ECON 202-504
Fall 2012
Quiz #1
Instructor: Jinkook Lee
Part I Short answer questions (15 points)
1) In economics, choices must be made because we live in a world of
.(1.5pt.)
2) In economics, the term ________ means "additional" or "extra." (1.5pt.)
3) Economists assume that individuals are rational and respond to
. (1.5pt.)
4) The production possibilities frontier shows
combinations of two products that
may be produced in a particular time period with available resources. (1.5pt.)
5) If the production possibilities frontier is linear, then opportunity costs are
of one good is produced. (1.5pt.)
as more
6) The law of demand implies, holding everything else constant, that as price of a good increases
will decrease. (1.5pt.)
7) When the price of a good falls, consumers buy a good more because of the ________ effect
and the ________ effect. (3pt.)
8) Market equilibrium is a situation in which
equals
. (3pt.)
Part II True or False questions (15 points)
1) The term market in economics refers to a group of buyers and sellers of a product and the
arrangement by which they come together to trade. (T/F) (1.5pt.)
2) The extra cost associated with undertaking an activity is called opportunity cost. (T/F) (1.5pt.)
3) Optimal decisions are made at the point where marginal cost equals zero. (T/F) (1.5pt.)
Figure 1 (For question 4-5 below)
4) (Refer to Figure 1) A movement from X to Y could occur because of an influx of immigrant
labor. (T/F) (1.5pt.)
5) (Refer to Figure 1) A movement from Y to Z is the result of advancements in food production
technology. (T/F) (1.5pt.)
6) Comparative Advantage is the ability of an individual, a firm, or a country to produce a good
or service at a lower opportunity cost than competitors. (T/F) (1.5pt.)
7) The basis for trade is absolute advantage, not comparative advantage. (T/F) (1.5pt.)
8)It is possible to have a comparative advantage in producing a good or service without having
an absolute advantage. (T/F) (1.5pt.)
9) Suppose that when the price of hamburgers decreases, the Ruiz family increases their
purchases of ketchup. To the Ruiz family, hamburgers and ketchup and substitutes. (T/F) (1.5pt.)
10) Surplus is a situation in which the quantity demanded is greater than the quantity supplied.
(T/F) (1.5pt.)
Part III (20 points)
Table 1
Hours
Open
1
2
3
4
5
6
Total
Revenue
(dollars)
$50
75
95
110
120
125
1) (Refer to Table 1) Lydia runs a small nail salon in the town of New Hope. She is debating
whether she should extend her hours of operation. Lydia figures that her sales revenue will
depend on the number of hours the nail salon is open as shown in the table above. She would
have to hire a worker for those hours at a wage rate of $10 per hour.
1-1) What is Lydia's marginal benefit if she decides to stay open for two hours instead of one
hour? (2pt.)
A) $25 B) $50 C) $75
D) $125
1-2) What is Lydia's marginal cost if she decides to stay open for two hours instead of one hour?
(2pt.)
A) $10 B) $20 C) $25
D) $40
1-3) Using marginal analysis, determine how many hours should Lydia extend her nail salon's
hours of operations? (2pt.)
A) 2 hours
B) 3 hours
C) 4 hours D) 5 hours
E) 6 hours
Table 2
Possible Output
Combinations
A
B
C
D
E
F
G
H
Cashews
(thousands of
pounds)
35
30
25
20
15
10
5
0
Almonds
(thousands of
pounds)
0
20
35
47
57
64
68
70
2) (Refer to Table 2) The Nut House produces only cashews and almonds. The table above
shows the maximum possible output combinations of the two nuts using all resources and
currently available technology.
2-1)Graph The Nut House's production possibilities frontier. Put almonds on the horizontal
axis and cashews on the vertical axis. Be sure to identify the output combination points on
your diagram. (3pt.)
2-2)Suppose The Nut House is currently producing at point C. What is the opportunity cost of
producing an additional 12,000 pounds of almonds? (2pt.)
2-3)Suppose The Nut House is plagued by a variety of white root-rot disease, which destroys
cashew trees but not almond trees. Show in a graph what happens to its PPF. (2pt.)
Figure 2
3) (Refer to Table 2) The figure above represents the market for canvas tote bags.
3-1) Assume that the market price is $35. Which of the following statement is true? (3pt.)
A) There is a surplus that will cause the price to decrease; quantity demanded will then increase
and quantity supplied will decrease until the price equals $25.
B) There is a surplus that will cause the price to decrease; quantity supplied will then increase
and quantity demanded will decrease until the price equals $25.
C) There will be a surplus that will cause the price to decrease; demand will then increase and
supply will decrease until the price equals $25.
D) There is a surplus that will cause the price to increase; quantity demanded will then decrease
and quantity supplied will increase until the price equals $25.
3-2) Assume that the price of tote bags is $15. Which of the following statement is true? (2pt.)
A) the quantity demanded exceeds the quantity supplied of tote bags by 75. The price will
eventually rise to $25 where quantity demanded will equal quantity supplied.
B) the demand exceeds the supply of tote bags by 55. Some consumers will have an incentive to
offer to buy tote bags at a higher price.
C) there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises to $25.
D) there is a shortage equal to 75 tote bags; the price of tote bags will rise until demand is equal
to supply.
3-3) Compare the conditions in the market when the price is $50 and when the price is $35.
Which of the following statement describes how the market differs at these prices? (2pt.)
A) At each price there is a surplus; the surplus is greater at $35 than at $50.
B) The difference between quantity supplied and quantity demanded is greater at $50 than at
$35.
C) At each price there is a surplus; firms will lower the equilibrium price in order to eliminate
the surplus.
D) At each price the supply of tote bags exceeds that demand for tote bags.
 5 Extra points
Statement: As the economy moves down the production possibilities frontier, it experiences
increasing marginal opportunity costs.
Prove the statement graphically and intuitively.
(If you can describe ECON 202-504 economy that we discussed in class, it will be perfect.)