SL 151���������������������������������������������������������������������������������� Name _________________________________________ CM ______

Bremmer I��������������������������������������������������������������������������� September 24, 2002

 

1st In-Class Exam - - Chapters 1-3, 18

 

Part I.Multiple Choice (3 points).For each question, indicate the best answer in the space provided.

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___ 1.���� Given production possibilities curve DC in Figure 1, point B indicates a bundle of goods:

A.��� where the economy is at full production and full employment.

B.��� that involves inefficient production and excessive unemployment.

C.��� that is beyond society�s current productive capabilities.

D.��� that society may be able to consume given free trade with another country.

E.���� Both C and D.

 

___ 2.���� Referring to Figure 1, a shift in the production possibilities curve from DC to EC could be due to a:

A.��� technological improvement in the production of ice cream.

B.��� technological improvement in the production of both goods.

C.��� reduction in the rate of unemployment towards full employment.

D.��� technological improvement in the production of frozen yogurt.

E.���� fall in the demand for frozen yogurt.

 

___3.����� The production possibilities curves in Figure 1 imply that:

A.��� resources in the economy are not specialized and they can be freely moved between the production of ice cream and frozen yogurt.

B.��� as the production of frozen yogurt increases along a given PPC, its opportunity cost is constant.

C.��� as the production of increase cream increases along a given PPC, increasing amounts of frozen yogurt must be given up.

D.��� production of point F is impossible given current technology and resources.

E.���� Both A and B.

 

Figure 2 shows the production possibilities curves for two countries - - Nation X and Nation Y.����������������������

 

___ 4.���� Given Figure 2, which of the following statements is true?

A.��� Both Nations X and Y exhibit the law of increasing cost.

B.��� The opportunity cost of producing steel in Nation X is greater than the opportunity cost of producing steel in Nation Y.

C.��� In Nation Y, the opportunity cost of one more unit of wheat is � unit of steel.

D.��� Neither country would gain from international trade.

E.���� Nation Y has a comparative advantage in steel production.

 

___ 5.���� Which of the following would cause an outward shift in a production possibilities curve?

A.��� A decrease in the size of the labor force.

B.��� A fall in the unemployment rate towards the full employment level.

C.��� The destruction of capital.

D.��� An increase in education and job training.

E.���� Society decides to produce more of one good and less of the other.

 

___ 6.���� If the government sets a price floor below the equilibrium price, then:

A.��� firms� revenues will fall.������������� D.��� neither a shortage nor a surplus occurs.

B.��� a shortage results.������������������������������ E.���� Both A and B.

C.��� a surplus occurs.���������


In Figure 3, the initial demand and supply curves of ground beef were D and S, respectively.Assume the demand and supply curves simultaneously shift to D' and S', respectively.��������������������������������������������������� ���������������

___ 7.���� Regarding Figure 3, which of the following would cause the demand curve to shift from D to D'?

A.��� A decrease in the price of beef.

B.��� A decrease in the price of chicken, a substitute for beef.

C.��� An increase in the price of wine, a complement for beef.

D.��� A decrease in consumer income, assuming beef is a normal good.

E.���� None of the above.

 

___ 8.���� Regarding Figure 3, which of the following would cause the supply curve to shift from S to S'?

A.��� A decrease in the price of beef.

B.��� A decrease in the price of cattle feed, an input for beef.

C.��� Ranchers expect the future price of beef to fall.

D.��� A decrease in the number of firms producing beef.

E.���� An increase in the per pound subsidy that ranchers received from the government.

 

___ 9.���� A decrease in both the equilibrium price and the equilibrium quantity could be caused by a(n):

A.��� decrease in supply.

B.��� simultaneous decrease in supply and increase in demand.

C.��� simultaneous increase in both demand and supply.

D.��� increase in demand.

E.���� a simultaneous increase in demand and decrease in supply.

 

___ 10.Given a perfectly inelastic demand curve, a government subsidy of $2 per unit causes the equilibrium price:

A.��� to fall by less than $2 per unit.������������������ D.��� to increase by more than $2 per unit.

B.��� to fall by more than $2 per unit.�������� E.���� to increase by exactly $2 per unit.

C.��� to fall by exactly $2 per unit.

 

___ 11.Given a negatively sloped, linear demand curve, as price increases:

A.��� revenue always increases.������������������������������������������������� D.��� the price elasticity of demand increases.

B.��� the price elasticity of demand remains constant.����������� E.���� revenue always decreases.

C.��� the price elasticity of demand decreases.

 

___ 12.Which of the following is characteristic of an elastic demand curve?

A.��� The product has a small number of viable substitutes.

B.��� Consumers have a longer time period to adjust to a price change�������������

C.��� Only a small percentage of the consumers� budget is spent on the good.

D.��� Consumers view the product as a luxury good.

E.���� None of the above characteristics are consistent with a good having elastic demand.

 

___ 13.Assume good Y has a negative income elasticity of demand and a perfectly elastic supply.Holding everything else constant, how will an increase in consumers� incomes affect the market for Y?

A.��� The equilibrium price and the equilibrium quantity of Y both increase.����

B.��� The equilibrium price and the equilibrium quantity of Y both decrease.�����������

C.��� The equilibrium quantity of Y remains constant, but the equilibrium price of Y falls.

D.��� The equilibrium price of Y remains constant, but the equilibrium quantity of Y falls.

E.���� The equilibrium price of Y increases, while the equilibrium quantity of Y falls.

 

___ 14.Given a linear demand curve, could an increase in supply ever cause no change in total revenue?

A.��� Yes, if the arc formula shows the price elasticity of demand between the two prices is elastic.����

B.��� Yes, if the arc formula shows the price elasticity of demand between the two prices is inelastic.

C.��� Yes, if the arc formula shows the price elasticity of demand between the two prices is unitary elastic.

D.��� Only if the demand was perfectly inelastic.

E.���� Only if the demand was perfectly elastic.


___ 15.If an increase in the price of Y causes the demand for X to shift to the right, then:

A.��� X and Y are complements, and the cross-price elasticity of the demand for X with respect to the price of Y is positive.��������

B.��� X and Y are complements, and the cross-price elasticity of the demand for X with respect to the price of Y is negative.�������

C.��� X and Y are substitutes, and the cross-price elasticity of the demand for X with respect to the price of Y is positive.

D.��� X and Y are substitutes, and the cross-price elasticity of the demand for X with respect to the price of Y is negative.

E.���� X is a normal good and the income elasticity of demand for X is positive.

 

Part II.Multiple Choice (55 points).Give a concise, but complete answer for the following questions.When appropriate, use math, graphs, and equations to help explain your answers.Label your graphs.

 

1.���� Assume an economy with specialized resources produces tanks and cars. Holding everything else constant, what happens to the production possibilities curves as natural resources are depleted?Is society better or worse off?Given the continued depletion of natural resources, why is sustained technological improvement important to society welfare? ��(15 points)

 

2.���� What happens to the current market price and the current market quantity of a company�s stock if current owners and potential investors expect the price of the stock to fall in the future?Explain your answer using a demand and supply diagram.(10 points)

 

3.���� Answer the following questions using Figure 4.(15 points)���������������������������������������������������������������������������� ���������������

A.��� Using the demand curve shown in Figure 4, compare the price elasticity of demand between 14 and $12 and between $6 and $4.Use the arc or midpoint formula in your calculations.In each price range is demand elastic, inelastic, or unitary elastic?(10 points)

B.��� Referring to Figure 4, is demand elastic, inelastic, or unitary elastic between points U and V?Why? (5 points)

 

4.���� Answer the following questions referring to the following production possibilities curves for Nation A and

������� Nation B.Show your work for partial credit.(15 points)

 

Nation A�s Production Possibilities

 

Nation B�s Production Possibilities

 

A

B

C

D

E

 

 

A

B

C

D

E

Good X

60

45

30

15

0

 

Good X

20

15

10

5

0

Good Y

0

15

30

45

60

 

Good Y

0

10

20

30

40

 

A.��� What is the opportunity cost of Nation A producing one more unit of Good X?(3 points)

 

B.��� What is the opportunity cost of Nation B producing one more unit of Good Y?(3 points)

 

C.��� Nation A has a comparative advantage in which product?(2 points)

 

D.��� Nation B has a comparative advantage in which product?(2 points)

 

E.���� What is a feasible terms of trade at which foreign trade is mutually beneficial?(3 points)

 

F.���� How much of Good X and Good Y is produced after trade?(2 points)