Student Last Name: Student First Name: PID: Honor Code Signature: Midterm 6/1/2012

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1 Economics Summer I (2012) Introduction to Economics Melati Nungsari UNC at Chapel Hill Student Last Name: Student First Name: PID: Honor Code Signature: Midterm 6/1/2012 Instructions: You have 90 minutes to complete this exam. This exam consists of 35 equally weighted questions. Answer all questions by both marking your Scantron sheet and by circling the correct answer on the examination itself. In the case of conflict, the Scantron answer is the official answer. You are allowed the use of a calculator but you may not use notes, books, cell phones or any electronic device. You may not talk with other students or look at the exam papers of other students. If you believe there is no right answer or more than one right answer to any question, explain your reasoning on the Appeals page. I will not consider an appeal unless you have recorded your argument on the exam sheet during the exam period. When you have finished the examination, sign the Honor Code Pledge. examination valid unless you sign the pledge. I will not consider an

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3 1. The production possibilities frontier illustrates A. the combinations of output that an economy should produce B. the combinations of output that an economy should consume C. the combinations of output that an economy can produce D. all of the above is correct 2. Which of the following is true of markets characterized by positive externalities? A. Social value exceeds private value, and market quantity exceeds the socially optimal quantity. B. Social value is less than private value, and market quantity exceeds the socially optimal quantity. C. Social value exceeds private value, and market quantity is less than the socially optimal quantity. D. Social value seldom exceeds private value; therefore, social quantity is less than private quantity. 3. In August, John spent $500 purchasing and repairing an old fishing boat which he plans to sell for $800 once the repairs are complete. In September, John discovers that he must make an additional repair costing $400 in order to make the boat worth $800 to potential buyers. He believes he can sell the boat without the additional repair for $300. John should A. Keep the boat but not make the repair since the original $500 is a sunk cost. B. Keep the boat after making the repair since it is not rational to spend $900 on repairs and then sell the boat for $800. C. Sell the boat without making the additional repair. D. Complete the repairs and sell the boat for $ Assume that Sally and Sam can produce either mixers or toasters. Table 1: Production of Sally and Sam Hours Needed to Make 1 Mixer Hours Needed to Make 1 Toaster Sally 8 5 Sam What is the opportunity cost for Sally in making 1 mixer? A. 8 5 toasters B. 5 8 mixers C. 5 8 toasters D. 8 5 mixers Page 3

4 5. Refer to Table 1. Two questions: What is the opportunity cost for Sam in making 1 toaster? Who has the absolute advantage in toaster-making? A. 1 2 mixers; Sam B. 2 mixers; Sally C. 2 toasters; Sally D. 1 2 mixers; Sally 6. Refer to Table 1. Now assume that Sam and Sally each have 40 hours available. If each person divides his/her time equally between the production of mixers and toasters, then total production is A. 2 mixers and 8 toasters B. 3.5 mixers and 6 toasters C. 5 mixers and 4 toasters D. 7 mixers and 12 toasters 7. Refer to Table 1. Which of the following combinations of mixers and toasters could Sam not produce in 40 hours? A. 0 mixers and 4 toasters. B. 1 mixer and 3 toasters. C mixers and 2.5 toasters. D. 2 mixers and 0 toasters. 8. Refer to Table 1. Suppose again that both Sam and Sally have 40 hours on their hands. We could use the information in the table to draw a production possibilities frontier for Sally and a second production possibilites curve for Sam. If we were to do this, measuring mixers along the horizontal axis, then A. the slope of Sally s production possibilities frontier would be -1.6 and the slope of Sam s production possibilities frontier would be -2.. B. the slope of Sally s production possibilities frontier would be and the slope of Sam s production possibilities frontier would be C. he slope of Sally s production possibilities frontier would be and the slope of Sam s production possibilities frontier would be 0.5. D. he slope of Sally s production possibilities frontier would be 1.6 and the slope of Sam s production possibilities frontier would be Melody s Chocolate Candy Store is maximizing profits in a perfectly competitive market by producing 2,000 candy bars per day. If Melody s fixed costs unexpectedly increase and the market price remains constant, then the short-run profit maximizing level of output is A. is less than 2,000 candy bars B. is more than 2,000 candy bars C. is still 2,000 candy bars D. becomes 0 Page 4

5 10. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the A. supply for marijuana is elastic B. demand for marijuana is elastic C. supply for marijuana is inelastic D. demand for marijuana is inelastic 11. Equilibrium price must decrease when A. demand decreases and supply decreases B. demand increases and supply decreases C. demand decreases and supply increases D. demand increases and supply increases 12. Scenario 1 Milk has an inelastic demand and beef has an elastic demand. Suppose that a mysterious increase in bovine fertility increases both the population of dairy cows and the population of beef cattle by 50 percent. The equilibrium price will A. increase in both the milk and beef markets. B. increase in the milk market and decrease in the beef market. C. decrease in the milk market and increase in the beef market. D. decrease in both the milk and beef markets. 13. Refer to Scenario 1. The equilibrium quantity will A. increase in both the milk and beef markets. B. increase in the milk market and decrease in the beef market. C. decrease in the milk market and increase in the beef market. D. decrease in both the milk and beef markets. 14. Refer to Scenario 1. The change in equilibrium price will be A. greater in the milk market than in the beef market. B. greater in the beef market than in the milk market. C. the same in the milk and beef markets. D. any of the above could be correct. 15. Refer to Scenario 1. The change in equilibrium quantity will be A. greater in the milk market than in the beef market. B. greater in the beef market than in the milk market. C. the same in the milk and beef markets. D. Any of the above could be correct. Page 5

6 16. If a 30 percent change in price causes a 15 percent change in quantity supplied, then the price elasticity of supply is about A. 0.5, and supply is elastic. B. 0.5, and supply is inelastic. C. 2, and supply is inelastic. D. 2, and supply is elastic. 17. What would happen to the equilibrium price and quantity of lattes if coffee shops began using a machine that reduced the amount of labor necessary to produce steamed milk (which is used to make lattes) and scientists discovered that coffee prevents heart attacks and informed consumers of their findings? A. Both the equilibrium price and quantity would increase. B. Both the equilibrium price and quantity would decrease. C. The equilibrium price would increase, and the effect on equilibrium quantity would be ambiguous. D. The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous. 18. Jeremy has been working at a donut store on Franklin Street called The Awesome Donut Store. They sell fried donut covered with sprinkles and they have been making positive and large economic profits since they opened. Today he opened his own shop, just two blocks away, to sell donuts covered with sprinkles. He is earning positive economic profits. What do you expect will happen to the price and quantity sold of the products at The Awesome Donut Store because of this competition? A. price will increase and the quantity sold will fall. B. price will fall and quantity sold will rise. C. price will increase and quantity sold will rise.. D. price will fall and quantity sold will fall. 19. As the price elasticity of demand approaches infinity, very small changes in price lead to A. very large changes in quantity demanded. B. very small changes in quantity demanded. C. no change in quantity demanded. D. None of the above is correct. 20. For which pairs of goods is the cross-price elasticity most likely to be negative? A. automobile tires and coffee B. peanut butter and jelly C. pens and pencils D. paperback novels and electronic books for e-readers Page 6

7 21. Questions will be based on the information provided here. The graph provides an illustration of the market for chewing gum. Answer the following questions. The equilibrium price and quantity in the market for chewing gum is A. (quantity 2, price 1200) B. (quantity 1200, price 2) C. (quantity 400, price 4) D. (quantity 4, price 400) 22. The consumer surplus and total surplus associated with the equilibrium for chewing gum is A. (400, 800) B. (200, 600) C. (600, 1000) D. (800, 200) 23. If the price of a pack of chewing gum were $3, the quantity supplied would be and there would be excess in the market. A. 400, demand B. 400, supply C. 200, demand D. 200, supply Page 7

8 24. Questions will be based on the information given in this question. Melanie owns a pesticide factory near Jordan Lake. She can sell a large can of pesticides for $100 each (no matter how many she sells). She has calculated her total costs for production and this is given below. Unfortunately, her factory discharges toxic waste into the lake which then harms the fish and water creatures in the lake. The Enviromental Protection Agency (EPA) has estimated the cost to clean up and the lake and it is given below as well. Table 2: Melanie s Costs of Production Cans of Pesticide Total cost to Sally ($) Cost to clean up lake ($) Assuming that the market for pesticides is perfectly competitive, how many cans of pesticide will Melanie produce to maximize profits? A. 100 B. 200 C. 300 D The cost of cleaning up the lake is an externality for Melanie. If the state government wishes to ensure that Melanie bore the cost of cleaning up the lake, how large of a per-can tax should it charge to Melanie s factory? A. $10 per can B. $20 per can C. $30 per can D. $40 per can 26. How many cans of pesticide should Melanie produce if she wished to produce the socially optimal quantity? A. 100 cans B. 200 cans C. 300 cans D. 400 cans 27. A firm in a monopolistically competitive market faces a A. downward-sloping demand curve because the firm s product is different from those offered by other firms. B. downward-sloping demand curve because there are only a few firms in the market. C. horizontal demand curve because there are many firms in the market. D. horizontal demand curve because firms can enter the market without restriction. Page 8

9 28. A firm that is the sole seller of a product without close substitutes is A. perfectly competitive B. monopolistically competitive C. an oligopolist D. a monopolist 29. Questions are based on the information that is provided here. Suppose that a firm in a perfectly competitive market faces the following demand schedule and costs: Price Quantity Total Cost $5 0 $ In order to maximize profits, the firm should stop producing after it makes the A. first unit. B. second unit. C. fourth unit. D. fifth unit. 30. Marginal revenue equals marginal cost when the firm producers A. 2 units B. 3 units C. 4 units D. 5 units 31. The marginal revenue from producing the 4th unit equals i) $5 ii) the price iii) the marginal cost A. (i) only B. (i) and (ii) only C. (ii) only D. (i), (ii), (iii) Page 9

10 32. If the firm is producing 2 units of output, it should A. produce more units of output because its marginal revenue is greater than its marginal cost. B. produce fewer units of output because its marginal revenue is less than its marginal cost. C. produce more units of output because its marginal revenue is less than its marginal cost. D. produce fewer units of output because its marginal revenue is greater than its marginal cost. 33. If the firm is producing 5 units of output, it should produce A. more units of output because its marginal revenue is greater than its marginal cost. B. fewer units of output because its marginal revenue is less than its marginal cost. C. more units of output because its marginal revenue is less than its marginal cost. D. fewer units of output because its marginal revenue is greater than its marginal cost. 34. Marcia is a fashion designer who runs a small clothing business in a perfectly competitive industry. Marcia sells 10 identical dresses per month. Her monthly total revenue is $5000. The marginal cost of making a dress is $400. In order to maximize profits, Marcia should A. make more than 10 dresses per month. B. make fewer than 10 dresses per month. C. continue to make 10 dresses per month. D. We do not have enough information with which to answer the question. 35. You and your friend Joe have identical tastes. At 2 p.m., you go to the local Ticketmaster outlet and buy a $30 ticket to a concert in Raleigh. Joe plans to attend the same concert, but plans to buy his ticket at the venue for $25 (no Ticketmaster surcharge). At 4 p.m., an unexpected ice storm begins, making the drive to Raleigh much less attractive than before (but assuring the availability of good seats). If both you and Joe are rational, is one of you more likely to attend the concert than the other? A. Joe is more likely to go because he has a higher marginal benefit. B. You are more likely to go because you have a lower marginal cost. C. Joe is more likely to go because he has a lower marginal cost. D. You are more likely to go because you have a higher marginal benefit. Page 10