Instructor: Brian B. Young

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1 Economics 212 Microeconomic Principles Exam No. 1 Date: 15 February 2012 Name The value of this exam is 100 points Instructor: Brian B. Young Please show your work where appropriate! Multiple Choice #1 2 points each One reason the demand for Chevrolet Malibus might increase is a a. decrease in price of Chevrolet Malibus. b. decrease in price of Ford Fusions. c. very successful advertising campaign for Chevrolet Malibus. d. poor quality performance record for Chevrolet Malibus. #2 When demand increases, there is a a. movement down along the demand curve. b. rightward shift of the entire demand curve. c. leftward shift of the entire demand curve. d. movement up along the demand curve. #3 The law of demand states that, other things remaining the same, if the price of a good rises, then the a. demand increases. b. demand decreases. c. quantity demanded decreases. d. quantity demanded increases. #4 The supply curve illustrates the law of supply because when the price increases, the a. supply increases. b. supply decreases. c. quantity supplied decreases. Page 1 of 7

2 d. quantity supplied increases. #5 If a substitute good is more narrowly defined (e.g., Chevrolet automobiles v. automobiles), then demand for that good is a. more elastic than for the more broadly defined good. b. more inelastic than for the more broadly defined good. c. unit elastic. d. Substitutes don t have any effect on elasticity. #6 Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then a. the demand for hot dogs will increase. b. the demand for hot dog buns will decrease. c. the quantity demanded of hotdogs will decrease. d. the demand for hot dog buns will increase. #7 A price ceiling set below the equilibrium price leads to a. a shortage. b. a surplus. c. an increase in the quantity bought and sold. d. no change in either the equilibrium price or the equilibrium quantity. #8 A price floor set below the equilibrium price results in a. a shortage. b. a surplus. c. an increase in the quantity bought and sold. d. no change in either the equilibrium price or the equilibrium quantity. #9 Over some price range, the demand for insulin is perfectly inelastic with respect to price. What will happen to the quantity demanded of insulin if the price increases within that range? a. The quantity demand will increase. b. The quantity demand will decrease. c. The quantity demanded will remain unchanged. d. More information is needed to make a definitive statement. Page 2 of 7

3 #10 In an indifference curve/budget line diagram, at the consumer equilibrium the slope of the budget line a. equals the slope of the indifference curve. b. is greater than the slope of the indifference curve. c. is less than the slope of the indifference curve. d. may be greater than, equal to, or less than the slope of the indifference curve. #11 In the 1930s, the U.S. economy suffered severely, with unemployment rates over 20 percent. During World War II in the early 1940s, Americans found that their living standards improved relative to what it had been in the recent past because a. production became more efficient in the war. b. the federal government forced Americans to produce more of both guns and butter. c. the economy put unemployed resources to work during the war. d. There is no way to explain this occurrence. #12 When the consumer is at his or her best affordable consumption point, it is the case that the marginal rate of substitution is a. greater than the relative price. b. equal to the relative price. c. less than the relative price. d. maximized #13 Suppose you have one point on a demand curve. To plot another point for this demand curve using a group of indifference curves, a. transfer all points from the indifference curve to the corresponding demand curve. b. horizontally sum the indifference curves. c. change the price of a good, rotate the budget line, and find the new best affordable point. This new price and quantity is another point on the demand curve. d. calculate the marginal rates of substitution from the indifference curve and transfer these values to the demand curve. #14 Points on a demand curve Page 3 of 7

4 a. reflect best affordable points along indifference curves. b. show diminishing marginal rate of substitution. c. show increasing marginal rate of substitution. d. show combinations of goods among which a consumer is indifferent. #15 The production possibilities frontier is the boundary between the a. goods and services that the economy can produce. b. attainable and unattainable combinations of goods and services. c. wanted and unwanted combinations of goods and services. d. rational and irrational choices facing a society. #16 People come to expect that the price of a gallon of gasoline will rise next week. As a result, a. today s supply of gasoline increases. b. today s demand for gasoline increases. c. the price of a gallon of gasoline falls today. d. next week s supply of gasoline decreases. #17 If we ignore the negative or positive sign, the midpoint method of calculating a percentage change in price between two points on a demand curve results in a. different percentages, depending on whether the price increases or decreases. b. the same percentage, regardless of whether the price increases or decreases. c. the price elasticity of demand. d. the price elasticity of supply. #18 Suppose the United Auto Workers bargained for higher wages and more benefits for autoworkers. As a result of the higher wages and increased benefits, a. the quantity of new automobiles supplied decreases. b. the supply of new automobiles decreases. c. the supply of new automobiles increases. d. None of the above answers is correct. #19 In the early 1900s, Ford produced its first automobile. The price of this car, the Model T, was a little over $1,000 while other automobiles sold for over $10,000. In spite of this low relative Page 4 of 7

5 price, Ford made a fortune by selling millions of Model Ts. What does this historical fact imply about the price elasticity of demand for automobiles in the early 1900s? a. It must have been highly inelastic. b. The price elasticity value for automobiles must have been equal to one. c. The demand for automobiles must have been highly elastic. d. None of these can explain why Ford made a fortune. #20 Economists use elasticity to measure the responsiveness of quantity to a change in price rather than just using the slope of the demand curve because elasticity is a. independent of the units of measurement. b. dependent on the units of measurement. c. easier to calculate. d. harder to calculate. #1 Short Answer 10 points each Consider the demand schedule for cigarettes in New York State below. Price per pack Quantity (millions) $1 70 $3 60 $5 50 $7 40 a. Calculate the price elasticity of demand for cigarettes when the price per pack rises from $3 to $5. b. Is the demand for cigarettes elastic or inelastic with respect to price? c. How has total revenue from the sale of cigarettes changed when the price per pack rises from $3 to $5? d. Which would be more elastic, the demand for cigarettes or the demand for Camel cigarettes? Why? Page 5 of 7

6 #2 Packs of cigarettes IC2 IC1 IC3 Cups of coffee Consider a consumer s preference mapping and budget line above: Suppose the price of coffee is $2.50 per cup. a. How much is the consumer s budget? b. How much is a pack of cigarettes? c. Which indifference curve (IC1, IC2, or IC3) is most preferred? d. What is the quantity of cigarettes and coffee consumed in equilibrium? #3 Page 6 of 7

7 The figure above shows the supply curve for pizzas. #4 a. What is the marginal cost of the 20th pizza? b. What is the minimum supply price of the 20th pizza? c. If the price is $6 per pizza, what is the producer surplus on the 20th pizza? d. If the price is $6 per pizza, what is the total producer surplus? e. If the price is $8 per pizza, what is the total producer surplus? f. If the price is $10 per pizza, what is the total producer surplus? Graphically show the effect on the equilibrium price and quantity of a product if the demand decreases and the supply simultaneously increases. #5 The price of crude oil is determined by the world market for oil where the price has risen from about $20 per barrel in 1996 to about $100 per barrel today. During the same period, the economies of China and India have grown at a phenomenal rate. Use supply and demand analysis to graphically explain how economic growth in these two countries has contributed to rising world crude oil prices. #6 Quantity demanded (tons of cat food per year) Price (dollars per pound of cat food) Quantity supplied (tons of cat food per year) The above table gives the demand and supply schedules for cat food. If the price is $3.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage or surplus, how much is the shortage or surplus? If $2.50 is the equilibrium price, what is the equilibrium quantity? Page 7 of 7

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