ECO 304K Exam 1 Version AC PDF

ECO 304K Exam 1 Annotated Answer Key Version: AC I have provided explanations for most questions to help you identify what we were looking for in answer. Multiple-Choice Answers: Short Answers: 1. ____A____ 17. ___D_____...

ECO 304K Exam 1 Annotated Answer Key Version: AC I have provided explanations for most questions to help you identify what we were looking for in answer. Multiple-Choice Answers: Short Answers: 1. ____A____ 17. ___D_____ 33. P = _$2__ 2. ____B____ 18. ___A_____ Q = _24__ 3. ____C____ 19. ___C_____ 34. A = __2_ 4. ____A____ 20. ___B_____ B = __4_ 5. ____C____ 21. ___A_____ C = __1_ 6. ____A____ 22. ___B_____ D = __3_ 7. ____B____ 23. ___D_____ 35. Circle one choice: 8. ____A____ 24. ___D_____ shifts right 9. ____C____ 25. ___D_____ shifts left 10. ___B_____ 26. ___C_____ move up 11. ___D_____ 27. ___C_____ move down 12. ___B_____ 28. ___B_____ 36. _RISE 4%__________ 13. ___D_____ 29. ___D_____ 37. PeD =__-1________ 14. ___A_____ 30. ___B_____ 38. UNIT ELASTIC___ 15. ___D_____ 31. ___B_____ 39. CS = _$6________ 16. ___B_____ 32. ___D_____ 40. _50% $3 per unit or $6 1 MULTIPLE CHOICE 1. According to the syllabus, if you complete exams 1-3, then the final exam is: A) optional. B) mandatory. 2. (InQuizitive) Which of the following statements best captures the core economic concept of “incentives”? A) Sure, I’ll give you my cookie in exchange for your soda. B) If you don’t clean your room, you can’t go out to the movies on Friday night. C) If you buy a new computer with your savings, you will not be able to buy a new phone. D) I am trying to decide whether I want another slice of pizza. 3. (InQuizitive) In economics, the Latin phrase “ceteris paribus” means “other things being equal.” How does the assumption of this phrase help economists when building models? A) It assumes all statements in a model are normative and testable. B) It assumes all variables are endogenous to the model. C) It assumes all variables remain constant except the one of interest. D) It assumes all possible variables have been included in the model. 4. (InQuizitive) During an economic recession, people tend to have a hard time finding work and have less “extra” spending money. For these individuals, choosing to buy used furniture instead of new furniture is an example of an increase in demand for an inferior good. A) True. B) False. 5. (InQuizitive) When consumers are unresponsive to changes in the price of a good, what does that mean? A) They do not notice that a new good has been introduced to the market. B) Sellers have charged too much for their product or service. C) They are unwilling to change their purchasing behavior, even when the price of a good or service changes. D) The demand has failed to keep up with the supply of a particular good or service. 2 6. (InQuizitive) A television set currently costs $100. A new excise tax law is passed and will impose a $5 tax on the sale of each television set. How much should a consumer expect to pay for the television set once the tax is in place? Assume neither the demand curve nor the supply curve is perfectly elastic nor perfectly inelastic. A) Between $100 and $105: Both the consumer and producer will pay part of the tax. B) More than $105: The deadweight loss of taxation will cause the consumer to pay more than the $5 tax. C) $105: The consumer will pay the full tax. D) $100: The full incidence of the tax will fall on the producer. 7. Rodrigo spends 12 hours binge watching A Man in Full. The streaming cost him $30 and he gave up eight hours of work at $15/hour. His opportunity cost is: A) $30 B) $150 C) $90 D) $120 The opportunity cost includes the $30 + (8 x $15) = $150. 8. What is true about scarcity? A) Scarcity forces us to make choices. B) Scarcity doesn’t affect the super-wealthy. C) Scarcity only affects commodities such as oil. D) All of the above are correct. 9. Julia is trying to decide how many hours she should work at her flexible job this week. She gets paid $18 per hour. Her marginal cost, which includes her direct expenses plus opportunity cost, is $8 per hour for the first 10 hours, $13 per hour for the next 10 hours, $16 per hour for the next 10 hours after that, and $20 per hour for the next 10 hours after that. How many hours should Julia work that week? A) 10 hours B) 20 hours C) 30 hours D) As many hours as possible, including overtime. She should work until MB = MC. Her MB is $18 per hour. For hours worked 21-30, her MC is $16 per hour. For hours worked 31-40, MC > MB. 3 10. A government subsidy for the consumption of solar panels cause consumers to purchase other energy efficient items as they reap the financial savings of the solar panels. This is an example of the effects of a(n): A) direct negative incentive. B) indirect positive incentive. C) indirect negative incentive. D) opportunity cost. Direct incentive: change in primary behavior. Semiautonomous driving is supposed to make driving easier, so this is a positive incentive. A side effect, or indirect incentive (secondary change in behavior) is that some drivers will spend less time with their eyes on the road. Many students answered: “indirect negative incentive”. The incentive is positive; the outcome is negative. 11. How does a rise in unemployment affect the production possibilities frontier (PPF)? A) The nation will slide down along the PPF. B) The PPF will shift in. C) The nation will slide up along the PPF. D) None of these answers are correct. We covered this in a Kahoot! I explained that the economy is operating inefficiently, i.e. inside the PPF. 12. You work at the Salty Sow restaurant. Your boss wants your advice on how to increase the demand for blackened redfish. Would lowering the price of blackened redfish achieve this goal? A) Yes. B) No. Lowering the price of the blackened redfish will increase the QD not the demand. 4 13. Suppose that Dwight and Jim can either make salads or grill steaks. Their maximum outputs per hour are listed in the following table. Given the same quantity of resources, at what terms of trade (relative price ratio) could they specialize and trade so that both consume outside their own production possibilities frontiers (PPFs)? Daily Production Person Salad Steak Dwight 10 30 Jim 15 75 A) 1 salad per 2 steaks B) 1 salad per 1 steak C) 1 salad per 3 steaks D) 1 salad per 4 steaks Work out the opportunity cost. Dwight: 1 Salad = 3 Steaks Jim: 1 Salad = 5 Steaks Any trade must take place between these ratios. 14. You are considering going to Dallas to visit friends. A round trip flight takes 3 hours and costs $225. A round trip bus ride takes 6 hours and costs $60. At what hourly wage rate would you be indifferent between taking the plane and the bus? A) $55 B) $50 C) $60 D) $150 Set the equations equal to each other and solve for T. 3T + 225 = 6T + 60 3T = 165 T = 55 15. Variables that are not controlled for in a model are called: A) normative statements. B) endogenous factors. C) positive statements. D) exogenous factors. 5 6 16. You have been given a ticket to see a Beyonce concert tonight. You cannot resell the ticket. Lady Gaga is performing on the same night & her concert is the only other activity you are considering. A Lady Gaga ticket costs $85 & on any given day you would be willing to pay as much as $150 to see her play. There is no other cost of seeing either performer. What is the opportunity cost of attending the Beyonce concert? Note: there is no option to see Beyonce tonight and Lady Gaga tomorrow. A) $150 B) $65 C) $0 D) $85 The opportunity cost is the foregone benefit, i.e. MB ($150) – MC ($85) = $65. 17. Which of the following would cause a decrease in the quantity supplied of bottled orange juice? A) The price farmers receive for their oranges rises. B) The wage of farm workers rises. C) A sudden rise in the price of plastic, an input in making bottled orange juice. D) None of these would cause a decrease in the quantity supplied of bottled orange juice. A decrease in QS is causes by a fall in the price of bottled orange juice. The other factors affect supply not QS. 18. Consider the statement: “I’m the peanut butter to your jelly. If peanut butter rises in price, this will decrease the demand for jelly.” A) True. B) False. 19. If the cost of labor used to make Nintendo Switch decreases, what will happen to the demand curve for Nintendo Switch? A) It shifts to the left. B) The slope becomes positive. C) Nothing happens to the demand for Nintendo Switch. D) It shifts to the right. 7 20. Suppose the price of milk (a complement to cereal) rises. At the same time, suppose the price of wheat (which is used to make cereal) falls. Given these changes, you should expect to see: A) an increase in both the equilibrium price and quantity of cereal. B) a decrease in the equilibrium price of cereal, but it’s hard to say what will happen to the equilibrium quantity. C) an increase in the equilibrium quantity of cereal, but it’s hard to say what will happen to the equilibrium price. D) a decrease in the equilibrium quantity of cereal, but it’s hard to say what will happen to the equilibrium price. Price of complement rises: demand curve shifts to the left (P falls; Q falls). Price of wheat rises: supply curve shifts to the left (P rises; Q falls) So Q falls but the impact on price is uncertain. 21. Demand for which of the following goods or services is likely to be the MOST elastic in warm weather? A) A Rip Curl brand straw wide-brim hat with a leather belt on the hat. B) A Rip Curl brand straw wide-brim hat. C) A straw wide-brim hat. D) A wide-brim hat. Answer: All 5 options involve hats. When a market is broadly defined, demand is inelastic. For example, buying a hat. The more narrowly defined the market is, the more elastic demand becomes. A pair of Rip Curl brand straw wide-brim hat with a leather belt on the belt is the most specific (narrowly defined) type of hat. 22. Anita wins the lottery and her income increases by 60%. She now buys 15% less ham. Her income elasticity of demand for ham is ________, making it a(n) ________ good. A) 0.25; normal B) -0.25; inferior C) 0.25; necessity D) -4.00; inferior % ∆ in QD % ∆ in income -15%/60% = -0.25. Inferior good: Ei < 0. 8 23. When the price of a sandwich increases from $2.50 to $2.75, the quantity demanded of lawn fertilizer is unchanged. The cross-price elasticity of demand between sandwiches and fertilizer is ________ because sandwiches and fertilizer are ________. A) 1; substitutes B) 0.5; complements C) 0.5; complements D) 0; unrelated 24. Which one of the following pairs of goods is likely to have a negative cross-price elasticity of demand? A) Purses and backpacks. B) Sofas and dining room tables. C) Manicures and pedicures. D) Gas and cars. Complements have a negative cross-price elasticity. If you increase the price of one good, you decrease the demand for the other (or vice versa). 25. Stress Less is a tobacco store that sells vapes. The owner wants to increase her total revenue and knows that the price elasticity of demand for her product is -1.4. What should she do to her price? A) Lower it by a relatively large amount. B) Leave it unchanged and use another way to increase sales. C) Raise it until the price elasticity of demand is equal to -1.0. D) Lower it until the price elasticity of demand is equal to -1.0. When demand is elastic (-1.4), you make more money by lowering the price (% ∆ QD > % ∆ P). Because demand is highly elastic, you don’t need to lower the price by a lot to make more revenue. 9 26. Orange juice and apple juice are substitutes. The supply of apples is reduced due to a bad harvest. Which of the following would be true? Assume the supply and demand curves in both markets are neither perfectly elastic nor perfectly inelastic. A) A decrease in the producer surplus in the market for orange juice while not affecting consumer surplus in the market for orange juice. B) An increase in both consumer and producer surplus in the markets for orange juice and apple juice. C) A decrease in the consumer surplus in the market for apple juice but an increase in producer surplus in the market for orange juice. D) A decrease in consumer surplus in the market for orange juice but an increase in producer surplus in the market for apple juice. When the supply of apples is reduced CS and PS for apples falls (market is smaller). People buy more oranges as a result (CS & PS rise as the market is bigger). 27. If the government wishes to minimize deadweight loss, it should tax goods that have _______ demand. A) elastic B) unitary C) inelastic Inelastic demand means consumers don’t respond by much to the tax, so less trade is driven out of the market (lower DWL). 28. A tax on private properties with large natural-grass lawns would likely cause a decrease in the price of A) solar panels. B) lawn fertilizer. C) shade trees. D) gravel. A tax on private properties with large natural-grass lawns will lead to a fall in demand for complementary goods, e.g. lawn fertilizer. When demand shifts to the left (P falls, Q falls) 10 29. Consider the market for bananas. The current price of a bunch of bananas is $3.00. Two consumers, Miles and Meghan, are willing to pay $3.50 and $4.50, respectively, for a bunch of bananas. Two farmers are willing to sell bananas for as little as $0.50 and $1.50 per bunch. How much is the total surplus in this market, assuming each consumer purchases one bunch of bananas and each farmer sells one bunch of bananas? A) $2 B) $3 C) $4 D) $6 TS = CS & PS. CS = Miles ($0.50) + Meghan ($1.50) = $2 PS = $2.50 + $1.50 = $4 TS = $6 30. Harry and Meghan spend their time making hamburgers and pizzas. Harry and Meghan wish to complete these tasks as quickly as possible. The production possibilities are given in the table: Harry Meghan Hamburgers Pizzas Hamburgers Pizzas 0 10 0 8 1 7.5 2 6 2 5 4 4 3 2.5 6 2 4 0 8 0 Which of the following statements is true? A) Harry has an absolute advantage, so he should do both. B) Meghan should make the hamburgers and Harry should make the pizzas. C) Harry and Meghan should eat out instead. D) Meghan should make the pizzas and Harry should make the hamburgers. Comparative advantage is lowest opportunity cost. Hamburgers Pizzas Harry: 1H = 2.5P Harry: 1P = 0.4H Meghan: 1H = 1P Meghan: 1P = 1H 11 31. Jimbo cuts wood in his spare time. Buyers of his wood are willing to pay $5 per piece of wood for as many pieces as Jimbo is willing to cut. On a particular day, he is willing to cut the first piece for $2, the second piece for $3, the third piece for $4.50, and the fourth piece for $6. If Jimbo is rational in deciding how many pieces of wood to cut, what would be his producer surplus? A) $9.50 B) $5.50 C) $15.50 D) $15.00 PS = first piece ($3) + second piece ($2) + third piece ($0.50) = $5.50 32. This graph shows a PPF for brisket and beer. Describe what the new PPF will look like if a new variety of hops, an ingredient in beer, is developed that produces twice as much yield. A) The entire PPF shifts inward. B) The entire PPF shifts outward. C) We move up and to the left along the PPF. D) The PPF shifts outward along the horizontal axis, but not along the vertical axis. Beer production directly increases; the production of brisket increases indirectly through time saved making beer. 12 SHORT ANSWER QUESTIONS 33. The market for umbrellas has a demand function, Qd = 30 – 3P and a supply function, Qs = 6P + 12. What is the equilibrium price and quantity sold in the market? Set demand equal to supply. 30 – 3P = 6P + 12 9P = 18 P = $2 Insert P = $12 into either equation. Qd = 30 – 3P Qd = 30 – (3 x 2) Qd = 24 34. Match the statements on the left with the correct answer on the right by drawing a line between them. Write your answers on the front page. Match These With These A. The price of toilet paper increases 1. The supply curve shifts out B. Tiff’s Treats cookies are the in thing 2. Move along the demand curve C. A new technology is developed 3. The supply curve shifts in D. A hurricane destroys a banana crop 4. The demand curve shifts out A-2 B-4 C-1 D-3 35. Illustrate what happens to demand for hamburgers when the price of fries increases. Shifts left 13 36. You are given the following elasticities: Price elasticity of demand for Dunkin Donuts = -1.5 Cross-price elasticity between Dunkin Donuts and Lola’s Donuts = -1.7 Cross-price elasticity between Dunkin Donuts and gasoline = -0.50 Income elasticity of demand for Dunkin Donuts = 1.8 What will happen to the sales at Dunkin Donuts if the price of gasoline decreases by 8%, holding all other things constant? The sales at Dunkin Donuts will increase by 4% (- 8% x -0.5). You were expected to include the math calculation, as we did in class. 37. Suppose Mary’s Café decides to raise the price of a flat white from $4 to $8. As a result, consumption drops from 1,000 to 500 flat whites. Calculate the price elasticity of demand using the midpoint method. ED is the % ∆ in QD / % ∆ in P. Midpoint Method: (-500) / [(1,000 + 500)/2] (4) / [(8 + 4)/2] -500 / 750 4/6 = -1 14 38. Dirk says that he will always spend $10 a week on lattes. Dirk’s demand for lattes is price: When someone commits to spending the same amount of money on a product, demand is unit elastic: the % ∆ in QD = % ∆ in P. For example:  P1 = $10; Qd1 = 1  P2 = $5; Qd2 = 2 Plug these numbers into the midpoint method (1) / [(2 + 1)/2] (-5) / [(5 + 10)/2] -1 / 1.5 -5/7.5 = -1 When you commit to spending a certain amount of money on any product, demand is unit elastic. We did an example in class. Use the following diagram to answer questions 39 and 40. 39. After the consumers are taxed $6, consumer surplus is ____. CS = 1/2 x b x h = 1/2 x 2 x 6 $6 15 40. The incidence of the tax on the producer is ____ %. The tax is $6 per unit (vertical gap between $15 - $21). Consumers pay $3 more; producers accept $3 less. 50% is the correct answer. But $3 per unit or $6 are also correct. 16