ECO201PrinciplesofMicroeconomics

SampleMidterm1Examination
October31st,2013(Fall2013)
Please Print Clearly
Section ____
Last Name _____________________________ First Name ______________________________ ID# __________________
Instructor:PauloGuimaraes

Instructions
1. Yourexamconsistsoftwoproblemsand25multiplechoicequestions.
2. Eachproblemaccountsfor25pointswith2pointsforeachmultiplechoice.
3. Youmustwriteyouranswerstotheproblemsinthespaceprovided.
4. Youmustturnoffyourcellphoneandkeepitoutofsight
5. On your table you are only allowed a blank piece of paper, pencil or pen and a standard
calculator.
THEEXAMINATIONPAPERMUSTBERETURNED

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Question1(25points)

Case1)Consideracountrywhichproducesonlyagriculturalgoodsandmilitarygoods.Bothgoodsuse
capitalandlaborasproductioninputs,however,theagriculturalgoodsareassumedtobemorelabor
intensive.Usingtwoseparategraphs(oneforeachquestion),drawtheoriginalproductionpossibility
frontier(militarygoodsonthehorizontalaxis,agriculturalgoodsontheverticalaxis)andillustrateeach
ofthefollowingsituations:

a) Thecountryexperienceslargeincreasesinimmigration

b) thereisatechnologicalimprovementintheproductionofmilitarygoodsonly

Case2)Considernowthemarketforagriculturalproductsanduseanadequategraphicalrepresentation
toillustratewhathappenstopriceandquantityinthefollowingsituationsdescribedbelow.Please
makesurethatyourgraphsarelabeledandthatthebeforeandaftersituationsareproperly
identified.

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c) duetoexceptionalconditionsthenumberoffarmersandcultivatedfarmlandincreases

d) Thegovernmentlowersincometaxesandallbuyershavehigherincome

e) Thepriceofimportedbeefgoesup

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Question2(25points)

Inonemonth,arestaurantsold3,500personalpizzasat$3.50perpizza.Duetoanincreaseintheprice
of a key pizza ingredient the restaurant increased the price of pizza by 20%. As a result of this price
changethetotalpizzarevenueforthenextmonthincreasedto$13,440.However,theincreaseinthe
priceofpizzaledtoadeclineonthemonthlysalesofsodawhichdecreasedfrom3,500cansto3,000
cans.

a) Findthepriceelasticityofdemandforthechangeinpricediscussedabove

b) Writeuptheexpressionforthepizzademandcurveofthisrestaurant

c) Whatpriceforpizzashouldtherestaurantselectifitwantedtomaximizetotalpizzarevenue?

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d) Findthecrosspriceelasticityofsodawithrespecttopizza

e) Knowingthatthesupplycurveforpizzaatthisrestaurantisgivenbyastraightlineandthatattheprice
of0therestaurantwillnotsupplyanypizzacalculatethepriceelasticityofsupplyforpizza

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Multiple Choice Questions (2 points each)

1. Which of the following factors would not contribute to increasing an existing comparative
advantage?
A. Efficiency improvements due to learning.
B. Less time lost by switching tasks.
C. Productivity improvements from greater experience.
D. Import restrictions.
This table shows demand for shoes in a 3 consumer market:

2. The data suggest that

A. Rachid prefers shoes to other items Rachid buys.
B. Rachidhas lower income than Younes or Fawzi.
C. Rachid has higher income than Younes or Fawzi.
D. Younes's demand for shoes is less than Rachid's.

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This graph describes the production possibilities on the island of Genovia:

3. The opportunity cost of producing one ton of agricultural products in Genovia is

A. 1 fewer car.
B. 1/50 fewer car.
C. 1/5 fewer car.
D. 1,000 fewer cars.
4. Which of the following is NOT a determinant of demand for gasoline?
A. The price of automobiles.
B. The price of gasoline.
C. The price of diesel.
D. The quantity of gasoline supplied.
5. When a government increases the cost of international trade, it is
A. keeping all domestic prices artificially low.
B. reducing the total amount of output available to domestic consumers.
C. helping domestic consumers.
D. hurting all domestic producers.
6. "Holding all other relevant factors constant, consumers will purchase more of a good as the
price falls." This statement reflects the behavior underlying
A. a decrease in the demand curve.
B. the supply curve.
C. an increase in demand.
D. the demand curve.

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7. Economic surplus is
A. the price paid to take an action.
B. the benefit gained by taking an action.
C. the wage someone would have to earn in order to take an action.
D. the difference between the benefit gained and the cost incurred of taking an action.
8. The marginal benefit of an activity is the
A. extra benefit associated with an extra unit of the activity.
B. same as the total benefits of the activity.
C. total benefit divided by the level of the activity.
D. total benefit associated with an extra unit of the activity.
9. Samia saw a pair of jeans that she was willing to buy for $35. The price tag, though, said they
were $29.99. Therefore,
A. Samia should buy the jeans because the price is less than her reservation price.
B. Samia should not buy the jeans because the price is not equal to her reservation price.
C. Samia should buy the jeans because the price is more than her reservation price.
D. Samia should not buy the jeans because they will be of lower quality than she expected.
10. If the elasticity of demand for your favorite singer's CD is 1.4, this means
A. a 1% increase in the price leads to a 14% reduction in quantity demanded.
B. a 10% decrease in the price leads to a 140% increase in quantity demanded.
C. few substitutes exist.
D. a 5% increase in the price leads to a 7% decrease in quantity demanded.
11. Suppose one knows two facts: first, the market for prescription drugs experiences chronic
shortages and second, government sets the price for prescription drugs. One can conclude that
the
A. buyers are hoarding prescription drugs.
B. government has set the price above the equilibrium price.
C. government has set the price below the equilibrium price.
D. government has set the price too high.

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12. You have noticed that there is a persistent shortage of teachers in an inner-city school district
in your city. Based on this observation, you suspect that
A. There is an excess supply of teachers.
B. The reservation price among teachers is lower than for other professions.
C. The wage for teachers at those schools is higher than at other schools in the city.
D. The wage for teachers at those schools is lower than the equilibrium wage.
13. The key to resolving the apparent paradox of international trade increasing total output yet
facing much political opposition is noting that
A. only the wealthy benefit from trade.
B. no one benefits from trade.
C. everyone does not benefit equally from trade.
D. economists are mistaken about the increase in output.
Karim and Hamid live together and share household chores. They like to cook some meals
ahead and eat leftovers. Suppose that in one hour Karim and Hamid can do the following:

14. Hamid and Karim have worked out an efficient arrangement. Under that arrangement,
A. Karim spends all of his time on cleaning, while Hamid does all the cooking
B. Hamid spends all of his time on cleaning, while Karim does all the cooking.
C. Karim does all of the cleaning and half of the cooking.
D. Hamid and Karim each spend a half hour on cooking and a half hour on cleaning.

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15. In Cuba, a bureaucratic committee makes the production decisions for the country's firms and
factories. Therefore Cuba is an example of a
A. capitalist economy.
B. mixed economy.
C. centralized economy.
D. pure free-market economy.
Point A on a linear production possibilities curve represents a combination of 12 coffees and 3
cappuccinos, and point B represents 3 coffees and 6 cappuccinos. Suppose coffees are on the
vertical axis and cappuccinos are on the horizontal axis.
16. The opportunity cost of a cup of coffee is
A. 9 cappuccinos
B. 3 cappuccinos
C. 1/3 of a cappuccino
D. 6 cappuccinos
Jaafar is trying to decide how to divide his time between his job as a stocker in the local grocery
store, which pays $7/hr for as many hours as he chooses to work, and cleaning windows for the
businesses in downtown. He makes $2 for every window he cleans. Jaafar is indifferent between
the two tasks, and the number of windows he can clean depends on how many hours he cleans a
day, as shown in the table below:
Cleaning time (hr/day) Total number of windows cleaned
0
0
1
7
2
11
3
14
4
16
5
17
17. What is the smallest amount of money per window cleaned that would induce Jaafar to spend
at least one hour per day cleaning?
A. $2
B. $7
C. $1
D. $3

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You own a pizza shop called "Pizza's' Us". Currently you are paying your cooks an hourly wage
of $20. You sell a medium pizza for $10 a pie. By hiring more cooks, you can increase your
pizza production as shown in the following table.

18. How many cooks should you hire to maximize your net benefit?
A. 5
B. 3
C. 4
D. 1
19. If cross price elasticity is positive but less than one, the two goods are
A. complements.
B. inelastically demanded.
C. substitutes.
D. normal.
20. Suppose that the demand for electricity has been found to be inelastic. The most likely
explanation for this finding is
A. the fraction of income spent on electricity is trivial.
B. electricity is no longer a luxury commodity.
C. few substitutes exist for electricity.
D. electricity is a monopoly market.

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21. If both supply and demand decrease simultaneously, the new equilibrium price is
___________ and the new equilibrium quantity is _________________.
A. lower; lower
B. indeterminate; lower
C. indeterminate; higher
D. lower; indeterminate

22. Refer to the figure above. Suppose this demand curve shows the demand at one coffee shop
that currently charges $2.00 for a latte. The manager wants to increase its total revenues. What
should the manager do?
A. Increase the price from $2.00 to $2.50.
B. Reduce the price from $2.00 to $1.00.
C. Reduce the price from $2.00 to $1.75
D. Increase the price from $2.00 to $3.00.

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Mustafa divides his time between studying Physics and studying Economics. He has discovered
that he can earn grades as shown on this production possibilities curve.

23. If Mustafa moved from Point A to Point C, his grade in Physics would go down by ______
his grade in economics.
A. less than the increase in
B. less than the decrease in
C. more than the increase in
D. more than the decrease in

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24. Refer to the figure above. What is the seller's reservation price when producing 250 units?
A. $8
B. $2
C. $4
D. $14
25. If most consumer goods and services are ______, then most income elasticities are ______.
A. inferior; positive
B. normal; greater than one
C. normal; positive
D. normal; negative

ECO201PauloGuimaraes