Dr. Barry Haworth
University of Louisville
Department of Economics
Economics 201
Fall 1998


Midterm #1

(Questions and Solutions)


Exam Solutions: The multiple choice answers (for Version A) are given in boldfaced print and the short answer question answers (for Version A) are given below each question.


1. Economic analysis is best designed to answer which question:
a. why goods and services are so scarce
b. what are the scarce factors and resources in different countries
c. why do people have unlimited wants when they buy goods and services
d. how should scarce goods and services be allocated amongst demanders with unlimited wants


2. When discussing Marginal Cost or Marginal Benefit, the word "marginal" means:
a. a small change
b. average
c. monetary
d. equal


3. Each student's opportunity cost of attending UofL is:
a. the monetary cost of paying tuition
b. the monetary cost of paying tuition and buying books and supplies
c. other activities that must be sacrificed if the person is to attend college
d. the extra time each student now must spend in studying for exams


4. What is the best description of the term normative economic analysis
a. where economic situations are described but opinions are left out
b. where one's personal views will impact their analysis of an economic event
c. where economic situations are described objectively
d. where one describes how various curves within a model will shift as events take place


5. On the production possibilities curve (PPC), points located outside the curve are:
a. inefficient points
b. equilibrium points
c. efficient points
d. unattainable points


6. The best definition of equilibrium is:
a. a point where there is no tendency toward change
b. the point where output occurs within a market
c. when the economy is producing along its PPC
d. the condition that determines the price in a market
e. both b and d are correct


7. In economic analysis, what purpose do models serve?
a. allow for prediction of future events
b. allow an analyst to explain how one variable will affect another variable
c. allow an analyst to explain why certain events occurred
d. all of the above


Questions #8-10 refer to the following PPC situation:
The island of Togo can produce either 4 units of shoes or 8 units of bananas. The island of Fiji can produce either 4 units of shoes or 12 units of bananas.

8. Which statement about Togo is true:
a. Togo has a comparative advantage in producing shoes
b. Togo has a comparative advantage in producing bananas
c. Togo has the absolute advantage in producing shoes
d. Togo has the absolute advantage in producing bananas


9. If unskilled labor from Fiji migrate to Togo, then which statement is true:
a. Togo's PPC will not shift, because the labor is unskilled
b. Togo's PPC will shift out, but production won't necessarily increase
c. Togo's PPC will shift in, but production won't necessarily decrease
d. Togo's PPC will not shift, because the unskilled workers will be unemployed


10. If a labor saving innovation occurs in Fiji's banana production, then what will happen?
a. The innovation will switch the absolute advantage in banana production to Fiji
b. The innovation will give Fiji a comparative advantage in shoe production
c. The innovation will shift Fiji's PPC outward (increase) for bananas but inward (decrease) for shoes
d. The innovation doesn't change Fiji's comparative advantage in banana production


Questions #11-12 are taken from the PPC relationship in the table below.


11. Between pts. C and D, what is the opportunity cost of each automobile?
a. 2 tractors
b. 12 automobiles
c. 1/6 tractor
d. 6 tractors
e. none of the above


12. Between pts. D and E, what is the opportunity cost of each tractor?
a. 16 automobiles
b. 2 tractors
c. 1/8 automobile
d. 8 automobiles
e. none of the above


13. A country is currently producing along (on) its PPC. If the country is suddenly able to produce more of both goods, which explanation must be true?
a. This country is specializing.
b. The productivity assocated with producing both goods is lower.
c. There was an increase in comparative advantage for both goods.
d. More laborers are available to produce both goods.


14. If a rancher produces only hamburgers, and a farmer produces only french fries, the ranch and farmer:
a. cannot gain from trade
b. could gain from trade when one or both have an absolute advantage
c. could gain from trade because each would enjoy a greater variety of food
d. could gain from trade only if each is producing both goods


15. If Michael Jordan is a better basketball player and lecturer than Professor Haworth:
a. then Michael Jordan's opportunity cost of playing basketball and lecturing is less than that of Professor Haworth
b. then Michael Jordan would be better off playing basketball and lecturing
c. then Michael Jordan will have a comparative advantage in both goods
d. then Michael Jordan and Professor Haworth may benefit from specialization and trade


16. Falling production costs had what effect on the VHS video manufacturing market?
a. increase in demand for videos
b. decrease in demand for videos
c. increase in supply of videos
d. decrease in supply of videos


17. How would a decrease in movie theatre ticket prices (e.g. providing a matinee performance) affect the market for popcorn and candy?
a. increase in demand, since these are complements
b. decrease in demand, since these are complements
c. increase in demand, since these are substitutes
d. decrease in demand, since these are substitutes


18. Cable TV and VCRs have had an adverse effect on movie theatre attendance. What relationship between these goods and movie theatres would cause such a result?
a. they are demand-related substitutes
b. they are demand-related complements
c. all are normal goods
d. all are inferior goods
e. all are goods with elastic demand


19. Count Footula is a foot-fetish video in the pornographic video market (and no, I haven't seen it). If this video has an income elasticity that equals -1.2, then it:
a. is a normal good
b. is an inferior good
c. is a luxury
d. is income elastic
e. both b and d are correct


20. The pornographic video industry is one of the few industries where women are paid substantially more than men (for comparable "work"). Suppose government wanted to rectify this problem with a price floor. How would a price floor affect the average actor, if the average actor makes only $25,000 per year:
a. would cause a shortage of actors, if the floor was set at $20,000
b. would have no effect on the average actor if the floor was set at $30,000
c. would cause a surplus of actors, if the floor was set at $30,000
d. both a and c are possible
e. both b and c are possible


21. The X-files TV series has expanded from being just a television show to producing a feature length movie as well as provide video tapes of certain episodes. What direct effect would producing this movie have on the market for these video tapes:
a. decrease the price of the videos, if more consumers buy the videos after watching the movie
b. increase demand, as the number of possible consumers increases after watching the movie
c. increase supply, after paying such high salaries to the movie's actors
d. decrease demand, since the price of substitute goods is much higher


22. According to the textbook, a "Price" acts as:
a. an incentive to sellers
b. a constraint to buyers
c. a way of placing a number on the value that a consumer places on a good or service
d. all of the above


23. All other things held constant, when the price of a good falls, the quantity supplied of that good also falls. This illustrates:
a. the law of supply
b. the law of demand
c. the law of increasing costs
d. the law of nature


24. Suppose Ford and the United Auto Workers sign a new wage contract, where Ford pays less of the workers' health care costs. How would the market for new cars be affected?
a. increase in the demand for new cars
b. decrease in the supply of new cars
c. increase in the supply of new cars
d. decrease in the demand for new cars


25. What is the direct effect of placing a price ceiling above the equilibrium price?
a. quantity demanded is greater than quantity supplied
b. quantity demanded is equal to quantity supplied
c. quantity supplied is greater than quantity demanded
d. the equilibrium price will increase


26. What is a possible indirect effect from rent controls in Louisville?
a. related rental markets experience an increase in demand as people leave Louisville because of the lack of rental housing
b. related rental markets experience a decrease in demand as people leave these markets to occupy low rent housing in Lousiville
c. increase in the supply of rental housing in Louisville, to keep up with the high demand
d. falling rents will occur in Louisville


27. In market Z, constant technological change causes supply to grow at a quicker rate than demand. If a price ceiling is placed below the equilibrium price in market Z, then what effect do you expect to see if the ceiling is left unchanged for a period of 10 years?
a. a worsening shortage over time
b. a worsening surplus over time
c. a lessening shortage over time, which may eventually be zero
d. a lessening surplus over time, which may eventually be zero


In answering questions #28-30, choose only the response that is always true

28. If good B's own price elasticity of demand is -0.96, then good B is a(n):
a. complement
b. substitute
c. normal good
d. inferior good
e. inelastic good


29. A luxury is also a(n):
a. complement
b. substitute
c. normal good
d. inferior good
e. inelastic good


30. What does a positive cross price elasticity imply:
a. complement
b. substitute
c. normal good
d. inferior good
e. inelastic good


The following information about Good X corresponds with Questions #31-32.
If the price of Good X increases by 5%, then 4% less of it is sold. If Good Y's price increases by 5%, then 8% less of Good X is sold.

31. What is the income elasticity of Good X:
a. -0.625
b. -0.8
c. -1.6
d. 1.6
e. not enough information given to provide an answer


32. What is the (own) price elasticity of demand for Good X:
a. -0.625
b. -0.8
c. -1.6
d. 1.6
e. not enough information given to provide an answer


33. When a per unit (commodity) tax is placed on suppliers in a market, what is the result?
a. decrease in demand
b. increase in demand
c. increase in supply
d. decrease in supply


34. A per unit (commodity) tax is placed on broccoli and candy bar suppliers. If the demand curve for candy bars is more elastic than the demand curve for broccoli, then:
a. consumers will pay more of the per unit tax on candy bars than on broccoli
b. consumers will pay more of the per unit tax on broccoli than on candy bars
c. consumers always bear the entire burden from any sales tax
d. the quantity demanded for candy bars will rise by more than that for broccoli


35. A per unit (commodity) tax is placed on the suppliers of a certain product. If the demand curve for this product is completely horizontal, then what do you expect to happen:
a. suppliers will bear the entire burden of the tax, consumers will bear nothing
b. consumers will bear the entire burden of the tax, suppliers will bear nothing
c. consumers and suppliers will each bear some of the tax burden
d. the consumers will bear a greater burden from the tax than suppliers


36. Willingness to pay measures
a. the value that a buyer places on a good
b. what a buyer is willing to pay for a good minus the amount the buyer actually pays for it
c. what a seller receives for a good, minus the minimum amount the seller is willing to pay
d. the maximum amount a buyer is willing to pay, minus the amount the seller is willing to accept


37. Consumer surplus is
a. the quantity of a good consumers get but did not have to pay for
b. the amount a consumer does pay, minus the amount the consumer is willing to pay
c. the amount a consumer is willing to pay, minus the amount the consumer did pay
d. the total value of a good to a consumer


38. Every time a consumer buys a good or service
a. he/she gains consumer surplus
b. his/her willingness to pay is less than his/her consumer surplus
c. he/she paid more than he/she was willing to pay
d. all of the above are always correct
e. none of the above are always correct


39. Consumer equilibrium occurs where (when):
a. a consumer spends less than their income (i.e. saves money)
b. a consumer's income equals their expenditure (i.e. doesn't save money)
c. the satisfaction from the last unit purchased (of a good) equals the good's price
d. the total satisfaction from all purchases equals the overall amount spent


40. Producer surplus measures
a. what sellers received in excess of the market price
b. the benefit to sellers of participating in a market
c. the difference between a consumer's willingness to pay the seller and the market price
d. all of the above




Short Answer Questions
1. Country A can produce 100 units of corn or 200 units of shoes. Country B can produce 200 units of corn and 400 units of shoes. Who has a comparative advantage in producing shoes? Show your work, and explain your answer.

Neither country has a comparative advantage in corn or shoes because their opportunity costs are the same for each good. See the calculations (and comparisons) below.




Questions #2 and 3 use the following information:
The demand and supply curves below describe the U.S. market for sequined, white Elvis shirts.

Demand:     P = 100 - 2Qd
Supply:     P = 20 + 8Qs

2. What is the equilibrium price and quantity for Elvis shirts in the U.S.?

Set Demand equal to Supply (and drop the subscripts for now):

100 - 2Q = 20 + 8Q

Solve for Q*:
Q* = 8

Plug Q* into Demand or Supply, and solve for P*
P = 100 - 2(8) = $84



3. What effect does a $60 price ceiling have on this market?
In your answer, state the amount of any surplus or shortage (and show your work).

Since the price ceiling is set below the equilibrium price of $84, it will cause a shortage (of 15 units). When producers must charge the price ceiling price of $60, then we can determine their output (quantity supplied) by looking at the supply curve.

To find Qs, set the Supply equation equal to $60 and solve for Qs:

$60 = 20 + 8Qs
Qs = 5

To find out how much people want to buy at a price of $60, set the Demand equation equal to $60 also, and solve for Qd:

$60 = 100 - 2Qd
Qd = 20

Any shortage is measured as the difference between quantity demanded and quantity supplied: Qd - Qs = 20 - 5 = 15.



Use the following stock information (taken from the Wall Street Journal) as you would have seen it when completing the second homework assignment from class.


4. Noting how the (final) price and quantity of each stock changes from day to day, state whether each stock is experiencing a decrease in demand, increase in demand, decrease in supply or increase in supply.

a. IBM

(close) Price decreased and (Vol) quantity increased, which implies an increase in supply

b. PepsiCo

Price decreased and quantity decreased, which implies a decrease in demand

c. Coca Cola Ent.

Price increased and quantity increased, which implies an increase in demand

d. Gen Motors

Price decreased and quantity decreased, which implies a decrease in demand

(for part d, on Version A, some people noticed that Net Chg shows a price increase, so I tried to give the appropriate credit to people -- if they pointed this out)