Download mock midterm WITH ANSWERS

Mock midterm
Basic Literacy. Circle the letter of the alternative that best answers or completes each
question.
1. Which of the following would be most likely to cause the demand for chicken to
increase?
a) a decrease in the price of chicken;
b) an increase in the price of fish (a substitute) ;
c) a reduction in the price of chicken feed;
a) all of the above.
2. A fall in the price of tomatoes, used in the production of pizza, will:
a) decrease the supply of pizza;
b) increase the quantity supplied of pizza;
c) increase the supply of pizza;
d) none of the above.
3. A decrease in the price of DVDs decreases the demand for VCRs. Restoration of
equilibrium in the VCRs market will require:
a) a leftward shift of the supply curve;
b) a rightward shift of the supply curve;
c) a movement up along the supply curve;
d) a movement down along the supply curve.
4. Which of the following best explains why the equilibrium price of sugar would fall at the
same time the equilibrium quantity would rise:
a) consumers but not producers of sugar expect a higher future price;
b) consumers but not producers of sugar expect a lower future price;
c) producers but not consumers of sugar expect a higher future price;
d) producers but not consumers of sugar expect a lower future price.
5. Which of the following would be most likely to cause the changes at the market for
tomatoes described below:
S
p
I.
D
S
S1
D
S1
q
a) a decrease in the price of tomatoes;
b) a decrease in the price of pizza (prepared with tomatoes) ;
c) an increase in the price of peppers (a substitute);
d) an increase in productivity in the production of tomatoes.
6. A Texas restaurant had an “oil plate special” on its menu that carried the same price as
the daily quote (price) on a barrel of crude oil. When oil prices rose, people stopped
buying the “oil plate special”. What law best explains this behavior?
a) the law of demand;
b) the law of increasing opportunity cost;
c) the law of supply.
7. If the equilibrium price of natural gas is $2.50 per thousand cubic feet and a price floor is
imposed of $2 per thousand cubic feet, the likely result will be:
a) a surplus;
b) a shortage;
c) depletion of inventories;
d) none of the above.
8. Which of the following is most likely a private good:
a) traffic lights;
b) national defense;
c) roads;
d) education.
II.
Analysis.
9. Use the supply and demand curves to explain what would happen in the market for pop
corn as a result of each of the following, other things being equal.
a) a decrease in the average level of buyers' income;
b) bad weather wreaks havoc with the corn crop.
10. The demand curve and the supply curve for widgets are given by the following equations:
Qd = 200 – 2P
Qs = 50 + P
a)
b)
c)
d)
e)
f)
III.
find the equilibrium price and equilibrium quantity
draw the supply and the demand curves
describe the market situation if the price were held to €20 by the government;
describe the market situation if the price were held to €60 by the government
what is the volume of the surplus /shortage?
What would be the price at the black market?
Advocacy.
11. True or False: “The law of demand states that the quantity demanded varies inversely
with price. However, everyone knows that a rise in demand leads to a rise in price, other
things equal.”
12. Congratulations! You were appointed as an economic consultant to the board of directors
of a big tobacco company. The government has set a price ceiling on cigarettes so that
there is a shortage. The industry complains that the ceiling price is far below the
equilibrium price. In response to these claims, the government sends an expert into the
market place to investigate the situation. After a week of study, he concludes that since
the quantity sold by the stores equals the quantity bought by consumers, the market is in
equilibrium, and there is no need to reconsider the ceiling price. How would you disprove
the expert’s arguments?
Answers and explanations
1. b) the increase in the price of fish will shift part of the demand for fish to the chicken market;
answer a) is wrong because it presents a change in quantity demanded, not in demand; answer
c) relates to supply of chicken, not demand.
2. c) the fall in the price of tomatoes will increase the supply of pizza, i.e. the supply curve will
shift leftwards, the new equilibrium price will be lower and the equilibrium quantity of pizza
will increase; answer a) is wrong because the supply of pizza will increase; answer b) is
wrong because quantity supplied rises when price of pizza rises.
3. d) when the demand for VCRs falls, i.e. the demand curve shifts to the left, the previous
equilibrium price becomes too high for buyers and the new quantity demanded at this price is
lower, while the quantity supplied remains the same; thus, a temporary surplus is created; it
will be cleared by a price decrease which will cause a movement downwards along the supply
curve and a simultaneous movement downwards along the demand curve.
4. d) if producers expect a lower future price they will increase the supply now in order to sell
more ant the current higher price, thus, the supply curve will shift leftwards and the new
equilibrium price will be lower, while the equilibrium quantity will be higher.
5. d) the increase in productivity means that producers can now supply more tomatoes at the
same cost and at the same price, thus supply rises and the supply curve shifts rightwards;
answer a) is wrong, because it relates to a change in quantity supplied, while on the graph we
have an increase in supply; answer b) is irrelevant, because tomatoes are a resource for
making pizza, not the other way round; answer c) relates to demand, not supply.
6. a) by definition: price rises, quantity demanded falls (even to zero in this case).
7. d) price floor of $2 means that no one should sell at a price below $2, but the equilibrium
price is $2.50. Thus, no one is motivated to sell below this price.
8. Skip it. We did not study it.
9. a) a decrease in demand – a leftward shift in the demand curve. Draw the graph; b) a fall in
supply – a leftward shift in the supply curve. Draw the graph.
10. Equilibrium price = 50; equilibrium quantity = 100; c) if P = 20, Qd = 200 – 2x20 = 160, Qs
= 50 +20 = 70. There is a shortage = 160 – 70 = 90; d) if P = 60, Qd = 80, Qs = 110. There is
a surplus = 30. f) a black market would be created in both case c) and case d). In case c) the
price will be where Qd = Qs = 70. Qd = 200 – 2P = 70. P = 65; In case d) sellers want to sell
more than buyers want to buy at P = 60. In order to eliminate the surplus, sellers should be
motivated to sell as much as buyers want to buy = 80. Qs = 50 + P = 80. In this case P = 30.
Under this price, sellers will be willing top sell exactly as much a buyers want to buy = 80.
Then the blackmarketeers are on the buyers side and they “save” 60 – 30 = 30 per unit, or
30x80 = 2400 on all units. Such a situation occurs on the labor market. If ALL workers are
hired illegally, they will be paid 30 instead of 60. In fact, some workers are hired illegally and
they are paid between 60 and 30, because there are still workers hired on the official market.
This case, however is difficult and I will not give it to you on the midterm. We did not have
time to discuss it in class and you will have only a black market, described on case c)
11. False. The first sentence states the law of demand = price rises and quantity demanded falls, for
example. The second sentence is related to a change in DEMAND, not in PRICE. If demand rises,
the EQUILIBRIUM PRICE INCREASES. Thus, the two sentences are not related.
12. False. The expert did not distinguish between quantity sold and quantity supplied and between
quantity bought and quantity demanded. The quantity sold by the stores always equals the quantity
bought by consumers. However quantity sold is not the same as quantity supplied and quantity
bought is not the same as quantity demanded. Thus, when there is a shortage, the quantity demanded
is larger than the quantity supplied, while still quantity sold equals quantity bought.
YOU WILL NOT HAVE TRUE OR FALSE QUESTIONS.