Download Midterm 1

ECON 201: Introduction to Macroeconomics
Professor Robert Gordon
Midterm Exam 1:
October 20, 2014
NAME ______________________________________________________
Circle your TA's name:
Max
Circle your section time:
Samir
9:00 am
Vishal
4:00 pm
Directions: This test is in two parts, a multiple choice question part and a short-answer part. Use
this answer packet to complete the exam. Calculators are permitted. Books, notes, reference
materials, etc. are prohibited. Good luck!
Part 1: Referring to the questions in the Multiple Choice Questions Packet, choose the one alternative that best completes the statement or answers the question. Each question is worth one
point. There is no penalty to guessing, so be sure to answer all of them. Write your answers in the
following table using capital letters.
1
6
11
16
21
26
2
7
12
17
22
27
3
8
13
18
23
28
4
9
14
19
24
29
5
10
15
20
25
30
1. The government of a small town has decided to ban smoking in all restaurants, stores, and
government offices. This is an example of which principle?
A) One person's spending is another person's income.
B) When markets fail to achieve efficiency, government intervention can improve society's
welfare.
C) There are gains from trade.
D) Resources should be used as efficiently as possible to achieve society's goals.
Use the following to answer questions 2-3:
2. Look at the table Production of Good Z and Good X in Urbanville. If this represents the
production possibility frontier and Urbanville is producing 5 of Z and 50 of X, then this
combination is:
A) feasible but inefficient.
B) feasible and efficient.
C) not feasible but efficient.
D) neither feasible nor efficient.
3. Look at the table Production of Good Z and Good X in Urbanville. Suppose this represents the
production possibility frontier and Urbanville is currently producing 15 of Z and 45 of X. This
combination is:
A) both allocatively and productively efficient.
B) productively efficient.
C) allocatively efficient.
D) neither productively nor allocatively efficient.
4. If the opportunity cost of manufacturing automobiles is lower in the United States than in
Britain and the opportunity cost of manufacturing airplanes is higher in the United States than in
Britain, then the United States will:
A) export both airplanes and automobiles to Britain.
B) import both airplanes and automobiles from Britain.
C) export airplanes to Britain and import automobiles from Britain.
D) import airplanes from Britain and export automobiles to Britain.
5. If they bake only cakes, in a single day George can bake 10 cakes and Greta can bake 5 cakes.
If they make only pies, in a single day George can bake 10 pies while Greta can bake 4 pies. We
know that:
A) George has an absolute advantage and a comparative advantage in making cakes.
B) George has an absolute advantage and a comparative advantage in making pies.
C) Greta has an absolute advantage and a comparative advantage in making cakes.
D) Greta has an absolute advantage and a comparative advantage in making pies.
6. The U.S. production possibility frontier would ________ if all computers using Microsoft
operating systems contracted a virus that deleted all information on those computers.
A) shift in
B) shift out
C) not change
D) cannot be determined from the information provided
7. If a supply curve is represented by the equation Q = 10 + 2P, what is its slope?
A) 1/2
B) 1
C) 2
D) 5
8. If Benjamin considers sushi to be a normal good and if his income increases by 20%, his
purchases of sushi will:
A) decrease by 20%.
B) increase.
C) decrease.
D) not change.
9. Good X and good Y are substitutes. Holding all other things constant, this means that when
the price of good X increases, the:
A) demand for good X will increase.
B) demand for good Y will increase.
C) demands for both good X and good Y will both increase.
D) demand for good Y will decrease.
10. Alice goes to the local supermarket to purchase one package of her favorite taco shells. She
often pays $1.50 for a package, but she finds they are on sale for $1 each. According to the law
of demand, one can expect Alice to:
A) purchase an alternative good.
B) purchase more than one package of taco shells.
C) decide not to purchase taco shells on this visit.
D) buy only one package of taco shells.
Use the following to answer questions 11-13:
Figure: Supply and Demand in the Orange Juice Market
11. Suppose a hurricane hits Florida, where oranges are grown. What will be the most likely new
equilibrium point in the orange juice market?
A) A
B) B
C) D
D) E
12. Suppose most people drink orange juice only with champagne. What will be the new
equilibrium point in the orange juice market if a law banning alcohol passes?
A) A
B) B
C) D
D) E
13. A reputable scientist asserts in a major scientific publication that drinking orange juice will
increase your life span. What will be the most likely new equilibrium point in the orange juice
market?
A) A
B) B
C) D
D) E
Use the following to answer question 14:
Table: Market for Apartments
14. If a government price ceiling of $700 is imposed on this market, an inefficiency will result in
the form of a:
A) surplus of 0.6 million apartments.
B) shortage of 0.6 million apartments.
C) surplus of 0.2 million apartments.
D) shortage of 0.2 million apartments.
15. Economists in general agree that rent controls are:
A) an efficient and equitable way to help low-income families.
B) an inefficient but sometimes effective way to help low-income families.
C) an efficient method of dealing with the shortages created during price ceilings.
D) the only way to solve the problem of poverty.
16. Which of the following is an example of a quantity control?
A) the Medicare reimbursement schedule for physicians.
B) the minimum wage.
C) unemployment insurance.
D) limits on the number of red snappers that can be caught in the Gulf of Mexico.
17. Suppose the United States removes the current sugar quotas and the market price of sugar
drops. In the candy bar market, we would expect consumer surplus to:
A) increase.
B) decrease.
C) not change.
D) Consumer surplus cannot be determined without information about the supply curve.
Use the following to answer questions 18-19:
Figure: The Market for Round-Trip Airline Flights
18. The supply and demand graph represents the market for round-trip airline flights between
Boston and New York. Suppose the mayor of New York decides to limit the number of flights to
Q1 to reduce air pollution. What area or areas represent consumer surplus after the quota is in
place?
A) a
B) a + b + c
C) c + e
D) b + d + f
19. Suppose the mayor of New York decides to limit the number of flights to Q1 to reduce air
pollution. What area or areas represent producer surplus after the quota is in place?
A) a
B) a + b + c
C) c + e
D) b + d + f
Use the following to answer questions 20-23:
Figure: The Shrimp Market
20. If the government imposes a quota limiting sales of shrimp to 500 pounds, the quota rent per
pound is:
A) $15.
B) $10.
C) $5.
D) The quota rent cannot be determined from the information provided.
21. If the government imposes a quota limiting sales of shrimp to 250 pounds, the quota rent per
pound is:
A) $17.50.
B) $10.
C) $7.50.
D) $0.
22. If the government imposes a quota limiting sales of shrimp to 1,000 pounds, the quota rent
per pound is:
A) $15.
B) $10.
C) $5.
D) $0.
23. If the government imposes a quota limiting sales of shrimp to 250 pounds, it would have the
same effect as a price ________ of ________.
A) floor; $17.50
B) floor; $10
C) floor; $7.50
D) The answer cannot be determined from the information provided.
24. Consider the market for corn. What happens if there is an increased demand for corn tortillas
and at the same time a new corn seed becomes available that dramatically increases the per-acre
yield?
A) Price and quantity decrease.
B) The change in price is indeterminate; quantity decreases.
C) The change in price is indeterminate; quantity increases.
D) Price increases; the change in quantity is indeterminate.
Part 2: Solve the following problems in the provided space. Show all your work clearly.
Problem 1 (10 points)
Tom and Jerry work after school for 4 hours each day. They can either make lemonade or
milkshakes.
If Tom spends all his time making lemonade, he can make 40oz, while if he spends all his time
making milkshakes he can make 8 milkshakes.
If Jerry spends all his time making lemonade, he can make 60oz, while if he spends all his time
making milkshakes he can make 4 milkshakes.
1. (1 pts) Tom decided to make 10oz of lemonade. How many milkshakes can he make? ___________
2. (3 pts) The opportunity cost of a milkshake for Tom is _______________________________ while the
opportunity cost of a milkshake for Jerry is _______________________________. Therefore, _____________ has
the comparative advantage in producing milkshakes.
3. (1 pts) Who has the absolute advantage in making lemonade? ________________________
4. (2 pts) Jerry is going to start working 6 hours a day (instead of 4). He decided to make 4
milkshakes. How much lemonade can he make? _________________
5. (3 pts) Tom got a lemon squeezer for his birthday. He is now making 25oz of lemonade and 6
milkshakes. If he was to spend all his time making lemonade, how much could he make?
________________________
Problem 2 (10 points)
Consider the market of Northwestern Students living in Elder wanting to take Uber cabs down to
the Mark II lounge. Suppose the (inverse) demand curve for students is given by P = -Q + 90 and the
(inverse) supply curve for drivers is given by P = 0.5 Q.
a) (4 points) Graph these curves below, compute the equilibrium prices and quantities, and
compute the consumer and producer surpluses in this market. Draw the surpluses on your
diagram. Be sure to label everything.
b) (3 points) Now suppose there is a big rainstorm on Friday night, and this makes road
conditions hazardous. The rain does not dampen the spirits of the students, but it makes the
drivers more reluctant to drive. As a result, the market price rises to $34 and the market
quantity decreases to 56 rides. Explain why this “surge pricing” occurred and draw a new
diagram below depicting it.
c) (3 points) Suppose the city of Chicago considers “surge pricing” unfair to consumers, and
mandates that Uber can never charge more than the market price in part (a) for a ride from
Elder to Mark II. Illustrate what this means on your diagram below and label the resulting
consumer surplus, producer surplus, and deadweight loss.
Problem 3 (10 points)
Consider the demand and supply for Chicago Bulls tickets, at United Center. Given below are
quantities demanded and supplied for two possible prices. Moreover, due to the seating capacity of
United Center, there is a limit on the maximum number of seats that can be supplied. Let this value
be 400. Assume linear demand and supply throughout this question.
Price
20
0
Quantity Demanded
300
600
Quantity Supplied
200
0
1. (2 pts) Find the equation of the demand curve
2. (2 pts) Find the equation of the supply curve.(Hint: Take into account that there is an upper limit
of 400 on the quantities supplied)
3. (3 pts) Find the equilibrium quantity and price
4. (3 pts) David Rose has recovered from injury (for now). As a result, there is an upward parallel
shift in demand. In particular at price 0 the quantity demand is 1120. Find the equilibrium.
SOLUTIONS
Answer Key
1. B
2. A
3. B
4. D
5. B
6. A
7. A
8. B
9. B
10. B
11. A
12. C
13. B
14. B
15. B
16. D
17. A
18. A
19. D
20. C
21. B
22. D
23. A
24. C
Problem 1
1-6
2-5oz, 10oz, Tom
3-Jerry
4-30 oz
5- 100 oz
Problem 2
a) P=30, Q=60, CS=1800, PS=900
Problem 3
1) Qd=-15P+600
2) Qs=10p when p<=40 and Qs=400 when p>40
3) P=24, Q=240
4) P=48, Q=400