IS and Econ 13 - First Midterm Examination Answers (correct answer starred “*”)

S. Skaperdas – January 28, 2015 Version A

Fill in your scantron, INCLUDING YOUR VERSION (A). There are 35 questions in the exam. Questions 1-25 are worth 1 point each. Questions 26-35 are worth 2 points each. 1. Suppose that, at a particular price, quantity demanded is 300 and quantity supplied is 500. Then, we should expect the price in this market to

a. Go up because there is excess demand. b. Go down because there is excess

supply.* c. Go up because there is excess supply. d. Stay the same. e. Go up or down, depending on whether

there is excess supply or excess demand.

2. Which of the following factors cause a movement along the demand curve? a. change in the price of related goods. b. change in the population. c. change in income. d. change in the price of the good.* e. a and d. 3. In 2013, which one of the following countries had the highest GNI per capita (at PPP)?

a. Bangladesh. b. Nigeria. c. Indonesia. d. India. e. Qatar.*

4. In 19th century U.S. the largest industry was

a. Automobiles b. Electricity generation c. Railroads* d. Computer electronics e. The internet.

5. Which one of the following is NOT a characteristic of the SECOND industrial revolution:

a. The spread of serfdom.* b. Growth of joint-stock companies or

corporations. c. High level of division of labor. d. Vertical integration of economic

activity.

e. Growth of bureaucracies. 6. A point outside a production possibilities frontier

a. indicates that some resources are unemployed.

b. is worse than points on the production possibilities frontier.

c. implies that too much capital and not enough labor are used.

d. is unattainable for production purposes.*

e. None of the above. 7. A decrease in incomes a. shifts the demand curve to the right. b. shifts the demand curve to the left.* c. causes a movement along the demand curve. d. implies no change in the demand curve.

e.causes a movement along the Supply curve.

8. Positive economics refers to a. analyses that try to understand how the economy actually works.* b. the positive reinforcement that the media can employ to pump up the economy. c. the positive feelings that firms can induce for the good of the economy. d. a and b. e. b and c. 9. Modern economic growth is correlated

a. with the gradual reduction of the public sector as a share of GDP.

b. with an increase in the size of the public sector.*

c. with a reduction in regulation and other government interference in business.

d. a and c. e. All of the above.

10. According to Jared Diamond in Guns, Germs, and Steel, the most dominant civilizations emerged in Eurasia because

a. the people were on average smarter there.

b. there were fewer animals and plants that were available for domestication there.

c. the propagation of agriculture along an East-West axis was easier.*

d. Eurasians were better hunters and gatherers.

e. c and d.

Consider two countries, Gaia and Virtualia, and suppose that each can produce just two goods, corn and virtual reality machines (VRMs). Their production possibilities are described below:

Gaia Virtualia Corn VRMs Corn VRMs 300 0 150 0 200 50 100 100 100 100 50 200 0 150 0 300 Use this information to answer questions 11-17. . 11. The opportunity cost of one unit of corn in Gaia is

a. 100 VRMs. b. 200 VRMs c. 2 VRMs. d. 1 VRM. e. ½ VRM.*

12. The opportunity cost of one unit of corn in Virtualia is

a. 2 VRMs.* b. ½ VRMs c. 100 VRMs. d. 200 VRMs. e. 600 VRMs.

13. The opportunity cost of one VRM in Gaia is

a. 100 units of corn. b. 2 units of corn.* c. 1 unit of corn. d. ½ units of corn. e. 200 units of corn.

14. The following statement is true:

a. Virtualia has an absolute advantage (“AA”) in the production of VRMs.

b. Virtualia has and AA in corn production.

c. Gaia has an AA in VRM production. d. b and c. e. Absolute advantage cannot be

determined from the information provided.*

15. The following statement is true: a. Gaia has a comparative advantage

(“CA”) in VRM production. b. Gaia has CA in corn production.* c. Virtualia has CA in both VRM and

corn. d. Virtualia has a CA in corn production. e. Comparative advantage cannot be

determined from the information provided.

Now suppose that VRMs can be used for electronic warfare and for each country to defend itself against the other (either under autarky or under trade), it needs to produce 50 VRMs and solely dedicate them to “defense.” Questions 16 and 17 apply to this new situation but with the same production possibilities in the previous table. 16. The maximum amount of corn that Gaia can produce for consumption or trade is

a. 200* b. 150 c. 100 d. 50 e. 0

17. The maximum amount of VRMs that Virtualia can produce for consumption or trade is

a. 300 b. 250* c. 200 d. 150 e. 100

18. An increase in the cost of producing a good a. shifts the demand curve to the right. b. shifts the demand curve to the left. c. causes a movement along the demand curve. d. implies no change in the demand curve.*

e. causes a movement along the supply curve.

19. During the Great Recession sales of new cars went down by almost 40% while their prices slightly decreased. This fact can best be explained by

a. a reduction in the demand for new cars.* b. an increase in the demand for new cars. c. a reduction in the supply of new cars. d. an increase in the supply of new cars. e. b and c.

20. Suppose the demand for Ipads is downward sloping and supply is upward sloping. If Ipads become cheaper to produce a. the demand for Ipads shifts to the left. b. the demand and supply of Ipads both shift c. the demand for Ipads shifts to the right. d. the supply of Ipads shifts.* e. none of the above

Suppose that each of Xena and Robinson face the choice between, on the one hand, Not Arming and Specializing in Production (with the intention to Trade) and, on the other hand, Arming with the intention of remaining autarkic. Denote the first “strategy” by N and the second by A. The matrix of possible outcomes is then as follows:

Xena N A Robinson N (No

arming) Robinson obtains: (5coconuts, 10 fish); Xena obtains (10 coconuts, 5 fish)

Robinson obtains: (0coconuts, 0 fish); Xena obtains (15 coconuts, 20 fish)

A (Arming)

Robinson obtains: (20 coconuts, 10 fish); Xena obtains (0 coconuts, 0 fish)

Robinson obtains: (2 coconuts, 6 fish); Xena obtains (7 coconuts, 4 fish)

21. If Robinson were to pursue his self-interest, he would choose:

a. N b. A* c. Sometimes N and sometimes A. d. Can never be determined from the

information provided. 22. If Xena were to pursue her self-interest, she would choose:

a. N b. A* c. Sometimes N and sometimes A. d. Can never be determined from the

information provided. 23. If Robinson and Xena were each to pursue their own self-interest, the outcome that will occur is

a. N for Robinson and N for Xena b. N for Robinson and A for Xena c. A for Robinson and N for Xena d. A for Robinson and A for Xena* e. Can never be determined from the

information provided.

24. The collectively rational outcome is for a. N for Robinson and N for Xena* b. N for Robinson and A for Xena c. A for Robinson and N for Xena d. A for Robinson and A for Xena e. Can never be determined from the

information provided. 25. The Industrial Revolution began in

a. The United States. b. France. c. Japan. d. Scandinavia e. Great Britain.*

(Note that questions 26-35 are worth 2 points each.) 26. Economic growth can be represented by a. a movement along the Production Possibilities Frontier (PPF). b. an inward (down and left) shift of the PPF. c. a downward shift in the demand curve. d. an outward expansion of the PPF.* e. c and d. 27. The province of Shanghai in China has about the same life expectancy and per capita income as

a. Bangladesh. b. India. c. Ghana. d. the rest of China. e. Italy.*

28. Suppose that to produce 10 pounds of rice in Japan requires 2 hours of labor, whereas in the U.S. it requires 1 hour of labor. As a result, we can conclude that

a. Japan has a comparative advantage (“CA”) in producing rice.

b. The U.S. has the absolute advantage in producing rice.*

c. Japan has the absolute advantage in producing rice.

d. The U.S. has a CA in producing rice. e. None of the above

29. David Ricardo, a British political economist of the 19th century, used the production of wine and cloth in Britain and Portugal to illustrate the idea of comparative advantage. In his classic example, the unit labor costs of production (i.e., how much labor it takes to production one unit of output) of these two goods in these two countries are Cloth Wine Britain 100 110 Portugal 90 80 According to these numbers, which of the following statements is correct? a. Britain has comparative advantage in producing wine. b. Britain has absolute advantage in producing wine. c. Portugal has absolute advantage in producing wine.* d. Portugal has comparative advantage in producing cloth. e. Neither comparative advantage nor absolute advantage can be determined by the information provided. 30. Corporations a. were the main form of firm organization since the beginning of the industrial revolution. b. became the dominant form of firm organization in the US in the late 19th century.* c. have always been the most efficient form of firm organization. d. arose in the late Middle ages and have been dominant since then. e. a and c. 31. There are more people on earth a. living on less than $1 a day than those living on less than $2 a day. b. living on less $2 a day than those living in high-income countries (as defined by the World Bank).* c. living in high-income than those living in middle-income. d. living in high-income countries than those living on less than $2 a day. e. living in high-income countries than those living in middle and low-income countries.

32. Consider the market for the Samsung Galaxy Note II. Samsung has started an effective advertising campaign for its product and more segments of the population consider it a “cool” product. At the same time, improvements in production techniques imply that the Note II is not becoming more expensive to produce. Which of the following MUST be true?

a. The equilibrium quantity will rise.* b. The equilibrium quantity will fall. c. The equilibrium price will fall. d. The equilibrium price will rise. e. Neither the equilibrium price nor

quantity will be affected. 33. Adam Smith

a. argued in favor of corporations as the most efficient form of firm organization.

b. considered the corporate form of firm organization critical for the success of the industrial revolution.

c. considered the corporate form of firm organization too immature for the nineteenth century economy.

d. argued against corporations because of the intractable problems inherent in the separation of ownership from management.*

e. a and b. 34. When the price of oil decreases, the price of jet fuel decreases and we can expect a. a shift to the left in the supply curve of air travel and higher airfares. b. a shift to the right in the demand curve for air travel and lower airfares. c. a shift to the left in the demand curve for air travel and higher airfares. d. a shift to the right in the demand curve for air travel and higher airfares. e. a shift to the right in the supply curve of air travel and lower airfares.* 35. The military superiority of European states over the rest of the world since the 15th century could ultimately be attributed to a. the philosophers of ancient Greece and Rome. b. their economies being more advanced than China in the 15th century. c. solely to the industrial revolution. d. advances in military technology induced by the considerable internal political fragmentation of Europe.* e. b and c.