ECON 251 Exam 1 Pink Spring 2011 (Practice Exam #1A for Fall 2011)

1. Earl can choose among three activities. He can golf, watch a movie, or take a nap. He values golfing at $36. He values watching a movie at $23, and he values napping at $62. What is Earls opportunity cost of golfing? a. $36 b. $62 c. $23 d. $85 Greg can produce pants or hats in the combinations described in the table below. Use the table to answer the following two questions: Pants 40 30 20 10 0 Hats 0 30 60 90 120

2. What is Gregs opportunity cost of producing the 15th pair of pants? a. 1/3 = 0.33 Hats b. 13/10 = 1.3 Hats c. 3 Hats d. 30 Hats 3. If Gregs production possibilities are graphed, what is the slope of Gregs PPF when the number of hats is measured on the x axis? a. -1/3 b. -3 c. -2 d. 3

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Terrence can produce pairs of gloves and shovels, and his production possibilities frontier is below:

Terrence's PPF
50 45 40 35 30 Pairs of 25 Gloves 20 15 10 5 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Shovels

4. Using the above information, what is Terrences marginal cost of producing a pair of gloves? a. The marginal cost of producing a pair of gloves is 3 shovels b. The marginal cost of producing a pair of gloves is 3 pairs of gloves c. The marginal cost of producing a pair of gloves is 1/3 of a pair of gloves d. The marginal cost of producing a pair of gloves is 1/3 of a shovel Pat and Jackie operate a pizza factory. If Pat uses all of his resources to produce pizza crusts, he can produce 1,000 crusts per hour. If Pat uses all of his resources to produce pizza sauce, he can make 200 gallons of pizza sauce per hour. If Jackie uses all of her resources to produce pizza crusts, she can produce 800 crusts per hour. If Jackie uses all of her resources to produce pizza sauce, she can make 100 gallons of pizza sauce per hour. This data is summarized in the following table.
Pizza Crusts Pizza Sauce Pat 1,000 200 Jackie 800 100

5. Pats opportunity cost of producing 1 pizza crust is: a. 5 pounds of sauce b. 1/5 = 0.2 pounds of sauce c. 5/4 = 1.25 pounds of sauce d. 4/5 = 0.8 pounds of sauce 6. _____has the comparative advantage in pizza crusts. _____has the comparative advantage in pizza sauce: a. Pat ; Pat b. Pat ; Jackie c. Jackie ; Pat d. Jackie ; Jackie
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7. Which of the following combinations of pizza crusts and pizza sauce would NOT be feasible for Pat and Jackie? a. 1,200 pizza crusts and 100 gallons of pizza sauce b. 1,000 pizza crusts and 100 gallons of pizza sauce c. 800 pizza crusts and 200 gallons of pizza sauce d. 900 pizza crusts and 195 gallons of pizza sauce 8. The law of demand states that a. Demand for a good varies inversely with the price of that good b. Quantity demanded of a good varies inversely with the price of a complement good c. Quantity demanded of a good varies inversely with the price of that good d. Demand for a good varies inversely with income 9. Samuels marginal benefit schedule for pants is below. If the price of pants is $15, how many pairs of pants will he purchase? Marginal benefit($) Quantity of pants 4 6 8 5 12 4 16 3 20 2 24 1 a. 2 b. 3 c. 4 d. 5 10. If peanut butter is an inferior good, an increase in the price of peanut butter will a. Reduce the demand for peanut butter b. Increase the demand for peanut butter c. Increase the quantity of peanut butter demanded d. Decrease the quantity of peanut butter demanded 11. If peanut butter is an inferior good, an increase in income will a. Reduce the demand for peanut butter b. Increase the demand for peanut butter c. Increase the quantity of peanut butter demanded d. None of the above 12. An increase in the price of wood used to manufacture houses will cause the _____ houses to _____. a. Demand for; Rise b. Demand for; Fall c. Supply of; Rise d. Supply of; Fall

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13. Given the change described in the previous problem, the equilibrium price of houses will _____ , and the equilibrium quantity will _____, all else equal. a. Rise; Rise b. Rise; Fall c. Fall; Rise d. Fall; Fall 14. Glass tile and ceramic tile are substitutes in consumption, while glass tile and glass bottles are substitutes in production. If the price of ceramic tile rises at the same time that the price of glass bottles fall, how will demand and supply of glass tiles be affected? a. Demand for glass tile will rise and supply of glass tile will fall b. Demand for glass tile will fall and supply of glass tile will rise c. Demand for glass tile will rise and supply of glass tile will rise d. Demand for glass tile will fall and supply of glass tile will fall. 15. The supply curve for a good reflects that goods a. Marginal benefit to consumers b. Marginal benefit to society c. Marginal cost to sellers d. Marginal cost to consumers 16. Which of the following would increase the demand for lemonade? a. An increase in the price of lemons used to make lemonade b. An increase in the supply of lemonade c. An increase in the expected future price of lemonade d. A decrease in the price of grape juice, a substitute in consumption of lemonade 17. An increase in the supply of lemonade would be graphed as a a. Shift to the right of the supply curve for lemonade b. Shift to the left of the supply curve for lemonade c. An increase in the slope of the supply curve for lemonade d. A decrease in the slope of the supply curve for lemonade Price 5 10 15 20 25 30 Quantity demanded 30 24 18 12 6 0 Quantity supplied 0 9 18 24 30 35

18. Based on the table above, at a price of $20, a. The market is at equilibrium b. There is pressure for price to continue to rise c. A shortage of 8 units exists d. A surplus of 12 units exists
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19. Based on the same table above, what is the marginal cost of the 24th unit of output? a. $0.83 b. $10 c. $20 d. $25 20. Calculate consumer surplus in the market assuming equilibrium in the market exists and that demand is linear. a. $15 b. $90 c. $135 d. $270 21. If the demand for facial tissues increases at the same time that supply of facial tissues decreases, how will equilibrium in the market for facial tissues be affected? a. Equilibrium price will rise, and equilibrium quantity will rise. b. Equilibrium price will fall, and equilibrium quantity will be indeterminate. c. Equilibrium price will be indeterminate, and equilibrium quantity will fall. d. Equilibrium price will rise, and equilibrium quantity will be indeterminate. Use the graph below to answer the following two questions:
P 20

14

10 7 D 2 10 15 25 Q

22. At equilibrium, what is total surplus in the market above? a. $30 b. $60 c. $75 d. $135

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23. If a price ceiling is set at $7 in the same market above, what is the deadweight loss? a. $0 b. $17.50 c. $60 d. $125 24. If instead of a price ceiling, a price floor is set at $7, what is the deadweight loss? a. $0 b. $17.50 c. $60 d. None of the above 25. When a market achieves allocation efficiency, which of the following is true? a. Marginal benefit is maximized b. Total surplus is maximized c. Consumer surplus is maximized d. Quantity is maximized Abby sells toys. Abby currently sells her toys at a price of $12 per toy, and she sells 500 toys per day. Abby is considering lowering the price to $8 per toy. If she does this, she expects to be able to sell 1,100 toys per day. 26. Given Abbys expectations about how the quantity demanded will change in response to the lower price, Abby apparently believes that the price elasticity of demand for her toys is equal to _____, implying that she believes that demand for her toys is _____. a. 2/3 = 0.67; inelastic b. 3/2 = 1.5; elastic c. 8/15 = 0.53; inelastic d. 15/8 = 1.88; elastic 27. If another producer starts selling a toy very similar to Abbys, we would expect demand for Abbys toys to become _____ elastic, implying that quantity demanded will be _____ responsive to future price changes. a. More; more b. More; less c. Less; more d. Less; less

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28. The graph above shows the demand for Petes Pizza. Based on this graph, what is the price elasticity of demand at the point (25, $12.5)? a. 1 b. 2 c. 4 d. 6 29. Based on the same graph, if the price of pizza rises from $5 to $10, we would expect Petes revenue to _______ because demand is ___________ in that price range. a. Rise; elastic b. Rise; inelastic c. Fall; elastic d. Fall; inelastic 30. You observe that the price of potato chips changes from $1.25 per bag to $1.49 per bag. After the change, you noticed the quantity of orange soda demanded changed from 87 to 66. Except for what you have observed, nothing else has changed. What is the cross price elasticity between potato chips and orange soda, and what does that imply? a. The cross price elasticity is 1.57 implying the goods are substitutes in competition b. The cross price elasticity is 1.57 implying the goods are complements competition c. The cross price elasticity is -1.57 implying the goods are substitutes competition d. The cross price elasticity is -1.57 implying the goods are complements competition 31. Suppose market demand for pounds of ground beef is described by the equation: Qd = 400 10P and market supply is described by Qs = 5P 50. What is the equilibrium quantity and equilibrium price in the ground beef market? a. The equilibrium price is $30 and the equilibrium quantity is 100 b. The equilibrium price is $23.33 and the equilibrium quantity is 166.67 c. The equilibrium price is $90 and the equilibrium quantity is 400 d. The equilibrium price is $70 and the equilibrium quantity is 300
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32. In the market for ground beef above, the level of ground beef production that satisfies allocative efficiency in the market is a. 100 b. 150 c. 50 d. 300 33. Now suppose a tax of $3 per pound of ground beef is imposed by the government. Which of the following would you expect to see? a. An increase in the price sellers receive after the tax and a decrease in the price consumers pay after the tax b. An increase in the price sellers receive after the tax and an increase in the price consumers pay after the tax c. A decrease in the price sellers receive after the tax and an increase in the price consumers pay after the tax d. A decrease in the price sellers receive after the tax and a decrease in the price consumers pay after the tax 34. With a $3 tax in the market for ground beef above, how is the tax burden divided? a. Producers pay $2 of the tax and consumers pay $1 b. Consumers pay $2 of the tax and producers pay $1 c. Division of tax burden depends on whether government levied the tax on consumers or producers d. None of the above 35. Let Qd = 2,300 8P be the market demand for barrels of oil and Qs = 4P 400 be the market supply of barrels of oil. If the government imposes a price ceiling of $150 for a barrel of oil, which of the following will occur? a. A price ceiling of $150 is lower than the equilibrium price for oil. Therefore, the price ceiling is ineffective, and the quantity of oil traded is 500 barrels. b. With a price ceiling of $150, there will be a shortage of 900 barrels of oil. c. With a price ceiling of $150, there will be a surplus of 600 barrels of oil. d. With a price ceiling of $150, there will be a shortage of 300 barrels of oil. 36. With a price ceiling of $150 in the market for oil, what is the marginal benefit of the last barrel of oil supplied? a. $700 b. $225 c. $150 d. $262.50 37. A price floor set above the market equilibrium price _____ , and a price ceiling above the equilibrium price ______. a. Creates shortages; Creates surpluses b. Creates shortages; has no effect c. Has no effect; creates shortages d. Creates surpluses; has no effect
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38. Consider the market for cups of coffee. Since everyone needs their coffee at any price, demand in the coffee market is perfectly inelastic. If demand is perfectly inelastic, which of the following is true? a. Demand has a slope equal to 0. b. Demand has a price elasticity of demand equal to 1. c. Demand has a price elasticity of demand equal to 0. d. Demand is horizontal. 39. Assuming the demand for coffee is perfectly inelastic, and the supply of cups of coffee is positively sloped, how will a $1 per unit tax on a cup of coffee affect the market? a. The tax increases the price consumers pay, decreasing their quantity demanded. Also, the tax decreases the price firms receive, decreasing quantity supplied. b. The coffee consumers pay the full amount of the tax. The price consumers pay $4 a cup and vendors still receive $3 a cup. The quantity traded doesnt change. c. The coffee vendors pay the full amount of the tax. The price consumers pay is still $3 a cup but vendors receive $2. The quantity traded decreases. d. The price consumers pay decreases, since demand is perfectly inelastic. The vendors pay the full amount of the tax. 40. A $1 tax in the market for coffee described in the previous problem will result in deadweight loss equal to a. $0 b. $1 c. $2 d. None of the above

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