Econ - 102

First Midterm

Summer 2011

Name:

Instructions:

·  Write your answers on this question paper and turn this in after you are finished.

·  This is a 60-minute examination. Read questions carefully before answering them.

·  Don’t forget to write your name

This exam has 40 multiple choice questions. Each multiple choice is worth 2.5 points.

1.  Which of the following questions is not answered by the decisions that every society must make?

a.  What determines consumer preferences?

  1. What goods will be produced?
  2. Who will produce the goods?
  3. Who will consume the goods?
  4. The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
  5. goods are scarce.
  6. people face tradeoffs.
  7. income must be earned.
  8. households face many decisions.
  9. College-age athletes who drop out of college to play professional sports

a.  are not rational decision makers.

b.  are well aware that their opportunity cost of attending college is very high.

c.  are concerned more about present circumstances than their future.

d.  underestimate the value of a college education.

  1. Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend $8,000 restoring the car. At this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $12,000. Stan should
  2. complete the repairs and sell the car for $12,000.
  3. sell the car now for $9, 000.
  4. never try such an expensive project again.
  5. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.
  6. Which of the following items is not a factor of production?
  7. labor
  8. land
  9. capital
  10. money
  1. Refer to Figure 1. The figure represents a circular-flow diagram. Boxes A and B represent
  2. firms and households.
  3. households and government.
  4. the markets for goods and services and the financial markets.

d.  the markets for goods and the markets for services

  1. Refer to Figure 1. The figure represents a circular-flow diagram. Boxes C and D represent
  2. households and government.
  3. firms and government.
  4. the markets for goods and services and the financial markets.
  5. None of the above are correct.
  6. Which of the following is the most accurate statement about production possibilities?
  7. An economy can produce only on the production possibilities frontier.
  8. An economy can produce at any point inside or outside a production possibilities frontier.
  9. An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier.
  10. An economy can produce at any point inside the production possibilities frontier, but not on or outside the frontier.

Figure 2

  1. Refer to Figure 2. If this economy moved from point C to point E,
  2. it still would not be producing efficiently.
  3. it was inefficient before but now it is producing efficiently.
  4. it would be producing more barrels and more bathtubs than at point C.
  5. It is not possible for this economy to move from point C to point E without additional resources.
  6. Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes vases, but Regan is better at producing both. In this case, trade could
  7. benefit both Jayson and Regan.
  8. benefit Jayson, but not Regan.
  9. benefit Regan, but not Jayson.
  10. benefit neither Jayson nor Regan.

Figure 3

  1. Refer to Figure 3. For Ben, the opportunity cost of 1 pound of ice cream is
  2. 1/14 pound of cones.
  3. 1/2 pound of cones.
  4. 2 pounds of cones.
  5. 4 pound of cones.
  6. Refer to Figure 3. Ben has a comparative advantage in
  7. cones and Jerry has a comparative advantage in ice cream.
  8. ice cream and Jerry has a comparative advantage in cones.
  9. neither good and Jerry has a comparative advantage in both goods.
  10. both goods and Jerry has a comparative advantage in neither good.
  11. Refer to Figure 3. Originally, Ben was producing at his point A and Jerry was producing at his point A. Then, each person decided to specialize in the product in which he has a comparative advantage. Furthermore, they agreed to trade 4 pounds of cones for 2 pounds of ice cream. As a result of these new arrangements, the gains from trade relative to the original situation are as follows:
  12. 1 additional pound of cones for Ben and 1 additional pound of ice cream for Jerry.
  13. 1 additional pound of ice cream for Ben and 1 additional pound of cones for Jerry.
  14. 2 additional pounds of ice cream for Ben and 2 additional pounds of cones for Jerry.
  15. 2 additional pounds of ice cream for Ben and 1 additional pound of cones for Jerry.
  16. A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information, it follows that the farmer’s opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of cotton
  17. is equal to 1.
  18. is greater than 1 but less than 2.
  19. is equal to 2.
  20. Not enough information is given to make this determination.
  21. The gains from trade are
  22. evident in economic models, but seldom observed in the real world.
  23. evident in the real world, but impossible to capture in economic models.
  24. a result of more efficient resource allocation than would be observed in the absence of trade.
  25. based on the principle of absolute advantage.
  26. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. Suppose that trade is then initiated between the two countries, and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat. Freedonia will now be able to consume a maximum of
  27. 30 units of corn and 30 units of wheat.
  28. 40 units of corn and 30 units of wheat.
  29. 40 units of corn and 20 units of wheat.
  30. 10 units of corn and 40 units of wheat.
  31. For a competitive market, which of the following statements is correct?
  32. A seller can always increase her profit by raising the price of her product.
  33. If a seller charges more than the going price, buyers will go elsewhere to make their purchases.
  34. A seller often charges less than the going price to increase sales and profit.
  35. A single buyer can influence the price of the product, but only when purchasing from several sellers in a short period of time.
  1. Each of the following is a determinant of demand except
  2. tastes.
  3. technology.
  4. expectations.
  5. the prices of related goods.
  6. You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has been wiped out by drought, and that this will cause the price of peanuts to double by the end of the year. As a result,
  7. your demand for peanut butter will increase, but not until the end of the year.
  8. your demand for peanut butter increases today.
  9. your demand for peanut butter decreases as you look for a substitute good.
  10. you will wait for the price of jelly to change before altering your demand for peanut butter.
  11. Other things equal, when the price of a good rises, the
  12. quantity demanded of the good increases.
  13. supply increases.
  14. quantity supplied of the good increases.
  15. demand curve shifts to the left.

21. The term market always refers to

a. an arrangement in which buyers and sellers meet at a specific time and place.

b. an arrangement in which an auctioneer plays at least a limited role in setting prices.

c. a group of buyers and sellers of a particular good or service.

d. All of the above are correct.

22. A competitive market is one in which

a. there is only one seller, but there are many buyers.

b. there are many sellers and each seller has the ability to set the price of his product.

c. there are many sellers and they compete with one another in such a way that some sellers are always being forced out of the market.

d. there are so many buyers and so many sellers that each has a negligible impact on the price of the product.

23. If a good is normal, then an increase in income will result in

a. an increase in the demand for the good.

b. a decrease in the demand for the good.

c. a movement down and to the right along the demand curve for the good.

d. a movement up and to the left along the demand curve for the good.

24. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are

a. a substitute good.

b. a normal good.

c. an inferior good.

d. a law-of-demand good.

25. When constructing a demand curve,

a. demand is on the vertical axis and quantity is on the horizontal axis.

b. price is on the horizontal axis and quantity is on the vertical axis.

c. price is on the vertical axis and demand is on the horizontal axis.

d. price is on the vertical axis and quantity demanded is on the horizontal axis.

26. Which of the following would not affect an individual's demand curve?

a. expectations

b. income

c. prices of related goods

d. the number of buyers

27. Suppose Spencer and Kate are the only two demanders of lemonade. Each month, Spencer buys six glasses of lemonade when the price is $1.00 per glass, and he buys four glasses when the price is $1.50 per glass. Each month, Kate buys four glasses of lemonade when the price is $1.00 per glass, and she buys two glasses when the price is $1.50 per glass. Which of the following points is on the market demand curve?

a. (quantity demanded = 4, price = $2.50)

b. (quantity demanded = 16, price = $2.50)

c. (quantity demanded = 3, price = $1.50)

d. (quantity demanded = 10, price = $1.00)

28. Which of the following events would cause a movement upward and to the right along the supply curve for tomatoes?

a. The number of sellers of tomatoes increases.

b. There is an advance in technology that reduces the cost of producing tomatoes.

c. The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes.

d. The price of tomatoes rises

29. Lead is an important input in the production of crystal. If the price of lead decreases, other things equal, we would expect the supply of

a. crystal to be unaffected.

b. crystal to decrease.

c. crystal to increase.

d. lead to increase

30. Which of the following events could shift both the demand curve and the supply curve for a good?

a. A technological advance pertaining to the production of the good is observed.

b. Incomes of all buyers of the good increase.

c. The number of sellers of the good increases.

d. Everyone revises upward their expectation of next month’s price of the good.

31. Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just learned that its leading competitor Toysorama is mass producing an excellent copy and plans to flood the market with their $5 doll in 6 weeks. Funsters should

a. “fight fire with fire” by decreasing supply of its doll for 6 weeks and then increasing the supply.

b. increase the supply of their doll now before the other doll hits the market.

c. increase the price of their doll now.

d. discontinue their doll.

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.

32. For the United States, what is the opportunity cost of a car?

a. 2.5 tons of grain

b. 0.4 tons of grain

c. 10 tons of grain

d. 5 tons of grain

33. For Japan, what is the opportunity cost of a ton of grain?

a. 2.5 cars

b. 0.4 cars

c. 0.8 cars

d. 1.25 cars

34. Which country has an absolute advantage in producing cars? In producing grain?

a. U.S in cars; Japan in grain

b. Japan in cars; U.S in grain

c. U.S in cars; U.S in grain

d. Neither in cars; U.S in grain

35. Which country has a comparative advantage in producing cars? In producing grain?

a. U.S in cars; Japan in grain

b. Japan in cars; U.S in grain

c. U.S in cars; U.S in grain

d. Neither in cars; U.S in grain

Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that