First In-Class Exam -- Spring 1996 rainbow bar Part A. Multiple Choice (3 points each). In the space provided, indicate the best answer for each question.
1. Referring to the production possibilities curve depicted in Figure 1, if the economy is producing at point A:
A. the output of clothing could increase only if food output were reduced.
B. the output of food and clothing could increase.
C. the output of clothing is at its maximum.
D. the economy is fully employed.
2. In Figure 1, an opportunity cost is involved in moving from:
A. point A to point B.
B. point D to point E.
C. point A to point D.
D. point D to point B.
3. The shape of the production possibilities curve in Figure 1 indicates that as food output increases along the curve:
A. a constant amount of clothing must be given up for each additional unit of food produced.
B. an increasing amount of clothing must be given up for each additional unit of food produced.
C. a decreasing amount of clothing must be given up for each additional unit of food produced.
D. the output of clothing also increases.
4. The best explanation of a shift of the production possibilities curve from C*2F*2 to C*3F*2 is:
A. depletion of resources used in the production of both goods.
B. technological change in the production of food and clothing.
C. technological change in food production.
D. technological change in clothing production.
5. The most likely cause of a shift of the production possibilities curve from C*1F*1 to C*2F*2 is:
A. depletion of resources used in the production of both goods.
B. technological change in the production of food and clothing.
C. technological change in food production.
D. technological change in clothing production.
6. A demand curve that is a downward sloping straight line will have:
A. a positive slope.
B. constant elasticity throughout its length.
C. lower elasticity at the top of the curve than at the bottom of the curve.
D. higher elasticity at the top of the curve than at the bottom of the curve.
7. A straight-line, positively sloped supply curve that starts from the quantity axis is:
A. elastic for all prices and quantities.
B. inelastic for all prices and quantities.
C. unitary elastic for all prices and quantities.
D. None of the above.
8. The demand for table salt is:
A. inelastic because there are few good substitutes.
B. inelastic because the price is low.
C. inelastic because table salt accounts for such a small percentage of households' total spending.
D. All of the above.
9. In a competitive market, if the existing price is below the equilibrium price, market forces will drive the price:
A. up and quantity supplied up.
B. up and quantity supplied down.
C. up and quantity demanded down.
D. Both A and C.
10. If oatmeal is a normal good, then a decrease in consumer incomes coupled with a decrease in the cost of raw oats (a necessary ingredient in oatmeal) will result in:
A. a decrease in the equilibrium quantity and an ambiguous effect on the price of oatmeal.
B. a decrease in the equilibrium price and an ambiguous effect on the quantity of oatmeal.
C. a decrease in the equilibrium quantity and an increase in the price of oatmeal.
D. a decrease in the equilibrium quantity and a decrease in the price of oatmeal.
11. Assume that President Clinton is successful in imposing an effective price ceiling on the amount doctors in general practice can charge their patients. Then assume that there is an increase in the number of general practitioners coming out of medical school. This will cause:
A. the existing shortage to deepen.
B. the existing surplus to lessen.
C. the existing shortage to lessen.
D. the existing surplus to deepen.
12. Which of the following would best explain a decrease in both the price and quantity of a product over a period of time?
A. A reduction in input prices.
B. A decrease in population.
C. A technological improvement in production methods.
D. A long strike by workers who make the product.
rainbow bar Part B. Short Answer Questions (64 points). When appropriate use graphs, equations, or math to helpexplain your answers. Label all axes and all graphs.
1. When the price of X is $30, quantity demanded is 15 units. When the price falls to $20 per unit, quantity demanded increases to 25 units. Using the arc formula, calculate the price elasticity of demand. In this price range, is demand elastic, inelastic, or unitary elastic? Show your work. (10 points)
2. Broom corn is used in making brooms. The North American Free Trade Agreement (NAFTA) eliminated the tariff that the U.S. placed on imported Mexican broom corn. Using two demand and supply curves -- one showing the market for imported Mexican broom corn and the other showing the market for U.S. broom corn -- analyze how the elimination of the tariff affected both markets. Briefly explain your results. (10 points)
3. (10 points) Describe the adjustments in the production possibilities curves in each of the following situations:

(A) The economy moves from full employment into a serious depression with large scale unemployment.
(B) A serious plague reduces the economy's labor force by one-third.
4. Figure 3 shows the production possibilities curves for two hypothetical nations, Orin and Pohl, which each make two hypothetical products, jaxs and keps. (19 points)
A. Do these countries exhibit the law of increasing costs? Why or why not? (4 points)
B. What is the opportunity cost of producing one more unit of keps in the country of Pohl? What is the opportunity cost of producing one more unit of keps in the country of Orin? (4 points)
C. Define what is meant by a comparative advantage? Which country has a comparative advantage in keps? (6 points)
D. To benefit from free trade, which country should produce only jaxs, export jaxs, and import keps? (2 points)
E. Suggest a terms of trade where both countries can benefit from free trade. (3 points)
5. Assume that coffee and cream are complements. Assume that a freeze damages a significant portion of the Brazilian coffee crop. Using two demand and supply diagrams -- one depicting the market for coffee and the other depicting the market for cream -- briefly explain how the freeze affected the equilibrium price and quantity of coffee and cream. (10 points)
6. Assume that the demand for good X is perfectly elastic, while the supply of X is the typical upward-sloping linear supply curve. Suppose the government imposes a $1 per unit excise tax on this industry. What is the effect of the tax on the equilibrium price and quantity of X? If your graph is self-explanatory, no other additional explanation is necessary. (5 points)
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