Spring 2013

Midterm Exam - Practice Set

Musatti

Practice Set 1 Multiple Choice Questions

1) The strategy that is best no matter what other players do is called a A) payoff. B) Nash equilibrium. C) dominant strategy. D) profit-maximizing strategy. E) prisoners dilemma. 2) When incomes rise, A) many demanders drop out of the market. B) the demand for normal goods drop. C) the demand for normal goods rise. D) expectations of future price changes improve. E) there is no effect on the demand for normal goods. 3) In economics, the long run is A) a time period in which no inputs can be varied. B) a time period in which there is at least one fixed input. C) five years. D) a time period in which all inputs can be varied. E) one year. 4) A key problem with centrally planned economies is that they A) are based on the principle of entropy. B) never reach an unemployment level of zero. C) tend to face inflationary pressures. D) grow too fast for the government to control adequately. E) do not create the right incentives for firms to meet consumer desires and for workers to work hard. 5) If a firm shuts down in the short run, its profit will be equal to A) FC B) -VC C) zero D) It depends on the firm and the market. E) (FC + VC) 6) Consider the following statements about perfectly competitive markets. I. It is unlikely that firms in competitive markets have extensive economies of scale. II. Firms in competitive markets can enter and exit freely. III. Firms in competitive markets have no fixed costs. A) I is true; II and III are false. B) All three statements are false. C) I and III are true; II is false. D) All three statements are true. E) I and II are true; III is false. 7) A perfectly elastic demand curve is one where buyers are so A) insensitive to price that quantity demanded cannot be calculated. B) sensitive to price that quantity demanded becomes infinity for even the smallest increase in price. C) insensitive to price that quantity demanded becomes infinity for even the smallest increase in price. D) sensitive to price that quantity demanded becomes zero for even the smallest increase in price. E) insensitive to price that quantity demanded becomes zero for even the smallest increase in price.

Spring 2013

Midterm Exam - Practice Set

Musatti

Narrative: In a week, a worker in the United States can produce forty (40) pounds of chicken or twenty (20) pounds of beef; a worker from Argentina can produce twenty (20) pounds of chicken or forty (40) pounds of beef. 8) Refer to the previous narrative: Which of the following statements is true? A) The United States should import chicken from Argentina in exchange for beef. B) The United States should not export chicken to Argentina in exchange for beef. C) Trade would cause the consumption possibilities frontiers of both countries to be inside their respective production possibilities frontiers. D) The United States should export chicken to Argentina in exchange for beef. E) Given these particular production possibilities frontiers, trade would benefit the United States only. 9) Jeff consumes onion rings and orange soda. Holding Jeffs utility constant, as he gives up more onion rings to get soda, the marginal utility that he gets from soda ________, and his marginal rate of substitution (of onion rings for soda) ________. A) increases; decreases B) decreases; decreases C) remains constant; decreases D) decreases; increases E) increases; increases 10) Governments allow natural monopolies to be the only firm in the market because A) the firm has spent resources on rent-seeking. B) scale economies make it more efficient to have a single firm in the market. C) they wish to be able to tax large firms. D) natural monopolies encourage innovation. E) licensing can keep undesirable firms out of local markets. 11) Use of the midpoint formula solves the problem that A) the more common method of calculating percent changes requires more computations. B) price increases tend to have greater elasticities than price decreases. C) percent increases equal percent decreases over the same range of numbers. D) price increases yield positive elasticities while price decreases yield negative elasticities. E) price increases yield inelastic results while price decreases yield elastic results. 12) One reason why high prices are associated with a high quantity supplied is that A) higher output levels lead to higher transportation costs. B) suppliers need to be compensated for higher production costs of higher output levels. C) suppliers are reluctant to offer quantity discounts unless pressured to do so. D) consumers expect higher prices for greater quantities. E) quality is higher as more goods are produced because of the learning curve so consumers are willing to pay more. 13) Currently, average product of labor is 20 units per worker. If an additional worker is hired and produces 10 units, which of the following statements must be true? A) The average product of labor is decreasing. B) The next worker hired will only produce 5 units. C) The firm will be able to pay the last worker less than previous workers D) Total product is decreasing. E) The last worker is less productive and should not have been hired. 14) Adding a 5th worker causes the output of a firm to rise from 90 to 125 units, and causes average productivity to rise to 25. Which of the following is a TRUE statement? A) Adding one more worker will cause total output to fall. B) The average product of labor was 20 when there were only 4 workers. C) There are diminishing returns to labor at this point. D) The marginal product of the 4th worker was less than 25. E) The average product of labor was less than 25 when there were only 3 workers. 15) Which pair comes from an elastic demand curve? A) A three percent increase in price leads to a half percent decrease in quantity demanded. B) A one percent increase in price leads to a one percent decrease in quantity demanded. C) A six percent decrease in price leads to a one percent increase in quantity demanded. D) A six percent increase in price leads to a one percent increase in quantity supplied. E) A one percent increase in price leads to a five percent decrease in quantity demanded.

Spring 2013

Midterm Exam - Practice Set

Musatti

16) Suppose the elasticity of demand for a seasonal allergy medicine is -2.3 in Arizona and -1.2 in Colorado. If the price of the medicine were originally $1 in both locations, we can conclude that A) the revenue effects cannot be compared for such disparate geographic locations. B) a $0.50 increase in price will cause an equal percentage drop in quantity demanded in both areas. C) a $0.50 increase in price will cause a smaller percentage drop in quantity demanded in Arizona than in Colorado. D) a $0.50 decrease in price will cause decreases in quantity demanded in both Arizona and in Colorado E) a $0.50 increase in price will cause a larger percentage drop in quantity demanded in Arizona than in Colorado. 17) The Hirfindahl-Hirschman Index (HHI) is calculated by A) adding the profits of the top four firms in the industry. B) dividing the profits of the top four firms by total profits. C) multiplying the market shares of the top four firms in the industry. D) adding the squared market shares of all firms in the industry. E) adding the market shares of the top four firms in the industry. 18) The reason taxes impose a burden on demanders is that taxes A) lower the price paid and increase quantity demanded, causing a loss in consumer surplus. B) raise the price paid and decrease quantity demanded, causing a loss in consumer surplus. C) raise the price paid and increase quantity demanded, causing a gain in consumer surplus. D) raise the price paid and decrease quantity demanded, causing a gain in consumer surplus. E) lower the price paid and decrease quantity demanded, causing a loss in producer surplus.

Identifications:
Diseconomies of Scale; Income effect; Negative Externality; Opportunity Cost; Moral Hazard

Short Answer/Exercises
Exercise 1 Assume that the NYC demand for the flu vaccine is 120 units regardless of the price charged. Assume further that the supply is given by Q = -200 + 4P. (a) What is the equilibrium price and quantity of the flu vaccine? (b) Mayor Bloomberg, horrified at the high price for the flu vaccine decides to set a price ceiling at $60. What are the results of this ceiling? Is the governments goal of helping those that badly need the vaccine being met? Explainusing a diagram. (c) Finally the government dismantles the price ceiling and hires an economist to help with the problem. The economist writes: There is a better way to handle this; we can simply place a sales tax of $20 on the flu vaccine and then refund all of the revenue from the sales tax to those who are buying the drug. This is a simple way to subsidize those that really need the vaccine and stop price gouging. Will this scheme work? Why or why not? What makes this case different from the standard supply and demand case? Exercise 2 Suppose that Shakira Inc. produces a brand new music CD. The production cost information for the firm and the demand for the new CDs are given as follows: FC = 30 VC = 8Q Q = 40 P (a) Is Shakira Inc. operating in a perfectly competitive market? How can you be sure? (b) What is the firms average cost function? (c) What quantity of output will the firm produce? At what price? (d) How much profit is the firm making when it maximizes profits? (e) If the firm were forced the firm to produce where price is equal to average cost, what would the firm earn in profits? Exercise 3 Hella buys only two products (CDs and books). Hella has prefernces so that her Total Utility of CDs is TUCD = 100+5CD where CD is the number of CDs she already owns. Hellas marginal utility of books is MUB = 10. Furthermore, books and CDs sell for exactly the same amount, $12 each. a. At what rate is Hella willing to trade CDs for books? Does this rate depend on the number of books or CDs she already owns? b. Does Hella consider books and CDs perfect complements, imperfect substitutes or perfect substitutes? c. Suppose Hella has $60. How many CDs and how many books does she buys when she is maximizing her utility? d. In a diagram, draw Hellas budget constraint and indifference curves and indicate her optimal combination of books and CDs.

Spring 2013

Midterm Exam - Practice Set

Musatti

Practice Set 1- Solutions

Multiple Choice questions:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Exercises
(1) a. Qd = 120; Qs = -200+4P; setting Qd=Qs yields 120=-200+4P 4P=320P*=80; Q*=120. (b) With price ceiling at P=60, Qs=40 and thus you have excess demand or shortage of 80 units. Some consumers are helped, others are rationed out of the market. (c) With perfectly inelastic demand (as in this case) there is no producer burden to the taxi.e. all of the tax is paid by consumers. To simply refund them the proceeds is not beneficial to them (though one could make the case that if you redistribute within the consumer group some twill be benefitted). (2) a. No. Downward sloping demand curve. (b) AC =TC/QTC=FC+VC30+8QAC=(30+8Q)/Q. (c) Need to calculate MR and MC; MC is 8 (from VC=8Q); For MR, inverting demand curve yields P=40-Q and you know that MR has twice the slope of demand so MR=40-2Q; setting MR=MC40-2Q=8Q*=16; putting this into demand curve yields P*=24. (d) Profit equals TR-TCTR=16 x 24 =384; TC=VC+FC8(16) + 30=158; TR-TC=384-158=$226. (e) If P=AC, profits are 0 by definition (i.e. no need to solve any quadratic equations!). (3) a. Hella is willing to trade books for CDs according to her MRS. The MRS of CDs for books is given by the ratio of MUB/MUCD. Hellas MUB = 10, while her MUCD = change in TUCD/ change in CD = 5. Hellas MRS is equal to 2, and she is willing to trade two CDs for one book. Hellas MRS is independent of the number of CDs or the number of books she owns. b. Hellas MRS is independent of the number of CDs or the number of books she owns. She considers books and CDs perfect substitutes. c. CDs and books are sold at the same price and Hellas MUB=10 > 5=MUCD. Hellas MUB/PB > MUCD/PCD and she spends all her money in books. d. Budget line: CD intercept of 6, books intercept of 6, slope of -1. Indifference curves are straight lines with slope of 2 (if books are measured along the horizontal axis). The optimal bundle is at a corner of the budget constraint

Spring 2013

Midterm Exam - Practice Set

Musatti

Practice Set 2
Multiple Choice Questions:
1) When Starbucks raised the price of its coffee beverages by 10c per cup, the companys revenue stayed the same. It appears that a) Starbucks coffee is an inferior good. b) Starbucks price elasticity of supply is lower than its price elasticity of demand. c) Demand for Starbucks coffee beverages is unit-elastic. d) Starbucks coffee beverages are luxury goods e) the increase in price was compensated by an equal increase in the cost of production.

Narrative 1. In the late 1800s, each year an English worker could grow 10 tons of cotton or weave 5 rolls of cloth; an Indian worker could grow 15 tons of cotton or weave 6 rolls of cloth. 2) Refer to Narrative 1. This data imply that: a. England had a comparative advantage in growing cotton. b. England should have exported cotton and cloth to India. c. England should have imported cotton from India while exporting cloth to India. d. Trade between the two countries was driven by Englands absolute advantage. e. In England, the opportunity cost of a roll of cloth was ton of cotton.

3. In Lower Manhattan, hundreds of offer a standard menu of services catering to an average of 200,000 customers each week. The market for nail services in Lower Manhattan is a. perfectly competitive. b. an oligopoly. c. a pure monopoly. d. a regulated monopoly. e. egotistically competitive. 4. In July 2008, the price of petroleum was $145 per barrel. By the end of the year, the price of petroleum has dropped to $65 per barrel. Which of the following events could explain the sharp drop in the price of petroleum? a. The fast rate of growth of the Chinese economy. b. OPEC announcing a plan to drastically cut production of crude oil. c. Building expectations of a worldwide economic downturn due to the effects of the 2008 financial crises. d. The United States Department of Energy replenishing its Strategic Petroleum Reserves (SPR). e. None of the above. 5. More consumers wish to buy a leather bag when it I sold for $300 than when it is sold for $50. a. Leather bags are a Giffen good. b. Leather bags are a Veblen good. c. Leather bags are necessities. d. Leather bags are complement goods. e. Leather bags are Nash goods. 6. Which of the following is an example of a price floor? a. The Earned Income Tax Credit. b. Rent stabilization and rent control in New York City. c. Price rebates at Staples. d. Excise taxes on cigarettes. e. The federal minimum wage.

7. Individuals that drive under the influence of alcohol or recreational drugs make roads more dangerous to all. Hence, even if the markets for vehicles and liquors were perfectly competitive, a. there would be a surplus of liquor. b. an inefficiently high number of vehicles would be sold each year. c. an inefficiently low amount of liquor would be consumed each year. d. efficiency would require a complete ban on alcoholic beverages. e. efficiency would require the payment of a subsidy to drivers or to car dealerships.

Spring 2013

Midterm Exam - Practice Set

Musatti

8. In August, The Store Company sold 120 comforters at a price of $90 each. If the price elasticity of demand for comforters measured using the midpoint formula is -2.00, how many comforters would the company sell at a unit price of $110? a. 60. b. 80. c. 100. d. 120. e. 160 Figure 1

9. Refer to Figure 1. Which of the four graphs represents the market for bottled water after a drop in the price of PET, a type of plastic used to manufacture water bottles? a. A b. B c. C d. D e. None of the above. 10. Bobs marginal utility from bananas is 2 times his marginal utility from apples. One banana costs 1.25 cents while one apple costs 50 cents. a. Bob should buy more apples and fewer bananas. b. Bob should buy more apples to increase his marginal utility. c. Bob should buy more bananas since he likes this fruit better. d. Bob should buy more apples and more bananas. e. Bobs marginal rate of substitution is 1. 11. Which of the following is NOT true when a perfectly competitive market is in long-run equilibrium? a. Output is produced at the minimum average cost. b. Firms marginal cost equals buyers marginal benefit. c. All firms have the same MC. d. All consumers pay the same unit price. e. All firms experience economies of scale.

Spring 2013

Midterm Exam - Practice Set

Musatti

Figure 2 Saudi Arabia and the United Arab Emirates, the two largest exporters of petroleum, are choosing the yearly number of barrels of petroleum they will produce and market this year. The economic profits from the sales are illustrated in the matrix below. Profits for UAE are in the shaded triangles.
Saudi Arabia 1 billion barrels $ 25 billion 0.5 billion barrels UAE $ 50 billion $ 60 billion 2 billion barrels $ 10 billion

$ 30 billion 1 billion barrels $ 40 billion

$ 15 billion

$ 45 billion

12. Refer to Figure 2. In this game, a. Saudi Arabia has a perfect strategy. b. if Saudi Arabia produces 2 billion barrels, UAE should produce 0.5 billion barrels. c. producing 1 billion barrels is UAEs dominant strategy. d. there is no Nash equilibrium. e. producing 1 billion barrels is Saudi Arabias dominant strategy. 13. Refer to Figure 2. The most likely outcome of this strategic interaction a. is Saudi Arabia produces 2 billion barrels and UAE produces 1 billion barrels. b. is Saudi Arabia produces 1 billion barrels and UAE produces 0.5 billion barrels. c. is Saudi Arabia produces 1 billion barrels and UAE produces 1 billion barrels. d. is Saudi Arabia produces 1 billion barrels and UAE produces 0.5 billion barrels. e. depends on the number of times the interaction is repeated over time. 14. Morning cereal and cellular phone services are sold in a. perfectly competitive markets. b. regulated monopolies. c. monopolistically competitive markets. d. oligopolies. e. administration controlled markets. 15. Which of the following is a fixed cost for Joe the plumber? a. Income taxes. b. Monthly payments for the lease of his company pick-up truck. c. Monthly payments for gasoline. d. Wages he could earn, if he worked for Sams Super Plumbers. e. The cost of duct tape. 16. In India, when the government introduced a 5 rupees per pound rice subsidy daily purchases of rice increased from 10 million pounds to 11 million pounds and ________. a. consumer surplus dropped by 5 million rupees per year. b. producer surplus increased by 5 rupees per day. c. the Indian government spent 50 million rupees per day to finance the subsidy. d. the subsidy created a daily deadweight loss of 2.5 million rupees. e. the subsidy raised the Indian governments revenue by 55 million rupees. 17. David, a rational consumer, bought two shirts and four woolen sweaters. He paid $40 for each shirt and $80 for each sweater. a. Davids opportunity cost of a shirt is two sweaters. b. David likes shirts better than sweaters. c. If the cleaners lost one of Davids shirts, he would need to receive two sweaters to fell fully compensated for the loss. d. Davids marginal utility of sweaters is twice his marginal utility of shirts. e. David should have bought more shirts since they are cheaper than sweaters.

Spring 2013

Midterm Exam - Practice Set

Musatti

18. In the Fall of 2011, a box of Red Delicious apples sold for $10.15. The same season, in New Jersey, the cost of picking, packaging and shipping a box of Red Delicious was $13.15. Which of the following events likely happened? a. A number of New Jersey orchards did not pick their apples. b. A number of New Jersey orchards raised the number of acres cultivated with apples. c. Most New Jersey orchards recorded accounting profits. d. Washington State orchards were had a surplus of Red Delicious. e. The variable cost of a box of Red Delicious was $3. 19. The price elasticity of demand for gold watches is - 0.5. The price elasticity of supply of gold watches is 2. If Mayor Bloomberg levies a tax on gold watches, a. the tax generates no revenue. b. sellers bear the full burden of the tax. c. buyers and sellers pay an equal share of the tax. d. buyers bear the larger share of the burden of the tax. e. Because supply is more price elastic than demand, the tax has no effect on the market price.

20. Refer to Figure 7-2. Which area represents consumer surplus after a price floor raises the price from P2 to P1? a. BDFC b. ACF c. BCED d. DEF e. ABD 21. Jewelry is a normal good. If the economy enters a recession and at the same time the price of gold and silver increase, what happens to the equilibrium price and equilibrium quantity of jewelry? a. The equilibrium price increases, but the equilibrium quantity could increase, decrease or stay the same because changes in input prices have no effect on quantity. b. Both the equilibrium price and the equilibrium quantity of jewelry decrease. c. The equilibrium price increases as during recessions inflation tends to be high. d. Both the equilibrium price and the equilibrium quantity of jewelry increase. e. The equilibrium quantity decreases, but the equilibrium price could increase, drop or stay the same. 22. After WWII, in the U.S. the median family income rapidly increased. In the same years, the share of income American families spent on medical services increased as well. This evidence shows that American families consider medical services a. a necessity. b. a luxury good. c. a complement to income. d. a substitute good. e. We need information about the change in the price of medical services to determine what type of product medical services are.

Identifications:
Substitution Effect; MES; Comparative Advantage

Spring 2013

Midterm Exam - Practice Set

Musatti

Short Answers/ Exercises

Exercise 1. The diagram illustrates the cost structure of Rays Pizza in 2007, a perfectly competitive firm selling pizza.
ATC
14 12 10 8 6 4 2 0

Price $ per pie

MC

Long Run AC AVC

A. B. C.

In the diagram, clearly mark the short run supply curve for this firm. In August 2007 the price of a pizza pie was $10 was Rays Pizza open for business? Clearly explain. In August of 2008, Rays pizza was open for business. Did the pizza parlor sell more pizzas in August 2007 or August 2008? Explain.

100 day

200 300 400 500 600 700

Pies per

Exercise 2. If the MTA wants to increase revenue, should it increase or decrease the price of

a subway ride? Explain. Exercise 3. In Oaxaca, the market for bread is perfectly competitive. The daily demand and supply of bread are represented by the following equations: Qd = 24 2P and Qs = 0.5P-1 where quantity is measured in thousands of lbs. of bread and price is measured in pesos per lb. of bread. a. In a diagram, draw the demand and supply curves, clearly label the curves and the market equilibrium; then using algebra, find the equilibrium price and the equilibrium quantity in this market. Show your work. b. The GVT suggests the introduction of a price floor at 11 pesos per lb. In the diagram, show the effect of the price floor on the price of bread and the amount of bread sold each day. c. Would bakers lobby in favor of the price floor? Why? Exercise 4. The market for wheat is perfectly competitive. It has been a long while since the price of wheat changed last. Currently the demand for wheat is D = 30-2P while the supply of wheat is S=P. a. What is the ATC of producing wheat? How do you know? b. Suppose a large agri-business company buys all farms and becomes the only seller of wheat. How much wheat would be produced then? At what price would the wheat be sold? c. The government breaks up the monopoly and the market for wheat is perfectly competitive once again. However, the price of rice increases five folds. In a diagram, show how the higher price of rice influences the price and quantity of wheat.

Exercise 5.

Last year, a young economist fresh from college worked 2,000 hours at an hourly rate of $100. This year Hanna, his boss, has decided to lower his hourly wage to $90 but to pay him a yearly bonus of $20,000. Will the young economist work longer or shorter hours once offered the new compensation package?

Spring 2013

Midterm Exam - Practice Set

Musatti

Practice 2 Solutions
Multiple Choice
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

C
16

C A
17 18

C
19

B
20

E
21

B
22

Short Answers / Exercises

Price $ per pie
14 12 10 8 6 4 2 0

1. (6 points) The diagram illustrates the cost structure of Rays Pizza in 2007, a perfectly competitive firm selling pizza.
ATC
MC Long Run AC AVC

A.

See Diagram.

B. Yes. When the price of a pizza pie is $10, profit maximizing output is about 600 pizzas where P=MC. At that level of output, P>AVC and Ray should stay open. C. In August 2008, Rays pizza sells fewer pizza pies. C1) The diagram shows that in 2007 Rays pizza ran at an inefficiently high scale. C2) All pizza parlors have similar cost structure, entry of new parlors eventually lowers price to $6. At this price Rays would sell 500 pizzas.

2. Whether MTA should increase or lower prices depends on the price elasticity of demand for subway rides. If the price elasticity of demand is higher than -1, that is if demand is inelastic, then the MTA could increase revenue by raising prices. If the price elasticity of demand is less than -1, that is if demand is elastic, the MTA could increase revenue by lowering its prices. As most likely the demand for subway rides is inelastic, the MTA could raise revenue by increasing prices. 3. B. In perfectly competitive markets, the price adjust so that in equilibrium D(P) = S(P) D=24-2P = 0.5P 1=S 25=2.5P P = 10 Q = 24-2x10 = 4 B. The price of bread increases to 11 pesos, the amount of bread sold drops to 2 thousand lbs. There is a surplus. C. No. The price floor lowers bakers producer surplus. The price increase reduces quantity so sharply that bakers producer surplus drops after the introduction of the price floor.Producer surplus would drop by the green area (loss in customers) and would increase by the red area (higher price per customer), clearly the green area is larger than the red area. 4. A. 10 cents per lb. As the price has not changed for a while, it is a long-run equilibrium price. In competitive markets, in the longrun the, price equals the ATC. D=30 2P =P=S P = 10 B. Firms earn the highest profits when output satisfies MR=MC. The AR of a pure monopolist is the price P = 15-Q/2; the MR of a pure monopolist is MR = 15 Q. The monopolist would produce 15- Q = Q Q* = 7.5 and charge P = 30 15 = 15 cents. C. If rice and wheat are substitutes: D increases, the D curve shifts to the right. If rice and wheat are complements: D drops and D curve shifts to Price S the left. Demand could also move in response to changes in expected future prices.

100 day

200 300 400 500 600 700

Pies per

D Quantity

Supply changes only if higher rice prices affect the expected future price of wheat. Rice and wheat are not substitutes in production, as they require different climatic conditions, furthermore it takes time to shift acreage from one crop to another. Higher expected future price for wheat depress the current supply of previously grown wheat, while lower expected future prices increase the current supply of previously grown wheat

5. As long as the young economist considers purchases an imperfect substitute of free time, he will work shorter hours. The bonus fully compensates the lower wage and the change in compensation package has no income effect but only a substitution effect. The

Spring 2013 Midterm Exam - Practice Set Musatti lower hourly wage reduces the rewards of working longer hours nudging the young economist to consume less and enjoy more free time. If the young economists considers free time a perfect complement of consumption, for example if he spends his budget in entertainment activities (movies, theatre, rock concerts, video-gaming, ultimate Frisbee ) that take a lot of time, then before and after the change in compensation package he works the same number of hours.

Spring 2013

Midterm Exam - Practice Set

Musatti

Practice Set 3
Multiple Choice
1. A negative externality exists if a. There are price controls. b. There are quantity controls. c. Social marginal cost of producing a good is higher than the private marginal cost. d. Social marginal benefit of producing a good is higher than private marginal benefit. e. The opportunity cost of producing a good is higher than the explicit cost. The demand curve for sneakers is downward sloping because of the a. Interest rate and marginal rate effects. b. International trade and income effects. c. Income and substitution effects. d. Substitution and wealth effects. e. Wealth and marginal rate effects. According to the law of diminishing (marginal) returns, a. the larger a financial investment the lower its return. b. the higher the amount of an input, the lower its marginal product. c. the larger a firms scale, the lower the average cost of production. d. the higher the price, the lower the revenue. e. the higher a firms output, the lower its marginal cost.

2.

3.

Table 4 An Increase in Supply An Increase in Demand No Change in Demand A Decrease in Demand 4. A D G No Change in Supply B E H A Decrease in Supply C F I

Refer to table 4: Which case results in an increase in both equilibrium price and equilibrium quantity? a. A b. B c. C d. D e. E

5.

According to the first welfare theorem, a. consumers enjoy higher welfare than producers. b. social welfare is highest when the government acts first. c. When competition is high, prices are poor signals of social welfare. d. social welfare is highest if all markets are perfectly competitive and in equilibrium. e. total surplus is a poor indicator of social welfare.

6.

For which of these markets can we use the demand and supply model of perfectly competitive markets to predict the welfare effects of a subsidy? (i) The market for commercial aircrafts. (ii) The U.S. market for first class mail. (iii) The market for wireless calling plans. a. (i) only. b. (i) and (ii). c. (ii) only. d. (ii) and (iii). e. For none of these markets

Spring 2013

Midterm Exam - Practice Set

Musatti

Figure 7. Adam and Eve have to decide separately whether to go to a baseball game or go to the theatre. The matrix below summarizes Adams and Eves utility depending on what each chooses to do. Game Eve Theatre UB = 0 UM = 100 UB = 50 UM = 50 UB = 100 UM = 70 UM = 0

Game Adam

UB = 70

Theatre

7.

Refer to Figure 7. In this game, a. Adam has a perfect strategy. b. There is no Nash equilibrium. c. There is a perfectly competitive equilibrium. Eved. is in Eve is in a prisoners dilemma. e. Eve has no dominant strategy.

8.

The price of college textbooks rises by 20%. Revenues from the sale of college textbooks increases by 10%. The demand for college textbooks is price a. Inelastic b. unit-elastic. c. elastic. d. perfectly elastic. e. perfectly inelastic.

Quantity 1 2 3 4 5 6 9. Utility 20 30 36 36 36 36

Pizza MU 20 10 6 0 0 0 Utility 10 15 19 22 25 25

Coke MU 10 5 4 3 2 0

Refer to the Table Above Bob is a rational consumer with $6 to spend on Pizza and Coke. The price of a slice of pizza is $2; the price of a can of Coke is $1. Bob utility from consuming pizza and Coke is shown in the table above. a. Bob buys one slice of pizza and no Coke. b. Bob buys one slice of pizza and one can of Coke. c. Bob buys two slices of pizza and two cans of Coke. d. Bob buys three slices of pizza and four cans of Coke. e. Bob buys three slices of pizza and no Coke.

10.

In an oligopoly, a. there are few buyers and many firms. b. there is one firm and many buyers. c. there are many firms that sell a standardized product. d. there are few firms that sell a similar but not identical product. e. buyers and firms are price makers.

Spring 2013 Figure 11 - A Perfectly Competitive Market.

Midterm Exam - Practice Set

Musatti

10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 Units 4 5 6

11.

Refer to Figure 11. If in this market the government sets and enforces a price ceiling of $4.00, a. quantity increases to five units. b. producer surplus increases to $4.00. c. Consumer surplus increases to $8.00. d. there is a surplus of three (3) units. e. the government collects revenue of $6. Figure 12

12.

Refer to Figure 12. Which of the four graphs represents the market for a product after the government start paying a subsidy to purchases of a complement good? a. A b. B c. C d. D e. None of them.

13. In a market, there is allocative efficiency if a. economic surplus is highest. b. the government imposes no taxes. c. consumer surplus is highest. d. the social marginal benefit of the product equals the social marginal cost. e. all of the above.

Price in $ per unit

Spring 2013

Midterm Exam - Practice Set

Musatti

Narrative 14. In one month, a U.S. worker can produce 150 shirts or 30 cars; a Canadian worker can produce 120 shirts or 30 cars. 14. Refer to narrative 14. According to economic sense, the U.S. should a. Import shirts and cars from Canada. b. Import shirts from Canada and export cars to Canada. c. Import cars from Canada and exports shirts to Canada. d. Export cars and shirts to Canada. e. Export shirts to Canada without importing cars.

15.

The price elasticity of demand for Gummy Bears is 4.0. To increase quantity demanded for Gummy Bears by 20%, the price of Gummy Bears should _____ by ____. a. Decrease by 4%. b. Decrease by 5%. c. Decrease by 80%. d. increase by 20%. e. Increase by 80%.

Narrative 16. To celebrate the last Lakers win, Kobe and Phil are organizing a party. In ten minutes, Kobe can inflate ten (10) balloons or prepare five (5) invitations; Phil can inflate one (1) balloons or prepare eight (8) invitations. 16. Refer to narrative 16. According to the data, _____ opportunity cost of inflating a balloon is ______ . a. Kobes; 2 balloons. b. Kobes; 2 invitations. c. Kobes; of a balloon. d. Phils; 8 invitations. e. Phils; 1 balloon. On the little island of Filicudi, Erickson Power is a natural monopolist. Why wont regulators require that Erickson Power produce the economically efficient output level? a. Because Erickson Power will sustain persistent losses and will not continue in business in the long run. b. Because at the efficient output level MC is above the demand curve. c. Because Erickson Power will earn zero profits. d. Because there is insufficient demand at that output level. e. Because at the efficient output the MR is higher than MC. In NYC, the market for caff lattes is monopolistically competitive. In the long run, a. The price of caff lattes is equal to the ATC of caff lattes. b. The price of caff lattes is equal to the MC of caff lattes. c. The ATC of caff lattes is lowest. d. Coffee shops suffer losses. e. Coffee shops collude. Narrative 19 As part of an estate settlement, Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk free bond fund, she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business. Her salary at Lucky.Com Inc. was $75,000 per year. 19. Refer to narrative 19. What are Mary's opportunity costs of operating her new business? a. $1,075,000 b. $175,000 c. $100,00 d. $75,000 e. $25,000

17.

18.

20.

Soap is a necessity. The ________ elasticity of demand for soap could be equal to ________. a. price; 0.5. b. price; - 5. c. income; - 5. d. income; 0.5. e. income; 5.

Spring 2013 21.

Midterm Exam - Practice Set

Musatti

In a market, demand is Qd = 20 0.5P while firms MC is equal to ten (10). a. Price is equal to 10. b. Price is equal to 20. c. Quantity is equal to 10. d. Quantity is equal to 15. e. There is not enough information to determine quantity or price in this market.

22.

Policies that mandate the installation of specific pollution control devices like scrubbers are called a. Piguvian policies. b. Command and control policies. c. negative externalities. d. Coase policies. e. Internalization policies.

23.

Joes Pizza has a number of very loyal customers. Today at Joes Pizza, MC=$10; P=$10; ATC=$8, AVC=$7. To earn the highest profit, Joe should a. b. c. d. e. shut down for good. temporarily close down stay open and sell more pizza pies. stay open and sell fewer pizza pies. stay open and sell the same number of pizza pies.

Narrative 24 The United States has a relative abundance of skilled workers, while China has a relative abundance of unskilled workers. Making airplanes requires employing high-skilled workers, while making toys requires employing low-skilled workers. 24. Refer to Narrative 24. a. The U.S. has a competitive advantage in low-skilled workers. b. The U.S. has a monopolistic advantage in producing toys. c. The U.S. has a comparative advantage in high-skilled workers. d. China has a comparative advantage in producing toys. e. China has a mercantile advantage in producing airplanes.

25.

Refer to Narrative 24. Opening the U.S. airplane and toy industries to international trade with China, a. hurts both China and the U.S. b. benefits both China and the U.S., however it hurts American low skilled workers. c. benefits both China and the U.S., however it hurts Chinese low skilled workers. d. benefits China and hurts the U.S. e. benefits the U.S. but hurts China.

Identifications:
Coase Theorem; PPF; AVC

Spring 2013

Midterm Exam - Practice Set

Musatti

Short Answers/Exercises
Exercise 1 (5 points) In 2009, a low-income family has a $300 monthly budget for heating oil and other expenses. Heating oil costs $3 per gallon, other expenses are measured in dollars. Each month, the family buys 50 gallons of heating oil, just enough to keep the house temperature at sixty-five. A. In the diagram, draw the familys monthly budget constraint and by adding an indifference curve, illustrate the familys optimal bundle in 2009. 300 B. In 2010, the price of heating oil climbs to $5 per gallon. The local 275 government starts a fuel assistance program to help the poor heat their 250 225 homes. The program pays $100 to each family, raising the monthly budget 200 to $400. 175 An economic pundit writes in the New York Times: This year we will see 150 125 low income families shiver in their homes. The fuel assistance program is 100 not doing enough. In the end, families will buy less oil than last year and 75 children will be cold. Do you agree with him? Clearly justify your answer 50 25 using the concepts of substitution and income effect.

0 10 20 30 40 50 60 70 80 90 100 Gallons of Heating Oil

30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Exercise 2. (14 points) In Gotham City, many years ago (before the advent of the internet, the Nook or the Kindle), the yearly demand for paperback books was Qd = 30 P. One hundred small bookstores used to sell paperbacks and the market supply was Qs = 2P - 12 (quantity in million of books and price in dollars per book). A. Draw the demand and supply curves; clearly label the curves and the market equilibrium; then use algebra to find equilibrium price and quantity. Show your work. (4 points) B. One year, the City Council of Gotham wanted to launch a One Thousand Books in Every Home initiative. For each book sold, the Council wanted to pay bookstores $6. Who would have benefited the most from this initiative, bookstores or readers? Clearly justify your answer. C. Unfortunately, due to lack of revenue, the Gotham City Council had to cancel the One Thousand Books in Every Home initiative before it even started. The same year, the city economy was hard hit by a recession. Thousands of local workers lose their jobs and families found it hard to make ends meet. On the upside, the price of imported paper and glue dropped, halving the cost of production of paperback books. What do you think happened to the price and quantity of paperbacks (in Gotham City paperback books are a normal good)? (4 points) D. After a couple of years, one firm (Engulf & Devour) bought all city bookstores and became the sole monopolist in the Gotham market for paperbacks. What do you think happened to the price and quantity of paperback books?

Exercise 3 (5 points) Big Machine Records is the label that releases Taylor Swifts music. If the label wanted to increase revenues from the sale of Taylors music, should it force Amazon and i-Tunes to raise or lower the price of Taylors songs? Justify your answer using clear economic concepts.

Spring 2013

Midterm Exam - Practice Set

Musatti

Practice Set 3 - Solutions

Section I - Multiple Choice questions (1 point each):
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

D
16

C
17

B
18

B
19

D
20

E
21

E
22

A
23

C
24

D
25

Exercises.
Exercise 1 In 2009, a low-income family has a $300 monthly budget for heating oil and other expenses. Heating oil costs $3 per gallon, other expenses are measured in dollars. Each month, the family buys 50 gallons of heating oil, just enough to keep the house temperature at sixty-five.

300 275 250 225 200 175 150 125 100 75 50 25 0

a. In the diagram. b. The higher price of heating oil increases the family bill for oil. However, thanks to the fuel assistance program, the family can still purchase 50 gallons of oil and spend $150 on other products as it did in 2009. However, since the opportunity cost of heating oil has increased, the family will spend less on oil and more on other products as the pundit suggests.

0 10 20 30 40 50 60 70 80 90 100 Gallons of Heating Oil

Exercise 2. In Gotham City, many years ago (before the advent of the internet, the Nook or the Kindle), the yearly demand for paperback books was Qd = 30 P. One hundred small bookstores used to sell paperbacks and the market supply was Qs = 2P - 12 (quantity in million of books and price in dollars per book).
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0

A. Draw the demand and supply curves; clearly label the curves and the market equilibrium; then use algebra to find equilibrium price and quantity. Show your work. (4 points) In equlibrium, Qd is equal to Qs: 30-P = 2P 12 42 = 3P P = 14 Q = 16 B. Readers would benefit the most. Subsidies benefit the most the side of the market that is less price elastic, in this example, the demand side. We can see that the demand for books is less elastic than the supply of books as the demand curve is flatter than the supply curve. Also the positive part of the price coefficient in the demand function is smaller than the price coefficient in the supply function.

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

C. Families lower incomes depress the demand for books and the demand curve shifts to the left. Lower cost of inputs increases the supply of books and the supply curve shifts to the right. Equilibrium price drops, nothing can be said about equilibrium quantity that could decrease, stay the same or increase. D. Unregulated monopolists tend to produce less and charge a higher price than firms in competitive markets would do. This is because by reducing output they can crank up the price and their profits. This puts downward pressure on quantity and upward pressure on prices. However, if the repeated acquisitions allow Engulf and Devour to benefit from significant economies of scale, Exercise 3 To increase revenues, a firm should increase price if demand is inelastic and should lower price if demand is elastic, As Big Machine Records has market power over the sale of Taylor Swifts music, it would contract price so that MR = MC and this happens only at a number of albums and songs and at a price where demand for Taylors music is elastic. Demand for Taylors music is most likely price elastic as there are many other musicians people can listen to. However, if Taylors fans are very loyal, demand would be less sensitive to price changes.

Spring 2013

Midterm Exam - Practice Set

Musatti

Practice Set 4 True, False, Justify

1. High income nations do not face scarcity.

______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________

2. If Jody, a rational consumer, has bought milk but not bread, she must like milk better than bread.

______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________

3. As a share of income, the burden of taxes on necessities falls more heavily on lower income families.

______________________________________________________________________________________________________________________ _____________________________________________________________________________________________________________________

4. If the price of oranges is unusually low, demand and supply for oranges must be below their normal levels.

______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________

5. If a firm makes losses it should temporarily close down.

______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________

Identifications:
Choke Price; Allocative Efficiency; Present Value; DWL

Short Answers/ Exercises

Spring 2013

Midterm Exam - Practice Set

Musatti

Exercise 1 (10 points) In a fictional City, the retail market for sneakers is perfectly competitive. The daily demand for sneakers is Qd = 60 0.5P and the daily supply is Qs = P. Price is measured in dollars and quantity in pairs of sneakers.
150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

A. Draw the demand and supply curves, clearly labeling the curves and the market equilibrium; then using algebra, find the equilibrium price and quantity. Show your work. (4 points) B. In the diagram, shade in the area that represents Producer Surplus when the market is in equilibrium. (1 point) C. The City is discussing the introduction of a tax on sneakers. The City mayor stated: If we ask stores to pay the City $20 for each pair of sneakers they sell, we raise $800 each day without imposing any pain on consumers. Do you agree with the City mayor? Why? D. Instead of the tax, the City introduces a license fee. Any store selling sneakers must pay a daily license of $100 regardless of the number of sneakers it sells. In the short run, does the license fee affect the supply curve of sneakers? Briefly explain. (2 points)

Exercise 2 - (5 points) The Manhattan market for restaurant meals is in long run equilibrium.

100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100

At Campo, a restaurant on Broadway between 112 and 113 street, the daily demand for meals is Qd = 100 P and the marginal cost of a meal is $20. The demand and marginal cost lines for meals served at Campo are represented in the diagram to the left. a) Using the diagram or algebra, find the number of meals the restaurant serves each day and the price of a meal. b) In the diagram, add an Average Cost (AC) curve to illustrate profits at Campo. c) Is the number of meals served at Campo efficient? Why?

th

th

Exercise 3 The diagrams below illustrate demand and supply in the U.S. market for cocaine.

100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80

a) With the aid of the diagram, explains what happens in the U.S. market for cocaine if the prices of ecstasy and heroin drop.

b) With the aid of the diagram, explain what happens in the U.S. market for cocaine after U.S. Customs and Border Protection officers at Laredo seize 20% of the weekly supply of cocaine.

Spring 2013

Midterm Exam - Practice Set

Musatti

Practice Set 4 - Solutions

True, False, Justify
1. High income nations do not face scarcity. _____False___________Scarcity is the mis-match between available resources and their potential uses. High income nations like all others would have higher welfare if they had more resources.______________________________________________________________________

2. If Jody, a rational consumer, has bought milk but not bread, she must like milk better than bread. False Her marginal utility per dollar of milk (MUm/Pm) must have been higher than her marginal utility per dollar of bread (MUb/Pb).

_________________________________________

3. As a share of income, the burden of taxes on necessities falls more heavily on lower income families. True Low income families spend a larger fraction of their income on necessities, hence a tax on necessities falls more heavily on them.

_________________________
4. If the price of oranges is unusually low, demand and supply for oranges must be below their normal levels. False Demand must be unusually low, however supply must be unusually high.

___________________
5. If a firm makes losses it should temporarily close down. False The firm should close down only if losses exceeded fixed cost. i.e. if revenues did not cover all variable costs.

_______________________

Short Answers/ Exercises

Exercise 1 (10 points) In a fictional City, the retail market for sneakers is perfectly competitive. The daily demand for sneakers is Qd = 60 0.5P and the daily supply is Qs = P. Price is measured in dollars and quantity in pairs of sneakers.
150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

A. Draw the demand and supply curves, clearly labeling the curves and the market equilibrium; then using algebra, find the equilibrium price and quantity. Show your work. The market is in equilibrium at the price where Qd=Qs 60-0.5P = P 60 = 1.5P P = $40 and Q = 60 20 = 40 B. In the diagram, shade in the area that represents Producer Surplus when the market is in equilibrium. (1 point) C. a) If the City introduces a $20 tax, sales would fall below 40 units and revenue would be less than $800. b) Because buyers are less price sensitive than sellers (demand is less price elastic than supply), a large portion of the tax burden will fall on consumers. D. No. The supply curve is the marginal cost of producing sneakers. The license fee is a fixed cost and does not affect stores marginal cost. ( 1 point)

Spring 2013 Exercise 2 - (5 points)

Midterm Exam - Practice Set

Musatti

The Manhattan market for restaurant meals is in long run equilibrium.

100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100

At Campo, a restaurant on Broadway between 112 and 113 street, the daily demand for meals is Qd = 100 P and the marginal cost of a meal is $20. The demand and marginal cost lines for meals served at Campo are represented in the diagram to the left. a)Using the diagram or algebra, find the number of meals the restaurant serves each day and the price of a meal. The restaurant serves meals up to the point where MR equals MC. In the diagram this happens when 40 meals are served each day. The restaurant can charge 100 40 = $60 per meal. P = 100 Q MR =100 2Q MR = 100 2Q = 20 = MC 80 = 2Q and Q = 40 P = 100 40 = 60

th

th

b) Restaurants sell their product in monopolistically competitive markets . In the long run, no restaurant earns extra profits. c) No. In monopolistically competitive markets, all firms operate below their minimum efficient scale no productive efficiency. Furthermore they charge a price P>MC no allocative efficiency. Exercise 3 (4 points) The diagrams below illustrate demand and supply in the U.S. market for cocaine.

100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80

a) With the aid of the diagram, explains what happens in the U.S. market for cocaine if the prices of ecstasy and heroin drop. Ecstasy and heroin are substitutes for cocaine. When their price drops, demand for cocaine drops, the price of cocaine drops and the amount of cocaine sold drops.

100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80

b) With the aid of the diagram, explain what happens in the U.S. market for cocaine after U.S. Customs and Border Protection officers at Laredo seize 20% of the weekly supply of cocaine. The supply of cocaine drops, the price of cocaine increases while the amount of cocaine sold drops.

Spring 2013

Midterm Exam - Practice Set

Musatti

MC Set 4

1) A collusive agreement to form a cartel is difficult to maintain because A) each member firm can increase its own profits by cutting its price and selling more. B) supply will decrease because of the high cartel price. C) forming a cartel is legal but frowned upon throughout the world. D) demanders will rebel once they realize a cartel has been formed. E) each firm can increase its profit if it decreases its production even more than the decrease set by the cartel. 2) Consider the market for smart phones. Which of the following shifts the demand curve rightward? A) an increase in the price of land-line phone service, a substitute for smart phones B) a decrease in the price of smart phones C) a decrease in the number of smart phone buyers D) an increase in the price of smart phones E) an increase in the supply of smart phones. 3) Which of the following can be a barrier to entry? i. exclusive ownership of a necessary input ii. patent iii. large economies of scale A) i, ii and iii B) ii only C) i and ii D) i and iii E) i only 4) Suppose the equilibrium price of a gallon of milk is $4. If the government imposes a price floor of $5 per gallon of milk, the A) demand decreases. B) quantity supplied of milk exceeds the quantity demanded. C) price of milk remains $4 per gallon. D) quantity supplied of milk falls short of the quantity demanded. E) supply increases.

5) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. Kevin will train how many clients per day? A) between 2 and 4 B) 6 C) 4 D) 10 E) None of the above answers is correct.

Spring 2013

Midterm Exam - Practice Set

Musatti

6) At the Punjab Bakery, two workers can decorate 14 cakes in an hour and three workers can decorate 18 cakes in an hour. The marginal product of the third worker is A) 32 cakes and the average product for three workers is 9 cakes. B) 18 cakes and the average product for three workers is 6 cakes. C) 4 cakes and the average product for three workers is 6 cakes. D) 9 cakes and is equal to the average product. E) 6 cakes and the average product for three workers is also 6 cakes.

7) The figure above shows the production possibilities frontiers for the United Kingdom and France. If the United Kingdom and France specialize and engage in trade, the United Kingdom will produce ________ and France will produce ________. A) fish; fish B) both wheat and fish; both wheat and fish C) fish; wheat D) wheat; fish E) wheat; wheat 8) Pizza Hut lowers the price of its pizza. The price elasticity of demand for Pizza Hut pizza equals 0.3. What happens to the Pizza Hut's total revenue? A) nothing B) It increases. C) It becomes negative. D) It decreases. E) It might change, but more information is needed to determine if it increases, decreases, or does not change. 9) A example of a good with external benefits is A) a dose of flu vaccine. B) a sewing machine. C) a pizza. D) an imported good. E) a pair of running shoes. 10) Which of the following shifts the demand curve for movies rightward? A) an increase in movie star salaries B) a decrease in the price of move tickets C) an increase in the price of NetFlix, a substitute for movies D) an increase in the price of HDTV sets E) an increase in the price of movie tickets

Spring 2013

Midterm Exam - Practice Set

Musatti

11) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $3.62, then A) there is a shortage of gasoline in Tulsa. B) there is a surplus of gasoline in Tulsa. C) the gasoline market in Tulsa is in equilibrium. D) without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) there is neither a surplus nor a shortage, but the market is NOT in equilibrium. 12) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $3.73, then A) there is a shortage of gasoline in Tulsa. B) the gasoline market in Tulsa is in equilibrium. C) there is a surplus of gasoline in Tulsa. D) without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) there is neither a surplus nor a shortage, but the market is NOT in equilibrium. 13) Moving along a country's PPF, a reason opportunity costs increase is that A) some resources are better suited for producing one good rather than the other. B) unemployment decreases as a country produces more and more of one good. C) technology must advance in order to produce more and more of one good. D) unemployment increases as a country produces more and more of one good. E) technology declines as a country produces more and more of one good. 14) KFC raises the price of its grilled chicken. The price elasticity of demand for KFC grilled chicken is 0.8. What happens to the KFC's total revenue? A) nothing B) It decreases. C) It increases. D) It becomes negative. E) It might change, but more information is needed to determine if it increases, decreases, or does not change.

15) The table above shows the production possibilities for an economy. The opportunity cost of a loaf of bread is ________ when moving from possibility B to possibility C. A) 1/2 of a book B) 200 books C) 2 books D) 100 loaves of bread E) 1 loaf of bread

Spring 2013

Midterm Exam - Practice Set

Musatti

16) Terence has $50 per week to spend on Subway sandwiches and milkshakes. The price of a Subway sandwich is $5 and the price of a milkshake is $4. He buys 6 sandwiches and 5 milkshakes. The marginal utility of the 6th sandwich = 25 and the marginal utility of the 5th milkshake = 24. Which of the following is true? A) He is not maximizing his utility because he is not spending all of his income. B) He is maximizing his utility. C) He is maximizing his utility even if he is not spending all of his income. D) He is not maximizing his utility and should buy more milkshakes. E) He is not maximizing his utility and should buy more Subway sandwiches.

17) Which figure above shows the effect of an increase in the cost of the tomato sauce used to produce pizza? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C 18) Pizza is a normal good. Which figure above shows the effect of a decrease in consumers' incomes? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C

Spring 2013

Midterm Exam - Practice Set

Musatti

19) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. What is Deb's opportunity cost of assembling 1 packet? A) 1/4 of an envelope B) 40 envelopes C) 160 envelopes D) 4 envelopes E) 4 packets

20) The figure above shows the market for tires. The figure shows that the government has imposed a tax of ________ per tire and that ________ pay most of the tax. A) $60; sellers B) $30; buyers C) $60; buyers D) $30; sellers E) $40; buyers 21) Suppose the elasticity of demand for Mexican food is -3.00 and the elasticity of supply is 1. If the government imposes a sales tax on Mexican food, which of the following occurs? i. Sellers bear the larger share of the tax burden. ii. Less Mexican food is produced by sellers. iii. The government receives the excess burden as revenue. iv. Only producer surplus decreases. A) iv only B) i , ii and iv C) iii only D) i, ii, iii, and iv E) i and ii

Spring 2013

Midterm Exam - Practice Set

Musatti

22) When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost A) remains constant. B) increases. C) decreases. D) might increase, decrease, or remain constant depending on how much people value the additional units of the good. E) cannot be predicted. Figure 9-3

Since 1953 the United States has imposed a quota to limit the imports of peanuts. Figure 9-3 illustrates the impact of the quota. 23) Refer to Figure 9-3. What is the area of domestic producer surplus after the imposition of a quota? A) B B) B + C C) E + I + J + M D) A +B +C E) B + E + I + J + M 24) Which of the following is a fixed cost for ACME manufacturing? A) the cost of shipping its product to market B) raw material costs C) the utility bill D) the annual fire and theft insurance premiums E) wages paid to labor

25) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point E. What would be the opportunity cost to increase the production of wine to 9 thousand bottles? A) 3 tons of rice B) 15 thousand bottles of wine C) 12 tons of rice

Spring 2013

Midterm Exam - Practice Set

Musatti

D) 9 thousand bottles of wine E) Nothing, it is a free lunch. 26) The deadweight loss from a rent ceiling below the equilibrium rent is smallest when the supply of housing is A) elastic but not perfectly elastic. B) inelastic but not perfectly inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. 27) If the percentage change in price is 10 percent and the demand is elastic, then the percentage change in the quantity demanded A) is larger than 10 percent. B) equals 0 percent. C) equals 10 percent. D) is greater than 0 percent but less than 10 percent. E) More information is needed to determine the magnitude of the change in the quantity demanded. 28) Sam's budget is $60.00. The combinations of gasoline and coffee along one of Sam's indifference curves are combinations A) that he can afford with his $60.00 budget. B) that require the same total expenditure. C) among which he is indifferent. D) that give him the same marginal rate of substitution. E) None of the above answers are correct. 29) If Country A can produce an extra plane by giving up two boats, and Country B can produce an extra plane by giving up three boats, then A) the two countries have no incentive to trade with one another. B) Country A has an absolute advantage in producing planes and a comparative advantage in producing boats. C) Country B has a comparative advantage over Country A in the production of planes. D) Country A has a comparative advantage over Country B in the production of planes. E) Country A would like to trade with B, but B cannot gain by trading with A. 30) The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60. What is the price elasticity of demand? A) 40.0 B) 1.25 C) 1.0 D) 20.0 E) 0.80 31) The extra cost associated with undertaking an activity is called A) marginal cost. B) foregone cost. C) opportunity cost. D) net loss. E) sunk cost.

Spring 2013

Midterm Exam - Practice Set

Musatti

1) A 2) A 3) A 4) B 5) C 6) C 7) C 8) D 9) A 10) C 11) A 12) C 13) A 14) C 15) C 16) D 17) C 18) B 19) D 20) D 21) E 22) B 23) B 24) D 25) A 26) E 27) A 28) C 29) D 30) B 31) A

Fall 2012

Principles of Economics

Musatti

Practice Sets

31