ECON 203-502
Name:
Spring 2013
Exam 1
Instructor: Jinkook Lee
UIN:
Major:
Part I) True / False (3pts. each)
1) Scarcity refers to a situation in which unlimited wants exceed the limited resources available
to fulfill those wants. (T/F)
2) If the population increases and input prices increase, the equilibrium price of a product will
definitely increase. (T/F)
3) The basis for trade is absolute advantage, not comparative advantage. (T/F)
4) Consumer surplus in a market for a product would be equal to the area under the demand
curve if the market price was zero. (T/F)
5) Producer surplus measures the total benefit received by producers from participating in a
market. (T/F)
6) If the government implements a price ceiling on insulin, this will cause an increase in
producer surplus. (T/F)
Part II) Short Answer (4pts. each)
1) Economists assume that individuals are rational and respond to
.
2) The ______ __ effect of a price change refers to the impact of a change in the price of a
good on a consumer's purchasing power.
3) The law of demand implies, holding everything else constant, that as price of a good increases
will decrease.
4) A supply curve shows
5) A tax is efficient if it imposes a small
of producing one more unit of a good or service.
relative to the tax revenue it
raises.
Part III) Multiple Choices (3 or 4pts. each)
1) Economists reason that the optimal decision is to continue any activity up to the point where
A) marginal benefit is zero.
B) marginal benefit is greater than the marginal cost.
C) marginal cost is zero.
D) marginal benefit equals the marginal cost.
(Situation 1)
DeShawn's Detailing is a service that details cars at the customers' homes or places of work.
DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a
total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20
to the total cost of the package. .
2) Refer to above situation 1. What is DeShawn's marginal benefit if he sells a basic detailing
package?
A) $35
B) $75
C) He makes a marginal loss of $15, not a marginal benefit.
D) The marginal benefit cannot be determined.
3) Refer to above situation 1. Should DeShawn continue to offer the engine detailing service?
A) yes, he still makes a profit by selling the engine detailing service with the basic detailing
package
B) yes, but only if he raises the price of the basic detailing package
C) no, his marginal benefit is less than his marginal cost
D) More information is needed for DeShawn to make this decision.
Table 1
Production Choices for Dina's Diner
Choice
A
B
C
D
E
Quantity of
Sliders
Produced
80
60
40
20
0
Quantity of
Hot Wings
Produced
0
25
50
75
100
4) Refer to Table 1. Assume Dina's Diner only produces sliders and hot wings. A combination of
40 sliders and 25 hot wings would appear
A) along Dina's production possibilities frontier.
B) inside Dina's production possibilities frontier.
C) outside Dina's production possibilities frontier.
D) at the vertical intercept of Dina's production possibilities frontier.
5) Refer to Table 1. Dina faces ________ opportunity costs in the production of sliders and hot
wings.
A) increasing
B) decreasing
C) constant
D) negative
Figure 1
General Motors recently approved for production the Cadillac Converj, an electric car based on
its Chevy Volt. The Converj will feature a "Generation 1.5 Voltec" powertrain, with a hybrid
engine that runs on a combination of electricity and gasoline. Suppose GM chooses to produce
both a coupe version and an SUV version of this hybrid-engine vehicle for its Cadillac brand.
Figure 1 shows changes to its production possibilities frontier in response to new developments
and different strategic production decisions.
6) Refer to Figure 1. Suppose worker productivity increases so that the total number of vehicles
produced increases as the company adds more machinery, workers and changes the layout of the
factory. This is best represented by the
A) movement from E to F in Graph A.
B) movement from G to H in Graph B.
C) movement from K to L in Graph C.
D) movement from J to H in Graph B.
7) Refer to Figure 1. In response to changing consumer demands, Cadillac cuts back on the
production of SUVs and increases its production of coupes. This strategy is best represented by
A) movement from E to F in Graph A.
B) movement from G to H in Graph B.
C) movement from K to L in Graph C.
D) movement from H to J in Graph B.
Table 2
Lawns Mowed
Gardens Cultivated
George
10
5
Jack
6
4
Table 2 shows the output per day of two gardeners, George and Jack. They can either devote
their time to mowing lawns or cultivating gardens.
8) Refer to Table 2. Which of the following statements is true?
A) Jack has a comparative advantage in both tasks.
B) George has a comparative advantage in both tasks.
C) Jack has a comparative advantage in lawn mowing and George in garden cultivating.
D) Jack has a comparative advantage in garden cultivating and George in lawn mowing.
Table 3
Kona Coffee
Price per lb.
(dollars)
$10
8
6
5
4
Luke's
Quantity
Demanded (lb.)
Ravi's
Quantity
Demanded (lb.)
3
9
14
18
22
0
3
7
12
18
Rest of Market
Quantity
Demanded (lb.)
Market
Quantity
Demanded (lb.)
23
32
68
85
110
9) Refer to Table 3. The table above shows the demand schedules for Kona coffee of two
individuals (Luke and Ravi) and the rest of the market. At a price of $6, the quantity demanded
in the market would be
A) 36 lb.
B) 68 lb.
C) 89 lb.
D) 123 lb.
10) Refer to Table 3. The table above shows the demand schedules for Kona coffee of two
individuals (Luke and Ravi) and the rest of the market. If the price of Kona coffee rises from
$4 to $5, the market quantity demanded would
A) decrease by 35 lb.
B) increase by 115 lb.
C) increase by 35 lb.
D) decrease by 115 lb.
Figure 2
11) Refer to Figure 2. Assume that the graphs in this figure represent the demand and supply
curves for laptop computers. Which panel best describes what happens in this market when the
price of computer hard drives falls?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
12) Refer to Figure 2. Assume that the graphs in this figure represent the demand and supply
curves for mustard and that bratwurst and mustard are complements. What panel describes
what happens in this market when the price of bratwurst falls?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
13) Refer to Figure 2. Assume that the graphs in this figure represent the demand and supply
curves for coffee. What happens in this market if buyers expect the price of coffee to rise?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
Figure 3
14) Refer to Figure 3. The graph in this figure illustrates an initial competitive equilibrium in
the market for motorcycles at the intersection of D2 and S1 (point C). Which of the following
changes would cause the equilibrium to change to point B? (4 pts.)
A) A positive change in the technology used to produce motorcycles and decrease in the price of
motorcycle insurance, a complement to motorcycles.
B) An increase in the wages of motorcycle workers and a decrease in the price of motorcycle
insurance, a complement to motorcycles.
C) An increase in the number of motorcycle producers and an increase in the number of
consumers who prefer riding motorcycles.
D) An increase in the wages of motorcycle workers and an increase in the price of motorcycle
insurance, a complement to motorcycles.
Figure 4
Figure 4 shows the demand and supply curves for the coffee market. The government believes
that the equilibrium price is too low and tries to help almond growers by setting a price floor at
$7.00.
15) Refer to Figure 4. What is the value of producer surplus after the imposition of the price
floor?
A) $3,000
B) $3,600
C) $4,200
D) $4,500
16) Refer to Figure 4. What is the value of the portion of consumer surplus that has been
transferred to producer surplus as a result of the price floor? (4 pts.)
A) $1,200
B) $1,500
C) $1,800
D) $3,000
17) Refer to Figure 4. What is the value of the deadweight loss after the imposition of the price
floor?
A) $600
B) $1,800
C) $2,700
D) $3,300
Figure 5
Figure 5 shows the market for cigarettes. The government plans to impose a unit tax in this
market.
18) Refer to Figure 5. What is the size of the unit tax?
A) $8
B) $5
C) $3
D) $2
19) Refer to Figure 5. The price buyers pay after the tax is
A) $12
B) $8
C) $5
D) $3
20) Refer to Figure 5. What is the size of the government tax revenue?
A) $120
B) $80
C) $200
D) $75
Extra Credit (3pts.)
a. Draw a production possibilities frontier for a country that produces two goods, wine and
cheese. Assume that resources are not equally suited to both tasks.
b. Define opportunity costs by using production possibilities frontier graph that you draw.
c. Use your production possibilities frontier graph to demonstrate the principle of opportunity
costs.