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of University Southern California Econ 203, Principles of Microeconomics Sample Midterm 2 1. The personal distribution of income refers to the: A) division of income between personal taxes, consumption expenditures, and saving. B) division of income on the basis of industry sources, for example, agriculture, transportation, and mining. C) distribution of income to basic resource classes, that is, wages, rents, interest, and profits. D) way income is distributed among specific households or spending units. 2. In economics, a business establishment that owns one or more plants is called a(n): A) industry. B) shop. C) conglomerate. D) firm. 3. The separation of ownership and control in a corporation means that: A) hired managers play a larger role in determining company policy than do a corporation's legal owners. B) the ownership of corporations is becoming increasingly concentrated in the hands of a few common stockholders. C) a firm's board of directors has no power over hired managers. D) stockholders have lost their voting privileges. 4. In a competitive market: A) spillover benefits will always exceed spillover costs. B) resources will be misallocated if government does not properly adjust demand and supply for large spillover costs and benefits. C) resources will be allocated efficiently only if spillover benefits equal spillover costs. D) an efficient allocation of resources is realized even where there are large spillover costs and benefits. 5. A market externality refers to: A) economic costs and benefits of market activities that go to those who are not directly involved in the market transaction. B) the impact of legal and institutional forces on market behavior. C) any unanticipated change in market price or output. D) any noneconomic force, for example, political disruption of the flow of Middle East oil, which has market effects. Page 1 Use the following to answer question 6: R ly N i ay ia vr o vr n l r El d iiy xu bt c al N xu bt o c d iiy n l al e A C B D 6. Refer to the above matrix. A public good is characterized by combination: A) A. B) B. C) C. D) D. 7. In performing its stabilization function, it may be appropriate for the nation's central bank (the Federal Reserve in the United States) to take actions to: A) increase taxes to reduce inflation. B) increase interest rates to reduce inflation. C) reduce government spending to reduce inflation. D) increase subsidies to businesses to reduce unemployment. 8. Government transfer payments: A) have been virtually eliminated by Federal revenue sharing. B) have virtually no effect on the distribution of income. C) make the distribution of income less equal. D) make the distribution of income less unequal. Use the following to answer question 9: The following data represent a personal income tax schedule. Answer the next question(s) on the basis of this information. T x b in o e a a le c m $ 0 20 00 40 00 60 00 80 00 1 ,0 0 0 0 T ta ta o l x $ 0 20 0 60 0 10 20 20 00 30 00 9. Refer to the above table. If your taxable income is $8,000, your average tax rate is: A) 25 percent and the marginal rate on additional income is also 25 percent. B) 25 percent and the marginal rate on additional income is 50 percent. C) 25 percent and the marginal rate on additional income cannot be determined from the information given. D) 20 percent and the marginal rate on additional income is 30 percent. Page 2 Use the following to answer question 10: Answer the next question(s) on the basis of the following data: T x b in o e a a le c m $00 10 20 00 30 00 40 00 50 00 60 00 T ta ta o l x $ 0 10 0 30 0 60 0 10 00 10 50 10. Refer to the above data. If your taxable income increases from $4000 to $5000, you will encounter a marginal tax rate of: A) 40 percent. B) 25 percent. C) 15 percent. D) 10 percent. 11. The physical import of DVD players to the United States from Japan best illustrates a: A) resource flow. B) financial flow. C) trade flow. D) technology flow. 12. Which of the following statements is correct? A) United States exports and imports have been decreasing as a percentage of U.S. GDP but the U.S. share of total world trade has been increasing. B) United States exports and imports have been decreasing as a percentage of U.S. GDP and the U.S. share of total world trade has been declining. C) United States exports and imports have been expanding as a percentage of U.S. GDP and the U.S. share of total world trade has been increasing. D) United States exports and imports have been expanding as a percentage of U.S. GDP but the U.S. share of total world trade has been declining. 13. Which of the following countries has recently emerged as one of the world's top trading nations in terms of total trade volume? A) Chile B) India C) Ireland D) China Page 3 Use the following to answer question 14: Alpha's production possibilities: A 60 0 B 45 15 C 30 30 D 15 45 E 0 60 Steel (tons) Wheat (tons) Omega's production possibilities: A 20 0 B 15 15 C 10 30 D 5 45 E 0 60 Steel (tons) Wheat (tons) 14. Refer to the above data. If Alpha was producing at alternative B and Omega was at alternative C before trade, the gain from specialization and trade would be: A) 30 tons of wheat. B) 5 tons of steel. C) 5 tons of steel and 15 tons of wheat. D) 15 tons of steel and 5 tons of wheat. Use the following to answer question 15: Answer the next question(s) on the basis of the following production possibilities tables for countries Alpha and Beta: Alpha Production Possibilities Product A B C D X 3 2 1 0 Y 0 4 8 12 Beta Product X Y Production Possibilities A B C D 6 4 2 0 0 4 8 12 15. Refer to the above tables. The domestic opportunity cost of one unit of X in Beta is: A) 2 units of Y. B) 4 units of Y. C) 1 unit of Y. D) 3 units of Y. 16. Depreciation of the dollar will: A) increase the prices of U.S. imports, but decrease the prices of U.S. exports. B) decrease the prices of U.S. imports, but increase the prices of U.S. exports. C) increase the prices of both U.S. imports and exports. D) decrease the prices of both U.S. imports and exports. Page 4 17. If the dollar price of one yen is $.04, a Japanese good priced at 560 yen would cost an American: A) $22.40. B) $2240. C) $14,000. D) $2.40. 18. The latest, on-going international round of trade negotiations is called the: A) Bangkok Round. B) Doha Round. C) Seattle Round. D) Stockholm Round. 19. The European Union (EU) comprises a group of European nations that have: A) abolished tariffs among one another and established a system of common tariffs with respect to nonmember nations. B) fully integrated their economies by establishing a central bank, a common currency, and a coordinated set of governmental budgetary policies. C) agreed to trade only among one another. D) eliminated all tariffs and trade barriers with nonmember nations. 20. Critics of the North American Free Trade Agreement (NAFTA) falsely feared that it would: A) increase the flow of illegal Mexican immigrants to the United States. B) cause the Eurpoean Union and Japan to raise trade barriers against U.S. goods. C) cause a massive loss of U.S. jobs to Mexico. D) increase foreign ownership of assets in the United States. 21. The price elasticity of demand coefficient measures: A) buyer responsiveness to price changes. B) the extent to which a demand curve shifts as incomes change. C) the slope of the demand curve. D) how far business executives can stretch their fixed costs. Page 5 Use the following to answer question 22: 22. The above diagram shows two product demand curves. On the basis of this diagram we can say that: A) over range P1P2 price elasticity of demand is greater for D1 than for D2. B) over range P1P2 price elasticity of demand is greater for D2 than for D1. C) over range P1P2 price elasticity is the same for the two demand curves. D) not enough information is given to compare price elasticities. 23. In which price range of the accompanying demand schedule is demand elastic? P ic r e $ 4 3 2 1 Q a tity un d mn e e a dd 2 4 6 8 A) B) C) D) $4-$3 $3-$2 $2-$1 below $1 24. In which of the following cases will total revenue increase? A) price falls and demand is inelastic B) price falls and supply is elastic C) price rises and demand is inelastic D) price rises and demand is elastic 25. The elasticity of demand for a product is likely to be greater: A) if the product is a necessity, rather than a luxury good. B) the greater the amount of time over which buyers adjust to a price change. C) the smaller the proportion of one's income spent on the product. D) the smaller the number of substitute products available. Page 6 26. Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price: A) will decrease but equilibrium quantity will increase. B) and quantity will both decrease. C) will increase but equilibrium quantity will decline. D) will increase but equilibrium quantity will be unchanged. 27. If the supply of product X is perfectly elastic, an increase in the demand for it will increase: A) equilibrium quantity but reduce equilibrium price. B) equilibrium quantity but equilibrium price will be unchanged. C) equilibrium price but reduce equilibrium quantity. D) equilibrium price but equilibrium quantity will be unchanged. Use the following to answer question 28: Price per ticket $13 11 9 7 5 3 Quantity 1,000 demanded 2,000 3,000 4,000 5,000 6,000 28. Refer to the above information. If the Mudhens' management wanted to maximize total revenue from the game, it would set the ticket price at: A) $5. B) $7. C) $9. D) $13. 29. Compared to coffee, we would expect the cross elasticity of demand for: A) tea to be negative, but positive for cream. B) tea to be positive, but negative for cream. C) both tea and cream to be negative. D) both tea and cream to be positive. 30. A linear demand curve has a constant elasticity over the full range of the curve. A) True B) False Page 7 31. The income effect indicates that: A) a rise in money income will cause consumers to buy smaller quantities of normal goods. B) when the price of a product falls, the lower price will induce the consumer to buy more of that product now that it is relatively cheaper. C) consumers should substitute among various products until the marginal utility from the last unit of each product purchased is the same. D) when the price of a product falls, a consumer will be able to buy more of it with a specific money income. Use the following to answer question 32: U its n c n md o su e 0 1 2 3 4 T ta o l u tility 0 W 3 5 Y 4 0 Mrg a a in l u tility 2 0 X 1 0 Z 32. Refer to above data. Marginal utility becomes negative beginning with the: A) first unit. B) second unit. C) third unit. D) fourth unit. 33. The theory of consumer behavior assumes that : A) consumers behave rationally, maximizing their satisfactions. B) consumers have unlimited money incomes. C) consumers do not know how much marginal utility they obtain from succesive units of various products. D) marginal utility is constant. 34. Assume that a consumer purchases products A, B, and C in quantities such that the last dollar spent on each yields the same marginal utility and the consumer's income is totally spent. We can conclude that: A) total utility is being minimized. B) production costs are being minimized. C) marginal utility exceeds total utility. D) total utility is being maximized. Page 8 Use the following to answer question 35: Units of X 1 2 3 4 5 6 MUx 20 18 16 14 12 11 MUx/ Px = $2 ___ ___ ___ ___ ___ ___ MUx/ Px = $1 ___ ___ ___ ___ ___ ___ Units of Y 1 2 3 4 5 6 MUy 48 40 36 32 24 12 MUy/ Py = $4 ___ ___ ___ ___ ___ ___ 35. If the price of X and Y are $2 and $4 per unit, respectively, to maximize total utility this consumer should buy: A) 1 units of X and 1 units of Y. B) 2 units of X and 2 units of Y. C) 1 units of X and 2 units of Y. D) 5 units of X and no units of Y. 36. (Last Word) Most people do not steal because: A) the marginal utilities of stolen goods diminish as more of them are obtained. B) the marginal utilities of stolen goods are negative. C) their marginal costs, including guilt costs, are too high. D) stolen goods can be sold only at deep discounts. Use the following to answer question 37: 37. Refer to the budget line shown in the diagram above. Given the same money income, reductions in the prices of both products C and D will: A) shift the budget line outward on the horizontal axis, but leave it anchored at "10" on the vertical axis. B) shift the budget line to the left. C) shift the budget line to the right. D) have no effect on the budget line. Page 9 38. Assume the price of product Y (the quantity of which is plotted on the vertical axis) is initially $15 and the price of X (the quantity of which is plotted on the horizontal axis) is initially $3. Assume money income is initially $60. If the prices of Y and X now increase to $30 and $6 respectively and money income increases to $120, then the budget line will: A) shift rightward and become steeper. B) shift rightward and become flatter. C) shift rightward, but its slope will not change. D) be unchanged. Use the following to answer question 39: 39. Refer to the above diagram where xy is the relevant budget line and I1 , I2, and I3 are indifference curves. At point K: A) MUx = MUy. B) MRS = Px/Py. C) MRS = Py/Px. D) Px exceeds Py. 40. Indifference curves are linear and budget lines are convex to the origin. A) True B) False Page 10 Short Answer Questions: Q1. The countries of Macrostan and Micrastan have the production possibilities tables for sheep and hogs shown in the tables below. Without trade Macro would produce at Alternative D and Micra would also produce Alternative D. Note that the costs of producing sheep and hogs are constant in both countries. Macrostan's Production Possibilities Table Alternative A B C D E F 25 20 15 10 5 0 0 5 10 15 20 25 Micrastan's Production Possibilities Table Alternative A B C D E F 20 16 12 8 4 0 0 3 6 9 12 15 Product (lbs) Sheep Hogs Product (lbs) Sheep Hogs (a) In Macro, the cost of producing: 5 units of sheep is ______ hog units. 1 unit of sheep is ______ hog units. (b) In Micra, the cost of producing: 4 units of sheep is ______ hog units. 1 unit of sheep is ______ hog units. (c) Which country has the comparative advantage in sheep production and which country has the comparative advantage in hog production? (d) If each nation specializes in the product where it has a comparative advantage and trades with the other, what will be the limits to the terms of trade for each sheep unit? (e) If the nations do not specialize and trade but remain at alternative D in Macrostan and D in Micrastan, the combined production of Macro and Micrastan will be how many sheep and how many hogs? (f) However, if the two nations specialize, the combined production of Macro and Micrastan will be how many sheep and how many hogs? (g) What will be the total gain of sheep and hogs if the countries specialize and trade? Page 11 Q2. A consumer has a daily income of $120 and purchases two products, X and Y. The price of X is $3 and the price of Y is $4. The following six pairs of points for X and Y define an indifference schedule: (7,40), (10,30), (15,20), (20,15), (30,10), and (40,8). 1) In the graph below, draw the budget line and the indifference curve. 2) What amounts of X and Y will allow the consumer to achieve equilibrium? 3) Describe in words what will happen to the budget constraint if the price of X decreases. Page 12 ANSWERS: Multiple Choice: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. D D A B A D B D B A C D D C A A A B A C A A A C B D B B B B D D A D C C C D B B Page 13 Short Answer Questions - Answers Q1. The countries of Macrostan and Micrastan have the production possibilities tables for sheep and hogs shown in the tables below. Without trade Macro would produce at Alternative D and Micra would also produce Alternative D. Note that the costs of producing sheep and hogs are constant in both countries. Macrostan's Production Possibilities Table Alternative A B C D E F 25 20 15 10 5 0 0 5 10 15 20 25 Micrastan's Production Possibilities Table Alternative A B C D E F 20 16 12 8 4 0 0 3 6 9 12 15 Product (lbs) Sheep Hogs Product (lbs) Sheep Hogs (a) In Macro, the cost of producing: 5 units of sheep is __ 5____ hog units. 1 unit of sheep is ___ 1 ___ hog units. (b) In Micra, the cost of producing: 4 units of sheep is _ 3 _____ hog units. 1 unit of sheep is ___ 3/4 ___ hog units. (c) Which country has the comparative advantage in sheep production and which country has the comparative advantage in hog production? Based on the opportunity cost of producing in each country, Macrostan has a comparative advantage in hogs while Micrastan has a comparative advantage in sheep. Page 14 (d) If each nation specializes in the product where it has a comparative advantage and trades with the other, what will be the limits to the terms of trade for each sheep unit? The limits to the terms of trade will be between 3/4 and 1 hog unit for each sheep unit (or conversely between 4/3 and 1 unit of sheep for each unit of hogs). (e) If the nations do not specialize and trade but remain at alternative D in Macrostan and D in Micrastan, the combined production of Macro and Micrastan will be how many sheep and how many hogs? If the nations do not specialize and trade but remain at alternative D in Macrostan and D in Micrastan, the combined production of Macrostan and Micrastan will be 18 sheep and 24 hog units. (f) However, if the two nations specialize, the combined production of Macro and Micrastan will be how many sheep and how many hogs? 20 sheep and 25 hog units. (g) What will be the total gain of sheep and hogs if the countries specialize and trade? Total gains from specialization will be 2 sheep and 1 hog unit (20-18 sheep and 25-24 hogs). Page 15 Q2. A consumer has a daily income of $120 and purchases two products, X and Y. The price of X is $3 and the price of Y is $4. The following six pairs of points for X and Y define an indifference schedule: (7,40), (10,30), (15,20), (20,15), (30,10), and (40,8). 1) In the graph below, draw the budget line and the indifference curve. 2) What amounts of X and Y will allow the consumer to achieve equilibrium? The point of tangency between the budget line and indifference curve is at 20X and 15Y. 3) Describe in words what will happen to the budget constraint if the price of X decreases. It will shift out, pivoting off of the vertical intercept (QY 30). Page 16

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