key 162 total points all multiple choice 1.5 pts...

EC201 – Fall 2017 Midterm Exam - Jenkins

1

KEY 162 Total Points

All Multiple Choice – 1.5 pts each

1) Economists assume that rational people do all of the following except 1) __D____

A) use all available information as they act to achieve their goals.

B) respond to economic incentives.

C) weigh the benefits and costs of all possible alternative actions.

D) minimize their opportunity costs.

2) Which of the following generates productive efficiency? 2) __A____

A) competition among sellers

B) competition among buyers

C) government inspectors

D) government production rules and regulations

3) The basic economic problem of ________ has always existed and will continue to exist. 3) __C____

A) inflation

B) efficiency

C) scarcity

D) recession

4) Economists reason that the optimal decision is to continue any activity up to the point 4) __D____

where the

A) marginal benefit is zero.

B) marginal benefit is greater than the marginal cost.

C) marginal cost is zero.

D) marginal benefit equals the marginal cost.

5) Which of the following is not an example of an economic trade-off that a firm faces? 5) __C____

A) whether it is cheaper to produce with more machines or with more workers

B) whether it makes sense to outsource the production of a good or service

C) whether or not consumers will buy its products

D) whether it should produce more of its product

6) The decision about what goods and services will be produced in a market economy 6) __D____

is made by

A) lawmakers in the government voting on what will be produced.

B) workers deciding to produce only what the boss says must be produced.

C) producers deciding what society wants most.

D) consumers and firms choosing which goods and services to buy or produce.

7) Economic models 7) __B____

A) make no assumptions in order to remain as accurate as possible.

B) are simplified versions of reality.

C) can not be used to analyze real-world issues.

D) magnify the complexity of economic issues in order to provide useful data.


2

8) Which of the following statements about opportunity cost is true? 8) __D____

A) A perfectly rational consumer is able to reduce her opportunity costs to zero.

B) Marginal analysis involves comparing the marginal benefits and opportunity costs of an action.

C) The most efficient opportunities have negative costs.

D) Opportunity cost is the highest-value alternative that must be given up to engage in an activity.

9) Which of the following is a positive economic statement? 9) __B____

A) The standard of living in the United States should be higher.

B) If the price of iPhones falls, a larger quantity of iPhones will be purchased.

C) The government should revamp the health care system.

D) The U.S. government should not have bailed out U.S. auto manufacturers.

10) Which of the following correctly describes the relationship between economic efficiency 10) __D___

and economic equity?

A) They are both automatically achieved in a free market economy.

B) They always call for opposite outcomes.

C) There is no conflict between the two goals.

D) There is often a trade-off between the two.

11) Which of the following is not a factor of production? 11) _C____

A) natural resources

B) labor

C) bank loan

D) capital

12) All of the following are critical functions of the government in facilitating 12) __C___

the operation of a market except

A) protecting private property.

B) enforcing property rights.

C) ensuring an equal distribution of income to all citizens.

D) enforcing contracts.

True or False -- 1 pt. each

13) In a mixed economy, the government decides how economic resources will be allocated. 13)_F_

14) Allocative efficiency is when a good or service is produced at the lowest possible cost. 14)_F

15) Microeconomics is the study of the economy as a whole. 15)_F_


3

Figure 1 is the production possibilities frontier (PPF) of a country producing two goods: paper and steel.

Questions 16-19.

16) Which of the following combinations (of steel and paper) is efficient? 16) _B____

A) Combinations V and Y

B) Combinations V, W, and X

C) Combination Y

D) Combinations V, W, X, and Y

17) Which of the following combinations could result from economic growth in the country? 17) _B____

A) Combinations V, W and X

B) Combination Z

C) Combination Y

D) Combinations V, W, X, and Z

18) If the economy is currently producing at point W, what is the opportunity cost of 18) __C___

moving to point X?

A) 3 million tons of steel

B) 19 million tons of steel

C) 5 million tons of paper

D) 9 million tons of paper

19) If the economy is currently producing at point Y, what is the opportunity cost of 19) __B___

moving to point W?

A) 2 million tons of steel

B) zero

C) 9 million tons of paper

D) 16 million tons of paper

V Z


4


20) Consumers and producers make all of the economic decisions in a market economy 20)_T_

21) The basis for trade is the presence of both absolute and comparative advantages 21)_F_

22) The two key groups that participate in markets are households and firms . 22)_T_

Definitions & Examples –

Provide a brief definition (2 pts) and relevant example (1 pt) for the following terms:

23) Substitutes – Goods that can serve the same purpose.

Ex. – Nike running shoes, Adidas running shoes

24) Negative externality – A cost that affects someone who is not directly involved in the

production or consumption of the good.

Ex. – CO2 emissions from coal-fired electricity plants contribute to global climate change


5

Figure 2 represents the market for Good X in Oregon. Questions 25-27.

25) An increase in Oregon’s population would be represented by a movement from 25) __C___

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.

26) Tastes change and consumers lose interest in Good X; this would 26) __D___

be represented by a movement from

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.

27) An increase in the price of a complement for Good X would be represented 27) __D___

by a movement from

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.

28) If the price of grapefruit rises, the substitution effect due to the price change will cause 28) __C___

A) a decrease in the demand for grapefruit.

B) a decrease in the demand for oranges, a substitute for grapefruit.

C) a decrease in the quantity of grapefruit demanded.

D) a decrease in the quantity of grapefruit supplied.


6

29) One would speak of a change in the quantity of a good supplied, rather than 29) __B___

a change in supply, if

A) supplier expectations about future prices change.

B) the price of the good changes.

C) the cost of producing the good changes.

D) prices of substitutes in production change.

30) In 2004, hurricanes damaged a large portion of Florida's orange crop. As a result 30) __C___

of this, many orange growers were not able to supply fruit to the market. If, following

the hurricane, the price remained at its pre-hurricane level, we would expect to see

A) a surplus of oranges.

B) the quantity demanded equal to the quantity supplied.

C) a shortage of oranges.

D) an increase in the demand for oranges.

Match each scenario with the appropriate diagram (may be used more than once)

– 1.5 pts each

31) The one taco restaurant in Corvallis has been doing great business, so two food carts 31) ___3___

in town begin to sell tacos as well.

32) In response to higher world prices for cherries, Aaron’s Unorthodox Orchards decides 32) __4____

to increase its output of cherries.

33) Prices for sedans decrease relative to SUVs, which causes General Motors to shift 33) ___1___

some of its productive capacity to produce more SUVs. Answer for supply of sedans.

34) A new economic forecast raises its expected economic growth rate for next year 34) __1____

and, as a result, the expected future price for oil increases.


7

Figure 3-4

Use Figure 3 to answer questions 35-38.

35) What is the equilibrium price and equilibrium quantity? 35) __C____

A) $25 and 500 C) $20 and 600

B) $20 and 500 D) $25 and 800

36) At a price of $10, how many units will be demanded and how many will be sold? 36) __D____

A) 200 demanded; 200 sold

B) 800 demanded; 600 sold

C) 600 demanded; 200 sold

D) 800 demanded; 200 sold

37) At a price of $25, there is a(n) _________ of ______ units. 37) __D____

A) surplus and 200

B) shortage and 600

C) equilibrium and 300

D) surplus and 300

38) If the current market price is $25, the market will achieve equilibrium by 38) __C____

A) a price increase, increasing the supply and decreasing the demand.

B) a price decrease, decreasing the supply and increasing the demand.

C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded.

D) a price increase, increasing the quantity supplied and decreasing the quantity demanded.


8

39) Apply your demand and supply analysis to the red wine market, given that:

(1) The high-profile fires in California have reduced the number of grapes available for the wine industry and

the price of wine grapes has increased

(2) New markets for red wine have opened in China and income in China is growing.

Complete the graph below showing the initial equilibrium quantity (Q1) and price (P1), any changes in the

supply and demand curves (S2, D2) and the equilibrium quantities and prices (Q2, P2) related to this scenario

(1 pt each).

a) Can we use this information to be certain whether the equilibrium quantity of red wine a) Yes No

will increase, decrease, or stay the same?

b) If Yes, how will the equilibrium quantity change? (Skip if No) b) ________

c) Can we use this information to be certain whether the equilibrium price of red wine c) Yes No

will increase, decrease, or stay the same?

d) If Yes, how will the equilibrium price change? (Skip if No) d) _Increase__

Price ($ per bottle)

Red Wine (bottles)

D1

S1

S2

D2

Q1 Q2

P2

P1


9

Consumer Willingness to Pay

Billy Bob $24

Jerry Lee 20

Daisy Mae 15

Leigh Anne 12

Jethro 7

The table above lists the highest prices five consumers are willing to pay for a country music concert

ticket.

40) If the price of one of the tickets is $18 40) _B____

A) Billy Bob and Leigh Anne will buy two tickets between them.

B) Jerry Lee will receive $2 of consumer surplus from buying one ticket.

C) Billy Bob and Daisy Mae receive a total of $16 of consumer surplus from buying one ticket each.

D) Daisy Mae, Leigh Anna, and Jethro will receive a total of $34 of consumer surplus since they will buy no

tickets.

41) Suppose price of a ticket is initially $25. Then, because ticket sales are slow, the price is 41) __C____

reduced from $25 to $10. Which of the following statements is accurate?

A) only three tickets will be sold.

B) consumer surplus decreases from $24 to $12.

C) consumer surplus increases from $0 to $31.

D) everyone will buy a ticket.

R-Hats-R-Huge

Marginal Cost

(dollars)

1st hat $24

2nd hat 30

3rd hat 38

4th hat 46

The table above lists the marginal cost of hats by R-Hats-R-Huge, a firm that specializes in making giant

hats.

42) If the market price of giant hats is $35, R-Hats-R-Huge will produce 42) __B____

A) 1 hat.

B) 2 hats.

C) 3 hats.

D) 4 hats.

43) If the market price of giants hats is $40 43) __C____

A) R-Hats-R-Huge will produce three hats.

B) producer surplus from the first hat is $40.

C) total producer surplus will equal $28.

D) there will be a surplus; as a result, the price will fall to $24.


10

Figure 4 shows the market for apartments in Salmon City. Recently, the government imposed rent

control at R0. Prior to the rent control going into effect, the equilibrium price was R*.

44) When R* was the price for apartments, what was the area that represented consumer surplus? 44) __B____

A) A + B + D

B) A + B + C

C) A + B + D + F

D) A + B + C + D + E + F

45) After the imposition of the ceiling, what is the area that represents the cost to apartment 45) _D_____

owners of supplying apartments?

A) F + G

B) G + H + J

C) F

D) G

46) With rent control, the quantity supplied is Q1. Suppose apartment owners ignore the 46) __B____

law and rent this quantity for the highest rent they can get. What is the highest rent they can get?

A) R* C) R0

B) R1 D) more than R1

47) What area represents the deadweight loss after the imposition of the ceiling? 47) __D____

A) G + H

B) J + H

C) C + E + J + H

D) C + E


11


48) The implementation of a price floor by the government typically leads to a 48) _F____

shortage of the product.

49) If social marginal cost is equal to private marginal cost, then the externality cannot 49) __F___

be mitigated by policy.

50) The possibility of private parties coming to an agreement that eliminates an externality 50) _T____

does not depend on who has the property rights.

51) In a competitive market equilibrium, marginal benefit and marginal cost are maximized. 51) _F____

52) Externalities affect consumers of goods whose production creates pollution. 52) __F___

53) Free riding occurs when an individual benefits from a good without paying for it. 53) __T___

54) Quasi-public goods are rival and nonexcludable. 54) __F___

55) If there is a positive externality in producing a product, then the market equilibrium price 55) __A___

A) is too high and equilibrium quantity is too low.

B) and equilibrium quantity are too low.

C) and equilibrium quantity are too high.

D) is too low and equilibrium quantity is too high.

56) Economists argue that the level of pollution should be 56) __C___

A) reduced completely to zero because by definition, it has a negative external effect.

B) ignored because there will always be pollution in the world.

C) reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of

pollution reduction to society.

D) best determined by experts who specialize in pollution studies

57) Private solutions to the problem of externalities are most likely when 57) __B___

A) government actively encourages these solutions.

B) transactions costs are low and the number of bargaining parties is small.

C) transactions costs are low and the number of bargaining parties is large.

D) transactions costs are low and the monetary damages to third parties are high.

58) Which of the following is a source of market failure? 58) __C___

A) unforeseen circumstances which leads to the bankruptcy of many firms

B) a lack of government intervention in a market

C) incomplete property rights or inability to enforce property rights

D) an inequitable income distribution


12

The graph above shows a market with a negative externality.

59) The private profit-maximizing quantity for the firm is 59) _B____

A) Qa. C) Qb - Qd.

B) Qb. D) Qd.

60) The deadweight loss due to the externality is represented by the area 60) _B____

A) abc. C) abd.

B) abf. D) ade.

61) If the government were to apply a Pigovian tax to bring about the efficient level 61) _C____

of production, what should the value of the tax be?

A) (Pf- Pb) per unit of output

B) (Pa- Pb) per unit of output

C) (Pa- Pc) per unit of output

D) Pa per unit of output

62) The cost of the negative externality should be 62) _C____

A) no larger than the marginal private cost

B) less than the subsidy for the inverse positive externality

C) equal to the amount of tax imposed by the government

D) equal to marginal benefits minus marginal costs


13

63) Haiti was once a heavily forested country. Today, 80 percent of Haiti's forests have 63) __B___

been cut down, primarily having been burned to create charcoal. The reduction in the number of

trees has led to devastating floods when it rains heavily. This is an example of

A) tragic externalities.

B) the tragedy of the commons.

C) human greed.

D) the consequences of not having a market economic system.

64) One difference between the demand for a private good and that for a public good is that 64) __A___

A) with a private good, each consumer chooses the quantity she wants to consume but

with a public good, each consumer chooses the price she is willing to pay for a fixed quantity.

B) the marginal benefit from consuming the last unit of a public good always exceeds the marginal benefit from

consuming the last unit of a private good because there are externalities in the consumption of the public good.

C) with a private good, each consumer receives different amounts of benefit from consuming the product but

with a public good, every consumer realizes the same amount of benefit from consuming the product.

D) with a private good, each consumer chooses the quantity she wants to consume but with a public good,

everyone consumes the same quantity.

65) Match term in Column A with the most appropriate one in Column B. (1 pt. each)

Column A Column B Answer

National defense A. Network Externality _D___

Flu vaccine B. Inferior Good _E___

Ramen noodles C. Complements _B___

Private Good D. Public Good _F___

Tuna in ocean (outside

national boundaries) E. Positive Externality _H___

Facebook F. Excludable & Rival _A___

Chips & salsa G. Excludable & Nonrival _C___

Toll Road H. Common Resource _G___


14

Cinder Flounder

Fish/Week Mice/Week Fish/Week Mice/Week

0 8 0 15

2 6 1 12

4 4 2 9

6 2 3 6

8 0 4 3 5 0

66) Amazing cats and entrepreneurs Cinder and Flounder catch and consume the products fish and mice (per

week). The table above displays their respective production (and consumption) schedules. Initially, they do not

trade and Cinder produces/consumes 2 fish and 6 mice per week and Flounder 4 fish and 3 mice per week.

Flounder takes EC201 one term and then explains to Cinder that trading could be mutually beneficial. Cinder

and Flounder decide to specialize in the products they produce relatively better than the other. Then Cinder

trades 4 fish for 7 mice from Flounder. To help answer the questions, you might want make a table to track the

trading. (1.5 pts each)

Who has the absolute advantage in producing mice? __Flounder

What is Flounder’s opportunity cost for producing one mouse? __1/3 fish

Who has the comparative advantage in producing fish? ___Cinder

To engage in trade, in what product does Flounder specialize? ___Mice

After trading, how many fish does Flounder have? ____4

After trading, how many mice does Cinder have? ____7

In terms of fish and mice, what are the overall gains from trade (vs the initial situation)? __2 ___ fish

___6 __ mice

Cinder Flounder

Fish/Week Mice/Week Fish/Week Mice/Week

Prod./Consumption w/o trade 2 6 4 3

Production w/ trade (both specialize)

8 0 0 15

Consumption w/ trade 4 7 4 8

Gains from trade 2 1 0 5


15

67) Fill in the 2 blanks for the equation for the Midpoint Formula for price elasticity of demand. (1 pt)

(Q2 - __Q1___) (P2 – P1)

------------------- X 100 ÷ ------------------- X 100

(Q1 + Q2)/2 (P1 + P2)/__2__

68) Imagine you own a pizza parlor. Currently, you sell 2,000 slices per week for $5.00 per slice. Then you

reduce the price to $4.00 and you sell 3,000 slices the week after the price change. Find the price elasticity of

demand using the Midpoint Formula. Show work. (3 pts)

3000−20002000+3000

2

= 1000/2500 * 100 = 40% 40%

−22.2% = - 1.8

4−55+4

2

= -1/4.5 * 100 = -22.2%

69) A year later, you decide to increase the price per pizza slice from $4.00 back to $5.00 and, using the

resulting sales data, you find a price elasticity of demand of 2.5. What is the percentage change in quantity

demanded due to the price change? Show work as needed. (2 pts)

5−4

(4+5)/2 = 1/4.5 * 100 = 22.2%

PED = % Ch in Quantity Demanded / % Ch in Price

2.5 = X/22.2%

X = 2.5 * 22.2% = 55.5%

70) Using the price increase scenario in #69, you would expect total revenue for 70) __D__

selling pizza to

A) increase

B) stay the same

C) move in proportion to the price change

D) decrease

71) In the case where the demand for pizza is unit elastic, what would be the expected change 71) __B__

in revenues after a price decrease

A) increase

B) stay the same

C) total revenue changes in proportion to the price change

D) decrease


16

Price elasticity of demand for Product Z -0.66

Cross-price elasticity of demand b/w Product Z & Product Y 0.97

Cross-price elasticity of demand b/w Product Z & Product X -1.18

Cross-price elasticity of demand b/w Product Z & Product W -0.44

Income elasticity of demand for Product Z 0.15

72) Product Z is a(n) ___________ good and the demand for it is ___________ . 72) _C___

A) inferior; inelastic

B) normal; elastic

C) normal; inelastic

D) necessary; inelastic

73) Product Z and Product Y are _________ and Product X has a _________ relationship 73) __D___

with Product Z than Product W does.

A) substitutes; weaker

B) complements; stronger

C) complements; weaker

D) substitutes; stronger

74) Which of the following products comes closest to having a perfectly inelastic demand? 74) _B____

A) gasoline

B) cholesterol medication in general

C) iPhones

D) bus rides

75) Which of the following goods would have the most inelastic demand? 75) __B___

A) ski vacations

B) bread

C) luxury cars

D) Home theater system


17

76) In the figure above, as price falls from PA to PB, the quantity demanded increases 76) __C___

most along D1; therefore

A) D1 is unit elastic.

B) D1 is more inelastic than D2 or D3.

C) D1 is more elastic than D2 or D3

D) D1 is elastic at PA but inelastic at PB.

77) The demand for all carbonated beverages as a whole is likely to be ________ the demand 77) __C___

for Diet Pepsi.

A) more elastic than

B) perfectly elastic compared to

C) less elastic than

D) perfectly inelastic compared to

79) If the income elasticity of demand is 2.0 and income increases by 10%, what 79) __B___

would be the percentage change in quantity demanded?

A) 2% C) 1.2%

B) 20% D) 5%

80) In question 79, what kind of good is being demanded? 80) __C___

A) substitute C) normal and luxury

B) inferior D) normal and necessity


18

81) If a price decrease in Good Y leads to an increase in quantity demanded of good Z, then 81) __B___

we can conclude that the cross-price elasticity will be

A) positive and the goods are complements.

B) negative and the goods are complements.

C) positive and the goods are substitutes.

D) negative and the goods are substitutes.

82) Suppose the supply of bicycles is price elastic. This means that 82) __D___

A) consumers will respond significantly to an increase in the quantity of bicycles supplied.

B) suppliers will increase the quantity of bicycles supplied, but not immediately.

C) suppliers face many substitutes for bicycles.

D) suppliers will respond significantly to changes in the price of bicycles.


83) A horizontal supply curve means supply is perfectly elastic. 83) __T___

84) When supply is unit elastic, the price elasticity of supply equals 1. 84) __T___

85) If a consumer good is literally one-of-a-kind, you would expect demand to be 85) __T___

very inelastic.

86) The Atlantic article compares online sales to haggling because it offers the possibility 86) __T___

of retailers capturing more of consumers’ willingness to pay with fixed prices.

87) Online shoppers use Big Data and complex algorithms to track down great bargains. 87) __F___

88) Economists have shown that when the Ultimatum game experiment is carried out, 88) __T___

both allocators and recipients act as if fairness is important.

89) A common pitfall of consumers is that they are too realistic about the future behavior. 89) __F___

90) The supply curve for many products will be inelastic over a short period of time, but 90) __T___

increasingly elastic over longer periods of time.

91) Firms pay famous individuals to endorse their products because famous people only 91) __F___

consume high-quality products.


19

92) Identify the one statement that does not demonstrate how social effects influence 92) __A___

consumer choice.

A) Students in an Economics class are required to purchase a textbook assigned by the professor.

B) There is utility gained from consuming goods or services that others are consuming.

C) Some products that people consume are determined by the social popularity of the products.

D) Companies such as Zappos.com and Netflix invite their consumers to write reviews about their experience

with their products which are then posted on the internet for others to see.

93) What is the endowment effect? 93) __C___

A) the phenomenon that economic agents are endowed with different qualities and

abilities so that trade among individuals increase efficiency

B) the tendency for economic agents with abundant resources to consume a proportionately greater quantity of

goods and services

C) the tendency of people to be unwilling to sell something they already own even if they are offered a price

that is greater than the price they would be willing to pay to buy the good if they didn't already own it.

D) the tendency of firms to use celebrities endowed with good looks to promote their products

94) A significant downside to network externalities is that 94) __A___

A) there may be large switching costs to consumers of changing products so that consumers end up using

products with inferior technologies.

B) firms may network with unethical suppliers or distributors.

C) the costs of using celebrity endorsements may be very high.

D) there may be large switching costs to firms changing technologies.

95) Suppose you pre-ordered a non-refundable movie ticket to X-Men: Apocalypse. 95) _A____

On the day of the movie you decide that you would rather not go to the movie. According to economists, what

is the rational thing to do?

A) Since the cost of the movie ticket is a sunk cost, it should not influence your decision. Your decision should

be based solely on whether you want to see the movie or not.

B) You should not waste resources. Since you have paid for the ticket you should watch the movie.

C) Your should go to the movie to minimize your losses.

D) You should go to the movie to maximize your utility.

96) Drawing on the Atlantic article, all of the following are ways that online retailers 96) __C___

make dupes of us except

A) keeping the price of a big-ticket good in line with competitors’ prices, while increasing the prices of its

complementary goods

B) performing pricing experiments on consumer behavior by frequently fluctuating prices.

C) providing consumers with transparent information to make rational decisions.

D) showing computers in more well-to-do zip codes higher prices for products than computers in lower income

zip codes.

key 162 total points all multiple choice 1.5 pts...

Documents