Micro Midterm 1 PDF

Test your understanding for midterm 1 None of these questions will show up on the exam but if you work on them (not memorize solutions) you should do well on the exam (TAs will solve selected questions) Point #Pizzas #Tanks A 20...

Test your understanding for midterm 1 None of these questions will show up on the exam but if you work on them (not memorize solutions) you should do well on the exam (TAs will solve selected questions) Point #Pizzas #Tanks A 20 0 B 18 6 C 14 10 D 8 12 E 0 13 1) The table above shows five different points along the production possibilities frontier for a country that produces tanks and pizzas. If the country is currently operating at point C and decided to move to point B, a. the opportunity cost of tanks would be fourteen pizzas b. it could not do so, given the current state of technology and quantity of resources c. the country would have to forego producing six tanks d. the opportunity cost of four pizzas would be four tanks e. the opportunity cost of four pizzas would be ten tanks 2) In one year, a weapons plant can manufacture either 1,000 more guns or 50 more tanks. The plant's opportunity cost of an extra tank is approximately a. 20 guns b. 50 guns c. 50 tanks d. 1/50 of a tank e. 1/50 of a gun. 3) Along a society's production possibilities frontier, a. the level of technology is changing b. more of one good can be produced without giving up some of the other good c. resources are not being fully utilized d. available resources are being used efficiently e. there is productive inefficiency in the economy 4) The concave shape of the production possibilities frontier reflects a. the law of comparative advantage b. the law of absolute advantage c. the law of increasing opportunity cost d. the simplifying assumption of scarce resources e. productive inefficiency 5) Suppose that the United States has an absolute advantage over Mexico in producing both agricultural and manufactured goods. In the U. S., the opportunity cost of 1 unit of agricultural output is 2 units of manufactured goods. In Mexico, the opportunity cost of 1 unit of agricultural output is 1.5 units of manufactured goods. Total production in the U. S. and Mexico will be maximized if a. the U. S. specializes in both types of output b. Mexico specializes in both types of output c. the U. S. specializes in agricultural goods and Mexico specializes in manufactured goods d. the U. S. specializes in manufactured goods and Mexico specializes in agricultural goods e. each country achieves self-sufficiency 6) Bill can cook dinner in 45 minutes and mow the lawn in 1.5 hours. Eileen can cook dinner in 1.5 hours and mow the lawn in 2 hours. Which of the following statements is correct? a. Bill has both an absolute advantage and a comparative advantage in cooking dinner. b. Bill has both an absolute advantage and a comparative advantage in mowing the lawn. c. Eileen has both an absolute advantage and a comparative advantage in cooking dinner. d. Eileen has both an absolute advantage and a comparative advantage in mowing the lawn. e. Bill has the comparative advantage in both cooking dinner and mowing the lawn. 7) Bill can cook dinner in 45 minutes and mow the lawn in 1.5 hours. Eileen can cook dinner in 1.5 hours and mow the lawn in 2 hours. Which of the following statements is correct? a. Bill should specialize in both tasks. b. Bill should specialize in cooking dinner; Eileen should specialize in mowing the lawn. c. Bill should specialize in mowing the lawn; Eileen should specialize in cooking dinner. d. Eileen should specialize in both tasks. e. neither person should specialize. 8) Orange juice and cranberry juice are substitute goods. An increase in the price of orange juice results in a(n) a. increase in the demand for orange juice b. increase in the supply of cranberry juice c. increase in the quantity demanded of orange juice d. increase in the demand for cranberry juice e. decrease in the quantity demanded of cranberry juice 9) Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation Qd = 300 – 8P where Qd is quantity demanded and P is price. The supply schedule can be represented by the equation Qs = 100 + 2P where Qs is the quantity supplied. The equilibrium price and quantity in the market for chocolate bars is a. P = 10 and Q = 160 b. P = 15 and Q = 150 c. P = 20 and Q = 140 d. P = 20 and Q = 210 e. None of the above 10) If some piece of information causes buyers to expect the price of a good to rise in the future, but sellers take the same information and believe it will have no impact on price, the result is a. a decrease in supply today b. an increase in supply today c. a decrease in quantity demanded today d. an increase in demand today e. an increase in quantity demanded today 11) Of the following, which could cause the demand curve for personal computers to shift to the left? a. a decrease in the price of personal computers b. an increase in the price of computer software c. a decrease in the price of computer software d. an increase in wealth (assuming personal computers are a normal good) e. expectations of an increase in the price of personal computers in the future 12) Which of the following could lead to an increase in the equilibrium quantity of a good? a. a decrease in supply and a decrease in demand b. an increase in the price of an input c. an increase in demand and an increase in supply d. a decrease in demand regardless of supply e. a decrease in technology 13) Which of the following would increase the amount of an inferior good that buyers would like to purchase? a. an increase in buyers' incomes b. an increase in the price of a complement c. a decrease in the price of a substitute d. a decrease in buyers' incomes e. a decrease in its expected future price 14) In Figure 3-11, suppose that initially the market is in equilibrium as defined by the demand and supply curves D1 and S1. Which price/quantity combination could result from a decrease in the wages paid to workers? a. $100 and 50,000 b. $120 and 50,000 c. $75 and 75,000 d. $120 and 75,000 e. $120 and 100,000 15) Suppose a local bookstore notices that a 2 percent increase in book prices leads to a 2 percent decrease in the number of books sold. Which of the following is true? a. Demand for books is price elastic. b. The store's sales revenue did not change. c. Demand for books is price inelastic. d. Demand for books is perfectly inelastic. e. The bookstore could increase revenue by further lowering prices. 16) Figure 5-11 Quantity of Public Higher Education Income Demanded $45 billion 90,000 student years $55 billion 110,000 student years $65 billion 130,000 student years $75 billion 150,000 student years  $85 billion 170,000 student years Figure 5-11 shows five different levels of income for a particular state (in billions of dollars) and the quantity of public higher education demanded there (for a given level of tuition). What is the income elasticity of demand if income rises from $45 billion to $55 billion? a. 1.00 b. 0.06 c. -1.00 d. 0 e. none of these 17) If a decrease in the price of one good causes the demand curve for another good to shift to the left, the two goods must be a. inferior b. normal goods c. inferior goods d. substitutes e. complements 18) The 10% rise in the price of coffee increases the demand for tea in NYC from 10,000 lbs a month to 12,000 lbs a) Compute the cross-price elasticity of demand for tea b) Graphically show the change in demand for tea 19) By utilizing existing resources more efficiently, an economy can produce at a point outside the PPF a. True b. False 20) Whether a subsidy for a certain good is given to a demander or supplier is irrelevant because a. in either case, the price that the demander has to pay will decrease; while the price the supplier receives will increase b. in either case, the price that the demander has to pay will increase; while the price the supplier receives will decrease c. either situation will create excess demand d. either situation will create excess supply e. none of these are correct Use the following graph to answer questions 21 and 22 Price per year S  P2 P1 P0 Q1 Q2 Q3 Quantity 21) Suppose the government imposes a price ceiling of P0. a. What is the short side of the market? b. How much will be sold in the absence of a black market and at what price? c. If a black market develops how many units will be sold by the supplier? d. What will the black market price be? Explain. 22) Suppose the government imposes a price floor of P2 a. What is the short side of the market? b. Why does the government need to buy up the surplus? c. How much will the government spend to support the price floor if it decides to purchase the surplus? d. Can you think of an alternative to purchasing the surplus that the government can use to ensure that the price support is maintained. 23) The assumption that more is better requires the consumer a. to rank any two baskets. b. to say that if basket A is preferred to basket B, and if basket B is preferred to basket C then basket A is preferred to basket C. c. to rank basket A higher when basket A has more units of at least one good and no less of the other goods d. to have a diminishing marginal rate of substitution. 24) Use the following to answer the next questions 24 to 31 below Tom has a monthly budget of I = $60 to spend fish and berries. His budget set (his consumption possibilities) and his preferences (indifference curves) are presented below. Berries (lbs per month) 15 A 12 B 9 C H 6 G D  3 E F 2 4 6 8 10 Fish (lbs per month) 25). Compute the price of fish, Pf and price of berries Pb and determine the slope of Tom’s budget constraint. 26) What information does the slope of the budget constraint give you? 27) Tom does not exhaust his budget if he consumes bundle G. What is the amount of his budget that is unspent? 28) At the optimal bundle D, compute Tom’s ratio MUx/MUy = MU fish/MUberries 29) Suppose the price of fish increases to $10 per lb. Draw in Tom’s new budget constraint 30) Explain why Rom’s indifference curves slope down 31) Which assumption guarantees that Tom’s indifference curves do not cross? 32) Why is bundle B not an utility maximizing bundle for Tom? 33) If ‘macaroni and cheese’ is an inferior good, then a. the income effect and the substitution effect work in opposite directions b. as the budget line shifts to the right, consumers demand more macaroni and cheese c. when the price of macaroni and cheese rises, the quantity demanded also rises d. the quantity demanded rises as purchasing power rises e. individuals will not consume macaroni and cheese 34) A consultant who earns $100 per hour takes 4 hours off work to go to the movies. The out-of-pocket cost for the cab and the movie ticket are $12. The total cost of the movie to the consultant is a. $12 b. $412 c. $400 d. $388 e. none of the above. 35) In one hour George can fix 4 flat tires or type 200 words. His opportunity cost of fixing a flat tire is _____________words a. 200 b. 4 c. 1 d. 50 e. 800 35. Amanda reinvented herself as a baker after California's COVID-19 shelter-in-place order. There was only one problem with her plan: the nationwide shortage of active dry yeast. For more than two weeks she scavenged local stores for active dry yeast in jars and packets, even by the pound, with no luck. So, she decided to use the closest substitute to bake brioche – baking soda. A. Draw a graph of the yeast market to illustrate the impact of yeast shortage B. Draw a graph of the baking soda market to illustrate the impact of the yeast shortage 36. The prices of things you buy increase during the coronavirus pandemic? News articles have reported price gouging on toilet paper and personal protective equipment in the U.S., numerous essential items in the U.K., and several other goods worldwide. Price gouging is the practice of offering to sell an essential item following a natural disaster or during a pandemic at a price much higher than its normal price. Several states in the U.S. and countries around the world have laws preventing price gouging. Price caps/ceilings prevented firms from adjusting their prices to meet the increasing demand. A. As a result, Quantity demanded is _____________than the quantity supplied and there is a ________of the market a. less; shortage b. greater; surplus c. less; surplus d. greater; shortage e. none of the above B. Draw a graph to illustrate your answer 37. Health experts tell us that our best defense against the coronavirus is clean hands. When the demand for hand sanitizer increases, the quantity demanded exceeds the quantity supplied and a shortage arises at the original price. Hand sanitizer is made from alcohol, but so are vodka, gin, and whiskey. A. Hand sanitizers and spirits are a. substitutes b. complements in production c. complements d. substitutes in production e. none of the above B. Draw a graph of the spirits market to illustrate your answer 38) Which of the following is False? a) Rightward shift in demand + unchanged supply curve = higher equilibrium price and larger equilibrium quantity b) Rightward shift in demand + Rightward shift in supply curve = lower equilibrium price and smaller equilibrium quantity c) Leftward shift in supply + unchanged demand curve = higher equilibrium price and smaller equilibrium quantity d) Leftward shift in demand + unchanged supply curve = lower equilibrium price and smaller equilibrium quantity e) Rightward shift in supply + unchanged demand curve = lower equilibrium price and larger equilibrium quantity Ans: B 39) Assume typical shapes of the demand and supply curves. If both demand and supply increase in a competitive market the equilibrium price will a. always rise b. always fall c. rise if demand increases more than supply d. fall if demand increases more than supply e. always remain unchanged 40) A decrease in equilibrium price and an increase in equilibrium quantity could be brought about by an a. increase in demand b. decrease in demand c. increase in resource prices d. improvement in production technology e. favorable shift in tastes and preferences 41) A decrease in demand coupled with a decrease in supply results in a(n) a. increase in equilibrium price and a decrease in equilibrium quantity b. increase in equilibrium price and a decrease in equilibrium quantity c. an increase in equilibrium price and an increase in equilibrium quantity d. ambiguous effect on equilibrium price and a decrease in equilibrium quantity e. ambiguous effect on equilibrium price and a decrease in equilibrium quantity 42) A decrease in demand and an increase in supply results in a(n) a. decrease in equilibrium price and an ambiguous effect on equilibrium quantity b. increase in equilibrium price and an ambiguous effect on equilibrium quantity c. ambiguous effect on equilibrium price and an increase in equilibrium quantity d. ambiguous effect on equilibrium price and a decrease in equilibrium quantity e. increase in equilibrium price and a decrease in equilibrium quantity 43. Suppose that an economy’s PPF is a straight line, rather than a bowed out, concave curve. What would this say about the nature of opportunity cost as production is shifted from one good to the other? If the PPF is a downward-sloping straight line, then the law of increasing opportunity cost does not hold. Instead, the opportunity cost of producing an additional unit of good 1 or good 2 remains constant as more of either is produced (i.e., there are constant opportunity costs in production). 44. How would each of the following affect the market for denim jeans in the United States? Illustrate each answer with a supply- and- demand diagram. a. The price of denim cloth increases. b. An economic slowdown in the United States causes household incomes to decrease. 45. Indicate which curve shifted— and in which direction— for each of the following. Assume that only one curve shifts. a. The price of furniture rises as the quantity bought and sold falls. b. Apartment vacancy rates increase while average monthly rent on apartments declines. c. The price of personal computers continues to decline as sales skyrocket. 46. In early 2011, even though cotton prices were high, cotton farmers in China began to hoard ( rather than sell) most of the crop they had harvested, filling spare rooms and even living areas of their homes with cotton. Given the cost and inconvenience of storing large amounts of cotton rather than selling it, what could explain this behavior? [Hint: Review the section of this chapter on factors that shift the supply curve.] Could this behavior explain why cotton prices were high during this period? Explain, using the concepts of supply and demand. 47. The short- run elasticity of demand for cigarettes ranges between 0.25 and 0.70. The same study suggested that the long- run elasticity of demand for cigarettes ranges from 1.0 to 2.5. Which is larger— short- run or long- run elasticity? Is this what we would expect? What adjustments might smokers be able to make in the long run that they can- not make in the short run that can explain the difference between short- run and long- run elasticities? 48. The Dangerous Curves box titled “ Slope and Elasticity,” states that when two demand curves share a point, then for a given price change and starting at that shared point demand will be more elastic along the flatter curve. Does this statement remain true if we replace the word “ starting” with the word “ ending”? Explain why or why not. 49. The demand for rosebushes in a market is as follows: Price ( per rosebush) Quantity Demanded ( rosebushes per week) $ 10 230 $ 11 150 $ 12 90 $ 13 40 a. Is this a straight- line demand curve? How do you know? b. Calculate the price elasticity of demand for roses for a price increase from $ 10 to $ 11. Is demand elastic or inelastic for this price change? c. Calculate the price elasticity of demand for roses for a price increase from $ 12 to $ 13. Is demand elastic or inelastic for this price change? 50. Suppose that 1,000 people in a market each have the same monthly demand curve for bottled water, given by the equation Qd = 100 - 25P, where P is the price for a 12- ounce bottle in dollars. a. How many bottles would be demanded in the entire market if the price is $ 1? b. How many bottles would be demanded in the entire market if the price is $ 2? c. Provide an equation for the market demand curve, showing how the market quantity demanded by all 1,000 consumers depends on the price. 51. What would happen to the market demand curve for polyester suits, an inferior good, if consumers’ incomes rose? 52. “ If a good is inferior, a rise in its price will cause people to buy more of it, thus violating the law of demand.” True or false? Explain. 53. [Indifference Curve Approach] The appendix to this chapter states that when a consumer is buying the optimal combination of two goods x and y, then MRS y, x = P x / P y. Draw a graph, with an indifference curve and a budget line, and with the quantity of y on the vertical axis, to illustrate the case where the consumer is buying a non- optimal combination on his budget line for which MRS y, x > P x / P y More challenging Qs: 54. Suppose that, over a period of six months, the price of corn increased. Yet, the quantity of corn sold by producers decreased. Does this contradict the law of supply? If not, why not? 55. Indicate whether each of the following events will shift the monthly demand curve for the Ford Taurus (a midsize car) to the right, to the left, or not at all: (a) GM introduces a new line of small, fuel-efficient cars; (b) Following an agreement between the US and Japan, Japanese car manufacturers will ''voluntarily'' reduce their exports of medium sized cars to the US; (c) The cost of steel increases. 56. Explain why a situation of excess demand will result in an increase in the market price. Why will a situation of excess supply result in a decrease in the market price? 57. Why does a market clear when the government imposes an excise tax of $T per unit? When the government imposes an excise tax, the price consumers pay increases, reducing the quantity demanded, and the price suppliers receive falls, decreasing the quantity supplied. These amounts fall to the point where the number of units supplied equals the number of units demanded by consumers, clearing the market. 58. In a competitive market with no government intervention, the equilibrium price is $10 and the equilibrium quantity is 10,000 units. Explain whether the market will clear under each of the following forms of government intervention: a) The government imposes an excise tax of $1 per unit. b) The government pays a subsidy of $5 per unit produced. c) The government sets a price floor of $12. d) The government sets a price ceiling of $8. 59. What does the sign of the cross-price elasticity of demand between two goods tell us about the nature of the relationship between those goods? 60. For the following pairs of goods, would you expect the cross-price elasticity of demand to be positive, negative, or zero? Briefly explain your answers. a) Tylenol and Advil b) DVD players and VCRs c) Hot dogs and buns 61. Suppose the price of A is $20 per unit, the price of B is $10 per unit, and the consumer’s income is $1000 per month. Which of the following baskets is not on the consumer’s budget line? a) A = 40, B = 20 b) A = 5, B = 90 c) A = 2.5, B = 95 d) A = 20, B = 40 62. Scott consumes only two goods, steak and ale. When the price of steak falls, he buys more steak and more ale. On an optimal choice diagram (with budget lines and indifference curves), illustrate this pattern of consumption. 63. Consumer preferences: a) are fixed exogenously and unchanging in reality. b) indicate how a consumer would rank any two possible baskets of goods, taking into account her budget constraint. c) indicate how a consumer would rank any two possible baskets of goods, taking into account the current prices of those goods. d) indicate how a consumer would rank any two possible baskets of goods, assuming that the baskets were available to the consumer at no cost. Use the following graph to answer the next 3 questions: The following graph shows the market for basketballs, when basket balls are not taxed. 64. If sellers of basket balls are taxed $6 a ball, the seller receives a price of $_______and sells ______balls a. $16 and 8 million balls b. $21 and 12 million balls c. $6 and 8 million balls d. $10 and 8 million balls e. None of the above 65. The government receives a revenue of $48 million a. True b. False 66. The economic burden of the tax is $________on the seller and $______ on the buyer a. $3 on the seller and $3 on the buyer b. $5 on the seller and $1 on the buyer c. $1 on the seller and $5 on the buyer d. $4 on the seller and $2 on the buyer e. None of the above