizza producers or a decrease in the cost of mozzarella cheese used to make pizza will a) decrease supply of pizza b) increase the price of pizza c) increase supply of pizza d) decrease demand for pizza 4. When prices rise, individuals and businesses devote more of their time or resources to producing or supplying because a) of higher demand b) of their preferences c) of the quest for higher prices d) of the need for a higher price to cover higher marginal opportunity costs 5. The main implication of scarcity in economics is that people must a) be unhappy b) be selfish c) not be selfish d) make choices 6. The circular flow diagram of economic life shows a) input markets in which businesses are sellers and households re buyers b) output markets where businesses are buyers and households are sellers c) input markets in which households are sellers and businesses are buyers d) input and output markets in which the government determines sellers and buyers 7. Economics can best be described as a) the study of how to reduce inflation and unemployment b) the study of the use of scarce resources to satisfy unlimited human wants c) the study of how a society ought to allocate its resources d) the application of sophisticated mathematical models to address social problems e) a normative science 8. The short-run supply for housing is quite while the long-run supply for housing is quite. a) inelastic; elastic b) elastic; inelastic c) inelastic; inelastic d) elastic; elastic e) flat; steep
3 9. The term demand a) describe consumers willingness and ability to pay for a particular product/service b) refers to consumers need for a particular product/service c) all of the above d) describe consumers desire for a particular product/service 10. For a normal product/service, an increase in consumer income will lead to a) a decrease in demand b) an increase in demand c) a decrease in supply d) an increase in supply 11. A retailer noticed that by lowering his price slightly, his total revenue increased. The price elasticity of demand within the current price range is a) inelastic b) unit elastic c) elastic d) undetermined 12. Which of the following does not influence the price elasticity of demand? a) Proportion of the income spent on the product/service b) Number of substitutes the product/service has c) Time to adjust d) Total revenue earned when the price changes 13. The opportunity cost for you to attend college a) may be equal to, or less than, the money cost b) is greater than the money cost c) depends on the income you can earn after graduation d) is determined by what you could earn if you did not go to college 14. For any activity, failure to consider a) past costs will result in too much for that activity b) past benefits will result in too little of that activity c) external costs will result in too much of that activity d) external benefits will result in too much of that activity 15. The production possibility boundary for Edward is given in the table Chair Table 100 0 80 10 60 20 40 30 20 40 0 50 Edward s opportunity cost of producing an additional chair is 1/2 table
4 16. In the Canadian economy, most decisions regarding resource allocation are made by: a) business firms only. b) negotiation between unions and firms. c) consumers and producers interacting in the price system d) Legal contract e) The various levels of government 17. Positive statements a) have been verified by appeal to factual evidence. b) are seldom employed in social sciences like economics c) are falsifiable in principle by appeal to factual evidence. d) form the basis of all normative arguments e) have no place in economics because economics deals only with value judgments 18. Refer to the figure below. The following combinations of kilometres of highway repair and helicopters are efficient, given the government's budget of $200 million. a) E b) G c) B d) D 19. The supply and demand schedules for dozens of roses are given below: Price Quantity Supplied per period Quantity Demanded per period $10 200 500 $20 300 450 $30 400 400 $40 500 350 $50 600 300 When the price is $20, there will be an excess Demand for/of 150 roses. 20. A fall in the price of potatoes, which are used in the production of french fries, will a) no effect on the supply of french fries b) lead to a decrease in the supply of french fries, causing the supply curve of french fries to shift to the left c) lead to an increase in the supply of french fries, causing the supply curve of french fries to shift to the right d) lead to a decrease in the demand for french fries e) have no effect on the supply of french fries but cause a movement along the supply curve of french fries
5 21. Shift in the supply curve from S 2 to S 1 might be caused by a) additional suppliers entering the industry b) a decrease in demand for X c) an improvement in the technology of producing good X d) a decrease in the price of X e) a rise in the costs of producing good X 22. A change in demand is said to take place when there is a a) price change b) movement along the demand curve c) shift of the supply curve d) quantity change e) shift of the demand curve 23. When the percentage change in quantity demanded is less than the percentage change in price that brought it about, demand is said to be a) Unit elastic b) Elastic c) Zero elastic d) Unelastic e) Inelastic 24. If two goods, X and Y, have a negative cross-elasticity of demand, then we know that they a) are both inferior goods b) are substitute c) each have a price elasticity greater than one d) Undefined e) are complements 25. Automobiles and gasoline are likely to a) substitute goods b) inferior goods c) independent goods d) luxury goods e) complementary goods 26. A leftward shift in the supply curve indicates a) decrease in the quantity supplied at each price b) that more is demanded at each price c) an increase in the quantity supplied at each price d) that an increase in income results in an increase in the quantity demanded at each price e) that more suppliers have entered the industry
6 27. Refer to the figure. A price floor set at a price of $3.00 will result in a) a surplus of 10 units b) a surplus of 20 units c) a shortage of 20 units d) no change in the market outcomes e) a shortage of 10 units Use the figure below to answer two following questions 28. Demand is inelastic a) over the entire demand curve in diagram 3 b) over the entire demand curve in diagram 1 c) over section (b) of the demand curve in diagram 1 d) at the midpoint between sections (a) and (b) of the demand curve in diagram 1 e) section (a) of the demand curve in diagram 1 29. Demand is perfectly elastic a) over the entire demand curve in diagram 3 b) over the entire demand curve in diagram 1 c) section (a) of the demand curve in diagram 1 d) over the entire demand curve in diagram 4 e) over section (b) of the demand curve in diagram 1 30. At any disequilibrium price, whether controlled or not, the quantity actually exchanged is determined by a) the elasticity of demand b) the elasticity of supply. c) the greater of quantity demanded and quantity supplied. d) government decree. e) the lesser of quantity demanded and quantity supplied.
Price Midterm Exam I, ECON100 7 PART B (In this part, there 8 short answer questions, worth 40 marks) 1. Suppose the market for frozen orange juice is in equilibrium at a price of $1.00 per can and a quantity of 4200 cans per month. Now suppose that at a price of $1.50 per can, quantity demanded falls to 3000 cans per month and quantity supplied increases to 4500 cans per month. a. (5 marks) Draw the appropriate diagram for this market (diagram must be labeled properly) Demand Supply $1.50 $1.00 3000 4200 4500 Orange Juice b. (5 marks) Calculate the price elasticity of demand for frozen orange juice between the prices of $1.00 and $1.50. Is the demand elasticity elastic or inelastic? inelastic demand for the orange juice
8 2. (5 marks) A rise in oil prices causes many other products to become more expensive to produce, especially products with high transportation costs and oil-based plastics. How will the higher oil price affect the supply of these other products? (please use a diagram or clearly point out the steps in answering the question) Price Quantity Oil is an important factor of production. When the price of oil goes up, given that the output market is competitive and a producer is unable to increase the price by himself, the supply of the good/service must be reduced to avoid any profit lose. Hence the supply function shifts to the left. As observed at the given price P * the supply is now lower. 3. (5 marks) Suppose your community council is considering the idea of returning to a flat monthly rate payment scheme for water usages. Explain what will happen to the demand for the following products: a) Water - When someone pays the same bill for water irrelevant to its use, if needed he/she will be using more. In general the demand for water goes up b) Orange juice - If you assume orange juice as a substitute, the demand for orange juice should go down - If you assume its an independent good, the demand for it would be unchanged c) Soap - Given the answer in a) if the demand for water goes up, demand for soap should go up, as it s a complementary good. Think about if you take bath frequently as don t need to think about additional cost for extra water use, you may use more soap. d) Beef - It is an independent good here. So, its demand should be unaffected.
9 4. Consider the hypothetical example provided in the following table to understanding three economic concepts: scarcity, choice and opportunity cost Fish Rabbit Jon 10 3 Sean 6 2 a. (5 marks) Who has the absolute advantage in catching fish and trapping rabbit? Why? Jon has absolute advantage in both catching fish and trapping rabbit. Because Jon can catch more fishes (10>6) or trap more rabbits (3>2) compared to that of Sean. b. (5 marks) Calculate the opportunity cost of fish and opportunity cost of rabbit for both Jon and Sean: Opportunity Cost of Fish Opportunity Cost of Rabbit Jon 3/10=0.3 rabbits 10/3 =3.33 fishes Sean 2/6 =0.33 rabbits 6/2=3 fishes c. (5 marks) Who should be a fisherman and who should be a rabbit trapper? Why? Opportunity cost is price (relative price) in term of another good. Someone will be specialized in a good production when the opportunity cost of that good in terms of another good is low. Which is called the comparative advantage In this example, although Jon has absolute advantage in both goods production, but he has comparative advantage in only catching fish, as his opportunity cost of fish is lower compared to Sean (0.3<0.33). On the other hand, Sean s opportunity cost of rabbit is lower than that of Jon (3<3.33) Sean s comparative advantage in trapping rabbits. So, Jon should be a fisherman and Sean should be trapping rabbits.
10 Name: Signature: Please answer your MCQs in the following table 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.