SUBJ SCORE #_____________
Economics 001
Professor Levinson
Midterm #1
12:30 pm October 1, 2013
Version A: Page 1 of 9
NAME
_____________________
GU ID # (9 digits) ________________
Seat
_____________________
DO NOT TURN TO PAGE 2
UNTIL THE INSTRUCTOR TELLS YOU TO DO SO.
FOLLOW THESE INSTRUCTIONS FIRST.
1.
Please read and sign the following statement: "In keeping with the Georgetown Honor
System, I assure that this exam is the product of my own work, that I will not make use of
unauthorized resources or collaborate with any other student."
(signature) _________________________________
2.
Please write your name, GU ID # (9 digits), and seat carefully and legibly at the top of this
page.
3.
IMPORTANT: Please fill out a ParScore sheet follows.
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
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4.
Under “ID NUMBER” fill out your GU ID # (9 digits) number and corresponding
bubbles, right-justified.
Write your name and shade the appropriate bubbles.
Under “CODE” enter “AA” for the 12:30 exam, “BB” for the 2pm exam.
Under “TEST FORM” shade in the letter corresponding to the Version at the top
right of this page.
Under “SUBJ Score” fill in the number at the top left of this page.
You have 1 hour to complete the exam, which consists of
TA Use Only.....
I.
II.
4 short-answer questions
15 multiple-choice questions
The exam is worth 60 points, so allocate your time
accordingly.
5.
You may refer to one 3x5 card with your written notes and use a calculator, but you may
not use any other notes or references.
6.
If you have a question during the exam, stay seated and raise your hand.
7.
When you are done: If there are fewer than 10 minutes left in the exam period, please
wait patiently and quietly until the exam period is over. If you have finished more than
10 minutes early, you may quietly bring this exam booklet to the place indicated by the
instructors.
Read the questions carefully. I have tried to be clear. Good luck.
Version A: Page 2 of 9
BONUS POINTS.
Make sure you have completed the instructions on the front page completely and accurately.
Part I:
1. Bill the farmer has a small 10-acre plot of land, in which he can either grow flowers or raise
berries. Five (5) of the acres are great for berries, and not so good for flowers. On those five
acres he can grow 150 pounds of berries but only 50 bunches of flowers. (Total, not per acre.)
The other five acres are equally good for berries or flowers, and on those acres he can grow 100
pounds of berries or 100 bunches of flowers. (Total.)
Berries
a)
Using the axes below, carefully graph Bill's production possibility frontier. Be sure to
label the intercepts on each axis, as well as the slope or slopes of the PPF, and kink points in the
PPF if there are any.
Flowers
b)
What is the opportunity cost of producing one more bunch of flowers when only one
bunch is being produced? (Be sure to get the units correct.)
_________________
c)
What is the opportunity cost of producing one more pound of berries, when only one
pound is being produced? (Be sure to get the units correct.)
_________________
d)
Suppose the market price of berries is $2 per pound, and the market price of flowers is $1
per bunch. To maximize revenue, how many flowers should Bill produce?
_________________
Version A: Page 3 of 9
2. A small town has five (5) taxi cabs. Each of the taxi cabs has an identical supply curve as
follows:
qiS = 2×P – 20
The town has 100 potential tax customers. Each of the customers has demand as follows:
qiD = 2 – 0.05×P
What is the equilibrium quantity of taxi rides in the town?
Q*= _______________
3. Suppose that in good-weather years, farms produce 300, that in bad-weather years farms
produce 100, and that demand for farm products can be written as
QD = 500-10P
Suppose further that the government enacts a policy to stabilize farm prices at $30, by
promising to buy or sell all of the farm product that consumers desire to buy or producers
want to sell, at that price. (Assume the government has sufficient storage capacity to buy
all that farmers produce, and sufficient product previously stored to supply all that
consumers demand.)
a) What quantity do consumers consume in good-weather years?
_____________
b) What quantity do producers sell in good-weather years?
_____________
c) How much does the government spend in good-weather years?
$_____________
Version A: Page 4 of 9
4. For this problem, do not worry if prices and quantities are not "realistic." Suppose that
the market for photocopies in Washington DC is given by the following equations:
QD = 72 − P
QS = 5P
where QD is the daily demand for copies in DC and QS is the total supply curve of all
copy stores together in DC.
a)
What is the equilibrium price and quantity of copies in DC?
P*=__________
Q*=__________
Suppose the government of DC imposes a tax of 6 per copy on suppliers of copies.
b)
What is the new equilibrium price and quantity?
P*=__________
c)
Q*=__________
How much of the statutory incidence of the tax is borne by suppliers?
Express your answer as a fraction.
___________________
d)
How much of the economic incidence of the tax is borne by suppliers?
Express your answer as a fraction.
___________________
Now suppose the government imposes a tax of 6 per copy on consumers of copies.
e)
What is the new equilibrium price and quantity?
P*=__________
f)
Q*=__________
How much of the statutory incidence of the tax is borne by suppliers?
Express your answer as a fraction.
___________________
g)
How much of the economic incidence of the tax is borne by suppliers?
Express your answer as a fraction.
___________________
h)
What is the deadweight loss of this tax?
___________________
Version A: Page 5 of 9
PART II. Multiple Choice [2 points for each correct answer. Wrong answers and blank
answers receive zero points.]
Please shade in the appropriate circle on the ParScore Sheet. No work written in this
section will be graded.
1. The figure at right depicts three demand curves,
which are parallel straight lines. At price P0,
which demand curve has the highest price
elasticity of demand?
a)
b)
c)
d)
e)
Demand curve A.
Demand curve B.
Demand curve C.
They all have the same elasticity at P0.
It is impossible to tell, given the
information here.
P
P0
A
B
C
Q
2. When the price of ice cream rose 25%, the quantity of ice cream sold fell 10%, and the sale
of chocolate syrup also fell 15%. This set of facts indicates that:
a) The demand for ice cream is price elastic.
b) The demand for chocolate syrup is price elastic.
c) The cross-price elasticity between ice cream and chocolate syrup is negative, so the
two are complements.
d) The cross-price elasticity between ice cream and chocolate syrup is positive, so the
two are substitutes.
e) None of the above.
3. Suppose you win two free tickets to an NFL football game in London. You look on-line and
find you can sell your free tickets to a ticket consolidator for $100 each ($200 total). Round
trip plane tickets to London cost $1000 ($500 each, round trip). You and your friend can
share a hotel room for $400.
Sitting here in Washington, DC. What is the opportunity cost, to you and your friend, for
both of you to travel to London to attend the game?
a)
b)
c)
d)
e)
$0
$200
$1,200
$1,400
$1,600
Version A: Page 6 of 9
4. You are hired by the dairy industry to study the market for milk. You observe that milk costs
$2 per gallon, and that 100 million gallons are sold each week. A month later you observe
that the price of milk is still $2 per gallon, but that 120 million gallons are sold each week.
Which of the following explanations could describe these circumstances?
a)
b)
c)
d)
e)
The supply of milk is perfectly inelastic, and demand has decreased.
The demand for milk is perfectly inelastic, and supply has increased.
The demand for milk is perfectly elastic, and supply has decreased.
The supply of milk is perfectly elastic, and demand has decreased.
The demand for milk has increased, and the supply of milk has increased.
5. If Nicky’s income elasticity of demand for clothes is 2, clothes are:
a)
b)
c)
d)
e)
a necessity for him.
an inferior good for him.
a luxury good for him.
complements for him
substitutes for him
6. Suppose that you are a staff economist with an economic consulting firm. The operator of a
local harbor has commissioned your firm to do a market analysis of the demand for berths (or
parking spaces) for boats. You've just completed your study of elasticities and are able to
make some recommendations based on the following information. The price elasticity of
demand for berths is 0.4, the income elasticity of demand for berths is 1.5, and the crossprice elasticity of demand for berths with respect to prices for boats is −1.2.
If the price of boats increases by 10% with no change in the price of a berth, what effect
will this have on the number of berths that people demand?
a)
b)
c)
d)
e)
The number of berths demanded will increase by 1.2%.
The number of berths demanded will decrease by 12%.
The number of berths demanded will decrease by 4%.
The number of berths demanded will increase by 12%.
The number of berths demanded will decrease by 1.2%.
Version A: Page 7 of 9
Price
7. The straight line demand curve
depicted at right has a price
elasticity of demand between
points A and B of...
Demand
11
a)
b)
c)
d)
e)
0.5
1.0
1.5
2.0
0.2
A
9
B
105
95
Quantity
8. Consider two possible government policies:
1. A price floor at price P1
2. A price ceiling at price P2
D
P
S
P1
Which of the following is true.
a) Neither policy has any deadweight loss
(DWL).
b) The price floor has a larger DWL.
c) The price ceiling has a larger DWL.
d) Both policies have the same DWL
P2
Q1
Q2
9. You are the head of an international industry group that sells widgets. You know that the
demand for widgets is inelastic. To increase your industry’s revenues, you should …
a)
b)
c)
d)
Encourage your members to reduce their production.
Encourage members to increase production.
It doesn't matter, revenue will be constant.
There is not enough information here to tell what you should advise.
Q3
Version A: Page 8 of 9
10. Along the straight-line production possibility frontier (PPF) at
right, the opportunity cost of good X
a)
b)
c)
d)
Y
P
is higher at point A than at B.
is lower at point A than at B.
is the same at both A and B.
It is not possible to tell, given the information in the
graph.
A
PPF
B
0
0
X
11. Hot dogs are a normal good. Hot dogs and mustard are complements. From these two
statements we know that ...
a)
b)
c)
d)
e)
mustard is a normal good.
mustard is an inferior good.
mustard is a luxury good.
mustard is a necessity.
nothing -- the two statements tell us nothing about the income elasticity of mustard.
12. The figure at right depicts a market in which suppliers
receive a subsidy per unit for producing a good.
Which of the lettered areas best represents the
deadweight loss (DWL) from the subsidy?
a)
b)
c)
d)
e)
f)
(a)
(b)
(c)
(d)
(e)
There is no DWL from a subsidy, only from a
tax.
P
D
S1
(e)
(d)
(a)
(b)
(c)
13. The demand curve for apartments in Georgetown is P = 5000–2Q and the supply curve is P
= 500+4Q (where P is the monthly rent in dollars and Q is the quantity of apartments). If a
price ceiling of $1000 is imposed, what will be the level of excess demand?
a)
b)
c)
d)
e)
0.
125.
750.
1375.
1875.
S2
Version A: Page 9 of 9
14. A government wishes to raise $1 million in tax revenue with the smallest deadweight loss, by
taxing books or pencils. The government will put a tax on books if:
a) the price elasticity of demand for books is higher than the price elasticity of demand for
pencils.
b) the price elasticity of demand for books is lower than the price elasticity of demand for
pencils.
c) the income elasticity of demand for pencils is higher than the income elasticity of demand
for books.
d) the income elasticity of demand for books is higher than the income elasticity of demand
for pencils.
15. Which of the following phrases best describes Economists' definition of "economic
efficiency," otherwise known as "Pareto efficiency?"
a) You cannot make anybody better off without making somebody else worse off.
b) You get the maximum possible output per unit of input.
c) You cannot produce any more of one good without producing less of another
good or using more inputs.
d) You produce at the minimum efficient scale.
e) All of the above.
If there are fewer than 10 minutes left in the exam period, please wait patiently and quietly
until the exam period is over. If you have finished more than 10 minutes early, you may
quietly bring your coding sheet and this exam booklet to the place indicated by the
instructors.
Have a great weekend. No discussion section this week or
homework this weekend.