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Multiple Choice (40 points)

Write down on your answer sheet your answer for each question. There is only one correct answer for each question. Each question is worth two points. 1. The production possibilities curve shows: A. B. the relationship between inputs and output the minimum amount of one good that can be produced for every possible production level of the other good. a positive relationship the maximum production of one good for every possible production level of the other good. how increasing the production of one good allows production of the other good to also increase.

C. D.

E.

2. If P is the price of a good and Q is the quantity demanded of a good at that price, then the correct mathematical statement of the price elasticity of demand is: A. B. C. D. E.
P P Q Q Q Q P P

P Q Q P
P P

3. If the price of shoes decreases and, as a result, the demand for shirts increases, then: A. B. C. D. E. shoes and shirts are complements. shoes are a normal good, shirts are inferior. shoes and shirts are substitutes. shirts are a normal good, shoes are inferior. both are normal goods.

4. To say that an individual possesses an absolute advantage in the production of software means that: A. B. he has a lower opportunity cost of producing software. he can produce more, and/or higher quality, software in a given amount of time. he was the rst to create the software. he charges the lowest price for software. he has the most capital.

C. D. E.

5. The short-run price elasticity of demand for electricity is likely to be (blank) the long-run price elasticity of demand because (blank). A. more elastic than; in the long run the price goes back to normal. just as elastic; its still the same product. less elastic; in the long run consumers have more ways to adjust their spending. more elastic; in the end, consumers always need the same amount of electricity. unclear in how it relates to; it depends on how big the shifts in supply are.

B. C.

D.

E.

6. If consumers completely cease purchasing a product when its price increases by any amount, demand is classied as being: A. B. C. D. E. inelastic. perfectly inelastic. unit elastic. perfectly elastic. elastic.

7. A price elasticity of demand of 0.6 means that a: A. 10 percent increase in the price results in a 6 percent increase in quantity demanded. 6 percent increase in the price results in a 6 percent decrease in the quantity demanded. 10 percent increase in the price results in a 6 percent decrease in demand. 10 percent increase in the price results in a 6 percent decrease in quantity demanded. 10 percent increase in the price results in a 6 percent increase in demand.

B.

C.

D.

E.

8. To say some person has a comparative advantage in the writing of an economics textbook means that: A. B. C. D. E. she can write a textbook faster than anyone else. she has the best word processing technology. her book will have more features. her book will be the easiest to read. she has a low opportunity cost of writing an economics textbook.

9. If the production possibilities curve for two goods A and B is bowed outward (concave), it means that: A. B. theres only a certain amount of each good available. workers get tired after a while and arent as productive anymore. production technology improves over time. there is decreasing marginal productivity in the production of each good. nobody would want to consume only good A or only good B.

C. D.

E.

For questions 10-13, refer to the following table: Jenny Sam Shoes per hour 3 4 Pants per hour 2 3

10. Sams opportunity cost of producing an extra pair of pants is: A. B. C. D. E. 1 pair of shoes.
5 4 4 5 4 3 3 2

pairs of shoes. pairs of shoes. pairs of shoes. pairs of shoes.

11. Jennys opportunity cost of producing an extra pair of pants is: A. B. C. D. E. 1 pair of shoes.
3 2

pairs of shoes.

2 pairs of shoes.
5 2

pairs of shoes.

3 pairs of shoes.

12. The comparative advantage for shoes belongs to (blank). The comparative advantage for pants belongs to (blank). A. Sam; Jenny. B. C. D. E. Sam; Sam. Jenny; Sam. Jenny; Jenny. both; Sam.

13. Jenny has an absolute advantage in: A. B. C. D. E. the production of shoes. neither shoes nor pants production. the production of pants. both shoe and pants production. pants and possibly shoe production.

For questions 14-17, assume that QS = 2 P and QD = 10 P . 3 14. At a price of $10, the quantity demanded is: A. B. C. D. E. 0 units. 2 units. 4 units. 6 units. 8 units.

15. Equilibrium price and quantity in this market are: A. B. C. D. E. $10 and 0 units. $8 and 6 units. $6 and 4 units. $4 and 6 units. $2 and 8 units.

16. At a price of $9, the market will experience (blank) in the amount of (blank) units. A. B. C. D. E. excess demand; 1 excess supply; 6 excess supply; 4 excess demand; 5 excess supply; 5

17. If the government instituted a price ceiling of $7.50, what would happen? A. B. C. D. E. demand would shift in. nothing. there would be excess supply. there would be excess demand. supply would become more elastic.

18. For a given quantity supplied on the supply curve, the price tells you: A. B. C. D. E. the price a monopolist could charge. the reservation price of the marginal buyer. the average cost of the average seller. the marginal cost of the marginal seller. the price oor.

19. Price elasticity of demand is equal to one at: A. B. C. the midpoint of a linear demand curve. the midpoint of any demand curve. the point where the demand curve intersects the price axis. the point where the demand curve intersects the quantity axis. the point where demand intersects supply.

D.

E.

20. Suppose that the price elasticity of demand is greater than one, and the price of a good increases. Consumer expenditure on the good will: A. B. C. D. E. increase. decrease. stay the same. its impossible to say. increase if the good is a normal good, decrease if the good is an inferior good.

Short Answer (40 points)

Answer each question in the space alloted on your answer sheet. 1. Consider the market for baseball bats. a. (3 points) Create a graph with the price of baseball bats on the Y-axis and the quantity of baseball bats on the X-axis. Plot the supply and demand curves for baseball bats. Be sure to label which is which. Indicate also the equilibrium price (P*) and quantity (Q*) of baseball bats. b. (6 points) Suppose that there is a tree disease that makes ash, a wood commonly used to make baseball bats, more expensive. Show what eect this has on the market for baseball bats. If the equilibrium changes, indicate the new equilibrium price (P ) and quantity (Q ) for baseball bats. c. (6 points) Suppose that following the tree disease, the price of baseball gloves increases. Show on the same graph you used for part b what eect this has on the market for baseball bats. If the equilibrium changes, indicate the new equilibrium price (P ) and quantity (Q ) for baseball bats. State any assumptions you use. d. (5 points) Is this nal equilibrium price P higher or lower than the original equilibrium price P*, or is it impossible to say? Explain briey.

2. Suppose Adam and Bill live on a desert island that has coconuts and sh. They are able to gather these items according to the following table: Coconuts per hour Fish per hour Adam 10 20 30 30 Bill Assume that they each work 5 hours a day. a. (5 points) Who has the comparative advantage in sh? Who has the absolute advantage in sh? b. (7 points) Graph Adam and Bills joint production possibilities curve. Label important points and slopes. c. (8 points) Can Adam and Bill benet from trade? If so, describe one consumption prole (a number of coconuts and sh for Adam, a number of coconuts and sh for Bill) that they can achieve through specialization and trade that they cannot achieve on their own.

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