Download Test 1 Microeconomics – ERAU --Machiorlatti

Practice Test 1 Macroeconomics –Machiorlatti
Name:__________________________________ClassTime:______________________
Useful formula’s:
(1) TS = CS + PS or TS = CS + PS +Tax Rev
(2) Area of Triangle = ½ b*h Area of a square or rectangle = l*w
MULTIPLE CHOICE ( 2.5pts each). Choose the one alternative that best completes the statement or answers the
question.
Refer to Figure 3.1 for the questions below.
Figure 3.1
1) In figure 3.1, if demand and supply decrease, then equilibrium:
A) quantity falls.
B) quantity rises.
C) price rises.
1) _______
D) price falls.
Refer to 4.1 for the questions below.
Figure 4.1
2) In figure 4.1, at equilibrium consumer surplus would be:
A) X.
B) A+B+C.
C) C.
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2) _______
D) X+Y+Z.
3) Marginal benefit is:
A) the satisfaction from consuming a given amount of a good.
B) the satisfaction from consuming a given amount of a good divided by the number of goods
consumed.
C) the additional satisfaction from consuming one more of a good.
D) the satisfaction from producing one more unit of a good.
3) _______
4) People who are able to rent apartments benefit from rent controls because:
A) it is easier to find an apartment in a desireable location.
B) the lower rent lets them captured some producer surplus.
C) there are more apartments to rent.
D) they find that their apartments are kept in better shape.
4) _______
5) Consumer surplus can be defined as:
A) total benefit to consumers from participating in the market.
B) marginal benefit to consumers from participating in the market.
C) net benefit to consumers from participating in the market.
D) average benefit to consumers from participating in the market.
5) _______
6) The supply curve of a producer shows:
A) the average cost of producing the good.
C) the marginal cost of producing the good.
6) _______
B) the total profit the producer earns.
D) the total cost of producing the good.
7) If a producer is willing to sell a unit of output at $15 and the market price is $20, the $5
difference is:
A) total profit.
B) producer surplus.
C) consumer surplus.
D) average profit.
7) _______
8) Producers lobby the government to convince law makers to impose a price floor, so that they
might:
A) charge consumers more than consumers are willing to pay.
B) receive a larger consumers surplus.
C) receive a larger producers surplus.
D) hire workers for less than they would otherwise have to pay.
8)
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______
Refer to 4.1 for the questions below.
Figure 4.1
9) In figure 4.1, with an effective price floor, consumer surplus would be:
A) X.
B) C.
C) A+B+C.
9)
______
D) X+Y+Z.
10) If the demand for good X decreases, when the price of good Y decreases, then:
A) goods X and Y are normal goods.
B) goods X and Y are substitutes.
C) goods X and Y are inferior goods.
D) goods X and Y are complements.
10) ______
11) If the demand for cars increases when the price of good gasoline decreases, then:
A) gasoline is a normal good.
B) cars are an inferior good.
C) the two goods are complementary.
D) the two goods are substitutes.
11) ______
12) If a market is in equilibrium:
A) quantity supplied equals quantity demanded.
B) supply is greater than demand.
C) the government has made the correct decision on price.
D) demand is greater than supply.
12) ______
Refer to Figure 3.1 for the questions below.
Figure 3.1
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13) In figure 3.1, if demand decreases and supply increases, then equilibrium:
A) quantity rises.
B) price falls.
C) quantity falls.
15) ______
D) price rises.
14) When the price of a good increases:
A) the quantity demanded of the good will decrease.
B) the quantity demanded of the good will increase.
C) the demand for the good will decrease.
D) the demand for the good will increase.
16) ______
Refer to Figure 3.1 for the questions below.
Figure 3.1
15) In figure 3.1, if supply increases, then equilibrium:
A) price and quantity rise.
C) price falls and quantity rises.
15) ______
B) price and quantity fall.
D) price rises and quantity falls.
16) If the price of a product increases from $12 to $15:
A) the demand for the product will decrease.
B) the demand for the product will increase.
C) the quantity demanded for the product will increase.
D) the quantity demanded for the product will decrease.
16) ______
17) The attainable production points on a production possibility curve are:
A) the points along and inside the production possibility frontier.
B) the points outside the area enclosed by the production possibilities frontier.
C) the points along the production possibilities frontier.
D) the horizontal and vertical intercepts.
17) ______
18) A production possibilities frontier with a bowed outward shape indicates:
A) the possibility of inefficient production.
B) constant opportunity costs as more and more of one good is produced.
C) decreasing opportunity costs as more and more of one good is produced.
D) increasing opportunity costs as more and more of one good is produced.
18) ______
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19) The ultimate purpose of patents and copyrights is to:
A) provide owners with large profit forever.
B) protect domestic firms from foreign competition.
C) protect firms from being taken advantage of by competing firms.
D) encourage the expenditure of funds on research and development to create new products.
19) ______
20) The slope or rate of change along a production possibilities frontier:
A) measures the opportunity cost of producing one more unit of a good.
B) has no economic relevance or meaning.
C) is always constant.
D) is always varying.
20) ______
21) A shift outwards of the nation's production possibilities frontier can occur due to:
A) a reduction in unemployment.
B) an increase in the labor force.
C) a change in the amounts of one good desired.
D) a natural disaster like a hurricane or bad earthquake.
21) ______
22) An example of something that is NOT a factor of production is:
A) the manager of the local tire shop.
B) an acre of farmland.
C) a drill press in a machine shop.
D) $1,000.
22) ______
23) The fundamental thing the government must do to facilitate the operation of a market economy
is:
A) set up and enforce private property rights.
B) ensure an equal distribution of income to all citizens.
C) produce goods to provide for low income households.
D) all of the above.
23) ______
24) When voluntary exchange takes place:
A) the government must have intervened in the market.
B) one party must lose.
C) both parties gain.
D) each party values what they have to start more than the other party.
24) ______
25) Which of the following is production at the lowest possible cost?
A) Allocative efficiency
B) Equity
C) Central planning
D) Productive efficiency
25) ______
26) How are the fundamental economic decisions determined in Cuba?
A) It uses traditional answers because Cuba is a developing economy.
B) The United Nations decides because Cuba is a developing economy.
C) Individuals, firms, and the government interact in a market to decide.
D) The government decides because Cuba is a centrally planned economy.
26) ______
27) The decision about what goods and services will be produced made in a market economy is
made by:
A) lawmakers in the government voting on what will be produced.
B) celebrities deciding what society needs the most.
C) producing firms deciding to produce only what the boss says must be produced.
D) consumers and firms choosing which goods and services to buy or produce.
27) ______
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28) The distribution of income primarily determines which of the fundamental economic questions?
A) What goods and services are to be produced?
B) Who will receive the goods and services produced?
C) How the goods and services are to be produced?
D) How to plan the economy?
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28) ______
Problems
Question 1 Production Possibility Frontier/Curve ( 30 pts )
a. Illustrate and explain the concept of increasing opportunity cost. Make sure to fully label your
graph and show the law of increasing OC on the graph below. ( 15 pts )
Illustration and Steps to show Increasing OC
(a) Steps in illustrate the idea of increasing opportunity cost
Step 1 - Draw a PPF making sure to label
Step 2 – On the x-axis draw equidistant unit increments (2-3)  this is to ensure one marginal unit
increases
Step 3 – Draw up from the unit marks up to the PPF over the y-axis
Step 4- Label OC and analyze
PPF 1: Illustrates (a)
Good Y
A
B
OC1
OC2
C
OC3
D
Good X
Each 1-unit increments
Note: A and D represent exclusive production in just one good. All the points between there show us
efficient production, but a combination of the two goods.
As we move from good-y production to only good-x production we shift over our resources using them
for only good-y to combinations of both good-x and good-y. The first things that are going to be shifted
for good-x production are going to be the resources best suited for good-x that are coming from good-y
production (i.e. the labor and capital from good-y production that is best suited for good-x
production and is not adding very much to our numbers of good-y produced  people specialized at
making good-x and not good-y, maybe capital and machinery used for good-x, etc..).
As we continue to shift from good-y to good-x on a per-unit basis the resources that are used are less
good at producing good-x and more specialized for good-y production (i.e. we increase good-x
production by 1 unit each time. Note: Distance along the x-axis is in 1-unit increments). For this reason
we see that we get fewer good-x out of the resources shift relative to the amount of good-y we have to
give up. Because we have this specificity of resources, we must give up more good-y for each unit
increase in good-x production. As we totally devote all of our resources to good-x we must then give up
the most good-y (OC3) because now the resources shifted were very specific to good-y production.
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b. In the following to PPF explain what is happening to production. What are two things which
could cause the shift in the PPF? Make sure to label the graph below. ( 15 pts )
Good Y
PPF1
PPF2
Good X
Reasons:
(1) Increase in K
(2) Increase in L
***or change in HC or Technology.
Change in Resources: The PPF shows all the production possible that a country, firm, state, etc…can
produce given a certain resource endowment (capital, labor, technology). If we reduce or increase the
amount of resources available (as shown above in PPF1-PPF2) then the amount of production must
change as shown above when the PPF shifts outward.
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Question 2 Supply and Demand (50 Points)
a. Explain why the supply curve slopes upward using the graph and law of supply. (10 pts)
Law of Supply: As the price of a good goes up, all else constant, the quantity supplied goes up or the
other way around (i.e. price up  Qs up). In general it states that suppliers like higher prices.
Graphically:
S
P
Q
b. Given formulas of Qs = -500+15P and Qd = 1000-5P determine equilibrium for both P and Q.
(10 pts)
Step1: set the equations equal to each other and solve for P
Qd = 1000 - 5p = Qs = -500+15p  1500 = 20p  p = 75
Step 2: Plug back into either equation to get Q
Qd = 1000 - 5p  1000 – 5(75)=625
Qs = -500+15p  -500+15(75) = 625
So PE and QE are 75 and 625
c. Calculate and Label CS,PS, & TS in the graph below. You must label the graph and
appropriate areas as well as show all calculations to receive full credit. (10 pts )
P
120
S
CS
PE=70
PS
D
15
Q
100
PS: Area = (½) b*h = (1/2) (70-15) (100-0) = 2750
CS: Area = (½) b*h = (1/2) (120-70) (100-0) = 2500
TS = PS + CS = 2750+2500=5250
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d. What happens to the equilibrium (P and Q) if the following shifts occurred simultaneously
S↓D↑? Explain all cases. You don’t need to use graphs to answer this question. (10 pts )
Recall that if we have a double shift we can't solely use graphical analyses to describe what happens to P
and Q at equilibrium. We must use our single shift components to do a complete analysis. We will
draw one case and finish the explanation explaining what would happen completely with variable
analysis.
Variable Analysis:
Step 1: Break up into single shift components
-S ↓  P↑ Q ↓
-D ↑ P↑ Q↑
So we know that P goes down for sure since it goes up in both cases. We also know Qun det er min ed . We
can have 3 cases for Q depending on the magnitude of the shifts of each curve.
(1) magnitude of supply shift greater than demand  Q ↓
(2) magnitude of demand shift greater than supply  Q ↑
(3) magnitude of each offset each other  Qsame
e. Show and explain would happen if there were a tax placed demanders in the graph below?
(10 pts )
Tax Affect on Demand – when we impose a tax on demand we get a shift in of demand as seen below.
Graph:
S
P
1
2
3
4
5
Demand
6
D (w/tax)
Q
-We can see all the results in the table below. Note: If you had numbers you could calculate the area
with the formula just as above:
Area = (½) b*h & Area = l*w.
TS: This decreases as the tax is imposed.
CS: This decreases as well due to the tax. It is now only area 1.
PS: This value also decreases down to area 6.
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*both PS and CS are returned to the consumers and producers as the rate of the tax is decreased. So the
previous area that was DWL or Tax Revenue reverts back to CS and PS.
Tax Revenue: This value goes up because the tax is imposed
Table 2:
PS
CS
DWL
Tax Revenue
TS
Solutions to MC
1. A
2. D
3. C
4. B
5. C
6. C
7. B
8. C
9.A
10. B
11. C
12. A
13. B
14. A
Before Tax
4-6
1-3
1-6
After Tax
6
1
3,5
2,4
1,2,4,6
15. C
16. D
17. A
18. D
19. D
20. A
21. B
22. D
23. A
24. C
25. D
26. D
27. D
28. B
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