Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
William M. Boal
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MIDTERM EXAMINATION #1 VERSION C
"Introduction to Economics"
September 15, 2009
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing
calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be
correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points
are 100.
(2) “The government should run a balanced budget”
is an example of
a. a positive statement.
b. a normative statement.
c. both of the above.
d. none of the above.
(3) “A sudden fall in the government deficit might
deepen the recession” is an example of
a. a positive statement.
b. a normative statement.
c. both of the above.
d. none of the above.
(4) "Economic capital" or "physical capital" includes
a. shares of stock in corporations.
b. savings in bank accounts.
c. corporate bonds.
d. bulldozers and trucks.
e. all of the above.
(5) Consider the production function shown below.
As more labor is used, the marginal product of labor
a. decreases.
b. increases.
c. first increases, then decreases.
d. remains constant.
Number of workers
(6) Consider a factory's production possibility curve
shown below. As more of either good is produced,
the opportunity cost of that good
a. decreases.
b. increases.
c. first increases, then decreases.
d. remains constant.
Mobile phones
(1) The assumption in economics that people are
"rational" means that people
a. maximize their income.
b. use math to make decisions carefully.
c. ignore "soft" concerns like friendships and
charity.
d. do the best one can with what they have.
e. make sacrifices today for a better future.
Corn harvested per day
I. Multiple choice: Circle the one best answer to each question. [1 pt each, 19 pts total]
Computers
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
(7) Farm A can produce 100 units of corn or 200
units of soybeans. Farm B can produce 50 units of
corn or 150 units of soybeans. Which farm has a
comparative advantage in soybeans?
a. Farm A.
b. Farm B.
c. Both farms.
d. Neither farm.
(8) The U.S. and Japan both can produce rice and
electronics. If the U.S. has a comparative advantage
in rice,
a. Japan must have a comparative advantage in
electronics.
b. Japan may also have a comparative advantage in
rice because rice is easy to grow.
c. the U.S. may also have a comparative advantage
in electronics because its workers are so
productive.
d. All of the above are possible.
(9) Monetary exchange is more common today than
bartering because
a. bartering is a lost art.
b. bartering is often illegal whereas anything can be
legally bought and sold with money.
c. monetary exchanges are subject to less tax.
d. bartering requires a "double coincidence of
wants."
(10) If it is easy for buyers and sellers to
communicate and find out prices, and if any buyer is
permitted to trade with any seller, then the market
will
a. exhibit price dispersion.
b. have upward-sloping demand.
c. tend to obey the Law of One Price.
d. tend toward a price of zero.
(11) "Ceteris paribus" means
a. "holding other things constant."
e. "comparative advantage."
a. "the Law of One Price."
b. "assuming rational behavior."
(12) If the price of beef rises, and nothing else
affecting the demand for beef changes, then this will
cause
a. the demand curve for beef to shift left.
b. the demand curve for beef to shift right.
c. the demand curve for beef will to rotate
clockwise until it becomes upward-sloping.
d. a movement along the demand curve for beef.
Midterm Examination #1 Version C
Page 2 of 9
(13) A fall in consumers' incomes will tend to shift
the demand for bus rides to the right because bus
rides are, in economic terms,
a. an inferior good.
b. a complementary good.
c. a substitute good.
d. a normal good.
(14) Flour is made from wheat, so if the price of
wheat falls, the
a. demand for flour will shift left.
b. demand for flour will shift right.
c. supply of flour will shift left.
d. supply of flour will shift right.
(15) Computer hardware and computer software are
complements, so if the price of computer hardware
falls, then the
a. demand for software will shift left.
b. demand for software will shift right.
c. supply of software will shift left.
d. supply of software will shift right.
The next two questions refer to the graph below.
Supply
Price
$20
Demand
Quantity
(16) Consider the supply-and-demand diagram
above. If for some reason the price were $15, then
there would be
a. excess demand.
b. excess supply.
c. both excess demand and excess supply.
d. neither excess demand nor excess supply.
(17) Consider the supply-and-demand diagram
above. If for some reason the price were $15, then
a. the price would fall.
b. the price would rise.
c. the demand curve would shift right.
d. the supply curve would shift left.
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
(18) In autumn, the price of warm clothing rises and
the quantity sold increases. This could be caused by
a
a. rightward shift in the demand.
b. rightward shift in the supply.
c. leftward shift in the demand.
d. leftward shift in the supply.
Midterm Examination #1 Version C
Page 3 of 9
(19) Also in autumn, the price of peaches rises and
the quantity sold decreases. This could be caused by
a
a. rightward shift in the demand.
b. rightward shift in the supply.
c. leftward shift in the demand.
d. leftward shift in the supply.
II. Problems: Insert your answer to each question in the box provided. Please use the margins and graphs for
scratch work. Only the answers in the boxes will be graded. Work carefullypartial credit is not normally given
for questions in this section.
(1) [Production functions: 8 pts] A crew at a concession stand at the state fair serves ice-cream cones, with the
hourly production function shown in the first two columns below. Complete the table by computing the work crew's
average product and marginal product and placing your answers in the unshaded cells of the third and fourth
columns below. Then answer the question below.
Number of
workers
0 workers
Ice-cream cones
served per hour
0 cones
Average Product
Marginal Product
cones served
per worker
2 workers
12 cones
cones served
per worker
cones served
per worker
4 workers
32 cones
cones served
per worker
cones served
per worker
6 workers
60 cones
cones served
per worker
[2 pts] Is the work crew's production function characterized by diminishing
returns to their labor input? Answer “YES,” “NO,” or “CANNOT BE
DETERMINED. ”
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
Midterm Examination #1 Version C
Page 4 of 9
(2) [Production possibility curves: 14 pts] Suppose Country X has 3 million workers employed in making cellular
phones or bicycles. Each worker can produce 3 cellular phones per week or 4 bicycles per week. Use the table at
bottom for scratch work.
a. What is Country X's opportunity cost of a cellular phone?
bicycles
b. What is Country X's opportunity cost of a bicycle?
cellular phones
c. If Country X wants to produce 60 more cellular phones, must it increase or
decrease production of bicycles?
d. By how much?
e. If Country X wants to produce 60 more bicycles, must it increase or
decrease production of cellular phones?
f. By how much?
bicycles
cellular phones
g. Draw Country X's weekly production possibility curve precisely below,
using a straightedge.
12
Cellular phones (millions)
11
10
9
8
7
6
5
4
3
2
1
0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16
Bicycles (millions)
Scratch work
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
Midterm Examination #1 Version C
Page 5 of 9
(3) [Comparative advantage, gains from trade: 17 pts] Country A and Country B each produce refrigerators and
computers. They each face a tradeoff between these two products because their workforces are limited. Their
production possibility curves are shown below.
13
12
Country A
10
Country B
Refrigerators (millions)
11
9
8
7
6
5
4
3
2
1
0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22
Computers (millions)
a. [2 pts] What is Country A's opportunity cost of producing a computer?
refrigerators
b. [2 pts] What is Country B’s opportunity cost of producing a computer?
refrigerators
c. [2 pts] What is Country A's opportunity cost of producing a refrigerator?
computers
d. [2 pts] What is Country B’s opportunity cost of producing a refrigerator?
computers
e. [2 pts] Which country has a comparative advantage in producing
computers?
f. [2 pts] Which country has a comparative advantage in producing
refrigerators?
g. [3 pts] Fill in the blanks: Both countries can consume combinations of computers and refrigerators outside their
individual production possibility curves if ___________________________ produces and exports two million
refrigerators to ___________________________, which produces and exports ______________ million
computers in return.
h. [2 pts] Plot the trade that you propose in part (g) in the graph above.
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
Midterm Examination #1 Version C
Page 6 of 9
(4) [Market equilibrium: 12 pts] Suppose seven buyers and seven sellers engage in a market similar to the activity
Buyer
Bob
Barb
Ben
Bailey
Brian
Betty
Bert
Value
$15
$14
$13
$12
$ 3
$ 2
$ 1
Seller
Sue
Steve
Sam
Sven
Sarina
Sean
Sally
Cost
$ 1
$ 2
$ 2
$ 3
$ 5
$ 6
$ 6
$15
$14
$13
$12
$11
$10
Price
we did in class. Each buyer may buy at most one unit
and each seller may sell at most one unit, but no one is
forced to trade. Assume that buyers and sellers are
each trying to maximize their personal earnings (or
“gains from trade”). Earnings for each buyer equal
the buyer's value of the good minus the price paid.
Earnings for each seller equal the price received
minus the seller's cost of the good. Earnings of
persons who do not trade are zero. Buyers’ values
and sellers’ costs are given in the following table.
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
0
1
2
3
4
5
6
7
8
Quantity
Suppose with some experience, the market settles on a
single price. All trades are made at that price.
Use this graph for scratch work.
a. Suppose the price were $7. Would there be excess demand, or excess
supply, or neither?
b. What is the equilibrium price likely to be, in whole dollars?
$
c. How many units of the good will be sold in this market?
d. Compute the total revenue received by sellers (which equals the total
spending by buyers).
e. Compute the combined total earnings (or gains from trade) of all buyers
and sellers. (Check your answer carefully! No partial credit for being
"close"!)
f. Who enjoys higher earnings in this particular market, the buyers or the
sellers? Or are buyers’ total earnings equal to sellers’ total earnings?
units
$
$
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
Midterm Examination #1 Version C
Page 7 of 9
(5) [Shifts in demand and supply: 15 pts] Analyze each of the following markets in italics according to the
accompanying imaginary scenario. Indicate whether and how demand and supply curves shift. Also indicate how
the equilibrium price (P*) and quantity (Q*) move. Finally, sketch a graph of each scenario, showing the shifts in
curves.
Demand:
Supply:
P*:
Q*:
shifts left,
shifts left,
increases,
increases,
shifts right,
shifts right,
decreases, or
decreases, or
or no change?
or no change?
cannot be
cannot be
determined?
determined?
a. Frozen pizzas: The price of
mozzarella cheese rises. (Almost all
pizzas contain mozzarella cheese.)
b. Chicken: The price of beef rises.
c. Cotton clothing: A new fashion
trend favors natural fibers like
cotton. Simultaneously, a blight
raises the price of raw cotton.
a.
P
S
D
Q
b.
P
S
D
Q
c.
P
S
D
Q
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
Midterm Examination #1 Version C
Page 8 of 9
(6) [Market equilibrium, price controls: 12 pts] The following graph shows the labor market. Note that the hourly
wage rate is the price.
$40
$35
Hourly wage
$30
$25
$20
Dema nd
$15
Suppl y
$10
$5
$0
0
10
20
30
40
50
60
70
80
90 100 110 120
Workers employed (millions)
First, find the unregulated market equilibrium.
a. Find the equilibrium price.
b. Find the equilibrium quantity.
$
million
Second, suppose the government imposes a minimum wage rate (a type of price floor) of $15. No workers may be
hired for any lower wage.
c. Compute the number of workers demanded at this price.
million
d. Compute number of workers supplied at this price.
million
e. Will there be excess supply or excess demand with this price floor?
f. How much?
million
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2009
Midterm Examination #1 Version C
Page 9 of 9
III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). [3 pts]
(1) Suppose a price ceiling were placed on infant formula. Would this help ensure that more babies had access to
infant formula? Justify your answer with a supply-and-demand graph.
(2) Consider the following statement. "The United States produces more cars and more corn than Mexico.
Therefore, the United States cannot benefit from trade with Mexico in these goods." Assume the first sentence
is correct. Do you agree or disagree with the second sentence? Justify your answer.
Please circle the question you are answering. Write your answer below. Full credit requires correct economic
reasoning, legible writing, good grammar including complete sentences, and accurate spelling.
[end of exam]