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A midterm exam for an economics 002 course at drake university from spring 2004. The exam covers principles of microeconomics, including production functions, opportunity costs, market equilibrium, and elasticities.
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Principles of Microeconomics (Econ 002) Signature: Drake University, Spring 2004 William M. Boal Printed name:
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100. I. Multiple choice: Circle the one best answer to each question. [2 pts each: 20 pts total] (1) The fundamental assumption that distinguishes economics from other social sciences is that a. people care only about themselves. b. only the fittest survive. c. people do the best they can with what they have. d. all important social interactions involve money. (2) Rational behavior implies doing something up to the point where the opportunity cost of the last unit done a. is much less than its benefit. b. is much more than its benefit. c. begins to fall below its benefit. d. begins to exceed its benefit. (3) Factory A can produce 20 cars per day or 60 trucks per day. Factory B can produce 50 cars per day or 100 trucks per day. Which factory has a comparative advantage in producing trucks? a. Factory A. b. Factory B. c. Both factories. d. Neither factory. (4) Barter is less common than monetary exchange because it a. is less advantageous for tax purposes. b. violates the principle of comparative advantage. c. violates the law of one price. d. requires a double coincidence of wants. (5) In an efficient well-functioning market, a. every potential seller will sell something. b. total gains from trade (or earnings) for buyers will equal total gains from trade for sellers. c. every trade will take place at a price halfway between the buyer's value and the seller's cost. d. all trades take place at roughly the same price. (6) Consider the market for HDTV sets, a normal good. If consumers’ income increases as the economy improves, a. the demand curve will shift left. b. the demand curve will shift right. c. the supply curve will shift left. d. the supply curve will shift right. (7) If at a given price, the quantity demanded is less than the quantity supplied, a. the price will fall. b. the price will rise. c. the price will remain constant. d. cannot be determined from information given. (8) In spring, the price of bathing suits rises and the quantity purchased also rises. This could be caused by a a. a rightward shift in the supply curve. b. a leftward shift in the supply curve. c. a rightward shift in the demand curve. d. a leftward shift in the demand curve. (9) Which good is likely to have the most elastic demand (that is, the highest price elasticity in absolute value)? a. A particular brand of sweater. b. All sweaters. c. All clothing. d. cannot be determined from information given. (10) The demand curve in the graph below is a. perfectly elastic b. perfectly inelastic. c. unitary-elastic. d. cannot be determined from information given.
Drake University, Spring 2004 Page 2 of 5 II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section. (1) [Production functions: 14 pts] Michelle clears snow with a snowblower, with the production function shown in the first two columns below. Complete the table by computing Michelle's average product and marginal product and placing your answers in the unshaded cells of the third and fourth columns below. Then answer this question: Hours worked Snow removed Average product(AP) Marginal product (MP) Is Michelle’s production function characterized by diminishing returns to her labor input? Circle your answer. a. yes. b. no. c. cannot be determined from the information given.
(2) [Production possibility curves, opportunity costs, comparative advantage: 15 pts] Two countries, Country A and Country B, can each produce tables and chairs. Their annual production possibility curves are shown below. 0
Tables (thousands) Chairs (thousands) Country A Country B a. Country A's opportunity cost of a table is how many chairs?
b. Country B’s opportunity cost of a table is how many chairs?
c. Country A's opportunity cost of a chair is how many tables?
d. Country B’s opportunity cost of a chair is how many tables?
e. Which country has a comparative advantage in tables? f. Which country has a comparative advantage in chairs? g. [3 pts] Fill in the blanks: Both countries can have combinations of goods outside their individual production possibility curves if ___________________________ produces one thousand tables for ___________________________, which produces ______________ thousand chairs in return.
Drake University, Spring 2004 Page 4 of 5 (5) [Market equilibrium: 10 pts] Suppose the market for simple pocket calculators is given by the diagram below. $ $ $ $ $ $ $ $ $ 0 1 2 3 4 5 6 7 8 Quantity (thousands) Price (^) Demand Supply a. Suppose the price of calculators were $4. Would there be excess demand, excess supply , or neither?
g. Compute the revenue to sellers (which equals spending by buyers) at the equilibrium price and quantity.
(6) [Calculating elasticities: 2 pts] Suppose that if the price of a home-delivered pizza were $5, the average household would buy 20 pizzas per year; but if the price were $15, the average household would buy only 4 pizzas per year. Compute the price elasticity of demand using the “arc-elasticity” or “midpoint” formula. (7) [Using elasticities: 8 pts] Suppose the electric utility raises its rates (that is, the price of electricity) by 5% and the elasticity of demand for electricity is known to be -0.4. Assume nothing else changes. a. Will the quantity of electricity demanded increase or decrease? b. ... by how much?
c. Will the total revenue received by the electric utility increase or decrease? d. ... by how much?
a. Will the quantity of airline tickets demanded increase or decrease?
c. Will spending on airline tickets, as a fraction of a consumer's total budget, increase or decrease? (Assume the price of airline tickets does not change.) d. ... by how much?
Drake University, Spring 2004 Page 5 of 5 III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [3 pts] (1) Consider the following statement. "The idea that there could be a tradeoff in the economy between capital goods (like buildings and equipment) and consumer goods (like food and clothing) is clearly false. It is impossible to turn a building into a hamburger, or a power drill into a tee-shirt." Do you agree or disagree? Justify your answer. (2) Consider the following statement. "If one country is better than another country at producing everything, then the first country cannot possibly benefit from trading with the second country." Do you agree or disagree? Justify your answer. Which question are you answering, (1) or (2)? _________. Please write your answer below, continuing on the back if necessary. [end of exam]