Econ 351

Marshall School of Business

Akbulut
Fall 2012

Midterm 1

A
Instructions:

You have 90 minutes to complete this exam.

There are 40 multiple choice questions.
The maximum total score is 100 points.

Good luck!

Students Full Name: _____________________________

1. In economics, choices must be made because we live in a world of

a. unemployment.
b. scarcity.
c. greed.
d. unlimited resources.
2. Microeconomics is the study of
a. small (less than $100,000) economic transactions in the economy.
b. the economy as a whole, including topics such as inflation, unemployment, and
economic growth.
c. how households and firms make choices, how they interact in markets, and how
the government attempts to influence their choices.
d. firms as individual units excluding how these firms interact with one another.
3. Society faces a trade-off in all of the following situations except
a. when deciding who will receive the goods and services produced.
b. when deciding what goods and services will be produced.
c. when deciding how goods and services will be produced.
d. when some previously unemployed workers find jobs.
4. The points outside the production possibilities frontier are
a. efficient.
b. attainable.
c. inefficient.
d. unattainable.
5. A production possibilities frontier with a bowed outward shape indicates
a. the possibility of inefficient production.
b. constant opportunity costs as more and more of one good is produced.
c. increasing opportunity costs as more and more of one good is produced.
d. decreasing opportunity costs as more and more of one good is produced.
6. Which of the following is an example of a positive, as opposed to normative,
statement?
a. To improve air quality, the government should increase the tax on gasoline.
b. Inflation is more harmful to the economy than unemployment is.
c. An increase in carbon tax is needed to tackle global warming.
d. An increase in the price of burgers will cause an increase in consumer demand for
DVD rentals.

For the following three questions, please use the following information:

The above figures show the production possibilities frontiers for Pakistan and Indonesia.
Each country produces two goods, cotton and cashews.
7. If the two countries have the same amount of resources and the same technological
knowledge, which country has an absolute advantage in the production of cotton?
a. Indonesia
b. They have the same advantage
c. Pakistan
d. cannot be determined
8. What is the opportunity cost of producing 1 bolt of cotton in Pakistan?
a. 3/8 of a pound of cashews
b. 5/8 of a pound of cashews
c. 1 3/5 pounds of cashews
d. 150 pounds of cashews
9. Which country has a comparative advantage in the production of cotton?
a. Indonesia
b. They have equal productive abilities.
c. Pakistan
d. neither country

10. When an industrys raw material costs increase, other things remaining the same,
a. the supply curve shifts to the left.
b. the supply curve shifts to the right.
c. output increases regardless of the market price and the supply curve shifts
upward.
d. output decreases and the market price also decreases.

11. A price ceiling is binding when it is set

a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.
12. Suppose roses are currently selling for $50 per dozen, but the equilibrium price of
roses is $45 per dozen. We would expect a
a. shortage to exist and the market price of roses to increase.
b. shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d. surplus to exist and the market price of roses to decrease.
13. Which of the following would shift the demand curve for new textbooks to the right?
a. A fall in the price of paper used in publishing texts
b. A fall in the price of equivalent used textbooks
c. A fall in the price of new textbooks
d. An increase in the number of students attending college.
14. Which of the following would cause an unambiguous decrease in the real price of
DVD players? (a decrease in price with certainty)
a. A shift to the right in the supply curve for DVD players and a shift to the right in
the demand curve for DVD players.
b. A shift to the right in the supply curve for DVD players and a shift to the left in
the demand curve for DVD players.
c. A shift to the left in the supply curve for DVD players and a shift to the right in
the demand curve for DVD players.
d. A shift to the left in the supply curve for DVD players and a shift to the left in
the demand curve for DVD players.

15. Long-run elasticities of demand differ from short-run elasticities because

a. it takes time for people to change their consumption habits.
b. durable goods last a relatively long time.
c. firms may be constrained in the short run by production capacity.
d. both a and b are correct.
For the following three questions, please use the following information:
Suppose the demand curve for a product is given by: Qd = 300 - 2P + 4I
where I is average income measured in thousands of dollars.
The supply curve is: Qs = 3P 100
Assume that I = 50.
16. What is the equilibrium price?
a. 100
b. 112
c. 120
d. 160
17. What is the equilibrium quantity?
a. 160
b. 180
c. 240
d. 260
18. What is the price elasticity of demand at the equilibrium?
a. -6/13
b. -12/13
c. -1
d. -2
19. Suppose that at a toll of $2 for crossing the Golden Gate Bridge, the price elasticity of
the demand for crossing the bridge is -0.5. If the bridge authorities decrease their
price, their total revenue will ________ and the number of people crossing the bridge
will ________.
a. rise, rise
b. rise, fall
c. fall, rise
d. fall, fall

20. The price elasticity of gasoline supply in the U.S. is 0.4. If the price of gasoline rises
by 8%, what is the expected change in the quantity of gasoline supplied in the U.S.?
a. +3.2%
b. -3.2%
c. +32.0%
d. +0.32%
21. Assume that the cross-price elasticity of demand is 2. Which of the following
statements would describe the relationship between the two related goods?
a. Demand is elastic to changes in the price of the substitute good.
b. Demand is inelastic to changes in the price of the substitute good.
c. Demand is elastic to changes in the price of the complement good.
d. Demand is inelastic to changes in the price of the complement good.
22. Theodores budget line has changed from A to B. Which of the following explains the
change in Theodores budget line?
Clothing
Budget Line B

Budget Line A
Food
a.
b.
c.
d.

The price of food and the price of clothing increased.

The price of food increased, and the price of clothing decreased.
The price of food decreased, and the price of clothing increased.
The price of food and the price of clothing decreased.

23. If Hakan is currently willing to trade 3 Hot Wheels cars for 1 Bakugan toy, then he
must like Bakugan better than Hot Wheels. This statement is
a. True because Hakan has a diminishing marginal rate of substitution.
b. True because Hakan is always willing to trade 3 Hot Wheels cars for 1 Bakugan.
c. Not necessarily true if Hakans willingness to trade Hot Wheels cars for 1
Bakugan toy does not change.
d. Not necessarily true if Hakans willingness to trade Hot Wheels cars for 1
Bakugan toy depends of how many Hot Wheels cars and Bakugan toys he
currently has.

24. The indifference curves for two goods that are perfect complements
a. are horizontal lines.
b. are convex.
c. are L-shaped.
d. are downward-sloping straight lines.
25. Yasemin consumes only CDs and books. At her current consumption bundle, her
marginal utility from books is 8 and from CDs is 12. Each book costs $2, and each
CD costs $4. Yasemin could increase her utility by:
a. increasing CD consumption and reducing book consumption.
b. increasing book consumption and reducing CD consumption.
c. maintaining her current consumption choices.
d. We do not have enough information to answer this question.
26. Bob views apples and oranges as perfect substitutes in his consumption, and MRS=1
for all combinations of the two goods in his indifference map. Suppose the price of
apples is $2 per pound, the price of oranges is $3 per pound, and Bobs budget is $30
per week. What is Bobs utility maximizing choice between these two goods?
a. 4 pounds of apples and 6 pounds of oranges.
b. 5 pounds of apples and 5 pounds of oranges.
c. 10 pounds of oranges and no apples.
d. 15 pounds of apples and no oranges.
27. Assume that beer is an inferior good. If the price of beer rises, then the substitution
effect results in the person buying __________ of the good and the income effect
results in the person buying ___________ of the good.
a. more, more
b. more, less
c. less, more
d. less, less
28. Your income response for bicycle riding changes with the amount of income you
earn. At low levels of income, you view bicycle riding as an inferior good and
substitute other types of transportation as your income rises. However, you view
bicycle riding as a normal good after your income rises above a particular level. What
shape does your Engel curve for bicycle riding have?
a. Vertical line
b. Horizontal line
c. C-shape
d. Upward sloping

29. Envision a graph with meat on the vertical axis and vegetables on the horizontal axis.
The income-consumption curve of a strict vegetarian would be represented by
a. the vertical axis.
b. the horizontal axis.
c. a diagonal straight line that starts from the origin and has a slope of 1.
d. right angles.
30. The bandwagon effect corresponds best to which of the following?
a. Snob effect
b. External economy
c. Negative network externality.
d. Positive network externality.
31. Defne receives utility from consuming candy (C) and milk (M) as given by the utility
function U(C,M)=3CM. In addition, the price of candy is $1 per unit, and the price of
milk is $4 per unit (gallon). Defnes weekly income is $60. What is Defnes marginal
rate of substitution of candy for milk when utility is maximized?
a. 0.25
b. 1
c. 3.5
d. 4
For the following two questions, please use the following information:
Sams utility of wealth function is U(w) = 15 w. Sam owns and operates a farm. He is
concerned that a flood may wipe out his crops. If there is no flood, Sams wealth is
$360,000. The probability of a flood is 1/10. If a flood does occur, Sams wealth will fall
to $160,000. Flood insurance, which would pay the loss in the event of a flood, is
available for $30,000.
32. Should Smith buy the insurance?
a. Yes.
b. No.
c. Sam is indifferent.
d. We need more information on Smiths attitude toward risk.
33. What is the maximum Sam would pay for the insurance?
a. $10,000
b. $18,000
c. $20,000
d. $36,000

34. Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15
each. Lauren's willingness to pay was $35, Leslie's willingness to pay was $25, and
Lydia's willingness to pay was $30. What is Lydias consumer surplus?
a. $15.
b. $30.
c. $45.
d. $90.
35. Which of the following is true regarding utility along a price-consumption curve?
a.
b.
c.
d.

It is constant.
It changes from point to point.
It changes only if income changes.
It changes only for normal goods.
P
30
25
20
15
10
5

D
20

40

60

36. Refer to the above figure. If price is $15, what is the total consumer surplus?
a. 0
b. 15
c. 450
d. 900
37. For a Giffen good, the income and substitution effects
a. work together.
b. work against each other, and the income effect dominates the substitution effect.
c. can work together or in opposition to each other depending upon their relative
magnitudes.
d. always exactly cancel each other.

38. Professors Adams and Brown make up the entire demand side of the market for
summer research assistants in the economics department. If Adams demand curve is
P = 60 2QA and Browns is P = 50 QB, where QA and QB are the hours demanded by
Adams and Brown, respectively, what is the market demand for research hours in the
economics department?
a.
b.
c.
d.

Q = 50 P for 0P60
Q = 80 (3/2)P for 0P60
Q = 80 (3/2)P for 0P50 ; Q = 30 (1/2)P for 50<P60
Q = 80 (3/2)P for 0P50 ; Q = 50 P for 50<P60

39. Any risk-averse individual would always

a.
b.
c.
d.

take a 10% chance at $100 rather than a sure $10.

take a 50% chance at $4 and a 50% chance at $1 rather than a sure $1.
take a sure $10 rather than a 10% chance at $100.
take a sure $1 rather than a 50% chance at $4 and a 50% chance at losing $1.

40. In the figure below, what is true about the two jobs?

a.
b.
c.
d.

Job 1 has a larger standard deviation than Job 2.

All outcomes in both jobs have the same probability of occurrence.
A risk-neutral person would be indifferent between the two jobs.
A risk-averse person would prefer Job 2.

Formula Sheet:

E PD

QD / QD
P / P

E ID

QD / QD
I / I

E PS

QS / QS
P / P

EQDb Pm

Qb / Qb
Pm / Pm

MRS (Y/X) MU X / MU Y

MU X / PX MU Y / PY

PX X PY Y I