Course: ECON1001-I Introductory Microeconomics I
Midterm I
University of Hong Kong
Fall 2009
Date: October 20, 2009
University Number: __________________________
Name: ______________________________
1) Don’t open this exam until you are told to do so. The exam is worth 100 total
points.
2) Follow the instructions at the beginning of each session.
3) There are two parts in this exam covering 6 pages.
1
Multiple Choices (4 points each): Choose the BEST answer given.
Part I. Multiple Choices (4 points each):
Choose the BEST answer given and write it down in the following table. No
scores will be given if you only circle your choice in the question but do not write
down.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
1. The “bowed” out shape of the production possibilities frontier (PPF) arises
because:
a) Since resources are scarce, producing more of one good means we must
produce less of another
b) To continue to get the same increment in the production of a particular good
requires that more and more of the other good be given up
c) As we move farther inside the production possibilities frontier, an economy
loses increasing amount of both goods
d) The opportunity cost associated with a move from a point on the production
possibilities frontier to a point outside the production possibilities frontier
increases in terms of what must be given up to get there
2. Suppose sushi is a normal good. When income increases, but the number of
producers in the market decreases,
a) The equilibrium price of sushi falls and the equilibrium quantity of sushi
rises
b) The equilibrium price of sushi falls and the equilibrium quantity of sushi
falls
c) The equilibrium price of sushi falls and the change to the equilibrium
quantity of sushi ambiguous
d) The equilibrium price of sushi rises and the change to the equilibrium
quantity of sushi ambiguous
3. If your income increases and your demand for nachos decreases, nachos are
considered
a) a positive good
b) a normal good
c) a negative good
d) an inferior good
2
4. Suppose an economist asserts that Taiwan has a comparative advantage in the
production of dried beef and the United States has a comparative advantage in the
production of potato chips. Which of the following statements is another way of
stating the same idea expressed in the assertion?
a) Taiwanese dried beef tastes better than American dried beef
b) Taiwan can produce potato chips at a lower opportunity cost than the U.S.
can
c) American potato chips are more chic than Taiwanese potato chips
d) The U.S. can produce potato chips at a lower opportunity cost than Taiwan
can
5. How will the market for bicycles be affected by an increase in the price of gasoline
and an increase in the desire for exercise?
a) The equilibrium price and quantity of bicycles will increase
b) The equilibrium price of bicycles will fall and the equilibrium quantity will
increase
c) The equilibrium price of bicycles will rise but we do not have enough
information to determine the change in equilibrium quantity
d) The equilibrium quantity of bicycles will rise but we do not have enough
information to determine the change in equilibrium price
6. If the price of dim sum is zero, to maximize total utility, you should consume until:
a) there is no dim sum left, since it is free
b) the total utility of eating dim sum is zero
c) the marginal utility of eating dim sum is constant at one
d) the marginal utility of eating dim sum is zero
7. Which of the following is not a property of the indifference curve?
a) indifference curves never intersect
b) indifference curves are generally downward sloping
c) indifference curves can never be straight lines
d) higher indifference curves mean higher utility
8. The cross price elasticity of demand for diet Coca Cola and diet Pepsi is
a) equal to zero
b) larger than zero
c) less than zero
d) cannot be determined
9. If the demand curve is perfectly price elastic,
a) consumer surplus will equal zero
b) consumer surplus will equal to producer surplus
c) consumer surplus will equal to total surplus
d) consumer surplus will be greater than producer surplus
3
10. When the government imposes a price floor above the equilibrium price in a
market, consumer surplus___________ and total surplus___________
a) may fall; may rise
b) will fall; will fall
c) will rise; will rise
d) may rise; may fall
11. If the marginal utility of green tea is MUg and the price of green tea is Pg, and the
marginal utility of espresso is MUe and the price of espresso is Pe, then to maximize
total utility, green tea and espresso should be consumed until:
a) MUg/ Pg = Pe/ MUe
b) MUg = MUe
c) MUg + MUe = Pg + Pe
d) MUg/ Pg = MUe/ Pe
12. Ma is a famous musician who plays only five concerts a year, each to an audience
of 3,000 people. He allows no recordings of his music. The price of a concert ticket
increases by $20 each year, but Ma does not change the number of concerts he gives,
the number of seats per concert, or his recording policy. Ma is behaving like a:
a) perfectly elastic supplier
b) perfectly inelastic supplier
c) unit-elastic supplier
d) perfectly inelastic consumer
4
13. In general, the price elasticity of a good that requires very skilled workers to
produce
a) decreases over time
b) increases over time
c) remains constant over time
d) may increase or decrease over time
Timing: E is higher in the long-run than in short-run (more elastic). More time to
find substitute in the long-run.
14. Which of the following will not shift the demand curve for coffee?
a) a change in the price of coffee
b) an announcement from the Hong Kong government, saying that there is
now definitive evidence that shows that drinking coffee is good for your health
c) a change in the technology of producing coffee
d) both (a) and (c)
Factors to shift demand curve: Price of complement goods, price of substitute goods,
income change, consumer’s preference, population change, expectation on future
price.
15. Suppose the demand curve for agricultural products is inelastic, then
a) the demand curve will be relatively steep
b) buyers are relatively unresponsive to changes in price
c) total farm income will decrease if the market price falls
d) all of the above
5
Short Answer Questions (20 points each):
1) For a straight line demand curve, show how the price elasticity of demand will
vary at various points of the demand curve. At the mid-point of the demand
curve, what is the price elasticity of demand? Show how you get the results.
6
2) The following table shows the maximum output of coconut and fish for 2
countries: India and China
India
China
Coconut
1000
500
Fish
1000
250
a) Which country has the comparative advantage in the production of coconuts?
Show how you get your results.
India: OCc = 1000 F /1000 C = 1F, OCF = 1C
China: OCc = 250 F / 500 C = 1/2 F, OCF = 2C
China has a comparative advantage on producing coconuts.
7
b) Will these countries benefit from trading with each other? Why or why not?
Show how you get your answer.
Both countries can benefit from specialization and exchange. Each country
specializes in producing the activities in which he has a comparative advantage on
and trade with other country.
Both countries will benefit from trade if the price ratio or the mutually agreed
exchange ratio is set between their opportunity costs. It is not beneficial to trade if the
exchange ratio sets outside the range.
0.5F < X<1F;
1C<X<2C
India
China
OC to produce 1 coconut
1 fish
0.5 fish
OC to produce 1 fish
1 coconut
2 coconut
China has a comparative advantage on producing coconuts; he will use all of his
resources to produce coconuts and trade with India. Thus, China is the supplier of
coconuts. He is willing to sell as low as 0.5 fish for one coconut (his reservation
price). If this “price” is any lower, then China is better off consuming coconut
domestically.
On the other hand, India is the demander of coconuts. He is willing to pay up to one
fish for one coconut (his reservation price). If this “price” is any higher, then India is
better off producing coconut domestically.
Therefore, it is beneficial to trade if the exchange ratio of coconut is set between 0.5F
< X < 1F.
(Same methodology for fish)
India
Exchange ratio
China
OC to produce 1 coconut
1 fish
0.6
0.5 fish
After the trade, the PPF is beyond the PPFs of both countries.
END
8
OC to produce 1 fish
1 coconut
1.5
2 coconut