Download 1013 P3 Quiz 1

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ACADIA UNIVERSITY
DEPARTMENT OF ECONOMICS
ECONOMICS 1013 P3 - MICROECONOMIC PRINCIPLES
Instructor: Dr. Burç Kayahan
TERM TEST – 1 (May 13, 2011)
TIME IS 120 MINUTES.
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MC Answers
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MULTIPLE CHOICE (2.5 pts per question) Choose the one alternative that best completes the
statement or answers the question.
1) Some sales managers are talking shop. Which of the following quotations refers
to a movement along the demand curve?
A) "We decided to cut our prices, and the increase in our sales has been
remarkable."
B) "It has been an unusually mild winter; our sales of wool scarves are down
from last year."
C) "The Green movement has sparked an increase in our sales of
biodegradable products."
D) "Since our competitors raised their prices, our sales have doubled."
E) None of the above.
2) Some producers are chatting over a beer. Which one of the following quotations
refers to a rightward shift of the supply curve?
A) "Our new, sophisticated equipment will enable us to undercut our
competitors."
B) "Raw material prices have sky-rocketed; we will have to pass the cost on
to our customers."
C) "We anticipate a big increase in demand. Our product price should rise,
so we are planning for an increase in output."
D) "Wage increases have forced us to raise our prices."
E) Both A and C.
3) Total revenue is more likely to rise when the price rises if
A) there are few substitutes for the good.
B) a high proportion of income is spent on the good.
C) some extended period of time passes.
D) all of the above.
E) none of the above.
4) A production possibilities frontier is negatively sloped because
A) more goods are purchased as price falls.
B) of opportunity cost.
C) some resources are unused.
D) there is not enough capital in the economy.
E) of increasing consumption.
5) An increase in the price of ground beef
A) increases the demand for chicken, a substitute for ground beef.
B) increases the demand for hamburger buns, a complement of ground beef.
C) increases the quantity demanded of ground beef.
D) decreases the quantity demanded of ground beef.
E) both A and D.
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Use the figure below to answer the following question.
Figure 4.1.3
6) Given the relationship shown in Figure 4.1.3 between total revenue from the
sale of a good and the quantity of the good sold, then
A)
B)
C)
D)
E)
the price elasticity of demand is zero.
the price elasticity of demand is 1.
this is a normal good.
this is an inferior good.
demand for this good is perfectly elastic.
7) If a 10 percent rise in income leads to an 8 percent increase in quantity
demanded for hot dogs, we can conclude that hot dogs are
A)
B)
C)
D)
E)
a necessity good with income elasticity of 0.80.
an inferior good with income elasticity of - 0.80.
a luxury good with income elasticity of 0.80.
a luxury good with income elasticity of 1.25.
a necessity good with an income elasticity of 1.25.
8) The price of good A falls by 10 percent and quantity of good A demanded does
not change. We conclude that the demand for good A is
A)
B)
C)
D)
E)
perfectly elastic.
inelastic.
elastic.
unit elastic.
perfectly inelastic
9) In a newspaper article it mentions that the cross price-elasticity of demand for
computers and Ipods to be -1.25, and the article concludes by stating that the
price of computers has fallen. You would expect that
A)
B)
C)
D)
E)
the demand for computers will go up.
the demand for computers will go down.
the demand for Ipods will go up.
the demand for Ipods will go down.
there will be no change in the demand for either good.
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Use the figure below to answer the following questions.
Figure 4.1
10) Figure 4.1illustrates a linear demand curve. If the price increases from $8 to $10,
A)
B)
C)
D)
E)
total revenue initially increases then decreases.
total revenue increases.
total revenue remains unchanged.
total revenue initially decreases then increases.
total revenue decreases.
11) The ________ the demand curve is, the _________ demand curve will be.
A)
B)
C)
D)
E)
flatter; more inelastic
flatter; more elastic
steeper; less inelastic
steeper; more elastic
None of the above.
12) Refer to the production possibilities frontier presented in the
left. At point A, the opportunity cost of producing 3 more units
of X
A) is 30 units of Y.
B) is 3 units of X.
C) is 20 units of Y.
D) is 10 units of Y.
E) cannot be determined from the diagram.
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13) Suppose the production possibilities frontier for skirts and pants is a straight line. As the production of
skirts increases, the marginal benefit of skirts
A) increases and marginal cost is constant.
B) is constant and marginal cost decreases.
C) decreases and marginal cost increases.
D) decreases and marginal cost decreases.
E) decreases and marginal cost is constant.
14) Use the figure above to answer this question. When 2,000 bicycles are produced each month,
A) the marginal benefit from another bicycle is greater than the marginal cost of another bicycle.
B) more bicycles must be produced to reach the efficient level of output.
C) fewer bicycles must be produced to reach the efficient level of output.
D) the economy is efficient at this level of production of bicycles.
E) both A and B.
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Use the figure below to answer the following questions.
15) Which one of the following would result in the demand curve shifting from D1 to D2 in Figure above?
A) an increase in the supply of pizza
B) a rise in the price of hamburgers, a substitute for pizza
C) a rise in the price of pizza
D) a fall in the price of pizza
E) a rise in the price of Coke, a complement of pizza
16) If Hamburger Helper is an inferior good, then, a decrease in income will lead to
A) a leftward shift of the demand curve for Hamburger Helper.
B) a rightward shift of the demand curve for Hamburger Helper.
C) a movement up along the demand curve for Hamburger Helper.
D) a movement down along the demand curve for Hamburger Helper.
E) an initial movement up and then down along the demand curve for Hamburger Helper.
17) Which of the following events leads to a rise in the price of oranges?
A) a rise in the price of apples
B) a scientific discovery that oranges cause hair loss
C) a decrease in income if oranges are a normal good
D) good growing weather in Florida
E) a technological improvement in the production of oranges
18) A fall in the price of a good from $11.50 to $8.50 results in an increase in the quantity demanded from
19,200 to 20,800 units. The price elasticity of demand is
A) 0.27.
B) 3.75.
C) 0.08.
D) 8.0.
E) 30.
19) Suppose this coming winter France will have unusually bad weather, and that next year's wine crop will
be substantially reduced. Select the best statement.
A) The French wine supply will increase as price rises.
B) If the demand for French wine is elastic, wine producers will experience an increase in total
revenue.
C) The initial change in the market will create a surplus of French wine.
D) In the final equilibrium, price and quantity will be higher.
E) none of the above
20) As a result of Hurricane Katrina, the supply curve of apples shifted leftward, the equilibrium price of
apples rose, and total revenue fell. This suggests that the price elasticity of demand for apples is
A) perfectly inelastic. B) elastic.
C) inelastic.
D) unit elastic.
E) perfectly elastic.
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PROBLEM SECTION: This section is worth 35 points in total.
1.
(12 points) Predict the economic impact of each of the next events by drawing the appropriate shifts
of curves – label your original demand and supply curves D and S, respectively, and any new ones
D* and S*. Also use ‘+’ and ‘-’ to indicate whether there will be an increase or decrease in demand
(D), supply (S), equilibrium price (Pe) and equilibrium quantity (Qe). If there is no change, use “0”.
If the change cannot be deduced with the information provided, use “U” for uncertain.
(a)
(4 pts) Market: Turkeys Event: Reduction in the price of chicken
D
(b)
Pe
Qe
(4pts) Market: Cell Phones Event: Due to the ongoing recession, unions agree to accept a wage
reduction for the current year
D
(c)
S
S
Pe
Qe
(4 points) Market: French Fries
D
S
Pe
Event: Increase in the price of ketchup
Qe
2.
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2. (13 points) Luke can produce 100 pies an hour or 200 cookies an hour. Han Solo can produce 40 pies an
hour or 400 cookies an hour. Initially, Luke and Han Solo choose to be self-sufficient and produce both of
these goods themselves (i.e no trade). Luke produces 50 pies and 100 cookies, whereas Han Solo produces
20 pies and 200 cookies.
(a) (2 points) Draw a figure (on the bottom of the page) with PPF of both of these individuals. Who has the
absolute advantage in pie and cookie production? Why?
(b) (4 points) Using the information provided, calculate the opportunity cost of pies and cookies for Luke
and Han Solo.
Luke
Han Solo
OCCookie
=
=
OCPie
=
=
(c) (2 points) Who has a comparative advantage in pie production? Briefly explain why. Who has a
comparative advantage in cookie production? Briefly explain why.
(d) (2 points) Suppose that Luke and Han Solo decide to make use of their comparative advantages and
specialize on the production of one good. Which good should Luke and Han Solo specialize at? What are
the respective quantities of production for pies and cookies after specialization for Luke and Han Solo?
(e) (3 points) Following the specialization, suppose that, Luke and Han Solo agree to trade 40 pies for 200
cookies. How much of each good do both sides end up with after the trade? Calculate the gains from
trade for each person using this result. Show on a figure (with PPF’s of both individuals) that both
individuals could consume at a higher level with the trade compared to the case with no trade.
Luke
Before Trade
With Specialization
After Trade
Gains from Trade
Pies
50
Cookies
100
Pies
20
Han Solo
Cookies
200
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3. (10 points) The data for Rental Housing Market in
Wolfville is shown on the graph to the left:
(a) (1 pts) In the absence of any intervention, what will
be the equilibrium quantity of houses rented and
the equilibrium monthly rent charged in Wolfville?
(b) (1 pts) Now suppose that the mayor of Wolfville implements a price ceiling of $800. What would be the
consequences of this policy in the rental housing market in Wolfville? Explain your answer using the graph.
(c) (4 pts) Realizing his mistake, the mayor lowers the price ceiling to $400. What would be the consequences
of this policy in the rental housing market in Wolfville? How would the cost of rental units be affected by
this policy? Explain your answer using the graph.
(d) (4pts) Does the price ceiling (of $400) result in an efficient outcome? Calculate the consumer surplus,
producer surplus and the dead weight loss resulting from this policy. Show the areas representing these
measures (consumer surplus, producer surplus and the dead weight loss) on your graph.
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BONUS QUESTION (3 points): According to the “The Central Canada gas price puzzle” article published in
Globe and Mail (in May 10th, 2011), explain how does the gasoline market in the United States is partially
responsible for the recent increases in the price of gasoline at the Canadian market.
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