Download Winter 2016 Economics 304 Name_________________________

Winter 2016
Economics 304
Quiz 5
Name_________________________
Instructions: Put all books and notes away. Circle the letter of the choice that best answers the
question. If you need scratch paper, just use blank space on the quiz. You are allowed to use a
calculator. All other electronic devices must be turned off and put away.
1. The market for wheat is characterized by
= 21 – 2Pw + Pc and
= Pw, where Qw is
the quantity of wheat in millions of bushels, Pw is the price per bushel of wheat, and Pc
is the price per bushel of corn. The market for corn is characterized by
= 21 – 2Pc +
Pw and
= Pc, where
is the quantity of corn in millions of bushels. In general
equilibrium, what is the price of wheat and corn?
A) Pw = $9.50; Pc = $6.50
B) Pw = $12.00; Pc = $12.00
C) Pw = $10.50; Pc = $10.50
D) Pw = $6.50; Pc = $9.50
2. If the initial allocation of goods is not efficient in the market, consumers will:
A) be required to consume somewhere above the contract curve.
B) not be able to trade goods and achieve Pareto efficiency.
C) change their tastes and preferences via their utility function to match the market's
marginal rate of substitution.
D) buy and sell goods at market prices until the marginal rate of substitution is
equalized across all consumers.
3. For Christmas, Josh and Cybil, who are brother and sister, each recently received 25
iTunes music downloads and 10 movie passes. Josh's marginal rate of substitution of
music downloads for movie passes is 1/4, while Cybil's marginal rate of substitution of
music downloads for movie passes is 2. Which of the following trades would be a
Pareto improvement over the original allocation?
A) Josh gives Cybil 3 music downloads for 1 of her movie passes.
B) Josh gives Cybil 1 music download for 4 of her movie passes.
C) Josh gives Cybil 1 music download for 3 of her movie passes.
D) Josh gives Cybil 8 music downloads for 1 of her movie passes.
Page 1
4. The market for soybeans is characterized by
= 18 – Ps and
= Ps – 0.5Pc, where Qs
is the quantity of soybeans in millions of bushels, Ps is the price per bushel of soybeans,
= 18 –
and Pc is the price per bushel of corn. The market for corn is characterized by
= Pc – 0.5Ps, where Qc is the quantity of corn in millions of bushels. In
Pc and
general equilibrium, what is the equilibrium quantity of corn and soybeans?
A) Equilibrium quantity of corn = 16 million and equilibrium quantity of soybeans =
16 million.
B) Equilibrium quantity of corn = 6 million and equilibrium quantity of soybeans = 6
million.
C) Equilibrium quantity of corn = 9 million and equilibrium quantity of soybeans = 9
million.
D) Equilibrium quantity of corn = 6.5 million and equilibrium quantity of soybeans =
6.5 million.
5. The market for soybeans is characterized by
= 18 – Ps and
= Ps – 0.5Pc, where Qs
is the quantity of soybeans in millions of bushels, Ps is the price per bushel of soybeans,
and Pc is the price per bushel of corn. The market for corn is characterized by
= 18 –
Pc and
= Pc – 0.5Ps, where Qc is the quantity of corn in millions of bushels. Suppose
the government strengthens the mandate for the use of corn-based ethanol, increasing
the demand for corn by 6 million bushels at any given price. In general equilibrium,
what is the equilibrium price and quantity of soybeans?
A) Ps = $13.50 and Qs = 7 million bushels
B) Ps = $14.00 and Qs = 4 million bushels
C) Ps = $10.40 and Qs = 8.6 million bushels
D) Ps = $12.80 and Qs = 5.2 million bushels
6. Pareto efficiency occurs when an economic allocation of goods:
A) enables the winners to compensate the losers for their losses.
B) cannot be changed without at least making one person worse off.
C) creates more winners than losers.
D) equalizes the net gains to all individuals.
Page 2
Use the following to answer question 7:
Figure 14.4
7. (Figure 14.4) What is the name of curve A and what is its significance?
A) contract curve: shows all possible allocations of pancakes and cereal that give
Elaine and Jerry equal utility
B) output curve: shows all possible combinations of pancakes and cereal that can be
produced at a constant per-unit cost
C) iso-profit curve: shows all possible combinations of pancakes and cereal that give
the manufacturers equal profit
D) contract curve: shows all possible Pareto-efficient allocations of pancakes and
cereal between Elaine and Jerry
8. Goods X and Y are substitute goods. If the demand for good X increases, we expect that:
A) the price of good X will increase and cause the demand for good Y to decrease. The
lower price for good Y will now cause the demand for good X to decrease, while
the lower price for good X will further cause the demand for good Y to decrease.
B) the price of good X will decrease and cause the demand for good Y to decrease. The
lower price for good Y will now cause the demand for good X to decrease, while
the lower price for good X will further cause the demand for good Y to decrease.
C) the price of good X will decrease and cause the demand for good Y to increase. The
lower price for good Y will now cause the demand for good X to increase, while the
higher price for good X will further cause the demand for good Y to increase.
D) the price of good X will increase and cause the demand for good Y to increase. The
higher price for good Y will further cause the demand for good X to increase, while
the higher price for good X will further cause the demand for good Y to increase.
Page 3
Use the following to answer questions 9-10:
Figure 14.1
9. (Figure 14.1) The market prices for cereal and pancakes are $2 and $1, respectively.
Pareto efficiency requires that the marginal rate of substitution of cereal for pancakes:
A) equals 2 for Elaine and 1 for Jerry.
B) equals 2 for Elaine and 1/2 for Jerry.
C) equals 1/2 for Elaine and 2 for Jerry.
D) equals 2 for Elaine and 2 for Jerry.
10. (Figure 14.1) Which of the following allocations of cereal and pancakes is NOT
possible?
A) Elaine consumes 8 pancakes and 10 bowls of cereal, and Jerry consumes no
pancakes and no bowls of cereal.
B) Elaine consumes 6 pancakes and 5 bowls of cereal, and Jerry consumes 2 pancakes
and 5 bowls of cereal.
C) Elaine consumes 1 pancake and 4 bowls of cereal, and Jerry consumes 7 pancakes
and 6 bowls of cereal.
D) Elaine consumes 3 pancakes and 6 bowls of cereal, and Jerry consumes 6 pancakes
and 3 bowls of cereal.
Page 4
11. Which of the following is an example of partial equilibrium analysis?
A) Scientific research indicates that there are health benefits to wearing cotton.
Knowledge of these benefits causes the demand for cotton to increase and the
supply of corn to decrease, as corn famers switch to planting more cotton.
B) Productivity enhancements in the manufacturing sector have increased the wages
of manufacturing workers, putting upward pressures on wages that must be paid to
attract workers to the service sector.
C) A tax on Internet sales reduces the quantity of online sales and caused the demand
for Internet access to decrease. The lower price for Internet access will spur
increased demand for online sales.
D) A deep freeze has destroyed much of the orange crop and caused the price of
oranges to increase and the quantity sold to fall.
Use the following to answer question 12:
Figure 14.2
Page 5
12. (Figure 14.2) Suppose that Elaine has 6 pancakes and 5 bowls of cereal, and Jerry has 2
pancakes and 5 bowls of cereal. Which of the following allocations would be a Pareto
improvement?
A) Elaine has 7 pancakes and 5 bowls of cereal, and Jerry has 1 pancake and 5 bowls
of cereal.
B) Elaine has 5 pancakes and 6 bowls of cereal, and Jerry has 3 pancakes and 4 bowls
of cereal.
C) Elaine has 5 pancakes and 5 bowls of cereal, and Jerry has 3 pancakes and 5 bowls
of cereal.
D) Elaine has 6 pancakes and 6 bowls of cereal, and Jerry has 2 pancakes and 4 bowls
of cereal.
13. The New Democratic Party in Canada is concerned that the Canadian oil boom has
increased the exchange rate, thereby harming the manufacturing sector by making it less
competitive in international markets. This concern highlights the notion of ______ and
can best be studied by using ______ analysis.
A) Baumol's cost disease; general equilibrium
B) Baumol's cost disease; partial equilibrium
C) Dutch disease; partial equilibrium
D) Dutch disease; general equilibrium
14. Which of the following situations is an example of general equilibrium analysis?
A) As fuel costs rise, airlines experience rising costs of production. Higher production
costs cause airline profits to fall, leading to higher air fares and fewer flights.
B) A decrease in the demand for peanuts causes both the equilibrium price and
quantity of peanuts to decrease. As a result, peanut farmers reduce their peanut
output and supply decreases.
C) An excise tax on cigarettes reduces the supply of cigarettes, leading to higher
cigarette prices.
D) A severe frost destroys a significant portion of the coffee crop, leading to higher
coffee prices. The higher coffee prices increase the demand for tea, resulting in
higher tea prices. The higher tea prices will, in turn, cause the demand for coffee to
rise even more, further increasing the price of coffee.
Page 6
Use the following to answer question 15:
Figure 14.5
15. (Figure 14.5) Suppose that Elaine currently has 1 pancake and 4 bowls of cereal, which
gives her a marginal utility of pancakes equal to 20 and marginal utility of cereal equal
to 5. Jerry has 7 pancakes and 6 bowls of cereal, which gives him a marginal utility of
pancakes equal to 6 and marginal utility of cereal equal to 18. Which of the following
statements is TRUE?
A) A Pareto improvement would be for Elaine to give Jerry 2 bowls of cereal in
exchange for 1 pancake.
B) Elaine and Jerry could both be made better off if Elaine traded 1/2 pancake for 1
bowl of Jerry's cereal.
C) Elaine and Jerry could both be made better off if Elaine traded 1 pancake for 1
bowl of Jerry's cereal.
D) The current allocation of pancakes and cereal between Elaine and Jerry is Paretoefficient.
Page 7
Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
C
D
A
B
D
B
D
D
D
D
D
B
D
D
A
Page 8