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Mid1W08 - v1 Name First Midterm Examination Economics 101...

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Unformatted text preview: v1 Name February 13, 2008 First Midterm Examination Economics 101 This exam has 32 questions. Unless a question explicitly says otherwise, assume that all supply curves slope upward and all demand curves slope downward. True/False. Mark box A for True and box B for False. Each correct answer adds 2 points to your score. Each blank answer gives you 1 point. 1. Opportunity cost is measured as the largest amount of money a consumer is willing to spend on the good. 2. Two goods are substitute goods if movement down the demand curve for one results in a decrease in demand for the other. 3. An upward shift of the supply curve corresponds to an increase in supply. 4. A price is not allowed to be higher if a binding price ceiling is in effect. 5. An increase in supply causes an increase demand for that good. 6. A demand curve that always has the same price elasticity of demand will also always have the same slope. 7. A consumer will always purchase an additional unit of a good if the marginal utility is greater than zero. Page # 8. A binding quota might increase the amount of money that consumers spend on a good. 9. A binding price floor might increase consumption of a good. 10. Economists compute a consumer's benefit from drinking another cup of coffee as the most that consumer would be willing to spend on that cup of coffee. Multiple Choice. Mark the box corresponding to the best answer. Each correct answer adds 5 points to your score. Each blank answer gives you 1 point. 11. ___ Suppose the supply of rental apartments in New York City is perfectly inelastic and demand is always unit elastic. There are 100 apartments and then half of them are condemned. After the apartments are condemned, compared to the original equilibrium, consumer expenditure on apartments: (a) more than doubles (b) increases, but less than doubles (c) falls by more than 50% (d) falls by less than 50% (e) stays the same 2 12. Lil' Wayne produces albums and mixtapes. Calculate the opportunity cost of one album as Lil' the points A and B. mixtapes h _———___—__——_—— (a) 1/2 albums (b) 2 albums ) 1/2 mixtapes (d) 2 mixtapes ) 4 mixtapes Wayne moves between amums Page # 3 13. Ann Arbor. Suppose the government contracts you to determine the per—dog tax that will generate exactly $10,000 in revenue by taxing the sale of Chihuahuas in Ann Arbor. The deadweight loss associated with this tax is: Emma: g 5 5 I I I l I ‘l _1______ i / I -1_______-___ I l I I I I 1 _ I ‘I I l \ I I I _l_ to I: 13 I; R: \ .- _- _-_I-—-_ _J-—-—-J—-—-4-———-— I I I I I I ----_ F---- I I I I I I I I I I I 7%: I I I I I I 0 50 100 150 200 250 300 Chmuahuas $2,500 $12,500 between 0 and $2,500 between $2,500 and $12,500 greater than $12,500 Page # The following diagram represents the market for Chihuahuas in 4 Page # l4. ___ Consider the market for an Americanwmade toy called the popoap shown in the graph below. Suppose the price of hoola—hoops, a substitute for popcap toys, increases, and as a result the demand for popcap toys changes by 20 million. What impact does this have on the equilibrium price and quantity of popcap toys? ---r—-_-_ ___—L-____ -——I-—-——h-—-—— {CI-p --r--r-- --1-fin-r--r-- ___- 01 to I I I I I I I I I I I I I I ___-hunn-I-u-ulun-unh—u- --L--l-- 1U 20 30 40 50 Popcap toys (millions) (a) The equilibrium price increases to $56 and the equilibrium quantity rises to 40 million. (b) The equilibrium price increases to $57 and the equilibrium quantity rises to 50 million. (c) The equilibrium price stays at $55 and the equilibrium quantity stays at 30 million. (d) The equilibrium price stays at $55 and the equilibrium quantity rises to 50 million. (e) The equilibrium price falls to $54 and the equilibrium quantity falls to 20 million. Page # 15. Consider the market for bottles of lotion shown in the graph below. As a result of a $2 perwbottle tax, producer surplus will w_ P($) : i : E l E l I S ? ----- : --------- r --------- E --------- 1 --------------- 6 I | --------- i --------- I —————————————— 5 ________________________________ uuuuuuuuuuuuuuuuuuuuuuuu _b. I I I I I l I I - --—-|—_..- -n-nru—u—r-nu- -u-uq-u-u-F-uu-fp-u- n---- ____L_—__L_-__ 10 25 40 55 70 Scuba decrease by $32.50 decrease by $25.00 decrease by $45.50 increase by $15.50 increase by $25.00 l’DCl-OU'QJ 16. ___ Reta has an income of $20 and only consumes apples and oranges. She always receives 5 units of utility frOm consuming an apple and 5 units of utility from consuming an orange. If the price of an apple is $0.20 and the price of an orange is $0.30, then to maximize her utility which of the following must be true? (a) Reta will spend all of her income on apples. (b) Reta will consume any combination of apples and oranges that will exactly spend her entire income. (c) Reta will spend all of her income on oranges. (d) Reta will spend 2/5 of her income on apples and 3/5 on oranges. (e) None of the above is necessarily true. 17. Page # ___ The market for Swiss Cheese in Ann Arbor is depicted in the graph below. Point E represents the market equilibrium on August 1, 2007. Suppose the following events occur between August 2, 2007 and January 1, 2008: I. Many Swiss Cheese producers in Ann Arbor switch from making Swiss Cheese to butter. II. The incomes of Swiss Cheese consumers increase, and Swiss Cheese is an inferior good. Which of the following could represent the new market equilibrium on January 1, 2008. PM P* (a) A only (b) B only (c) C and D only (d) A and B only (e) E only 7 18. Page # Suppose the graph below illustrates the supply and demand curves for used houses. The government decides to subsidize each house sold by $10,000. The change in consumer expenditure due to the subsidy will be ___, and the change in producer revenue due to the subsidy will be P (35, Thousand) 120 .............................. 11o ---------------------------- 100 ---------------------------- 90 ----------------------------- so ---------------------------- ____.L____-|_____.l........_.l.____.._l 7o ----------------------------- 40 60 80 100 Houses 0;O 0; increase of $600,000 decrease of $600,000; 0 increase of $600,000; increase of $800,000 decrease of $800,000; increase of $600,000 (DQOU‘CU 8 Page # project to improve transportation. In order to do so, $80 million dollars are required and the government will tax packs of cigarettes to raise that revenue. If the market for cigarettes is shown below, what is the smallest possible tax per pack that will raise this revenue? 19. Suppose that the Ecuadorean government plans to implement a new P ($) 5 E E E E 7 ----- : --------- ; --------- 4 --------- 4 ---------- ; ------ e ------ a --------- : ————————— 4 —————————— = —————————— ; —————— s ------ a ---------- 5r --------- : ---------- . --------- ' ------ 4 """ i """"" I“ """"" i """"" I """"" r """ 3 """" i """"" r """" : """"" 1 """"" : """ 2 """ 3 """"" ; """"" *; """"" 1 """"" F'ijéfiand 1 ----- : --------- e --------- a --------- 4 ---------- z» ------ 10 25 40 55 70 Cigarettes (in millions of packs) (m % (b) $4 (C) $3 (d) $2 (e) less than $2 20. When the government subsidizes each pound of apples sold, the more __ the demand is, the the new price will be, holding everything else constant. ) inelastic; higher; producer ) elastic; lower; consumer ) elastic; lower; producer ) inelastic; lower; producer ) inelastic; higher; consumer $67393 Page # 10 21. ___ The table below shows the marginal utility for Tom at a soccer game. He has $60 to spend at the game, and will only buy 2 goods, which are slices of pizza and bags of popcorn. If the price of each slice of pizza is $6 and each bag of popcorn is $4, then what combination of them should Tom purchase? _— ___-“nun Marginal Utility margina'Uti'ity 26 20 13 17 16 13 7 of Popcorn (a) 10 pizzas, 0 popcorns (b) 9 pizzas, 1 popcorns (c) 8 pizzas, 3 popcorns (d) 6 pizzas, 6 popcorns (e) 5 pizzas, 7 popcorns 22. Suppose the U.K government imposes a price control that results in a surplus of 10. If the market conditions are given by the following table, then we can conclude that the government's policy was to impose a Quantity Quantity Demanded Supplied price floor at 4 pounds price ceiling at 4 pounds price floor at 2 pounds price ceiling at 2 pounds price floor at 3 pounds mDJOU‘SD Page # ll 23. Suppose the supply of video games is perfectly inelastic. If the supply doubles, the effect on the equilibrium price is and on the equilibrium quantity is when demand is relatively more inelastic. smaller; the same the same; larger larger; the same smaller; smaller larger; smaller (DD-DUO) 24. ___ The graph below shows the market for ice cream. Suppose, in an attempt to promote healthy living, the government imposes a binding quota that increases the equilibrium price by $2. Using the midpoint formula, calculate the price elasticity of demand between the original equilibrium and the equilibrium with the quota. .2. I I I l I --.I____J_-_-L_-_I.____I___.— __-_L_-_J-_-— --.._L-...—— ———J____J ____._.........._.._.-.,....-.. .............-..._._+.......... "‘-“f-'— _"-1_-——T—-‘-l'——_ 5 10 15 20 30 Ice cream Page # 12 25. The table below gives data for the demand for pickles in Ann Arbor. Moving between the listed points on the demand curve, which of the following is correct: Price Quantity (a) Demand between A and B is price inelastic (b) Demand between D and E is price elastic (c) Demand between A and B is unit elastic (d) Demand between B and C is price elastic (e) Demand between D and C is unit elastic Page # 13 26. ___ Paula pays a cleaning service to clean her house. She budgets $500 each week to spend on cleaning, food, or clothing. Her marginal benefit schedule for hours of housecleaning are given in the table below. What is the most Paula will pay for 4 hours of cleaning? Marginal Benefit ($) A (fl 1-!- K3 3 Q. $104 $80 $96 $60 $128 (DR-OUR! 27. Suppose gasoline refineries are destroyed in a hurricane and at the same time many Americans decide to carpool to work. Which of the following could NOT be a result of these two changes in the market for gasoline? (a) A decrease in the equilibrium price of gasoline (b) An increase in consumer expenditure on gasoline (c) No Change in the equilibrium quantity of gasoline consumed (d) An increase in the equilibrium price of gasoline (e) More than one of the above 28. 29. Page # 14 Sally's demand for sugar is perfectly (price) inelastic. Which of the following does perfectly inelastic demand imply? (a) If the price of sugar doubles, Sally's expenditure on sugar will double. (b) If the price of sugar doubles, Sally's expenditure on sugar will more than double. (c) If the price of sugar doubles, Sally will spend the same amount of money on sugar. (d) If Sally's income doubles, Sally will spend the same amount of money on sugar. (e) More than one of the above. The following graph represents the market for candy bars in a small economy. Suppose, in an effort to discourage the unhealthy consumption of candy bars, the government puts a tax of 6 cents on each candy bar. Encouraged by the response, the government increases the tax by 6 cents. How much tax revenue (in dollars) is raised after the tax increase? P (cents) I I I I I I I I I I I I I I I I I -1__T__r--r_1-_1-iT--r_ -L-_L_-L_J__J_-i__L_ I I I I i I I I I I I I I I I S I I I i 1 -‘F‘1"1"T"T' I I I I I -..I-...Jm-nJ-«-Lu 50 60 70 80 90 100110 120130140 Candy Bars $6.60 $5.40 $8.40 $10.80 $13.20 mDJlUW 30. 31. and B, the price ) ) ) ) ) $63393? increases stays the decreases decreases increases Page # 15 Consider the demand curve and two alternative supply curves, A shown in the table below. with supply curve If demand increases by 4, the most; same; A the most; the most; the most; 0210335 3’ In the market for desktop computers, there is a decrease in both the equilibrium price and quantity. Which of the following could NOT have caused both of these changes? (a) (b) a decrease in demand an increase in supply and, in demand a decrease in supply and, at the same time, a decrease in demand (C) (d) a decrease in supply and, in demand (e) More than one of the above at the same time, a decrease at the same time, an increase Page # 16 32. In lecture, when we discussed the impact of a shift in the supply curve, the example we used was: (a) The cause of the higher price of tortillas in Mexico (b) The reason for increased purchases of flat—panel televisions in China (c) The higher price of lettuce in the Northeast due to regulation of the trucking industry (d) The price of commercials in the Superbowl (e) The effect on campaign finances when a major contributor is jailed First Midterm Examination Economics 101 February 13, 2008 Answer Key - Version 1 Number Answer 1 False 2 True 3 False 4 True 5 False 6 False 7 False 8 True 9 False 10 True 11 E 12 D 13 A 14 A 15 A 16 A 17 A l8 B 19 D 20 D 21 22 23 24 25 m m wag mrdmsotu UIFF)W(1 ...
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