Name______________________________
Framingham State College
Department of Economics and Business
Principles of Microeconomics Section D
2nd Midterm Practice Exam – Fall 2006
This exam provides questions that are representative of those contained on your exam. This test
should in no way be considered a facsimile of your exam. All topics, problems, key words,
and class discussion are fair game for the exam whether or not they are contained on this
practice exam.
----------------------------------------------------------------------------------------------------------Directions:
• Provide the best answer to the following:
• 10 Multiple Choice Questions each worth 4 points
• 10 True/False Questions each worth 2 points
• 5 Short Answer Questions each worth 8 points
• for a total of 100 points.
• You will be given 110 minutes to complete the exam.
• If you finish early, you may quietly turn in your exam and leave.
• The exam is closed book and closed note, please place everything other than your calculator and writing tools at the front of the class.
• You may not share a calculator.
• Ensure that you label your graphs comprehensively. Show the before state and the after
state where appropriate and label the two states in a way that is unambiguous
• You are expected to use full sentences in your answers to the Short Answer Questions.
Incomplete sentences will be penalized in the grade awarded.
-----------------------------------------------------------------------------------------------------------Multiple Choice: Identify the letter of the choice that best completes the statement or answers the
question.
____
1.
Economics is defined as the study of
a. business.
b. how society manages its scarce resources.
c. central planning.
d. government regulation. (1)
____
2.
A price ceiling
a. is a legal maximum on the price at which a good can be sold.
b. is a legal minimum on the price at which a good can be sold.
c. occurs when the price in the market is temporarily above equilibrium.
d. will usually result in a market surplus. (47)
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3.
Water shortages caused by droughts can be most efficiently lessened by
a. allowing price to equate the quantity demanded of water with the quantity supplied of
water.
b. restricting water usage of consumers.
c. arresting anyone who wastes water.
d. imposing tight price controls on water. (49)
Figure 1
____
4.
Refer to Figure 1. The price sellers receive after the tax is imposed is
a. $18.00.
b. $14.00.
c. $12.00.
d. $8.00. (50)
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Figure 2
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5.
Refer to Figure 2. When the price rises from P1 to P2, consumer surplus
a. increases by an amount equal to A.
b. decreases by an amount equal to B + C.
c. increases by an amount equal to B + C.
d. decreases by an amount equal to C. (58)
Figure 3
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6.
Refer to Figure 3. Producer surplus before trade would be
a. $3600.
b. $4400.
c. $5200.
d. $6600. (68)
Figure 4
____
7.
Refer to Figure 4. To internalize the externality in this market the government should
a. impose a tax on this product.
b. provide a subsidy for this product.
c. encourage firms to supply more of this product by taxing them.
d. produce the product itself. (75)
____
8.
When a free-rider problem exists
a. too few resources are devoted to the good.
b. the cost of the good will always be more than the benefit of the good.
c. the good will not be produced.
d. entrepreneurs will eventually find a way to make free-riders pay their share. (80)
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9.
The town of Sointenly does not have any public snow-plows. Anyone who wants their
street cleared of snow must hire a private snow-plow company to do it for $75. Curly,
Larry and Moe all live on a dead-end street, with Curly living at the very end of it. Each
one values snow removal at $50. At present, the snow is never cleared from the street.
We can conclude that
a. the current situation is best because the cost of snow removal exceeds what each of
them is willing to pay for it.
b. Larry and Moe should wait for Curly to pay for the service because if the snow is
cleared all the way to Curly's house, Larry and Moe will get the service for free.
c. the fee charged by the snow removal company is unfairly high.
d. Curly, Larry and Moe could all be better off if they acted collectively. (85)
____
10.
Deadweight loss from taxes in a market represents the
a. inefficiency that taxes create.
b. shift in benefit from producers to consumers.
c. part of consumer and producer surplus that is now revenue to the government.
d. loss in profit to producers when quantity demanded falls as a result of higher prices.
(91)
True/False:
Indicate whether the sentence or statement is true or false.
____
11.
Productivity is the primary determinant of a country's living standards. (103)
____
12.
The tradeoff between the production of different goods can change because of
technological improvement over time. (105)
____
13.
The housing shortages caused by rent controls are larger in the long run than in the short
run because both the supply of housing and the demand for housing are more elastic in
the long run. (124)
____
14.
If a tax is imposed on the buyer of a product, the tax incidence will fall entirely on the
buyer, causing the buyer to pay more. (127)
____
15.
Even though participants in the economy are motivated by self-interest, the "invisible
hand" of the marketplace guides this self-interest into promoting general economic wellbeing. (134)
____
16.
Free trade causes job losses in industries in which a country does not have a comparative
advantage, but it also causes job gains in industries in which the country has a
comparative advantage. (142)
____
17.
If the social cost of producing robots is less than the private cost of producing robots, the
private market produces too few robots. (145)
____
18.
Pigovian taxes enhance efficiency, but the cost to administer the tax frequently exceeds
the revenue they raise for the government. (148)
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19.
When one person enjoys the benefit of national defense, he (or she) reduces the benefit to
others. (150)
____
20.
If we can conclude that human life has a finite value, cost-benefit analysis can lead to
solutions in which human life is worth less than the cost of a potential project. (155)
Short Answer: Your answers should be given in complete sentences or complete paragraphs.
21.
Gary and Diane must prepare a presentation for their marketing class. As part of their
presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It
would take Gary 10 hours to do the required calculation and 10 hours to prepare the
slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the
slides. (169)
a. How much time would it take the two to complete the project if they divide the
calculations equally and the slides equally?
b. How much time would it take the two to complete the project if they use comparative
advantage and specialize in calculating or preparing slides?
c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better
solution than for each to specialize in calculating or preparing slides?
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22.
Using the graph in Figure 5, answer the following questions. (170)
Figure 5.
a. What was the equilibrium price in this market before the tax?
$
b. What is the amount of the tax?
$
c. How much of the tax will the buyers pay?
$
d. How much of the tax will the sellers pay?
$
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e.
How much will the buyer pay for the product after the tax is imposed?
$
f.
How much will the seller receive after the tax is imposed?
$
g.
As a result of the tax, what has happened to the level of market activity?
23.
What is meant by "internalizing" an externality? How can a negative externality be
internalized? (192)
24.
Why are public policy solutions such as Pigovian taxes and subsidies preferred over
regulatory policies? (196)
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25.
Using the information in the graph shown below, answer the following questions about
hammers.
Price
$22
Domestic
Supply
$14
World
Price
$10
$5
Domestic
Demand
$0
0
50
90
Quantity
135
a. What is the equilibrium price of hammers before trade?
$
b. What is the equilibrium quantity of hammers before trade?
c. What is the price of hammers after trade is allowed?
$
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d. What is the quantity of hammers imported?
e. What is the amount of consumer surplus before trade?
$
f.
What is the amount of consumer surplus after trade?
$
g. What is the amount of producer surplus before trade?
$
h. What is the amount of producer surplus after trade?
$
i.
What is the amount of total surplus before trade?
$
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j.
What is the amount of total surplus after trade?
$
k. What is the change in total surplus because of trade?
$
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