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Unformatted text preview: Econ 1 Sample Midterm Examination Winter Quarter 2008 1. (a) 2. (a) 3. (b) 4. (b) 5. (a) 6. (a) 7. (c) 8. (c) 9. (d) 10. (a) 11. (a) 12. (c) 13. (c) 14. (d) 15. (a) 16. (a) 17) In Oregon, they grow trees which are used to produce wood products, and they fish salmon which are eaten for dinner. (a) Draw a production possibilities frontier (PPF) showing possible combinations of wood products and salmon dinners that can be produced with the available resources in Oregon. Is the PPF upward sloping or downward sloping? Why? Downward sloping because of opportunity costs (b) Suppose the people of Oregon begin to study forestry and fishing, increasing their human capital. What effect will their studies have on Oregon's PPF? Why? Show the effect on your graph. Increase in productivity, change in technology, will shift PPF out. 18) If there is a decrease in supply, what would happen to the amount of consumer surplus and why? Show in a graph. A decrease in supply would drive the equilibrium price upward. This would decrease the area under the demand curve and above the price. This of course is the amount of consumer surplus. 19) Consider 2 counties, Japan and the U.S., producing two goods: cell phones and computers. Suppose that there are 10 workers in each country. The table below depicts how many goods can be produced by a worker per day in each country. Japan 1 6 Output per worker U.S. 2 6 Cell Phones Computers (a) Which country (if any) has the absolute advantage in producing cell phones? U.S. (b) Which country (if any) has the absolute advantage in producing computers? No country has an absolute advantage in producing computers. (c) Which country (if any) has the comparative advantage in producing cell phones? U.S. (d) Which country (if any) has the comparative advantage in producing computers? Japan True/False/Uncertain. Say whether the statement is true, false, or uncertain and explain. No points will be given for answers without explanations. (20) In a market, if the demand curve is very elastic and the supply curve is very ineleastic, producers pay most of the burden for an excise tax. TRUE: A flat demand curve or a steep supply curve imply that the producers pay most of the tax burden, so when combined the producers surely pay most of the burden. (21) If Brenda winds up spending exactly $100 per day on ice tea, no matter what happens to the price, what do we know about Brenda's personal demand curve for ice tea? Explain briefly and give the elasticity equation for this situation. Unit elastic (22) A 20 percent increase shoelaces may have little impact on the demand. The same can't be said for a 20 percent increase in college tuition. Explain in two or three sentences. This has to do with the amount of one's budget spent on the item: a lot smaller amount for shoelaces, and thus an increase in their price will have little impact on demand: not so for college tuition. (23) The demand for tobacco is price inelastic. Suppose there is a drought that destroys a large portion of the tobacco crop. What will happen in the market for tobacco? Will the equilibrium price and quantity change? If so, how? What will happen to the total revenue earned by tobacco farmers? The drought will lower the supply of tobacco. The supply of tobacco will shift to the left, increasing price but lowering the equilibrium quantity sold. However, since the demand for tobacco is price inelastic, the percentage increase in price will be larger than the percentage decrease in quantity demanded. Therefore, the total revenue earned by tobacco farmers will rise. (24) Explain what happens to the equilibrium price and quantity in the market for gasoline, if there is an increase in consumers' incomes and an increase in crude oil prices. Crude oil is used to make gasoline. Illustrate your answer with a graph of the gasoline market. As gasoline is normal good, an increase in income leads to an increase in demand (shifting the demand curve to the right). At the same time, an increase in an input (crude oil) price leads to a decrease in supply (shifting the supply curve to the left). At the new equilibrium, the equilibrium price will certainly be higher while the equilibrium quantity is indeterminate. (25) (a) Equilibrium: Quantity demanded = quantity supplied 110 0.5 Q = 20 + 0.5 Q 1.5 Q = 90 Q* = 60 printers P* = $80 (c) P = 110 0.5 Q (demand) P 7.5 = 20 + Q (supply) 110 0.5 Q = 27.5 + Q Q**= 55 printers Consumer pays => Pc = 110 0.5 (55) = $82.5 Producer receives => Ps = 82.5 7.5 = $ 75 (d) Consumers pay: 82.5 80 = $2.5 of the tax Producers pay: 80 75 = $5 of the tax (e) CS (Before tax) = (60) (110 80) = $900 CS (After tax) = (55) (110 82.5) = $756.25 Therefore, consumers are worse off after the tax. ...
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- Fall '08