Principles I, Economics 2610 Exam #1 Summer, 2006

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1 Principles I, Economics 2610 Dr. Porter Exam #1 Summer, 2006 Last Name First Name 1. (4 pts.) Why is there scarcity? 2. (5 pts.) Assume you and a friend are watching a movie together. Would the opportunity cost of watching the movie be the same for both of you? Explain. 3. (6 pts.) On the graph below draw a production possibilities frontier that exhibits increasing opportunity cost. Identify two points: one at which society is not achieving productive efficiency and one where productive efficiency was achieved. Clearly identify both points. Rice Wheat

2 4. (4 pts.) Given the table below, answer the following. Number of parking lots Corn production A. What is the opportunity cost of the third parking lot? B. he table exhibits (pick one): increasing costs constant costs 5. (6 pts.) Given the following, find the equilibrium price and quantity (show your work): Q D = P Q S = 4P At a price of $5 will there be excess supply or excess demand? Explain your answer. 6. (4 pts.) Why would a market not be in equilibrium if the price were above the equilibrium price? How would you expect the price to change?

3 7. (10 pts.) he graphs below show the market for butter. Show how the graphs would change given the new assumptions by drawing a line on the graph. hen answer the following questions. A. he price of margarine rises. D S P Q here was a change in (check one): demand the quantity demanded here was a change in (check one): supply the quantity supplied B. he price of milk rises. D P S here was a change in (check one): demand the quantity demanded here was a change in (check one): supply the quantity supplied 8. (6 pts.) On the graph below draw a demand curve that is perfectly inelastic. How will consumers respond to a change in the price of a good with a perfectly inelastic demand? P Q Q

4 9. (4 pts.) Given the demand schedule shown below, what is the elasticity of demand between a price of 1 and a price of 2? Price Quantity (5 pts.) Assume that a consumer has an income of $400 per week, the price of a compact disk is $20 per CD, and the price of overcoats is $80. Draw a budget line representing the combinations of CDs and overcoats a consumer can buy in a week. Identify the numerical values of the intercepts. Assume the price of overcoats falls to $50. Draw a new budget line reflecting the drop in price. CDs Overcoats 11. (4 pts.) Given the original prices in the previous question, what is the slope of the budget line? How does it represent the tradeoff faced by the consumer? 12. (4 pts.) Define the term "marginal utility". 13. (5 pts.) How can a change in price result in an income effect?

5 14. (5 pts.) he chart below represents a consumer s preferences for strawberries and peaches. Assume the price of strawberries is $4 per quart, the price of peaches is $2 per pound, and the consumer has an income of $10. If the consumer is buying 2 quarts of strawberries and 1 pound of peaches is she maximizing her utility? Explain your answer. Quarts of MU of Pounds of Peaches MU of Peaches Strawberries Strawberries

6 15. (40 pts.) Put an "X" directly on the "" if the statement is true, and an "X" on the "F" if it is false. F Even Bill Gates faces scarcity. F Economists would classify a piece of manufacturing equipment as capital. F If the economy goes into a recession and there are very high rates of unemployment the economy will be at a point inside the production possibilities frontier. F he economy achieves allocative efficiency when the mix of goods produced matches preferences of consumers. F Improvements in technology will shift the production possibilities frontier inward. F Adam Smith believed that the use of resources needed to be regulated by the government to prevent the economy from degenerating into a state of chaos. F In a communist system all property is owned privately. F In a command economy decisions on how to allocate resources are made by markets. F he US economy allocates resources solely through market capitalism. F Profits provide firms with an incentive to produce goods consumers want and to use resources in an efficient manner. F In a perfectly competitive market the behavior of any individual consumer or producer will have no effect on the market price. F Price floors can cause shortages. F If macaroni and cheese is an inferior good, demand for macaroni and cheese will fall if consumers incomes go down. F A change in stock prices, by changing consumers wealth, could cause a change in the demand for a good. F If goods A and B are complements, an increase in the price of B will cause the demand for A to fall. F If the elasticity of demand is -2, this means a one percent increase in price would result in a two percent reduction in the amount consumers want to buy. F Demand for a good is more inelastic when there are no close substitutes for the good. F When the share of income consumers spend on a good is smaller, demand for the good will be more inelastic. F If the price of a good rises, and both prices are in the elastic portion of the demand curve, total expenditures will fall F If the income elasticity of a good is negative, the good is a normal good.

7 F If the cross-price elasticity of two goods is positive, the goods are complements. F In the long run the firm will choose the mix of capital and labor that minimizes the cost of producing the quantity of output they expect to sell. F If all prices double and the consumer's income doubles the budget constraint will be unchanged F It is possible to construct an objective measure of utility. F Marginal utility always rises with each successive unit of a good. F When a good is an inferior good and the price rises, the income effect will lead the consumer to purchase more of the good and the substitution effect will lead the consumer to buy less of the good.

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