Download Izmir University of Economics Name & Surname: Department of Economics, Fall 2014

Izmir University of Economics
Department of Economics, Fall 2014
ECON 101- Principles of Microeconomics
Name & Surname:
Student ID #:
1st Midterm Exam
Note: The duration of the exam is 90 minutes. Good luck!
Part1: Each multiple choice questions is worth 2 points. The whole section is worth 30 points.
1) Which of the following best defines economics?
A) Economics teaches how to limit our wants.
B) Economics studies how to choose the best alternative when coping with scarcity.
C) Economics helps you earn as much money as possible.
D) Economics analyzes all aspects of human behavior in general.
2) Which of the following is a microeconomic topic?
i) Gas prices increase after a hurricane hits the gulf coast.
ii) Selim starts a new business designing web pages.
iii) Ayça decides to practice an extra hour of soccer instead of studying.
A) i, ii and iii
B) i only
C) ii and iii
D) i and ii
3) When Ford decides to increase production of hybrid cars, it directly answers the ________
question.
A) what
B) how
C) for whom
D) where
4) Consider a PPF with consumption goods on the horizontal axis and capital goods on the
vertical axis. If the country operates on its PPF near its ________ axis, this country ________.
A) vertical; will experience greater economic growth
B) vertical; will not face opportunity costs
C) horizontal; will have a larger chance at economic growth
D) vertical; is operating at an inefficient point
5) A change in the demand for apples could result from any of the following EXCEPT
A) a change in the number of buyers.
B) increased preferences for fresh fruit consumption for health reasons.
C) a change in the price of an apple.
D) a change in the price of a banana.
6) As more time passes, the price elasticity of gasoline
A) increases.
B) decreases.
C) stays the same.
D) becomes perfectly inelastic.
7) Consider two markets, the market for flowers and the market for cookies. Suppose the equilibrium
price of flowers is $12 and the equilibrium price for cookies is $3. If the government places a $6 price
ceiling on both markets:
A) There will be a shortage of flowers and cookies
B) There will be a surplus of flowers and cookies
C) There will be a shortage of flowers only
D) There will be a shortage of cookies only
Refer to the information provided in Figure 4.6 below to answer the questions that follow.
Equilibrium in this market occurs at the intersection of curves S and D.
Figure 4.6
8) In figure 4.6, the area of [A + B + C] represents
A) producer surplus.
B) consumer surplus.
C) consumer surplus plus producer surplus.
D) consumer surplus minus producer surplus.
9) In figure 4.6, the area of [E + F + G] represents
A) producer surplus.
B) consumer surplus.
C) consumer surplus plus producer surplus.
D) consumer surplus minus producer surplus.
10) A situation where illegal trading at market prices takes place is known in economics as a
A) smuggler's market.
B) pirate market.
C) black market.
D) command market.
11) The ________ automatically distributes scarce goods.
A) price system
B) barter system
C) central authority system
D) command economy
12) An efficient economy is an economy that produces what ________ demand(s) and does so at the
________ possible cost.
A) consumers; highest
B) consumers; least
C) the government; highest
D) the government; least
13) The phrase ceteris paribus means
A) "scarcity is a fact of life."
B) "all else equal."
C) "there is no such thing as a free lunch."
D) "everything affects everything else."
14) Which of the following is an opportunity cost of attending college?
A) the cost of your apartment or dorm
B) the income you could have earned if you didn't attend college
C) the cost of the food that you consume while you are attending college
D) the education you gain from attending college
15) A surplus will occur if a ________ is set ________ the equilibrium price.
A) price floor; below
B) price floor; above
C) price ceiling; above
D) price ceiling; below
Part 2: Answer all of the questions. This section is worth 70 points. Read the questions carefully, and
show all your work where asked, otherwise you will not be given full credit for the question.
1) (15 pts) The table below gives the demand and supply schedules for cat food.
a) (3 pts) What is the equilibrium price and quantity? How can you tell?
b) (4 pts) If the price is $3.00 per pound of cat food, will there be a shortage, a surplus? Explain
why. If there is a shortage, how much is the shortage? If there is a surplus, how much is the
surplus?
c)
(4 pts) Explain how the market forces adjust to maintain equilibrium in the cat food market.
d) (4 pts) If the supply increases by 20 tons at every price, what is the new equilibrium price and
quantity? Show your work.
2) (6 pts, 2 pts each) State whether the following statements are examples of positive economic
analysis. Explain briefly.
a) The inheritance tax should be abolished because it is unfair.
b) Allowing Chile to join NAFTA would cause wine prices in the US to drop.
c)
The first priorities of the new regime in South Sudan should be to rebuild schools and
highways and to provide basic health care.
3) (15 pts) In Pioneer Ville, the price elasticity of demand for bus rides is 0.5, the income elasticity of
bus rides is -0.1 and cross price elasticity of demand for bus rides with respect to gasoline is 0.2.
a) (3 pts) Is the demand for bus rides elastic or inelastic? Why?
b) (4 pts) Would an increase in the price of bus rides increase the bus company’s total revenue?
Explain your answer.
c)
(4 pts) If incomes increase by 5 percent with no change in prices, how will the number of bus
rides change? Is a bus ride a normal good or an inferior good? Why?
d) (4 pts) Describe the relationship between bus rides and gasoline. If the price of gasoline
increases by 10 percent with no change in the price of a bus ride, how will the number of bus
rides change? Are bus rides and gasoline complements or substitutes? Explain.
4) (15 pts, 5 pts each) For each of the following events, draw a diagram that illustrates the likely
effect on the market for jeans. Indicate each case the impact on equilibrium price and equilibrium
quantity.
a) The price of cloth (denim) used to make jeans falls.
b) The wage rate paid to garment workers increases.
c)
People’s incomes increase.
5) (19 pts) Tony and Patty produce skis and snowboards. Tables 1 and 2 show their production
possibilities. Each week, Tony produces 5 snowboards and 40 skis and Patty produces 10
snowboards and 5 skis.
Table 1: Tony’s production possibilities
Snowboards
(per week)
25
20
15
10
5
0
Skis
(per week)
and
and
and
and
and
and
0
10
20
30
40
50
Table 2: Patty’s production
possibilities
Snowboards
(per week)
20
10
0
and
and
and
Skis
(per
week)
0
5
10
a) (5 pts) Draw two separate production possibilities graphs for Tony and Patty. Show the
combinations of snowboards and skis at which Tony and Patty choose to produce and mark
these points as A.
b) (4 pts) What is the opportunity cost of producing a snowboard for Tony? For Patty? Who has
a comparative advantage in producing snowboards?
c)
(4 pts) What is the opportunity cost of producing a ski for Tony? For Patty? Who has a
comparative advantage in producing skis?
d) (3 pts) If Tony and Patty specialize on the product which they have comparative advantage
and trade 5 snowboards for 5 skis, what are the gains from trade?
e) (3 pts) Show the combinations of snowboards and skis after specialization and trade on the
graphs. Mark these points as B. Are there gains from trade? How can you tell?