Practice exam for midterm 1, summer 2015.
Chapters 1-7
To answer the next 4 questions, suppose there is a small island economy with 20 Hawkeyes and
30 Buckeyes. Each Hawkeye is capable of producing either 10 bushels of berries or 5 fish in a
given day. Each Buckeye can produce either 9 bushels of berries or 3 fish in a given day.
Both Hawkeyes and Buckeyes can also split their time across activities to produce a mix of
berries or fish in a given day.
1) The absolute advantage in fish is held by the ______ and the absolute advantage in berries is
held by the ______.
a. Hawkeye; Buckeye
b. Hawkeye; Hawkeye
c. Buckeye; Buckeye
d. Buckeye; Hawkeye
2) The comparative advantage in fish is held by the ______ and the comparative advantage in
berries is held by the ______.
a. Hawkeye; Buckeye
b. Hawkeye; Hawkeye
c. Buckeye; Buckeye
d. Buckeye; Hawkeye
.
3) If the economy is organized efficiently and produces 100 fish per day, what is the maximum
amount of berries it can produce in a day?
a. 150 bushels
b. 270 bushels
c. 390 bushels
d. none of the above
4. If the economy is organized efficiently and produces 100 fish per day, the opportunity cost of
an additional fish would be:
a. 2 bushels of berries
b. 3 bushels of berries
c. .5 bushels of berries
d. 1/3 bushels of berries.
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berries
fish
5) Which of the following would cause the PPF to shift outward as illustrated in the diagram
above?
a. discovery of a better way to catch fish.
b. discovery of a better way to gather berries
c. more workers.
d. all of the above.
6) If an economy is producing on its PPF, we know that:
a. it has achieved productive efficiency
b. it is impossible to produce more of one good without reducing production of another good
c. resources must be allocated according to their comparative advantage
d. all of the above
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7) If an economy has achieved allocative efficiency,
a. the marginal cost of each good must equal its marginal benefit
b. it must be impossible to produce more of one good without giving up something that
consumers value more highly
c. it must be impossible to increase the sum of consumer and producer surplus
d. all of the above
8) Suppose that brand X is an inferior good. This means that if people’s income fall, the
equilibrium price of brand X should ____ and the equilibrium quantity should ___.
a. rise; rise
b. rise; fall
c. fall; rise
d; fall; fall
9) As discussed in class, the U.S. has recently imposed tariffs on the import of steel that was
used for the pipes used in fracking for oil. This would cause the equilibrium price of oil in the
U.S. to ____ and the equilibrium quantity to _____.
a. rise; rise
b. rise; fall
c. fall; fall
d. fall rise
10) When ethanol is produced from corn, a byproduct called “distillers grain” is created that can
be fed to cattle. As a result, an increase in the demand for ethanol will cause the equilibrium
price of distiller’s grain to ____ and the equilibrium quantity to ____.
a. rise; rise
b. rise; fall
c. fall; fall
d. fall; rise
11) Suppose that over the next year the equilibrium price of gasoline rises but the equilibrium
quantity falls. These two simultaneous events could be explained by:
a. an increase in consumer income if gas is a normal good.
b. higher priced ethanol which is a substitute in consumption for gas
c. an increase in the cost of oil which is an input in the production of gasoline.
d. none of the above.
12) If there is a surprise news release today indicating that the grape harvest several months
from now will yield far more grapes than previously anticipated, this would:
a. not affect grape prices until after the harvest
b. increase grape prices today as supply decreases and demand increases
c. decrease grape prices today as supply increases but demand is unchanged
d. decrease grape prices today as supply increases and demand decreases
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13) Suppose that a golf course raises its price 10% and finds that its total revenue from golfers
rises 2%. Based on this information, we can conclude that the price elasticity of demand at the
golf course is
a. 8
b. 0.8
c. 2
d. 0.2
e. none of the above
14) If a firm raises its price, total revenue will:
a. always rises.
b. rise only if demand is inelastic.
c. rise only if demand is elastic.
d. rise only if demand is unit elastic.
15) If a firm faces inelastic demand,
a. it would increase profits by raising price
b. it would increase profits by cutting price
c. it is impossible to say whether profits would rise or fall if it cut price without more
information
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16) The cross-price elasticity between hybrid cars and gasoline is likely to be ____ and the
cross-price elasticity between SUVS (low gas mileage) and gasoline is likely to be ____.
a. positive; zero
b. positive; negative
c. negative; positive
d. negative; zero.
17) The supply of a good tends to be more inelastic:
a. if it is costly to store
b. the supply of inputs used to produce the goods is elastic
c. the time period for adjusting to price changes is longer
d. all of the above.
18) As supply becomes more inelastic, the effect of an increase in demand will be a (smaller,
larger) increase in equilibrium price and a (smaller, larger) increase in equilibrium quantity.
a. smaller; smaller
b. smaller; larger
c. larger; larger
d. larger; smaller
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To answer the next 3 questions, refer to the diagram below describing the competitive market
for turkey.
19. The price elasticity of demand for turkey between a price of $1.50 and $2.00 is
a. 2
b. 1
c. 0.5
d. none of the above
20. The demand for turkey is
a. inelastic for all prices below $1.50
b. elastic for all prices below $1.00
c. inelastic for all prices between 0 and $3.50
d. none of the above.
21. At the equilibrium price and quantity for turkey, consumers surplus (in millions of $) is
____ and producers surplus (in millions of $) is ____.
a. 300; 300
b. 300; 240
c. 240; 300
d. none of the above.
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To answer the next 4 questions, refer to the diagram below describing the market for gadgets.
SMC
110
PMC
100
90
80
70
60
SMB=PMB
50
25
50
75
100
# of gadgets producedl monthly
22) Based on the diagram above, there must be a (positive, negative) externality of ____ for
each gadget produced.
a. positive; $20
b. positive; $10
c. negative $10
d. negative $20
23) Based on the diagram above, market equilibrium would generate (more, less) than the
socially efficient amount to be produced and a deadweight loss of _____.
a. more; $500
b. less; $500
c. less; $250
d. more; $250
24) Based on the diagram above, the market could be moved to the allocatively efficient
outcome with a (subsidy, tax) of ____.
a. subsidy; $10
b. subsidy; $20
c. tax; $10
d. tax; $20
25) If production of gadgets was increased from 50 to 75, the benefits of the extra gadgets to
society would be ______ and the cost of the extra gadgets to society would be ______.
a. $2125; $2375
b. $2125; $1875
c. $1975; $1875;
d. $none of the above
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26) When a company installs a security camera to monitor activity outside of their building,
crime is reduced for the company and neighboring buildings. As a result, installation of
security cameras creates a _____ externality and a competitive market for security cameras
would result in (more, less_) than the efficient number of security cameras being installed.
a. positive; more
b. positive; less
c. negative; more
d. negative; less
To answer the next 3 questions, consider the competitive market for rental apartments in
a city named Alton described in the diagram below.
Suppose there are no positive or negative externalities associated with the production or
consumption of rental housing and the government imposes a rent ceiling at $500 per
apartment.
27) This price ceiling will result in:
a. a shortage of 2,000 apartments per month.
b. a surplus of 1,000 apartments per month
c. a surplus of 2,000 apartments per month
d. neither a shortage nor a surplus since the ceiling won’t be binding.
28) Compared to the equilibrium price and assuming no search costs, with the $500 rent ceiling
consumers would be
a. better off by $350,000
b. better off by $500,000
c. worse off by $125,000
d. none of the above
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29) Compared to the equilibrium price and assuming no search costs, with the $500 rent ceiling
landlords would be
a. worse off by $500,000
b. worse off by $325,000
c. worse off by $625,000
d. none of the above
Suppose that Cincinnati government imposes a per night tax of $10 on hotel owners for
each occupied hotel room.
To answer the questions below, assume that the market for
hotel rooms in Cincinnati before the tax is imposed is described in the diagram below.
Price per ticket (in $)
115
S
110
105
100
95
D
90
85
1,000
2,000
3,000
4,000
rooms per day
l
To examine the effect of the $10 tax, you should draw the new supply and/or demand
curves on top of the diagram above. Be careful to account for the fact that the tax is $10
when determining where to draw the new curve.
30) How much tax revenue should the Cincinnati government.expect daily from the $10 hotel
tax?
a. $2,000
b. $20,000
c. $30,000
d. none of the above.
31) If the hotel tax is imposed, each day consumers would be worse off by _____ and hotel
owners would be worse off by _____.
a. $12,500; $12,500
b. $10,000; $12,500
c. $12,500; $10,000
d. $10,000; $10,000
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32) The daily excess burden of the $10 hotel tax would be
a. $2500
b. $5000
c. $7500
d. none of the above
33) If the bridges between Cincinnati and Covington are improved and visitors can move more
easily between the two cities, we would expect that the consumer share of the hotel tax in
Cincinnati would (rise, fall) because hotel demand in Cincinnati would become more (elastic,
inelastic).
a. rise; inelastic
b. rise; elastic
c. fall; inelastic
d. fall; elastic;
34) The tax revenue generated from the hotel tax would be greater if demand was more ____
or if supply was more -____.
a. elastic; elastic
b. elastic; inelastic
c. inelastic; inelastic
d. inelastic; elastic
35) The excess burden (i.e. deadweight loss) from the hotel tax would be greater if demand
was more _____ or supply was more _____.
a. elastic; elastic
b. elastic; inelastic
c. inelastic; elastic
d. inelastic; inelastic
36) Numerous cities limit the number of taxi cabs available in the city below what the private
market would provide. The effect of such a “quota” on taxicabs is to:
a. increase the price of cab rides
b. makes consumers worse off
c. potentially makes cab drivers better off, but they might be worse off
d. all of the above
37) If a city increases the cab quota by 10% but it is still below what the market would
provide, we would expect the decrease in the price of cab rides to be larger if:
a. demand is more inelastic
b. demand is more elastic
c. supply is more elastic
d. both b and c
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38) Suppose that a city decides to subsidize bus rides for its citizens. Assuming no
externalities from bus rides, the effect of the subsidy would be to:
a. increase consumer’s surplus for bus riders
b. increase producer’s surplus for bus companies
c. increase taxpayer costs more than consumers and producers surplus rises
d. all of the above.
39) The United States has a comparative advantage in producing airplanes if
A) it has a larger quantity of skilled workers than do other nations.
B) it can produce a larger quantity than can other nations.
C) it can produce them at a lower dollar cost than can other nations.
D) it can produce them at a lower opportunity cost than can other nations.
40) Prior to international trade, the price of good X is lower in country A than in country B. This means
that we know that
A) country A has a comparative advantage in the production of product X.
B) country B has an absolute advantage in the production of product X.
C) country A has an absolute advantage in the production of product X.
D) country B has a comparative advantage in the production of product X.
41) A country specializes in the production of goods for which it has a comparative advantage, so
A) some producers and consumers win, some lose, but overall the gains exceed the losses.
B) producers win, consumers lose, but overall the gains exceed the losses.
C) all producers win.
D) all consumers win.
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The figure shows the market for shirts in the United States, where D is the domestic demand curve and S
is the domestic supply curve. The world price is $20 per shirt.
42) In the figure above, with international trade American consumers buy ________ million shirts per
year.
A) 16 B) 24 C) 32 D) 48
43) Tariffs and import quotas both result in
A) higher levels of domestic consumption.
B) the domestic government gaining revenue.
C) lower levels of domestic production. D) lower levels of imports.
44) An import quota on sugar
A) increases the demand for sugar and raises its price.
B) increases the imports of sugar and lowers its price.
C) increases the imports of sugar and raises its price.
D) decreases the imports of sugar and raises its price.
45) Who benefits from a tariff on a good?
A) Domestic producers of the good
B) Foreign producers of the good
C) Domestic consumers of the good
D) Foreign governments
46) When the United States imposes an import quota on a good, the amount of the ________ in U.S.
consumer surplus is ________ the amount of the ________ in U.S. producer surplus.
A) decrease; equal to; increase B) increase; smaller than; increase
C) decrease; larger than; increase
D) decrease; larger than; decrease
47) Import quotas ________ the price of imported goods and ________ the quantity consumed in the
nation imposing the quota.
A) raise; increase
B) raise; decrease
C) lower; decrease
D) lower; increase
48) A key difference between tariffs and quotas is that
A) the government receives revenue with quotas, but the importer receives added profit with tariffs.
B) consumers are hurt with quotas but not with tariffs.
C) the government receives revenue with tariffs, but the importer receives added profit with quotas.
D) consumers are hurt with tariffs but not with quotas.
49) If the United States imposes a tariff on imported cars, the
A) U.S. demand curve shifts leftward.
B) U.S. supply curve shifts rightward.
C) U.S. demand curve shifts rightward.
D) the price in the United States rises but neither the U.S. demand curve nor the U.S. supply curve shift.
50) A tariff on imported peanuts ________ the quantity of peanuts imported and ________ the domestic
price of peanuts.
A) increases; lowers
B) decreases; decreases
C) decreases; increases D) does not change; increases
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The figure shows the market for shirts in the United States, where D is the U.S demand curve and S is
the U.S. supply curve. The world price is $20 per shirt. The United States imposes a tariff on imported
shirts, $4 per shirt.
51) In the figure above, with the tariff American consumers ________ million shirts per year.
A) 32 B) 40 C) 16 D) 48
52) In the figure above, with the tariff the United States imports ________ million shirts per year.
A) 16 B) 32 C) 24 D) 8
53) In the figure above, the tariff ________ U.S. imports of shirts by ________ million shirts per year.
A) decreases; 16 B) increases; 8 C) increases; 4 D) decreases; 8
54) In the figure above, the tariff ________ the domestic production of shirts in the United States by
________ per year.
A) increases; 8 million B) increases; 4 million
C) decreases; 8 million D) decreases; 16 million
55) In the figure above, the U.S. government's revenue from the tariff is ________.
A) $64 million B) $128 million C) $32 million D) $48 million
56) In the figure above, U.S. consumers' ________ from the tariff is ________.
A) loss; $80 million
B) loss; $176 million
C) gain; $128 million
D) gain; $64 million
57) In the figure above, U.S. producers' ________ from the tariff is ________.
A) gain; $128 million
B) loss; $64 million
C) loss; $32 million
D) gain; $80 million
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58) In the figure above, the deadweight loss from the tariff is ________.
A) $80 million B) zero C) $16 million D) $32 million
The figure shows the market for shirts in the United States, where D is the domestic demand curve and S
is the domestic supply curve. The world price is $20 per shirt.
59) In the figure above, with international trade ________ million shirts per year are produced in the
United States.
A) 32 B) 16 C) 20 D) 48
60) In the figure above, with international trade the United States ________ million shirts per year.
A) exports 16 B) imports 32 C) exports 32 D) imports 48
61) In the figure above, international trade ________ consumer surplus in the United States by ________.
A) decreases; $192 million
B) decreases; $320 million
C) increases; $192 million
D) increases; $320 million
62) In the figure above, international trade ________ producer surplus in the United States by ________ .
A) decreases; $192 million
B) decreases; $320 million
C) increases; $320 million
D) increases; $192 million
63) In the figure above, international trade ________ total surplus in the United States by ________.
A) decreases; $256 million
B) increases; $320 million
C) decreases; $192 million
D) increases; $128 million
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64) Suppose sugar is exported from a nation. In the sugar market who does NOT benefit from the
exports?
A) domestic producers B) workers in the industry
C) domestic consumers D) foreign consumers
65) A country opens up to trade and becomes an importer of a sugar. In the sugar market, consumer
surplus will ________, producer surplus will ________, and total surplus will ________.
A) increase; decrease; decrease B) increase; decrease; increase
C) decrease ; increase; increase D) decrease; decrease; decrease
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ANSWER KEY
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
B
A
B
B
C
D
D
A
B
D
C
D
B
B
A
B
A
D
B
A
D
D
D
D
A
B
A
D
C
B
A
B
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
D
C
A
D
A
D
D
A
A
D
D
D
A
C
B
C
D
C
B
A
A
A
A
B
D
D
B
B
D
A
D
C
B