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

In Figure 1, S₁ and D₁ represent the original supply and demand curves and S₂ and D₂ represent the new curves. Answer the next three questions on the basis of this diagram.

1. Referring to Figure 1, the indicated shift in supply from S₁ to S₂ may have been caused by:
   1. a decrease in the number of firms in the industry.
   2. firms expecting the future price of the product to increase.
   3. an increase in the price of the product.
   4. a decrease in the price of a key input used in the manufacture of the good.
   5. an increase in the price of a substitute in production.
   
   
2. Referring to Figure 1, the indicated shift in demand from D₁ to D₂ may have been caused by:
   1. a decrease in the price of the good.
   2. a decrease in income, if the good is normal.
   3. an increase in the price of a substitute good.
   4. an increase in the price of a complement good.
   5. None of the above.
   
   
3. In the market depicted in Figure 1:
   1. the shifts in demand and supply caused the equilibrium to move from point J to point M.
   2. there was an increase in demand and an increase in supply.
   3. the equilibrium price fell because the shift in supply was greater than the shift in demand.
   4. the shifts in demand and supply caused both equilibrium price and quantity to decrease.
   5. Both B and C.
   
   
4. Referring to the production possibilities curve in Figure 2, which of the following statements is true?
   1. Resources in this economy aren't specialized as they can be freely moved between the production of civilian goods and the production of war goods.
   2. Given production possibilities curve (a), point Y indicates that society is failing to use available resources efficiently.
   3. The movement from curve (a) to curve (b) implies an improvement in civilian goods technology but not in war goods technology.
   4. Given production possibilities curve (a), the combination of civilian and war goods indicated by point X is unattainable to this economy.
   5. All of the above statements are false.
   
   
5. If the production possibilities curve were a straight, downward sloping line, this would suggest that:
   1. the production possibilities curve exhibits the law of increasing cost.
   2. more and more of one good must be sacrificed as the production of the other good increases.
   3. opportunity costs of producing a given good is constant regardless of how much is being produced.
   4. resources are specialized.
   5. All of the above except C.
   
   
6. Which of the following will tend to shift the production possibilities curve to the right?
   1. A decrease in the unemployment rate towards the full employment level.
   2. A decrease in labor.
   3. A decrease in natural resources.
   4. A technological improvement which allows firms to produce more output from given inputs.
   5. A decrease in capital.
   
   
7. If a nation has a comparative advantage in the production of X, this means that the nation:
   1. is not subject to the law of increasing opportunity cost.
   2. has a production possibilities curve identical to those of other nations.
   3. cannot benefit by producing and trading this product.
   4. must give up less of other goods than other nations in producing a unit of X.
   5. cannot consume a bundle of goods above its production possibilities curve with free trade.
   
   
8. If two nations have straight-line production possibilities curves:
   1. there will be basis for mutually advantageous trade whether the slopes are equal or not.
   2. there will be a basis for mutually advantageous trade provided the slopes differ.
   3. there will be no basis for mutually advantageous trade.
   4. then their after trade consumption possibilities curves must lie inside their respective production possibilities curves.
   
   
9. Consider the supply and demand curves depicted in Figure 3. If the government established a price ceiling of $15, then the total revenue received by suppliers would:
   1. fall by $120.
   2. fall by $240.
   3. fall by $30.
   4. remain unchanged.
   
   
10. Other things being the same, the shortage associated with an effective price ceiling will be greater the:
    1. smaller the elasticity of both demand and supply.
    2. greater the elasticity of supply and the smaller the elasticity of demand.
    3. the greater the elasticity of both demand and supply.
    4. greater the elasticity of demand and the smaller the elasticity of supply.
    
    
11. An inferior good is best defined as a product for which the:
    1. cross price elasticity of demand is negative.
    2. cross price elasticity of demand is positive.
    3. income elasticity of demand is negative.
    4. income elasticity of demand is positive.
    5. income elasticity of demand is zero.
    
    
12. Assume there is an increase in the demand for hand-held personal digital assistants. The subsequent:
    1. increase in price will be greater in the long run than in the short run.
    2. increase in price will be greater the less elastic the supply.
    3. increase in price will be greater the more elastic the supply.
    4. decline in price will be greater the more elastic the supply.
    5. Both A and C.
    
    
13. Which of the following would not be true regarding the price elasticity of demand?
    1. The larger the portion of one's budget that is spent on a good, the more elastic is the demand for the good.
    2. The greater the availability of good substitutes, the less elastic the demand.
    3. The less time there is at hand, the less responsive buyers can be in their purchases.
    4. If demand is inelastic and price falls, total revenue also declines.
    5. If demand is unitary elastic, a change in price results in no change in total revenue.
    
    
14. Assuming a downward sloping, linear demand curve, lower prices always corresponds to:
    1. more elastic demand.
    2. less elastic demand.
    3. greater total revenue.
    4. lower total revenue.
    
    
15. If the demand curve is perfectly elastic, and supply is upward sloping, giving every firm a $1 per unit subsidy will:
    1. increase price exactly by $1.
    2. decrease price exactly by $1.
    3. decrease price by less than $1.
    4. decrease price by more than $1.
    5. not affect price at all.

1. When the price was $12, quantity demanded was 24 units. When price increased to $14, quantity demanded was 16 units. Calculate the arc price elasticity of demand associated with this price range. Is demand elastic, inelastic, or unitary elastic? Confirm the previous answer by comparing the total revenue associated with each price and explaining how changes in price and total revenue are related to the price elasticity of demand. Show your work for partial credit. (10 points)
   
   
2. Using a production possibilities curve, describe three situations where it is possible for society to consume more of both goods. (10 points)
   
   
3. The U.S. government administers two programs that affect the market for cigarettes. Media campaigns and labeling requirements are aimed at making the public aware of the health dangers of cigarettes. At the same time, the Department of Agriculture maintains effective price floors for tobacco, and the government limits the amount of land that can be devoted to tobacco production. Are these programs at odds with respect to the goal of reducing cigarette consumption? Explain. As part of you answer, illustrate graphically the effects of both policies on the market for cigarettes. (10 points)
   
   
4. Before economic reforms were implemented in the countries of Eastern Europe, regulation held the price of bread substantially below equilibrium. Using a demand an supply diagram, describe what happened to the bread market in these countries as prices were deregulated. (10 points)
   
   
5. Figure 4 on the right shows the production possibilities curves for two hypothetical nations, Orin and Pohl, both of which produce two hypothetical products, jaxs and keps. Answer the following questions on the basis of this figure. (15 points)
   1. Referring to the country of Orin, what is the opportunity cost of producing 1 unit of jaxs? (2 points)
   2. Referring to the country of Orin, what is the opportunity cost of producing 1 unit of keps? (2 points)
   3. Referring to the country of Pohl, what is the opportunity cost of producing 1 unit of jaxs? (2 points)
   4. Referring to the country of Pohl, what is the opportunity cost of producing 1 unit of keps? (2 points)
   5. In which product does each country have a comparative advantage? Explain. (4 points)
   6. Suggest a terms of trade and explain why both countries would find this terms of trade mutually beneficial. (3 points)