Name____Answer Key______________ B-Number__________________Section_01 - 14___

Econ 162-A1, A2 Kenny Christianson

Spring 2015 February 27, 2015

MIDTERM EXAMINATION NUMBER ONE (A)

PART I MULTIPLE CHOICE (30 points)

Choose the single best answer by circling the appropriate letter.

1. Economics is best described as

a. the study of business decision-making.
b. the study of choices that arise from scarcity.
c. the study of markets.
d. the study of resources.
e. the study of supply and demand.

2. Capital
a. is the physical tools, plant, equipment and machinery used in production.
b. has a return known as interest.
c. helps to contribute to economic growth.
d. is purchased when firms make investment expenditures.
e. all of the above.

3. To study the world, economists use a process of

a. model-building.
b. elimination.
c. including as many explanatory variables as possible.
d. scientific deduction.
e. none of the above.

4. For an economy as a whole, the PPC is concave (bowed away from the origin) due to
a. the fact that resources are all the same.
b. constant opportunity costs.
c. the law of demand.
d. the law of increasing costs.
e. the principle of comparative advantage.

5. Which of the following will lead to an increase in the price of peanut butter?
a. a decrease in the price of jelly (a complement).
b. an increase in the price of cashew butter (a substitute).
c. an increase in the price of peanuts (an ingredient).
d. a peanut butter factory burns to the ground.
e. all of the above.
Econ 162-A1, A2 Spring 2015 Midterm Examination One 2

6. Which of the following is not a determinant of supply in a market?

a. resource prices
b. the number of firms
c. business expectations
d. the population of consumers
e. technology

7. An increase in demand in a market

a. leads to a decrease in price and quantity.
b. leads to a decrease in price and an increase in quantity.
c. leads to an increase in price and quantity.
d. leads to an increase in price and a decrease in quality.
e. has no effect on price and quantity.

8. A price floor on the market for soybeans

a. creates a surplus in the market for soybeans.
b. creates a shortage in the market for soybeans.
c. is effective only when the price floor is set below the equilibrium price.
d. leads to a situation where the quantity demanded exceeds the quantity supplied.
e. both a) and c).

9. Which of the following statements is false?

a. The four fundamental economic questions include what and how much to produce,
how to produce, for whom to produce, and when to consume.
b. In the case of negative externalities, a private market provides too little of the good
compared to the social optimum.
c. Adam Smith wrote the Wealth of Nations in 1776.
d. Monopolists raise the price of their product by restricting output.
e. Politicians tend to be myopic.

10. Which of the following is an example of a public good?

a. national defense
b. roads and bridges
c. a local playground
d. a lighthouse
e. all of the above
Econ 162-A1, A2 Spring 2015 Midterm Examination One 3

PART II TRUE-FALSE AND EXPLAIN (25 points)

State whether each of the following five statements is true or false (@ 2
points each) and then briefly explain why you gave the answer that you
did (@ 3 points each). Use graphs where appropriate, and you may use
the back of the page if necessary.

1. The opportunity costs of going to college tend to decline as one gets older.

False – as one gets older, the opportunity costs of foregone wages and time spent with family
will increase.

2. Suppose that the economy of Workland has a PPC with agricultural products on the vertical
axis and manufactured products on the horizontal axis. In this case immigration will increase the
horizontal intercept but the vertical intercept remains unchanged.

False – With immigration, both intercepts will increase.

3. If both the supply and demand for petroleum fall, then the price will fall but the effect on
quantity is indeterminate.

False – If both supply and demand decrease, then we know the qu8antity will decrease but the
effect on price is indeterminate.

4. Three types of economic systems include socialism, communism and capitalism.

False – They include traditional economies, command and control economies, and market
economies.

5. A market will become safer when the government makes that market illegal. (Provide three
examples for full credit).
False – on the supply side, profits increase, criminals have a comparative advantage in supplying
the good, potency increases, producers are not concerned with reputation or brand names, and
violence becomes the means of contract enforcement.
On the demand side, consumers lose information about the quality of products, and there is an
incentive to consume illegal products more intensively.
Econ 162-A1, A2 Spring 2015 Midterm Examination One 4

PART III PROBLEMS (45 points)

Answer each of the following three questions to the best of your abilities. Please
show all work, and be sure to answer each part of every question. Be sure to label
all axes and curves, and show numerical intercepts and intersection points where
ever possible. Partial credit will be given where appropriate. Use extra pages if
necessary.

1. Suppose that you open a restaurant that only serves chicken soup. You sell both cups of soup
and bowls of soup. A cup of soup is made up of 5 fluid ounces of soup. A bowl of soup
consists of 15 fluid ounces of soup. Suppose that you currently have a big pot of soup on the
stove that contains 300 fluid ounces of soup.
a. Draw the PPC for your restaurant. Put cups of soup on the vertical axis and bowls of
soup on the horizontal axis. (4 points)
b. On your graph, please show (i) an inefficient point, (ii) an efficient point, and (iii) an
unattainable point. (3 points)
c. What is the opportunity cost of one bowl of soup? (3 points)
d. Suppose that a delivery truck arrives with 150 more fluid ounces of soup. How does
your PPC change? Show both the old and new PPCs on a new graph. (4 points)
e. Now what is the opportunity cost of one bowl of soup? (1 point)

a. cups of soup 300/5 = 60

300/15 = 20
60
iii

ii
i PPC

20 bowls of soup

c. Opportunity cost of 1 bowl of soup = 60/20 = 3 cups of soup.

d. cups of soup
90

60

PPC PPC’

20 30 bowls of soup

e. The opportunity cost of one bowl of soup = 90/30 = 3 cups of soup still.
Econ 162-A1, A2 Spring 2015 Midterm Examination One 5

2. Suppose that the towns of Vestal and Johnson City both have two activities to perform. Their
Road Departments must plow snow and their Police Departments must issue tickets for speeding.
The maximum output of both towns, when all resources are devoted to that output, is shown by
the following table:

VESTAL JOHNSON CITY

Miles plowed per day 400 300

Tickets issued per day 400 100

a. Which town has an absolute advantage in snow plowing? Which town has an absolute
advantage in issuing speeding tickets? (2 points)
b. For Vestal, what is the opportunity cost of plowing one mile of snow? What is the
opportunity cost of issuing one ticket? (2 points)
c. . For Johnson City, what is the opportunity cost of plowing one mile of snow? What is the
opportunity cost of issuing one ticket? (2 points)
d. Should the towns specialize and trade? Why or why not? Which town should specialize in
which activity? (3 points)
e. If your answer to d) is yes, then use the PPC and CPC model to show that both towns are
better off if they specialize and trade. (6 points)

a. Vestal has an absolute advantage in both activities.

b. Vestal c. Johnson City
400M = 400T 300M = 100T
1M = 1T 1M = (1/3)T
1T = 1M 1T = 3M
d. Yes. Since Vestal has a lower opportunity cost in issuing tickets (1M v 3M), then Vestal
should specialize in tickets. Since Johnson City has a lower opportunity cost in miles plowed
((1/3)T v 1T), then Johnson City should specialize in snow plowing.
e. Both are willing to trade 1 ticket for 2 miles plowed, or 150 tickets for 300 miles plowed.

VESTAL JOHNSON CITY

M M

400 Johnson City starts here

300
300
CPC 300M

300M PPC Vestal starts here PPC CPC

100 250 400 T 100 150 T

150T 150T
Econ 162-A1, A2 Spring 2015 Midterm Examination One 6

3. Suppose that the market for Smartphones in the United States for a year is given by the
following equations:

Demand: P = 240 – 2Q
Supply: P = 80 + 2Q

a. Find the equilibrium price and quantity. (2 points)

b. Show graphically. (4 points)
c. Suppose that due to technological change, the supply of Smartphones increases to

Supply’: P = 40 + 2Q.

At the original equilibrium price, is there a shortage or a surplus? (1 point) Of how much? (1
point). Show on a new graph. (2 points).
d. Once the supply increases, what is the new equilibrium price and quantity? (2 points) Show
on your graph from c). (3 points)

a. 240 – 2Q = 80 + 2Q P* = 240 – 2(40) = 160

-4Q = -160 P* = 80 + 2(40) = 160 (check)
Q* = 40
b. P
S
240
S’

160
140

80

40 surplus = 20 D

40 50 60 120 Q

c. 160 = 40 + 2Q At a price of $160, the quantity demanded is still 40, but now the quantity
-2Q = 120 supplied is equal to 60. So there is a surplus = 60 – 40 = 20.
Qs = 60

d. 240 – 2Q = 40 + 2Q P* = 240 – 2(50) = 140

-4Q = -200 P* = 40 + 2(50) = 140 (check)
Q* = 50

Congratulations!
You’ve survived your first macroeconomics exam!