Eastern Mediterranean University Faculty of Business and Economics Department of Economics 2016‐17 Fall Semester ECON101 ‐ Introduction to Economics I Midterm Exam Answer Key 21 November 2016 Duration: 90 minutes Name: _________________________ Student ID: _____________________ Group No: ______________________ Part A: Multiple Choice Questions (1.5 points each, total 45 points) Please mark your answers on both the exam paper and the optic sheet. 1. The main reason why households and societies face many decisions is that a. resources are scarce.
b. goods and services are not scarce. c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree. 2. Efficiency means that a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. d. society is getting the maximum benefits from its scarce resources. 3. For most students, the largest single cost of a college education is a. the wages given up to attend school.
b. tuition, fees, and books. c. room and board.
d. transportation, parking, and entertainment. 4. Making rational decisions "at the margin" means that people a. make those decisions that do not impose a marginal cost. b. evaluate how easily a decision can be reversed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the dollar costs for each decision. 5. Suppose that a small country agrees to trade with a large country. Which country can benefit? a. only the small country.
b. only the big country. c. both d. neither 6. Which of the following transactions does not take place in the markets for factors of production in the circular­flow diagram? a. a landowner leases land to a farmer b. a farmer hires a teenager to help with harvest c. a construction company rents trucks for its business d. someone buys corn for dinner Page 1 of 7 7. Refer to Figure 1. Which combination of points show Figure 1: C
onsider the production possibilities curve for a production possibilities only achievable with improvements country that can produce sweaters, apples (in bushels), or a in technology or increases in resources? combination of the two. a. Q, R, U, and V b
. S and X c. T and W d. None of the above is correct. 8. Refer to Figure 1. If this society is producing at point T, a. there is idle (not in use) capacity in the economy. b. production is efficient. c. growth can only be achieved through an advancement in technology. d. the opportunity cost of producing one more sweater is approximately 40 bushels of apples. 9. Refer to Figure 1. The opportunity cost of moving from point U to point R is a. 60 bushels of apples. b. 80 bushels of apples. c. 80 sweaters. d. 160 sweaters. 10. Refer to Figure 1. The opportunity cost of one additional unit of sweater from point U to point R is a. 60 bushels of apples. b
. 0.75 bushel of apples. c. 80 sweaters. d. 1.33 sweaters. Figure 2 Panel (a)
Panel (b) 11. Refer to Figure 2 above. T
he rate of tradeoff between producing chairs and producing couches is constant in a. Panel (a).
b. Panel (b).
c. both Panel (a) and Panel (b). d. neither Panel (a) nor Panel (b). 12. If Iowa’s opportunity cost of corn is lower than Oklahoma’s opportunity cost of corn, then a. Iowa has a comparative advantage in the production of corn. b. Iowa has an absolute advantage in the production of corn. c. Iowa should import corn from Oklahoma. d. Oklahoma should produce just enough corn to satisfy its own residents’ demands. Page 2 of 7 Table 1 Assume that Brad and Theresa can switch between producing wheat and producing beef at a constant rate. Minutes Needed to Make 1 Brad Bushel of Wheat Pound of Beef 10 12 Theresa 6 10 13. Refer to Table 1 above. What is Brad’s opportunity cost of producing one pound of beef? a. 5/6 bushel of wheat
b. 6
/5 bushels of wheat
c. 3/5 bushels of wheat
d. 5/3 bushels of wheat 14. Belarus has a comparative advantage in the production of tractors, but Russia has an absolute advantage in the production of tractors. If these two countries decide to trade, a. Belarus should export tractors to Russia.
b. Russia should export tractors to Belarus. c. trading tractors would provide no net advantage to either country. d. Without additional information about opportunity costs, this question cannot be answered. 15. Production possibilities frontiers cannot be used to illustrate tradeoffs. a. True
b. F
alse 16. The price elasticity of demand for a good measures a. the responsiveness of quantity demanded to a change in price. b. consumers’ desire to avoid monopolistic markets in favor of competitive markets. c. firms’ ability to produce more of a good as price rises. d. firms’ response to the tastes of consumers. 17. Which of the following expressions is valid for the price elasticity of demand? a. Price elasticity of demand =
. b. Price elasticity of demand =
. c. Price elasticity of demand =
. d. Price elasticity of demand =
. 18. Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is a. 0.35. b. 0.43. c
. 2.33. d
. 2.89. 19. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly a. elastic, and the demand curve will be horizontal. b
. inelastic, and the demand curve will be horizontal. c. elastic, and the demand curve will be vertical. d. inelastic, and the demand curve will be vertical. Page 3 of 7 Figure 3 20. Refer to Figure 3. As price falls from Pa to Pb, which demand curve represents the most elastic demand? a. D1 b. D2 c. D3 d. All of the above are equally elastic. 21. The forces that make market economies work are a. work and leisure.
b. politics and religion. c. supply and demand.
d. taxes and government spending. 22. When the price of a good or service changes, a. the supply curve shifts in the opposite direction. b. the demand curve shifts in the opposite direction. c. the demand curve shifts in the same direction.
d. there is a movement along a given demand curve. 23. Which of the following statements is correct? a. Buyers determine supply, and sellers determine demand. b. Buyers determine demand, and sellers determine supply. c. Buyers determine both demand and supply. d. Sellers determine both demand and supply. 24. The demand for a good or service is determined by a. those who buy the good or service.
b. the government. c. those who sell the good or service.
d. both those who buy and those who sell the good or service. 25. A shortage exists in a market if a. there is an excess supply of the good.
b. quantity supplied exceeds quantity demanded. c. the current price is below its equilibrium price. d. All of the above are correct. 26. Which of the following would cause price to increase? a. an increase in supply
b. a decrease in demand c. a surplus of the good
d. a shortage of the good 27. The law of demand states that, other things equal, when the price of a good a. falls, the demand for the good rises.
b. rises, the quantity demanded of the good rises. c. rises, the demand for the good falls.
d. falls, the quantity demanded of the good rises. Page 4 of 7 28. A competitive market is one in which there a. is only one seller, but there are many buyers. b. are many sellers, and each seller has the ability to set the price of his product. c. 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. are so many buyers and so many sellers that each has a negligible impact on the price of the product. 29. Goods with many close substitutes tend to have a. more elastic demands.
b. less elastic demands. c. price elasticities of demand that are unit elastic. d. income elasticities of demand that are negative. 30. When the price of a good is higher than the equilibrium price, a. a shortage will exist. b. buyers desire to purchase more than is produced. c. sellers desire to produce and sell more than buyers wish to purchase. d. quantity demanded exceeds quantity supplied. Part B: Problems (65 points) Question 1. U
.S and Japan both produce car and grain. The following table describes the production possibilities of these two countries: Cars per worker per year Tons of grain per worker per year U.S 4 10 Japan 4 5 To keep the things simple, assume that each country has 1
00 w
orkers, and there is c
onstant marginal product of labor f or both countries. A. Graph the production possibilities frontiers for the American and Japanese economies. (Place Cars on the y­axis) (3+3 pts) B. For US what is the o
pportunity cost o
f a c
ar ? Of g
rain ? For Japan, what is the O
pportunity cost o
f a c
ar ? Of grain ? Put this information in the table below. (1.5 *4 pts) Answer: Car Ton of grain U.S 10/4=2.5 tons of grain 4/10=0.4 of a car Japan 5/4=1.25 tons of grain 4/5=0.8 of a car Page 5 of 7 C. Which country has an a
bsolute advantage in producing c
ar ? In producing g
rain ? Explain briefly. (4 pts) Answer: Neither country has an absolute advantage in producing cars , because they are equally productive (the same output per worker); the United States has an absolute advantage in producing grain , because it is more productive (greater output per worker). D. Which country has a
comparative advantage in producing c
ar ? In producing g
rain ? Explain briefly. (4 pts) Answer: Japan has a comparative advantage in producing cars , because it has a lower opportunity cost in terms of grain given up. The United States has a comparative advantage in producing grain , because it has a lower opportunity cost in terms of cars given up. E. Without trade , half of each country’s workers produce cars and half produce grain . What quantities of cars and grain does each country produce? Explain briefly. (5 pts) Answer: W
ith half the workers in each country producing each of the goods, the United States would produce 200 cars (50 workers times 4 cars each) and 500 tons of grain (50 workers times 10 tons each). Japan would produce 200 cars (50 workers times 4 cars each) and 250 tons of grain (50 workers times 5 tons each). Question 2. T
he figure below shows the demand and supply for orange juice. a. Calculate the price elasticity of demand when the price of orange juice rises from $20 to $40. Is the demand elastic, inelastic, or unit elastic? (6+2 pts) Answer: PED = [(4 ­ 5) / 4.5] / [(40 ­ 20) / 30] = ­ 0.33. Because |PED| = 0.33 which is less than 1, demand is inelastic in this price range. b. Calculate the price elasticity of supply when the price of orange juice declines from $100 to $80. Is the supply elastic, inelastic, or unit elastic? (6+2 pts) Answer: PES = [(3 ­ 4) / 3.5] / [(80 ­ 100) / 90] = 1.29. Because PES is greater than 1, supply is elastic in this price range. c. Over what price range is the demand for orange juice elastic? (4 pts) Answer: Given the linear demand curve, demand is elastic in the price range above the equilibrium price (from 70 to 120). Page 6 of 7 Question 3. Given the diagram above; a. Holding everything else constant (ceteris paribus), show on the diagram above and briefly explain what happens in this market when the price increases. (5 pts) Answer: W
hen price increases to P from the equilibrium price, there occurs excess supply in the market as much as the difference between quantity A and B. b. Ceteris paribus, show on the diagram above and briefly explain what happens in this market when income increases. Show the old and new equilibrium prices and quantities as P0, Q0 and P1, Q1, respectively. (5 pts) Answer: W
hen income increases, this causes the demand for normal goods to increase as well. When demand shifts to right as shown on the diagram above (from D0 to D1), the equilibrium price and quantity both increases from Q0 to Q1 and P0 to P1. c. Ceteris paribus, show on the diagram above and briefly explain what happens in this market when energy prices increase. Show the new equilibrium price and quantity as P2, Q2, respectively. (5 pts) Answer: W
hen energy prices increase, this makes inputs more costly therefore causes the supply to decrease. When supply shifts to left as shown on the diagram above (from S0 to S1), the equilibrium price increases P0 to P2, and equilibrium quantity decreases from Q0 to Q2. d. List down three factors that cause supply to increase. (5 pts) Answer: S
upply increases when; 1. Input prices decrease 2. Number of suppliers increases 3. Technology improves Page 7 of 7