VILLANOVA UNIVERSITY
Villanova School of Business
Department of Economics
Economics 1001
Intro. to Microeconomics
PRACTICE EXAM 1
Dr. Alan J. Donziger
October 2007
Essays and graphs. In your answers define all
significant terms. Use diagrams (fully labeled) wherever
appropriate.
NOTE: You will not have this many essay questions to
answer and there will be some choice of the essay
questions to answer.
1. Explain how the market for cheese steaks reaches equilibrium and how
this equilibrium serves to reconcile the opposing desires of buyers and
sellers. What forces cause the market to move from a position of
disequilibrium to one of equilibrium? Does the presence of equilibrium
indicate a "good" condition for society?
2. Describe the operation of a pure market economy as portrayed by the
circular flow model. What assumptions are made to simplify this model?
Explain how such an economic system answers the fundamental
economic questions of WHAT?, HOW? and FOR WHOM
3. In the Kingdom of Villanovaland two categories of goods are produced:
lawyers and basketball games. Draw a production possibilities curve for
this country. Discuss the assumptions underlying this curve. Label the
following points and fully explain their significance:
Point A - The country has unemployment.
Point B - The country has full employment.
Point C - The country has experienced economic growth.
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4. A publisher raised the price of its economics textbook from $75 to $85.
This reduced the quantity demanded for the textbook from 8,200 to 7,800.
What is the value of the price elasticity of demand? Is the demand for
textbooks elastic, unit elastic or inelastic? Explain the relationship
between price elasticity of demand and total revenue for products with
inelastic, elastic and unit elastic demand when price increases.
5. A new technology is developed to improve the production of MP3 players.
Explain and illustrate graphically the effects on the supply and demand
(and equilibrium price and quantity) for both the MP3 player market and
the market for CD players (Use two separate graphs).
6. Two simultaneous events impact the market for low gas mileage Hummer
automobiles. First, the price of gasoline increases and second a decrease
in the price of steel lowers the cost of producing Hummers (assume that
this decrease does not affect the cost of producing other cars). Explain
and illustrate graphically the effects on the supply and demand (and
equilibrium price and quantity) of Hummer automobiles.
7. In the market for medical marijuana (cannabis, pot, weed – whatever you
want to call it), explain how a change in the law, removing any restrictions
on its use, would create an efficient allocation of this product. Use a
diagram in your answer, illustrating consumer and producer surplus. How
do government limitations on this market create a deadweight loss and
inefficiency?
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Multiple Choice Questions:
1) Scarcity arises from
A) inefficient production.
B) exploration.
C) limited resources and limitless wants.
D) limited wants and limitless resources.
2) In part, microeconomics is concerned with
A) how a business firm decides upon the amount it produces and the price
it sets.
B) changes in the economy's total output of goods and services over long
periods of time.
C) factors that explain changes in the unemployment rate over time.
D) the Federal Reserve's policy decisions.
3) When a firm decides to produce more electric cars and fewer gas guzzlers, it
is most directly answering the ________ question.
A) "how"
B) "scarcity"
C) "what"
D) "for whom"
4) Keeping in mind economists' definition of factors of production, which of the
following is NOT a factor of production?
A) money
B) low-skilled labor
C) coal
D) an engineer
5) Which of the following is NOT an investment in human capital?
A) a business student takes a seminar in using a laptop computer
B) a student purchases a laptop computer
C) a computer science student learns how to repair a laptop computer
D) a computer science student takes a course on programming a laptop
computer
6) The production possibilities frontier represents
A) the maximum amount of labor and capital available to society.
B) combinations of goods and services among which consumers are
indifferent.
C) the maximum levels of production that can be attained.
D) the maximum rate of growth of capital and labor in a country.
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7) Which of the following is NOT true concerning a society's production
possibilities frontier (PPF)?
A) It reveals the maximum amount of any two goods that can be produced
from a given quantity of resources.
B) Tradeoffs occur when moving along a PPF.
C) Production efficiency occurs when production is on the frontier itself.
D) Consumers will receive equal benefits from the two goods illustrated in
the PPF.
8) A choice is made. The value of the highest-valued alternative given up is the
________ of the choice made.
A) accounting cost
B) total cost
C) opportunity cost
D) monetary cost
9) As a person consumes more and more of a good, the
A) marginal benefit increases.
B) marginal benefit decreases.
C) marginal benefit increases or decreases depending whether or not the
economy is on the PPF.
D) price of the good falls.
10) If the marginal benefit of consuming another unit of a good is positive, then to
reach the efficient level of output more of the good should be consumed
A) no matter what..
B) as long as the consumer can afford to pay for it.
C) if the total benefit is greater than the total cost.
D) if the marginal benefit is greater than the marginal cost.
11) The "law of demand" states that changes in
A) demand are related directly to changes in supply.
B) the quantity demanded of a good are not related to changes in the
quantity supplied.
C) the quantity demanded of a good are inversely related to changes in its
price.
D) demand are inversely related to changes in supply.
12) When the price of a good falls, ceteris paribus, the income effect for a normal
good implies that people buy
A) less of that good because the relative price of the good has fallen.
B) more of that good because the relative price of the good has risen.
C) less of that good because they cannot afford to buy all the things they
previously bought.
D) more of that good because they can afford to buy more of all the things
they previously bought.
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13) You observe that an increase in the price of salsa decreases the demand for
tortilla chips and increases the demand for potato chips. You can conclude that
A) salsa and tortilla chips are substitutes.
B) salsa and potato chips are complements.
C) tortilla chips and potato chips are complements.
D) salsa and tortilla chips are complements.
14) Which of the following will NOT shift the supply curve for pick-up trucks?
A) a change in production technology.
B) an increase in the price of a resource used to produce pick-up trucks.
C) a change in the number of suppliers of pick-up trucks.
D) a change in the price of pick-up trucks.
15) Throughout the 1990s, the price of four-wheel drive vehicles rose and each
year more were purchased. This experience suggests that there were
A) technological advances in the way four-wheel drive vehicles are
produced.
B) rightward shifts in the demand curve for four-wheel drive vehicles.
C) movements leftward along the supply curve of four-wheel drive
vehicles.
D) none of the above
16) What will happen to the equilibrium price and quantity of coffee if it is
discovered to help prevent colds and, at the same time, Brazil and Vietnam
emerge in the global market as massive producers of coffee?
A) The price will fall and the effect on the quantity is uncertain.
B) The quantity will increase and the effect on the price is uncertain.
C) The quantity will decrease and the price will rise.
D) The quantity will increase and the price will remain unchanged.
17) The price of a good rises by 12 percent and the price elasticity of demand for
the good is 0.85. Which of the following is a correct interpretation of these facts?
A) When the price rises by 12 percent, the quantity demanded decreased
by 0.85 percent.
B) For each 1 percent that the price rose, the quantity demanded
decreased by 10.2 percent.
C) For each 0.85 percent that the price rose, the quantity demanded
decreased by 1 percent.
D) For each 1 percent that the price rose, the quantity demanded
decreased by 0.85 percent.
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18) Florida State University has just lowered the price of its season football
tickets from $350.00 to $300.00. As a result, there was an increase in the
number of season tickets purchased from 43,000 to 47,000. The price elasticity
of demand for season tickets equals
A) 1.71.
B) 1.58.
C) 0.71.
D) 0.58.
19) A hot dog vendor on a street corner could increase the quantity of hot dogs
her customers demand by 12 percent if she lowers the price of a hot dog 10
percent. The demand for the hot dogs is
A) cross elastic.
B) arc elastic.
C) unit elastic.
D) elastic.
20) The marketing people at Ben and Jerry's Ice Cream Company believe that if
they lower the price of their Cherry Garcia flavor ice cream by 25 percent, the
quantity demanded will increase by 5 percent. If they are correct in their belief,
then
A) the demand for Cherry Garcia is price elastic.
B) their total revenue from Cherry Garcia will increase if they lower the
price.
C) the demand for Cherry Garcia is income elastic.
D) their total revenue from Cherry Garcia will decrease if they lower the
price.
21) Suppose inter-city bus travel is a substitute for transportation by train. Which
of the following could then be true?
A) The cross elasticity between bus and train travel could equal 0.65.
B) The cross elasticity between bus and train travel could equal 1.0.
C) The cross elasticity between bus and train travel could equal 1.25.
D) All of the above could be true.
22) For Product X, the income elasticity of demand is -2.56. Which of the
following is therefore true?
A) Product X is a necessity.
B) Product X is a luxury.
C) Product X is an inferior good.
D) Product X is a normal good.
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23) The demand curve for CDs shows the
A) minimum price that consumers are willing to pay if a given quantity of
CDs is available.
B) maximum price that consumers are willing to pay if a given quantity of
CDs is available.
C) maximum price that producers must be offered to get them to produce
a given quantity of CDs.
D) minimum price that producers must be offered to get them to produce a
given quantity of CDs.
24) Resource use is efficient if
A) the goods and services people value most highly are produced.
B) it is not possible to produce more of a good without giving up
production of a good which is more highly valued.
C) the marginal social benefit is equal to the marginal social cost of the
last unit produced.
D) All of the above answers are correct.
25) Which of the following arguments support the proposition that society should
accept at least some income inequality?
A) Income redistribution will require taxation, causing inefficiently low
levels of labor supply and saving, thus decreasing the size of the
economic pie.
B) Administrative costs associated with income redistribution imply that
low-income people receive less than $1 for each dollar taken from
high-income people.
C) Income redistribution programs divert skilled labor and capital to tax
compliance activities and away from production of goods and services
that people value.
D) All of the above answers are correct because all support the
proposition that society should accept some income inequality.
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Answers to multiple choice questions
1 C
14 D
2 A
15 B
3 C
16 B
4 A
17 D
5 B
18 D
6 C
19 D
7 D
20 D
8 C
21 D
9 B
22 C
10 D
23 B
11 C
24 D
12 D
25 D
13 D
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