Sample Midterm 1 Questions. Unless told otherwise, assume throughout that demand curves slope downwards and supply curves slope upwards.

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1 Sample Midterm 1 Questions Unless told otherwise, assume throughout that demand curves slope downwards and supply curves slope upwards. 1. Suppose that you are indifferent between seeing a seeing a move or going to a concert on a particular Saturday evening. You are willing to pay $20 to see the movie and the movie ticket costs $5. You are willing to pay $80 for the concert. What must be the price of a concert ticket? a) $5. b) $95. c) $65. d) There is insufficient information to figure out the price of the concert ticket. 2. Which of the following statements about opportunity costs is FALSE? I. The opportunity cost of a given action excludes the monetary costs of that action. II. The opportunity cost of an action is equal to the explicit costs of that action plus the implicit costs of that action. III. To calculate accurately the opportunity cost of an action we need to first identify the next best alternative to that action. a) III only. b) I only. c) II only. d) None of the statements are false. 3. According to marginal analysis, optimal decision-making involves: a) Taking actions whenever the marginal benefit is positive. b) Taking actions only if the marginal cost is zero. c) Taking actions whenever the marginal net benefit is positive. d) All of the above.! 1

2 4. Ziming (a UVic student) has bought a plane ticket home for Christmas, leaving Victoria on December 18. He was willing to pay $1300 of the plane ticket, and the ticket cost $900. Ziming can change the date of the flight by incurring a $100 fee. On the day of the flight, Ziming will also have to pay $10 for a shuttle ride to the airport, as well as $25 to check his bag on the plane. When the final exam schedule is published, Ziming learns that he has an exam on December 19, which he cannot miss. What do Ziming's SUNK COSTS equal? (Assume that the only relevant costs are those above.) a) $400 b) $135 c) $100. d) $0. 5. Which of the following concepts explains why production possibilities frontiers slope downwards? a) Increasing marginal opportunity costs. b) The law of supply. c) The law of demand. 6. Suppose that - at a given level of some economic activity - marginal benefit is less than marginal cost. The economic agent in question (the decision-maker) can increase net benefits by decreasing the level of the activity, for which of the following reasons? a) Total costs will fall by more than total benefits. b) Total benefits will rise by more than total costs. c) Neither a) nor b). d) Either a) or b).! 2

3 7. Jane s marginal benefit per day from drinking coke is given in the table below. This shows that she values the first coke she drinks at $1.20, the second at $1.15, and so on. Suppose that the price of coke is $1.00, but the store is holding a buy one get one free sale on cokes. What does Jane s consumer surplus equal, at her optimal choice? Marginal benefit Cokes $ $ $ $ a) $0.35. b) $3.15 c) $ Suppose that you are willing to pay $14 to see a movie at the theatre on Saturday night. A ticket costs $9, and the next-best alternative use of your time would be to go to stay at home and watch movies on Netflix (to which you already subscribe, at cost $10 per month). You value the night at home watching Netflix movies at $6. Which of the following statements is/are TRUE? I. The opportunity cost of watching Netflix movies is $5. II. You will stay at home and watch Netflix movies. III. The opportunity cost of seeing the movie at the theatre is $15. a) I, II, and III. b) None of the above statements are true. c) II only. d) I and III only.! 3

4 The following TWO questions refer to the table below, which shows the maximum number of goods X and Y that producers A and B can produce in one day. X Y Producer A Producer B Which of the following statements in TRUE? a) Producer A has the comparative advantage in producing X. b) Producer A has the comparative advantage in producing Y. c) Producer B has the absolute advantage in producing X and Y. d) No producer has the comparative advantage in producing either X or Y. 10. Remember to refer to the table above. If there are 20 units of good X being produced efficiently each day, how many units of good Y will be produced each day? a) 10. b) 15 c) Which of the following statements about production and trade is TRUE? I. If a country has the comparative advantage in producing a good, then it that country will import that good. II. If a country has the absolute advantage in the production of a good, it will export that good. III. Trade allows countries to consume bundles of goods that lie outside their production possibilities frontiers. a) I only. b) I and II only. c) I, II and III. d) III only.! 4

5 12. The following question refers to the table below, which shows the maximum number of tables and lamps that countries A and B can produce in one hour. tables lamps Country A Country B Which of the following statements is TRUE? a) Country B has the comparative advantage in producing both tables and lamps. b) Country B has the comparative advantage in producing tables. c) Country B has the comparative advantage in producing lamps. d) None of the above statements is true. Use the diagram below, which illustrates the PPF diagram drawn for two countries that are free to trade with one another, to answer the following TWO questions. y A PPF1 B C PPF2 D E x 13. Which of the following production combinations is/are INEFFICIENT? I. Country 1 produces at point C and country 2 produces at point D. II. Country 1 produces at point C and country 2 produces point at B. III. Country 1 produces at point A and country 2 produces at point D. a) II only. b) I only. c) I and II only. d) I, II and III.! 5

6 14. Which of the following production combinations is/are EFFICIENT? I. Both countries produce at point A. II. Country 1 produces at point E and country 2 produces point at B. III. Country 1 produces at point E and country 2 produces at point D. a) II only. b) I only. c) I and II only. d) I, II and III. 15. The diagram below illustrates the PPFs for two countries that produce wine and cheese. With no trade, country 1 produces at point A on its PPF and country 2 produces at point B. Wine Wine PPF1 B A PPF2 Cheese Cheese Assume that the two countries now begin to trade with one another. Which of the following WILL occur (relative to the case with no trade). a) Country 1 will produce more wine. b) Country 2 will export cheese. c) Country 1 will produce less cheese. d) All of the above.! 6

7 16. Which of the following concepts can be used to explain why production possibility frontiers slope downwards? a) Increasing marginal costs. b) The law of supply. c) The law of demand. The following TWO questions refer to the PPF diagram below. y 40 PPF 30 x 17. What is the MARGINAL cost of producing good x? a) 3/4 of a unit of x. b) 3/4 of a unit of y. c) 4/3 units of x. d) 4/3 units of y. 18. What is the TOTAL cost of producing fifteen units of good x? a) 10 units of y. b) 15 units of y. c) 20 units of y.! 7

8 19. Which of the following statements about efficiency is/are TRUE? I. If, given some current situation, we are unable to implement a change that makes at least one person better off and no-one worse off, then the current situation is efficient. II. A situation is inefficient, if we are able to make one person better off without making anyone else worse off. III. If we implement a change such that at least one person is better off and no one is worse off, then the situation after the change will be efficient. a) I only. b) III only. c) I and II only. d) I, II and III. 20. The table below shows the maximum number of multiple choice questions and labs questions that Emma and Nick can prepare in 1 hour. Multiple choice questions Lab questions Emma 10 2 Nick 15 5 Suppose Emma and Nick agree to work together for THREE hours. They only need to prepare a total of 45 multiple choice questions in these three hours. If they prepare those 45 multiple choice questions efficiently, how many lab questions will they also be able to prepare? a) 5. b) 10. c) 15.! 8

9 The diagram below illustrates the PPFs for two countries who are free to trade. y Economics PPF1 200 x Suppose that aggregate production of y across the two countries is equal to 200 (that is, country one s production of y plus country two s production of y equals 200 units). If these 200 units of y are being produced efficiently, then aggregate production of x will equal: a) 100 units of x. b) 200 unit of x. c) 250 units of x. d) 300 units of x. PPF2 22. Which of the following statements about demand curves is FALSE? a) If the price of the good increases, demand decreases, b) The law of demand holds if a consumer s marginal benefit is decreasing in consumption. c) Both a) and b) are false. d) Neither a) nor b) is false. 23. Which of the following IS a determinant of the demand for good Y? a) The technology used to produce Y. b) The price of good X, a substitute for Y. c) Both a) and b). d) Neither a) nor b).! 9

10 The following TWO questions refer to an individual s demand curve diagram, illustrated below. 4 3 $ 2 1 D Q 24. If the price of this good is $1 per unit, what will be the quantity demanded? a) 2. b) 4. c) 6. d) If the price of the good falls from $2 to $1, what will be the increase in TOTAL benefits? a) $10. b) $3. c) $1. d) $None of the above. 26. Which of the following can result in a INCREASE in demand? I. A decrease in income. II. A decrease in the price of a substitute for the good. III. Changes in expectations about the future price of the good. a) I only. b) I and II only. c) I, II, and III. d) I and III only.! 10

11 27. Which of the following statements is TRUE? a) Consumer surplus is the difference between the most a consumer is willing to pay and the amount of money they had to pay. b) Consumer surplus is represented graphically by the area under the demand curve and above the price line, up to the quantity in question. c) Consumer surplus measures the gains from trade/net benefits to buyers. d) All of the above are true. The following TWO questions refer to the supply curve diagram below. $ 20 S If the price increases from $5 to $15, quantity supplied will increase by:: a) 5 units. b) 10 units. c) 15 units. d) 20 units If the price is $10 per unit, what will producer surplus equal, given the producer s optimal choice? a) $25. b) $50. c) $100. d) $None of the above.! 11

12 30. Which of the following will shift the market supply curve of good X? I. An increase in the price of the good. II. A change in the number of sellers of the good. III. A change in the technology used to produce the good. a) I, II, and III. b) I only. c) II only. d) II and IIII only. Economics Which of the following statements about supply curves is TRUE? a) The law of supply states that as price rises, supply increases. b) If the marginal cost of production is always equal to $5 per unit, then the supply curve is horizontal. c) Both a) and b) are true. d) Neither a) nor b) are true. 32. Which of the following statements about market surplus is FALSE? I. Market surplus equals the area under the demand curve and above the supply curve, up to the quantity in question. II. Market surplus is equal to consumer surplus plus producer surplus. III. Market surplus is equal to social surplus if both external costs and benefits are zero. a) III only. b) I only. c) I and III only. d) None of the above statements is false.! 12

13 The following THREE questions refer to the supply and demand curve diagram below. $ D S Q 33. At the equilibrium, market surplus will equal: a) $120. b) $180. c) $ At price of $2, there is: a) Excess supply of 100 units. b) Excess supply of 80 units. c) Excess demand of 100 units. d) Excess demand of 80 units. 35. If demand increases by 50 units at every price, what will be the new equilibrium price in this market? a) The equilibrium price will $7 and the equilibrium quantity will be 70 units. b) The equilibrium price will $8 and the equilibrium quantity will be 80 units. c) The equilibrium price will $9 and the equilibrium quantity will be 90 units. d) There is insufficient information to determine the new equilibrium price and quantity.! 13

14 36. An increase in the marginal cost of producing a good is, graphically, represented by: a) A leftward shift in the supply curve. b) A rightward shift in the supply curve. c) A movement up and to the right along a supply curve. d) A movement down and to the left along a supply curve. 37. When deciding how much of a particular good to produce, a producer should: a) Keep producing more as long as the price is at least as great as marginal cost. b) Produce an extra unit of output if it generates positive producer surplus. c) Both a) and b). d) Neither a) nor b). 38. Suppose goods X and Y are complements, and the price of good Y increases. Which of the following is TRUE? I. The demand for X decreases. II. Quantity demanded for Y will decrease. III. The price of X will increase. a) I only. b) I and II only. c) II and III only. d) I, II, and III. 39. If lentils are inferior and incomes decrease, we would expect: a) An increase in equilibrium price and a decrease in equilibrium quantity. b) A decrease in equilibrium price and an increase in equilibrium quantity. c) A decrease in equilibrium price and equilibrium quantity. d) An increase in equilibrium price and equilibrium quantity.! 14

15 The following THREE questions refer to the supply and demand diagram below. $ S a b f c g e D1 D2 Q1 Q2 Q 40. Which of the following could NOT explain the shift in demand from D1 to D2. a) An increase in the number of sellers of the good. b) An increase in income. c) An increase in the price of a substitute for this good. d) A decrease in income. 41. If demand increases from D1 to D2, which area represents the increase in PRODUCER surplus? a) a + c. b) e + g. c) a + c + e + g. d) a + b + c. 42. If demand increases from D1 to D2, which area represents the increase in the producer s revenue (that is, the amount of money sellers receive from consumers)? a) a + c. b) e + g. c) a + c + e + g. d) a + b + c.! 15

16 43. The following question refers to the diagram below, which illustrates an individual s demand curve for a good. $ Demand P1 P2 If price falls from P1 to P2, which area represents the increase in consumer surplus that is a transfer from sellers? a) Area B. b) Area D. c) Area B + D. d) There is no transfer from sellers. A B C Q1 D E Q2 Q 44. All else equal, increase in the marginal cost of producing a good will result in: a) A lower equilibrium quantity and a higher equilibrium price. b) A lower equilibrium quantity and a lower equilibrium price. c) A higher equilibrium quantity and a higher equilibrium price. d) A higher equilibrium quantity and a lower equilibrium price. 45. Max is selling his car. The minimum he needs to be paid for the car is $4,000. He pays $20 to place a for sale ad in the newspaper, and he also pays mechanic $100 to provide a written assessment of the quality of the car. He initially asks $5,200 for the, but ends up selling it for $4,900. Calculate Max s producer surplus. a) $1,200. b) $900. c) $1,080. d) $780.! 16

17 46. Suppose the equilibrium price of good X is $10 and the equilibrium quantity is 200 units. If the price of good X is $40: a) The quantity demanded will be more than 200 units. b) The quantity supplied will be less than 200 units. c) There will be an excess demand for good X. d) There will be an excess supply of good X. The following TWO questions refer to the diagram below, which illustrates a supply curve. 47. If the price is $2 per unit, what is the quantity supplied? a) 2. b) 4. c) 6. d) If the price of this good increases from $3 to $4, by how much do the producers total costs increase? a) $1. b) $4. c) $7.! 17

18 49. Consider the supply and demand diagram drawn below. $ S What does producer surplus equal, at the equilibrium? a) $2,250. b) $4,500. c) $6, D Q 50. Suppose the price of good X increases. If X and Y are complements, then, in the market for good Y, we would expect: a) A decrease in demand. b) A decrease in quantity supplied. c) A decrease in producer surplus. d) All of the above. 51. If X and Y are substitutes, and if the marginal cost of producing X increases, then which of the following will occur? I. The quantity demanded of X will decrease. II. The equilibrium price of Y will increase. III. The supply of X will increase. a) II only. b) I only. c) I, II and III. d) I and II only.! 18

19 52. Consider the market for socks. Suppose that both of the following occur simultaneously: (i) the price of shoes (a complement to socks) decreases; and (ii) wages paid to sock-makers decrease. Then, in the market for socks we would expect: a) The equilibrium price of socks could either increase or decrease, but equilibrium quantity will definitely decrease. b) The equilibrium quantity of socks could either increase or decrease, but equilibrium price will definitely decrease. c) The equilibrium price of socks could either increase or decrease, but equilibrium quantity will definitely increase. d) The equilibrium quantity of socks could either increase or decrease, but equilibrium price will definitely increase. 53. Suppose that there are external benefits resulting from a particular market s activity (but no external costs). Which of the following is true? a) Market surplus equals social surplus. b) Market surplus is greater than social surplus. c) Market surplus is less than social surplus. 54. Suppose that in the market for good X (an inferior good), the following occur simultaneously: (i) consumer incomes increase and (ii) the marginal cost of producing good X increases.which of the following statements is TRUE? a) The equilibrium price of X could either increase or decrease, but equilibrium quantity will definitely decrease. b) The equilibrium quantity of X could either increase or decrease, but equilibrium price will definitely decrease. c) The equilibrium price of X could either increase or decrease, but equilibrium quantity will definitely increase. d) The equilibrium quantity of X could either increase or decrease, but equilibrium price will definitely increase.! 19

20 Use the supply and demand diagram below to answer the following TWO questions. $ S2 P2 P1 a b f c e g S1 Q2 Q1 Q 55. If supply decreases from S1 to S2, which area represents the decrease in MARKET surplus? a) b + c - f. b) a + b + c. c) b - f - e. d) c + f + g + e. D 56. If supply decreases from S1 to S2, which area represents the decrease in CONSUMER surplus? a) b + c + g. b) b + c. c) g + f. 57. Which of the following WILL result in an increase in price in the equilibrium price of a normal good? I. An increase in the price of a complement to the good. II. A decrease in the price of a substitute for the good. III. An increase income. a) I only. b) I and III only. c) I, II, and III, d) III only.! 20

21 58. Consider the supply and demand curves drawn below. $ D X S Y Z Q Given the equilibrium quantity, which area represents PRODUCER SURPLUS? a) X + Y + Z. b) X + Y. c) X. d) There is no producer surplus. 59. Recent hurricanes in the Caribbean have resulted in a decrease in the supply of bananas. What will be the expected effect of this on the equilibrium in the banana market? a) An increase in the equilibrium price and the quantity. b) An increase in the equilibrium price and a decrease in the equilibrium quantity. c) A decrease in the equilibrium price and the quantity. d) A decrease in the equilibrium price and an increase in the equilibrium quantity.! 21

22 The following TWO questions refer to the supply and demand curve diagram below. $ D S Q 60. If a price floor is set at $8, which of the following statements is true? a) Quantity demanded will decrease by 30 units. b) Sellers would like to sell 80 units. c) Quantity traded will equal 30 units. d) All of the above are true. 61. Calculate the deadweight loss associated with an $8 price floor. a) $50. b) $75. c) $100.! 22

23 62. Consider the diagram below which illustrates one demand curve and two different possible supply curves. $ D S2 S1 Q If demand increases in this market, then: a) The increase in equilibrium price will be smaller, if supply is S1 than if supply is S2. b) The increase in equilibrium quantity will be smaller, if supply is S1 than if supply is S2. c) The decrease in both equilibrium price and quantity will smaller, if supply is S2 than if supply is S1. d) Both a) and b) are true.! 23