Name Recitation Section Number Econ 1101-Lecture 2 Midterm 1 Spring 1999 Form A Put your name and recitation section number on this sheet, your multiple choice answer sheet, the definition section, and the short answer section. Put the form of your exam on your multiple choice answer sheet. This exam has 7 numbered pages. This is a closed book, closed note exam. No calculators may be used on this exam. No scratch paper may be used during the exam. 1
Section 1: Multiple Choice (3 points each) For the following questions, find the best answer and fill in the corresponding circle on your answer sheet. 1. An economic outcome is said to be efficient if a. the economy is producing only the goods and services consumers need the most. b. the economy is getting all it can from the scarce resources it has available. c. the economy is using all of the resources it has available. d. the economy is conserving on resources, using as few as possible. 2. Positive statements are a. affirmative, justifying existing economic policy. b. prescriptive, making a claim about how the world ought to be. c. descriptive, making a claim about how the world is. d. optimistic, putting the best possible interpretation on things. 3. Serenity Park has decided to raise the price of entrance fees to increase revenue for improvements. If the people who go to the park have a unit elastic demand, then a. the effect of the planned price increase is ambiguous. b. the planned price increase would increase total revenue. c. the planned price increase would decrease total revenue. d. the planned price increase would not change total revenue. 4. Kit, a frequent flier, says if the airlines want to attract more passengers, they should lower fares for business travelers as well as for vacationers, because both groups respond equally to a price decrease. What assumption must Kit be making? a. Business travelers have a more elastic demand than vacationers. b. The demand for flights is inelastic. c. Business travelers and vacationers have the same elasticity of demand for flights. d. The supply of flights is inelastic. 5. Sweetland is a country that produces only two goods, ice cream and candy. All of Sweetland s resources are equally suited towards producing either ice cream or candy. Sweetland s production possibility frontier (PPF) is a. the same as any other country producing only ice cream and candy. b. bowed outward. c. bowed inward. d. a straight line. 6. When the price of a good or service changes, a. there is a movement along a stable supply curve. b. supply shifts in the opposite direction. c. demand shifts in the opposite direction. d. there is a change in quantity supplied in the opposite direction. 2
7. Amber can iron a shirt in 5 minutes. She can mow the lawn in 30 minutes. Jabin can iron a shirt in 3 minutes. He can mow the lawn in 20 minutes. Which of the following statements about Amber and Jabin is true? a. Amber has an absolute advantage in ironing shirts. b. Jabin has a comparative advantage in both jobs. c. Jabin has an absolute advantage in mowing the lawn. d. Both b and c are true. 8. Karen has 40 hours each week to write books and prepare meals. If Karen devotes all of her time to writing books, she writes 1 book a week. If Karen devotes all of her time to preparing meals, she prepares 10 meals a week. What is Karen s opportunity cost of preparing one meal? a. 1/10 book b. 4 meals c. 10 books d. 4 hours of labor 9. Suppose the income of people who play football decreases. At the same time the technology for making footballs improves. In the market for footballs a. both price and quantity demanded will decrease. b. price will increase and the change in quantity demanded is ambiguous. c. price will decrease and the change in quantity demanded is ambiguous. d. the quantity demanded will increase and the change in price is ambiguous. 10. Suppose the price of muffins decreases. At the same time the number of sellers of doughnuts decreases. In the market for doughnuts a. both price and quantity demanded will decrease. b. quantity demanded will increase and the change in price is ambiguous. c. quantity demanded will decrease and the change in price is ambiguous. d. the quantity demanded will increase and the price will decrease. 11. Ed likes to consume two goods, pizzas and pepsi. When we draw his indifference curves, pizzas are on the x-axis. The price of a pizza is $10. The price of a pepsi is $2. At the point that Ed chooses to consume, his marginal rate of substitution is a. 10. b. 5. c. 2. d. unknown. We need more information to determine this. 12. If an indifference curve is bowed inward, the marginal rate of substitution is a. likely to be constant for all bundles along the indifference curve. b. likely to be identical to the relative price for each bundle along the indifference curve. c. is equal to the slope of the indifference curve. d. different for each bundle along the indifference curve. 3
13. If the income elasticity of demand for a good is -0.5 then a. the good is a normal good. b. a mistake was made. Income elasticity of demand is always positive. c. the good is an inferior good. d. the good is mostly consumed by rich people. 14. Recall the guest lecture by Bill McCausland. Which of the following trade patterns cannot be explained by comparative advantage? a. Before the Auto Pact of 1965, Canadians bought mostly cars produced in Canada. b. Canada tends to import fruits and vegetables. c. Canada tends to export live animals. d. Canada tends to export forestry products. 15. If a consumer s consumption of one good decreases, the consumption of another good must be increased in order to remain indifferent between the two bundles. What property of indifference curves fits this idea? a. downward-sloping b. generally bow inward c. higher curves are preferred d. do not cross 16. If Mexico has a lower opportunity cost for computers than the US, we expect to see Mexico a. exporting computers to the US. b. importing computers to the US. c. not producing computers. d. None of the above is correct. 17. A production point that is on the production possibility frontier (PPF) is a. efficient. b. possible. c. equitable. d. both a and b e. both b and c 18. Suppose the price of milk decreases. What will happen in the market for cookies? a. Quantity supplied will increase. b. Demand will increase. c. Quantity demanded will decrease. d. both a and b e. both b and c 4
19. When the price of plastic decreases, in the market for plastic snow shovels a. demand shifts to the right. b. demand shifts to the left. c. supply shifts to the right. d. supply shifts to the left. 20. good 2 good 1 a. Good 1 is an inferior good and good 2 is a normal good. b. Both good 1 and good 2 are normal goods. c. Both good 1 and good 2 are inferior goods. d. Good 1 is a normal good and good 2 is an inferior good. 21. The formula for the midpoint approximation for percentage change is new-old a. old old-new b. new new-old c. average of new and old old-new d. average of new and old 22. The price elasticity of demand is % Q D a. % P % Q D b. % P % P c. % Q D % P d. % Q D 5
Name Recitation section number Section 2: Definitions (3 points each) Give the definition of the following three terms in the space provided. comparative advantage complements indifference curve 6
Section 3: Short Answer Name Answer all parts of the following questions in the space provided. Recitation section number hockey pucks basketballs (4 points) a) The price of a basketball is $6.00. The price of a hockey puck is $3.00. Otto s income is $120.00. Draw a budget line for Otto on the above diagram. (4 points) b) Suppose the price of hockey pucks increases to $4.00. Draw a new budget line on the above diagram to show this. Make sure you label which budget line is for part b. (8 points) c) Hockey pucks and basketballs are NOT Giffen goods. After the price change Otto consumes more basketballs. Draw indifference curves on the diagram. Label the bundle Otto would choose before the price change as point A. Label the bundle Otto would choose after the price change as point B. (3 points) d) Will Otto consume more or fewer hockey pucks after the price change? Explain. (6 points) e) What must be true for Otto to increase his consumption of basketballs? Explain. 7