ECO201 – Principles of Microeconomics Sample Midterm 1 Examination October 31st, 2013 (Fall 2013) Please Print Clearly Section ____ Last Name _____________________________ First Name ______________________________ ID# __________________ Instructor: Paulo Guimaraes Instructions 1. Your exam consists of two problems and 25 multiple choice‐questions. 2. Each problem accounts for 25 points with 2 points for each multiple choice. 3. You must write your answers to the problems in the space provided. 4. You must turn‐off your cell‐phone and keep it out of sight 5. On your table you are only allowed a blank piece of paper, pencil or pen and a standard calculator. THE EXAMINATION PAPER MUST BE RETURNED ECO 201 – Paulo Guimaraes draw the “original” production possibility frontier (military goods on the horizontal axis. agricultural goods on the vertical axis) and illustrate each of the following situations: a) The country experiences large increases in immigration b) there is a technological improvement in the production of military goods only Case 2) Consider now the market for agricultural products and use an adequate graphical representation to illustrate what happens to price and quantity in the following situations described below. Please make sure that your graphs are labeled and that the “before” and “after” situations are properly identified. however.Question 1 (25 points) Case 1) Consider a country which produces only agricultural goods and military goods. Both goods use capital and labor as production inputs. Using two separate graphs (one for each question). the agricultural goods are assumed to be more labor‐ intensive. ECO 201 – Paulo Guimaraes . c) “due to exceptional conditions the number of farmers and cultivated farmland increases” d) “The government lowers income taxes and all buyers have higher income” e) “The price of imported beef goes up” ECO 201 – Paulo Guimaraes . 500 cans to 3. However.500 personal pizzas at $3. a) Find the price elasticity of demand for the change in price discussed above b) Write up the expression for the pizza demand curve of this restaurant c) What price for pizza should the restaurant select if it wanted to maximize total pizza revenue? ECO 201 – Paulo Guimaraes . Due to an increase in the price of a key pizza ingredient the restaurant increased the price of pizza by 20%. a restaurant sold 3. As a result of this price change the total pizza revenue for the next month increased to $13.440. the increase in the price of pizza led to a decline on the monthly sales of soda which decreased from 3.Question 2 (25 points) In one month.50 per pizza.000 cans. d) Find the cross‐price elasticity of soda with respect to pizza e) Knowing that the supply curve for pizza at this restaurant is given by a straight line and that at the price of 0 the restaurant will not supply any pizza calculate the price elasticity of supply for pizza ECO 201 – Paulo Guimaraes . Multiple Choice Questions (2 points each) 1. Rachid has higher income than Younes or Fawzi. This table shows demand for shoes in a 3 consumer market: 2. Efficiency improvements due to learning. ECO 201 – Paulo Guimaraes . Which of the following factors would not contribute to increasing an existing comparative advantage? A. Rachid prefers shoes to other items Rachid buys. C. B. C. Less time lost by switching tasks. Younes's demand for shoes is less than Rachid's. Rachidhas lower income than Younes or Fawzi. Productivity improvements from greater experience. D. D. B. The data suggest that A. Import restrictions. The price of diesel. a decrease in the demand curve. 5. The quantity of gasoline supplied. The price of automobiles. B. 1/50 fewer car. 1. reducing the total amount of output available to domestic consumers. 1 fewer car. Which of the following is NOT a determinant of demand for gasoline? A. ECO 201 – Paulo Guimaraes . "Holding all other relevant factors constant. C. The price of gasoline. D. it is A. B. D. When a government increases the cost of international trade. 4. C. The opportunity cost of producing one ton of agricultural products in Genovia is A. B. consumers will purchase more of a good as the price falls. the demand curve." This statement reflects the behavior underlying A.This graph describes the production possibilities on the island of Genovia: 3. D. B. C. the supply curve. keeping all domestic prices artificially low. an increase in demand.000 fewer cars. 6. 1/5 fewer car. C. hurting all domestic producers. D. helping domestic consumers. few substitutes exist. government has set the price too high. D. 11. D. total benefit associated with an extra unit of the activity. Samia should buy the jeans because the price is more than her reservation price. B. government has set the price above the equilibrium price. B. a 10% decrease in the price leads to a 140% increase in quantity demanded. The marginal benefit of an activity is the A. D.7. the price paid to take an action.4. B. D. said they were $29. the difference between the benefit gained and the cost incurred of taking an action. C. C. C. a 1% increase in the price leads to a 14% reduction in quantity demanded. government sets the price for prescription drugs. The price tag. a 5% increase in the price leads to a 7% decrease in quantity demanded. ECO 201 – Paulo Guimaraes . Suppose one knows two facts: first. extra benefit associated with an extra unit of the activity. Samia should buy the jeans because the price is less than her reservation price. Samia saw a pair of jeans that she was willing to buy for $35. the benefit gained by taking an action. Samia should not buy the jeans because the price is not equal to her reservation price. this means A. the wage someone would have to earn in order to take an action. same as the total benefits of the activity. 9. 10. the market for prescription drugs experiences chronic shortages and second.99. D. government has set the price below the equilibrium price. total benefit divided by the level of the activity. If the elasticity of demand for your favorite singer's CD is 1. 8. C. One can conclude that the A. Economic surplus is A. Therefore. Samia should not buy the jeans because they will be of lower quality than she expected. buyers are hoarding prescription drugs. B. B. C. though. A. D. economists are mistaken about the increase in output. Under that arrangement. B. only the wealthy benefit from trade. while Karim does all the cooking. D. B. D. no one benefits from trade. Based on this observation. while Hamid does all the cooking B. The wage for teachers at those schools is lower than the equilibrium wage. Hamid and Karim each spend a half hour on cooking and a half hour on cleaning. The key to resolving the apparent paradox of international trade increasing total output yet facing much political opposition is noting that A. Karim does all of the cleaning and half of the cooking. The reservation price among teachers is lower than for other professions. 13. C. everyone does not benefit equally from trade. C. C. The wage for teachers at those schools is higher than at other schools in the city. They like to cook some meals ahead and eat leftovers. you suspect that A. ECO 201 – Paulo Guimaraes . A. Hamid and Karim have worked out an efficient arrangement. Hamid spends all of his time on cleaning. Karim and Hamid live together and share household chores. You have noticed that there is a persistent shortage of teachers in an inner-city school district in your city. Karim spends all of his time on cleaning. There is an excess supply of teachers.12. Suppose that in one hour Karim and Hamid can do the following: 14. C. 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. The opportunity cost of a cup of coffee is A. and the number of windows he can clean depends on how many hours he cleans a day. $2 B.15. pure free-market economy. which pays $7/hr for as many hours as he chooses to work. Therefore Cuba is an example of a A. a bureaucratic committee makes the production decisions for the country's firms and factories. and point B represents 3 coffees and 6 cappuccinos. $3 ECO 201 – Paulo Guimaraes . Suppose coffees are on the vertical axis and cappuccinos are on the horizontal axis. In Cuba. D. 6 cappuccinos Jaafar is trying to decide how to divide his time between his job as a stocker in the local grocery store. centralized economy. $7 C. 16. capitalist economy. What is the smallest amount of money per window cleaned that would induce Jaafar to spend at least one hour per day cleaning? A. $1 D. Point A on a linear production possibilities curve represents a combination of 12 coffees and 3 cappuccinos. 3 cappuccinos C. 1/3 of a cappuccino D. mixed economy. Jaafar is indifferent between the two tasks. 9 cappuccinos B. He makes $2 for every window he cleans. and cleaning windows for the businesses in downtown. B. Suppose that the demand for electricity has been found to be inelastic. 5 B. 3 C. C. C.You own a pizza shop called "Pizza's' Us". electricity is no longer a luxury commodity. ECO 201 – Paulo Guimaraes . Currently you are paying your cooks an hourly wage of $20. D. B. substitutes. the two goods are A. 4 D. D. you can increase your pizza production as shown in the following table. 20. If cross price elasticity is positive but less than one. B. You sell a medium pizza for $10 a pie. few substitutes exist for electricity. electricity is a monopoly market. 1 19. the fraction of income spent on electricity is trivial. complements. How many cooks should you hire to maximize your net benefit? A. 18. The most likely explanation for this finding is A. normal. inelastically demanded. By hiring more cooks. Refer to the figure above.50. What should the manager do? A.00 to $1.00 for a latte. lower.00 to $2. indeterminate. Reduce the price from $2. ECO 201 – Paulo Guimaraes . C. the new equilibrium price is ___________ and the new equilibrium quantity is _________________. Increase the price from $2. If both supply and demand decrease simultaneously.00 to $1.75 D. lower C.00. indeterminate.00. lower.21. indeterminate 22. B. lower B. Suppose this demand curve shows the demand at one coffee shop that currently charges $2. A. Reduce the price from $2.00 to $3. Increase the price from $2. higher D. The manager wants to increase its total revenues. his grade in Physics would go down by ______ his grade in economics. more than the decrease in ECO 201 – Paulo Guimaraes .Mustafa divides his time between studying Physics and studying Economics. less than the increase in B. less than the decrease in C. If Mustafa moved from Point A to Point C. A. 23. more than the increase in D. He has discovered that he can earn grades as shown on this production possibilities curve. normal. greater than one C.24. A. positive D. Refer to the figure above. $2 C. $4 D. normal. normal. What is the seller's reservation price when producing 250 units? A. $14 25. If most consumer goods and services are ______. $8 B. negative ECO 201 – Paulo Guimaraes . positive B. inferior. then most income elasticities are ______.