Ag Econ 1041
Exam 1, 140 points
September 25, 2008
Name __________KEY____________________
11 a.m. Section
Short answer – five points each
1. What is the true cost of any decision we make?
Opportunity cost
2. Draw a production possibilities curve (frontier) and distinguish what can be produced
from what cannot be produced currently. Be sure the curve reflects the reality of
production alternatives.
Good A
Cannot be
produced
Can be
produced
Good B
1
3. Diagram the market for cell phones and then show on the same diagram the impact of
more buyers with increased income. Be sure to show initial and new market outcomes.
P
S
P1
P0
Q0
Q1
Q
4. Show with a diagram how prices would remain the same when the quantity exchanged
increases.
P
S
S1
P0
D1
D
0
Q0
Q1
Q
2
5. Use two graphs to show the difference between a decrease in quantity demanded verses
a decrease in demand.
P
P1
P0
D0
D
D1
Q
Q1
Q0
6. Use a diagram to show why summer clothes have lower prices today than they were six
weeks ago.
P
S
P0
P1
D
D1
0
Q1
Q0
Q
3
7. Show on a graph how the increase in the price of cotton would affect the market for
producing t-shirts.
P
S1
S0
P1
P0
D
0
Q1
Q0
Q
8. “Coca Cola’s soda sales rose 5%.” Diagram how this might happen, particularly in a
market with increasing income.
P
S
P1
P0
D1
D0
0
Q0
Q1
Q
4
9. Diagram the market situation for flat screen televisions as production technology
improves.
P
S0
S1
P0
P1
D
0
Q0
Q1
Q
10. If Alex likes steak more, why does he eat more pizza than steak?
Pp < Ps
True/False – one point each
T
F
F
T
F
F
F
T
T
T
T
F
F
11. The most fundamental economic issue is scarcity.
12. Economics is the study of ways that people can earn more income.
13. Decisions are best when the decision maker focuses on average benefits and average
costs.
14. Markets are where sellers and buyers interact in an effort to make themselves better
off.
15. Supply is the quantity of a product produced within a specific time period.
16. Opportunity cost is what we pay for a good minus any coupons or rebates.
17. A comparative advantage is held by a producer who has the lowest monetary costs to
produce a good.
18. The marginal benefit curve of consuming your favorite good eventually declines as
consumption increases.
19. Increases in income tend to increase our consumption of many but not all goods.
20. The reduction in the price of automobiles would be expected to increase the number of
automobiles purchased.
21. Demand is a schedule of quantities that consumers will choose at various prices.
22. Consumers have no impact on the prices they pay for goods at Wal-Mart or other retail
stores.
23. If the price of computers increases, the price of software will also increase, ceteris
paribus.
5
T
T
F
T
T
F
T
T
24.
25.
26.
27.
28.
29.
30.
31.
F
T
F
32.
33.
34
F
T
F
35.
36.
37.
F
38.
F
F
39.
40.
The elasticity of demand is important to sellers but determined by buyers.
The market equilibrium occurs where demand intersects supply.
The increase in plywood prices has reduced our demand for new homes.
We face tradeoffs and must give something up to acquire something else.
An increase in the price of cigarettes makes them a less attractive alternative.
A reduction in the price of soft drinks increases the demand for soft drinks.
Opportunity cost includes both benefits and costs of the foregone alternative.
A supply curve is the lowest opportunity cost facing sellers in terms of prices and
quantities made available for sale.
More firms making cloth and clothing will raise the price of clothing.
Prices are measures of relative value as well as signals to potential buyers and sellers.
If I stand up at a football game I can see better, so everyone can see better if we all
stand up.
My decision to purchase a coat depends on how many coats are available in Columbia.
Prices indicate scarcity.
A production possibilities frontier will immediately shift outward if demand increases
for the two products.
A point under or within the production possibilities curve indicates available resources
are fully utilized.
Opportunity cost is only relevant for business decisions.
Outputs are used to produce inputs.
10 points
41. a.) Draw market demand and supply for gold. What happens in this market when the
utility for stocks declines? ______demand ↑ or P ↑_______________________
P
S
P1
P0
D1
D0
0
Q0
Q
Q
6
b.) Use the decision rule or consumer equilibrium concept to explain the shift in
part A.
MU g > MU s
MC
MC
Matching – one point each
__S__ 42.
__G__ 43.
__D__ 44.
__H__ 45.
__E__ 46.
__B__ 47.
__I__ 48.
__J__ 49.
__T__ 50.
__C__ 51.
__F__ 52.
__R__ 53.
__Q__ 54.
__P__ 55.
__O__ 56.
__N__ 57.
__M_ 58.
__L__ 59.
__K__ 60.
__A__ 61.
Demand
Scarcity
Resource
Capital
Opportunity cost
Production possibilities
Productivity
Ceteris paribus
Scale
Slope
Economics
Supply
Equilibrium
Elasticity
Price
Utility
Margin
Total revenue
Substitute
Market
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
R.
S.
T.
Where exchange occurs
What could be produced
Rise ÷ Run
Used to produce other goods
Best foregone alternative
Decision analysis
Resources < wants
Input
Output per input
All else equal
Replacement good
Price times quantity demanded
Edge or where change occurs
Value to an individual
Measure of scarcity
Responsiveness
Current P&Q in market
Willingness and ability to sell
Buyers price-quantity relationship
A relative level of measurement
Multiple choice – two points each
__B___ 62. Consider the market for bread. If the price of wheat rises, then the
a.) demand curve for bread shifts leftward
b.) supply curve of bread shifts leftward
c.) price of bread falls
d.) equilibrium quantity of bread increases
e.) demand curve for bread shifts rightward
__A___ 63. Consider the market for wheat. If there is an improvement in harvesting
technology,
a.) the supply curve for wheat shifts rightward
b.) the demand curve for wheat shifts rightward
c.) the equilibrium price rises
d.) the demand curve for wheat shifts leftward
7
__A___ 64. If producers believe the price of leather shoes will decrease next year, today
a.) the supply curve for leather shoes shifts rightward
b.) the supply curve for leather shoes shifts leftward
c.) there is a movement along the supply curve for leather shoes
d.) the equilibrium price of leather shoes rises
e.) the equilibrium quantity of leather shoes falls
__B___ 65. In the market for peanut butter, if there is an increase in the price of bread (a
complement for peanut butter) along with a drought in peanut growing areas, the
a.) equilibrium quantity of bread increases
b.) equilibrium quantity of peanut butter definitely decreases
c.) equilibrium quantity of peanut butter might increase or might decrease
d.) equilibrium price of peanut butter definitely rises
e.) equilibrium price of peanut butter definitely falls
__B___ 66. The price elasticity of demand is a measure of
a.) the equilibrium price of a product
b.) buyers’ responsiveness to change in the price of a product
c.) the amount of a product purchased when income increases
d.) whether a product is a substitute or a complement
e.) how much a change in demand affects the equilibrium price
__A___ 67. When the percentage change in the quantity demanded is less than the percentage
change in price, then demand is
a.) inelastic
b.) unit elastic
c.) elastic
d.) irrelevant
e.) undefined
__B___ 68. The price elasticity of demand for wheat is less than one. If a drought caused the
supply curve for wheat to shift leftward, then
a.) wheat farmers’ total revenue will decrease
b.) wheat farmers’ total revenue will increase
c.) wheat farmers’ total revenue will not change
d.) the demand curve for wheat also will shift leftward
e.) all of the above
__B___ 69. If the demand for insulin is inelastic, an increase in insulin prices leads to
a.) less total revenue for insulin makers
b.) more total revenue for insulin makers
c.) no change in total revenue for insulin makers
d.) first a decrease, then an increase in total revenue for insulin makers
e.) none of the above
8
__B___ 70. If the price elasticity of demand for gasoline equals 0.3, then an increase in the
price of a gallon of gasoline from $3.10 to $3.30
a.) decreases total revenue
b.) increases total revenue
c.) leads to no change in total revenue
d.) makes the demand for gasoline elastic
e.) both answers b and d are correct
__B___ 71. Suppose the Oakland Raiders football team increases their season ticket prices
and total revenue from ticket sales falls. The demand for Raiders tickets is
a.) inelastic
b.) elastic
c.) unit elastic
d.) perfectly elastic
e.) perfectly inelastic
9