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ECO201: PRINCIPLES OF MICROECONOMICS

FIRST MIDTERM EXAMINATION

Prof. Bill Even

March 7, 2016

FORM 1

Directions

1. Fill in your scantron with your unique-id and the form number listed on this page. Proper

completion of this step of the directions is worth the equivalent of one question.

2. There are 41 multiple choice questions. All answers should be recorded on the scantron

sheet. No credit will be given for answers placed elsewhere. Record your answers on the

exam as well because this will be the record of your answers which you can use to determine

which questions you got right or wrong on the exam.

3. A calculator is allowed. Cell phones or any other electronic device are prohibited. Access to

any electronic device other than a calculator will be treated as a case of academic dishonesty.

4. You have until the end of the class period to finish the exam and complete the scantron.

Additional time may be purchased at a price of 5 percentage points per minute.

5. When you finish the exam, turn in your scantron to the proctor and place your exam in

the pile that corresponds to the row that you sit in for class.

P a g e | 2

Suppose there is a small island economy with 20 Redhawks and 20 Bobcats. The

production possibilities curves for one Redhawk and one Bobcat are given below.

1) The absolute advantage in fish is held by the group of _____ and the absolute advantage in

berries is held by the group of _____.

a. Redhawks; Bobcats b. Redhawks; Redhawks

c. Bobcats; Redhawks d. Bobcats; Bobcats

2) The comparative advantage in fish is held by the ______ and the comparative advantage in

berries is held by the ______.

a. Redhawks; Bobcats b. Redhawks; Redhawks

c. Bobcats; Redhawks d. Bobcats; Bobcats

3) If the economy is organized efficiently and produces 150 bushels of berries per day, what is

the maximum amount of fish it can produce in a day?

a. 200 b. 300 c. 400 d. none of the above.

Number of fish

Bushels of berries 10

15

20

Redhawk

Bobcat

5

P a g e | 3

Suppose there is a small island economy with 20 Redhawks and 20 Bobcats. The

production possibilities curves for one Redhawk and one Bobcat are given below.

4). Suppose the economy is operating on its production possibilities frontier and producing 150

bushels of berries per day. If it increases berry production by 1 bushel, the opportunity cost of

the extra bushel of berries will be _____ fish.

a. 1/2 b. 2 c. 3 d. 1/3

5). For the economy described, a combination of 250 berries and 150 fish would be:

a. productively inefficient

b. productively efficient

c. impossible to produce without more resources or better technology

d. it is impossible to determine whether it is productively efficient without more information.

Number of fish

Bushels of berries 10

15

20

Redhawk

Bobcat

5

P a g e | 4

To answer the next 3 questions, note that t-bone and ribeye steak are produced from different

parts of beef livestock. Also, most people dining out would consider t-bone and ribeye steak as

substitutes.

6) Based on this information, t-bone and rib-eye steak are:

a. complements in consumption, but substitutes in production

b. complements in consumption and production

c. substitutes in consumption and production.

d. complements in production, but substitutes in consumption

7) Suppose that the demand for t-bone steak increases. Given the effect on the equilibrium

price and quantity of t-bone steak, this should cause the demand for ribeye steak to ____ and the

supply of ribeye steak to ____.

a. rise; fall

b. fall; rise

c. rise; rise

d. none of the above

8) If the demand for t-bone steak rises at the same time that the supply of t-bone steak rises, we

know that:

a. the equilibrium price of t-bone steak will definitely rise

b. the equilibrium quantity of t-bone steak will definitely rise

c. the equilibrium price of t-bone steak could rise or fall, but the equilibrium quantity will

definitely rise

d. the equilibrium quantity of t-bone steak could rise or fall, but the equilibrium price will

definitely rise

9) Suppose that the price of oil fell and the quantity sold rose sharply over the past month.

Which of the following could explain this?

a. consumer incomes fell assuming that oil is a normal good.

b. consumer income rose assuming that oil is a normal good

c. the price of an input used in oil production fell sharply

d. none of the above.

P a g e | 5

To answer the next 3 questions, consider the following information. Since the 1970s, the U.S.

federal government has subsidized companies that produce ethanol. Ethanol is a fuel produced

from corn. Ethanol can be used instead of gasoline to fuel a car. Some presidential candidates

(e.g. Ted Cruz) have called for the elimination of ethanol subsidies.

10) If the ethanol subsidy is eliminated, we should expect corn prices would ____ and corn

production would ____.

a. rise; fall

b. rise; rise

c. fall; fall

d. fall; rise

11) Since either gasoline or ethanol can used to fuel a car, we should expect that elimination of

the ethanol subsidy would cause the production of gasoline to ____ and the price of gasoline to

___.

a. rise; fall

b. rise; rise

c. fall; fall

d. fall; rise

12) Many farmers can use their resources to grow either corn or beans. If the ethanol subsidy is

eliminated, we should expect this to cause bean prices to _____ and bean production to ____.

a. Rise; rise

b. Rise; fall

c. Fall; rise

d. Fall; fall

13) Suppose there is a surprise announcement that a large share of the orange crop that is going

to be harvested next month could be wiped out by unexpectedly cold weather. The effect of

this announcement on orange prices today is that the demand for oranges would ___ and the

supply of oranges would -___.

a. rise; rise.

b. rise; not change

c. not change; rise

d. none of the above

P a g e | 6

14) Suppose that the equilibrium price of bananas is currently $1 per pound. Which of the

following would be TRUE?

a. a price ceiling of $1 would lead to a shortage if the demand for bananas falls

b. a price floor of $1 would lead to a surplus if the demand for bananas fall

c. a price floor of $1 would lead to a surplus if the supply of bananas falls

d. all of the above.

15) Several years ago, Netflix increased the price of its service by approximately 60 percent

and saw its number of subscribers drop from 23 million to 22 million. Based on this

information, what is the price elasticity of demand for Netflix?

a. .03 b. .07 c. 2.1 d. 13.5

16). Amazon.com has been gradually increasing its presence in the market for video streaming

and now competes with Netflix. The entry of Amazon into this market should cause:

a. the income elasticity of demand for Netflix to increase.

b. the income elasticity of demand for Netflix to decrease.

c. the price elasticity of demand for Netflix to increase.

d. the price elasticity of demand for Netflix to decrease.

17) Amazon’s Kindle Fire is a tablet pc that competes with the i-pad. Some commentators

point out that the Kindle Fire could increase demand for other Amazon products since the

Kindle Fire will make it easier to purchase products from Amazon. With this information

about the Kindle Fire, you can conclude that the cross price elasticity between the Fire and the

I-pad is _____ and the cross price elasticity between the Fire and other Amazon products is

______.

a. negative; negative.

b. negative; positive.

c. positive; positive.

d. positive; negative

18) Amazon.com introduced the Kindle Fire at a price of $199. If the price elasticity of

demand for the Kindle Fire is 0.6, a 10 percent reduction in the price of the Kindle Fire would

increase the number of units sold by

a 6 percent and increase total sales revenue.

b. 6 percent and decrease total sales revenue.

c. 4 percent and decrease total sales revenue.

d. 4 percent and increase total sales revenue

P a g e | 7

19) A hotel discovered that when it cut the prices of its rooms by 10 percent for weekend

reservations, the total revenue from rooms booked rose by 15 percent. Based on this

information, we can conclude that the price elasticity of demand for rooms on the weekend is:

a. .67

b. 1.5

c. 2.5

d. 3.0

20) The income elasticity of demand for an inferior good is ______ and for a luxury good is

____.

a. positive; greater than one.

b. negative; greater than one.

c. negative; between zero and one.

d. positive; less than negative one.

21) A decrease in storage costs will make supply (more, less) elastic ______ and cause the

price of the product to be (more, less) responsive to a change in demand.

a. more; more

b. more; less

c. less; more

d. less; less

22) Ben is willing to pay $4 for his first slice of pizza and $3 for his second slice of pizza. If the

market price is $1 and Ben two slices of pizza , he receives a total consumer surplus of

a. $5.

b. $4.

c. $3.

d. $2

23) If production is at the allocatively efficient level,

a. there is no deadweight loss

b. the sum of consumer and producer surplus is maximized

c. the social marginal benefit of another unit of the good equals the social marginal cost

d. all of the above

P a g e | 8

To answer the next 3 questions, refer to the diagram below describing the apartment rental

market.

24) In the above figure, if the rental price of an apartment is $1000, consumer’s surplus would

be:

a. $500,000

b. $750,000

c. $1,000,000

d. none of the above

25) In the above figure, if output increased from 3,000 to 4,000 apartments, the additional cost

of supplying the apartments would be _____ and the additional benefits to renters from those

apartments would be ____.

a. $625,000; $875,000

b. $875,000; $625,000

c. $1,000,000; $500,000

d. none of the above.

26) In the above figure, if there were rent controls imposed that prohibited rents above $500

per month,

a. there would be a shortage of 1,000 rental apartments

b. there would be a shortage of 2,000 rental apartments

c. there would be a surplus of 1,000 rental apartments

d. there would not be a shortage or a surplus since the rent control would not be binding.

P a g e | 9

To answer the next 2 questions, refer to the diagram below describing the apartment rental

market.

27) In the above figure, if the rental market was not originally regulated and a rent ceiling of

$500 was imposed, the surplus received by landlords would ______ and the surplus received by

renters would _____.

a. decrease $500,000; decrease $500,000.

b. decrease $375,000; increase $375,000

c. decrease $625,000; increase $375,000

d. none of the above

28) In the above figure, if there was no rent ceiling but the government imposed a monthly tax

of $250 on landlords for every apartment that they own, the equilibrium rent paid by renters

would

a. not change

b. rise by less than $250

c. rise by $250

d. rise by more than $250.

P a g e | 10

29) Suppose that the city of Cincinnati imposes a $10 per night tax on any hotel room that is

rented. The tax applies only to hotels within city limits. Just beyond city limits, there are

hotels that are exempt from the tax. Based on this information, we should expect that the

consumer share of the $10 hotel tax will be (greater, lesser) at hotels near the city limits since

demand will be (more, less) elastic.

a. greater; more

b. greater; less

c. lesser; more

d. lesser; less

30) If a city imposes a hotel tax, the revenue generated by the tax will be greater when hotel

supply is (more, less) inelastic or when hotel demand is (more, less) inelastic.

a. more; more

b. more; less

c. less; more

d. less; less

31) If a city imposes a hotel tax, the deadweight loss from the tax will be greater when hotel

supply is (more, less) inelastic and when hotel demand is (more, less) inelastic.

a. more; more

b. more; less

c. less; more

d. less; less

P a g e | 11

To answer the next 4 questions, refer to the diagram below describing the market for gadgets.

32) Based on the diagram above, there must be a (positive, negative) externality of ____ for

each gadget produced.

a. positive; $1 b. negative; $1 c. positive; $2 d. none of the above

33) Based on the diagram above, market equilibrium would produce ______ than the socially

efficient amount to be produced and a deadweight loss of _____.

a. 75 more; $50

b. 25 more; $25

c. 25 less; $25

d. none of the above

34) Based on the diagram above, the market could be moved to the socially efficient outcome

with a (subsidy, tax) of ____.

a. subsidy; $1

b. subsidy; $2

c. tax; $1

d. tax; $2

35) If production of gadgets was increased from 50 to 75, the benefits of the additional 25

gadgets to society would be ______ than the costs to society of the additional 25.

a. $25 greater

b. $50 greater

c. $25 less

d. $50 less

PMC

SMB=PMB

# of gadgets produced monthly

6

8

25

7

50 75

9

5

4

3

100 l

SMC

P a g e | 12

36) When a company installs a security camera to monitor activity outside of their building,

crime is reduced for the company and neighboring buildings. As a result, installation of

security cameras creates a _____ externality and a competitive market for security cameras

would result in (more, less_) than the efficient number of security cameras being installed.

a. positive; more

b. positive; less

c. negative; more

d. negative; less

To answer the next 2 questions, consider the following information. Several commentators

have argued that the American Medical Association and the federal government work together

to limit the number of medical doctors by controlling the number of people who graduate from

medical school. This acts like a quota. Suppose that the impact of the quota is to reduce the

number of Medical doctors (MDs) from 1.1 to 1.0 million and to increase their salaries from

$100,000 to $110,000 annually. Draw linear supply and demand curves for MDs that reflects

the impact of those quota and use it to answer the next 2 questions.

37) The effect of limiting the number of medical doctors is to increase surplus for doctors by

____.

a. $10 billion

b. more than $10 billion

c. less than $10 billion

38) The effect of limiting the number of medical doctors is to decrease surplus for doctors’

patients by ____.

a. $10 billion

b. more than $10 billion

c. less than $10 billion

P a g e | 13

Suppose that the price of a solar collector is $1000 and the equilibrium quantity sold is 1 million

per month. To stimulate the use of green energy, the federal government offers a $200 subsidy

for each solar collector produced. Suppose the subsidy causes the equilibrium quantity to rise

to 1.2 million and the equilibrium price paid by consumers to drop to $900. Draw linear

supply and demand curves for solar collectors reflecting the market before and after the subsidy

is introduced to answer the next 3 questions.

39) The subsidy will cause consumer’s surplus to increase by:

a. $100 million

b. $110 million

c. $120 million

d. none of the above

40) The subsidy will cost the U.S. taxpayer:

a. $120 million

b. $200 million

c. $240 million

d. none of the above

41) If the demand for solar collectors was more elastic, the subsidy’s cost to the U.S. taxpayer

would be ____ and its effect on the number of solar collectors produced would be ____.

a. greater; greater.

b. greater; smaller

c. smaller; greater.

d. smaller; smaller

P a g e | 14

Answers

1 b 2 c 3 c 4 b 5 b 6 d 7 c 8 c 9 c

10 c11 b 12 c 13 d 14 b 15 b 16 c 17 d 18 b 19 c 20 b 21 b 22 a 23 d 24 a 25 b 26 b 27 c 28 b 29 c 30 a 31 d 32 d 33 b 34 d 35 c 36 b 37 c 38 b 39 b 40 c 41 a