Part I. Multiple-Choice (3 points each). Indicate the best answer for each question in the space provided.

1. How might a country consume a bundle of goods that lies above its production possibilities curve?
   1. The unemployment rate would have to fall toward the current full-employment level.
   2. The country could discover new supplies of natural resources.
   3. The country could engage in free trade with other countries.
   4. All of the above.
   5. Both B and C.
   
   
2. Referring to Figure 1, which of the following statements is false?
   1. Point D indicates an inefficient use of resources and the presence of unemployment.
   2. Point E is unobtainable because such a combination of goods is beyond society's current productive capabilities.
   3. The opportunity cost of producing one more pizza increases as more pizzas are produced.
   4. Resources in the economy are not specialized and resources can be freely moved between the production of pizzas and CDs.
   5. In drawing the production possibilities curve in Figure 1, the supply of resources is assumed to be constant and technology is fixed.
   
   
3. According to Figure 2, the shift of the production possibilities curve from curve A to curve B was most likely caused by which of the following?
   1. A decrease in the unemployment rate towards its current full-employment level.
   2. A decrease in the supply of labor.
   3. A decrease in capital.
   4. An improvement in only the technology used in producing capital goods.
   5. A general improvement in overall technology.
   
   
4. Assume a country has a straight-line, downward sloping production possibilities curve, and it does not trade with any other country. You can conclude that:
   1. the country's production possibilities curve is also the country's consumption possibilities curve.
   2. as more of a good is produced, its opportunity cost remains constant.
   3. resources are not specialized.
   4. All of the above.
   5. None of the above.
   
   
5. Which of the following would cause the demand curve for good X to shift to the right?
   1. An increase in income, if X is an inferior good.
   2. A decrease in the price of good S, a substitute for good X.
   3. An increase in the price of good C, a complement to good X.
   4. A decrease in the price of X.
   5. None of the above.
   
   
6. Which of the following would cause the supply curve of good X to shift to the left?
   1. A decrease in the price of X.
   2. A decrease in the number of firms producing good X.
   3. Producers expect the price of X to fall in the near future.
   4. There is a cost-saving improvement in the technology used to make X.
   5. Workers who produce good X agree to take a cut in wages.
   
   
7. After a decrease in supply, consumer expenditures on the good increased. In this price range, the price elasticity of demand:
   1. is greater than 1.
   2. is equal to 1.
   3. is less than 1.
   4. cannot be determined from the information given.
   
   
8. Suppose there was a decrease in both demand and supply, but the shift in supply was a larger magnitude. Therefore, you can correctly conclude:
   1. equilibrium quantity will fall but the change in equilibrium price is indeterminate.
   2. equilibrium price will increase but the change in equilibrium quantity is indeterminate.
   3. that both equilibrium price and quantity will decrease.
   4. equilibrium price will increase and equilibrium quantity will fall.
   5. equilibrium price will decrease and equilibrium quantity will increase.
   
   
9. If there is a surplus:
   1. price would increase, causing the supply curve to shift to the right, and the demand curve to shift to the left.
   2. price would increase, causing producers to move up along the supply curve and consumers to move up along the demand curve.
   3. price would decrease, causing the demand curve to shift to the right, and the supply curve to shift to the left.
   4. price would decrease, causing producers to move down along the supply curve and consumers to move down along the demand curve.
   
   
10. Starting at the vertical intercept, as one moves down a straight-line, downward sloping demand curve:
    1. the price elasticity of demand increases, hits a maximum, and then decreases.
    2. the price elasticity of demand remains constant.
    3. the price elasticity of demand decreases.
    4. the price elasticity of demand increases.
    5. the price elasticity of demand decreases, hits a minimum, and then increases.
    
    
11. Assume the supply curve is perfectly elastic. If the government pays all firms a $2 per unit subsidy, then:
    1. equilibrium price will decrease by less than $2.
    2. equilibrium price will decrease exactly by $2.
    3. equilibrium price will decrease by more than $2.
    4. equilibrium price will increase by exactly $2.
    5. equilibrium price will increase by less than $2.
    
    
12. Assume demand is perfectly inelastic and the equilibrium price is $5. If the government sets a price ceiling at $4:
    1. it would not be binding.
    2. the resulting surplus will be larger the less elastic the supply.
    3. the resulting surplus will be larger the more elastic the supply.
    4. the resulting shortage will be larger the less elastic the supply.
    5. the resulting shortage will be larger the more elastic the supply.
    
    
13. The demand for a product will be less elastic:
    1. if the good was a luxury good rather than a necessity.
    2. if the consumer spent a larger portion of his or her income on the good.
    3. if the product had a large number of available substitutes.
    4. in the short run rather than in the long run.
    
    
14. If a positively sloped, linear supply curve cuts the vertical axis above the origin, then:
    1. at every price, supply is elastic.
    2. at every price, supply is inelastic.
    3. at every price, supply is unitary elastic.
    4. the firm would be willing to sell output at a zero price.
    
    
15. Assume an increase in the price of Y results in an increase in demand for good X. Therefore:
    1. X and Y are complements and the cross price elasticity of demand for X should be negative.
    2. X and Y are substitutes and the cross price elasticity of demand for X should be positive.
    3. X and Y are complements and the cross price elasticity of demand for X should be positive.
    4. X and Y are substitutes and the cross price elasticity of demand for X should be negative.
    5. X is a normal good, and the income elasticity of X is positive.

1. Define opportunity cost. Using a production possibilities curve, explain how this diagram shows the concept of opportunity cost. (10 points)
   
2. Suppose the price of product X is reduced from $1.45 to $1.25 and, as a result, the quantity of X demanded increases from 2,000 to 2,200. Using the arc formula (the book calls it the midpoint formula), calculate the price elasticity of demand. Is demand elastic or inelastic? (7 points)
   
   
3. Other things being equal, use a demand and supply curves to show the effect of each of the following on the equilibrium price and quantity of corn. (18 points)
   1. Corn is now considered by doctors to be the most healthy vegetable.
   2. There is a decline in the amount of land used to grow corn.
   3. The price of peas, a substitute for corn, goes up.
   4. Corn is a normal good and incomes fall.
   5. Producers expect the price of corn to fall in the future.
   6. The price of fertilizer increases.
   
   
4. Answer the following questions using Figure 3, which shows the production possibilities curves for George and Martha. (10 points)
   1. What is George's opportunity cost of producing 1 more brownie? (1 point)
   2. What is Martha's opportunity cost of producing 1 more cupcake? (1 point)
   3. Define what is meant by comparative advantage. Where does George's comparative advantage lie? In what product does Martha have a comparative advantage? Explain. (6 points)
   4. Suggest a terms of trade that both George and Martha would find mutually advantageous. (2 points)
   
   
5. Suppose the government imposes a $5 per unit excise tax on sellers of automobile tires. Using a demand and supply curves, carefully show and explain the before-tax and after-tax situation. Indicate on your graph the tax burden on consumers, the tax burden on sellers, and the government's tax receipts. (10 points)