georgia institute of technology school of...

Georgia Institute of TechnologySchool of Economics

ECON 2106 JK1&JK2! Principles of Microeconomics!!!! Fall 2012

Instructor: Dr. Johnson Kakeu (johnson.kakeu @econ.gatech.edu) TAs: Joseph Greene ([email protected] @gatech.edu)

"Winners must have two things: definite goals and a burning desire to achieve them." - Brad Burden -

PREPTEST -2

Hey guys :)I strongly advise you to discuss the following questions in groups of 3 to 4 students. As you know, trading ideas with other classmates will lead to a more efficient outcome. It will increase your total knowledge capacity surplus !!!

READY, STEADY, GO >>>>>>>>>>>>>>>>>>>>>>>

1. The university president believes that increasing student tuition by 5% will increase revenues. If the president is correct that revenues will increase, then the tuition increase will:

A) reduce the number of students enrolling by less than 5%. B) reduce the number of students enrolling by more than 5%. C) reduce the number of students enrolling by exactly 5%. D) increase the number of students enrolling by 5%.

Use the following to answer question 2.

Figure: The Market for Yachts

2. (Figure: The Market for Yachts) Look at the figure The Market for Yachts. A quota of ________ will bring about the same price and output in the market for yachts as would an excise tax of $30,000.

A) 2,000 B) 3,000 C) 4,000 D) The answer is impossible to determine.

3. The price elasticity of demand is computed as the percentage change in the: A) quantity demanded divided by the percentage change in the quantity supplied. B) price divided by the percentage change in the quantity demanded. C) quantity demanded divided by the percentage change in income. D) quantity demanded divided by the percentage change in the price.

4. There is one gas station in a small rural town. The owner of the station claims that he will sell the same quantity of gas no matter how high or low the price. If he is correct in this assertion, what must be true about the demand curve for gas at his station?

A) It must be vertical with a price elasticity of zero. B) It must be vertical with a price elasticity of infinity. C) It must be horizontal with a price elasticity of zero. D) It must be horizontal with a price elasticity of infinity.

5. If two goods are complements, their cross-price elasticity of demand should be: A) less than 0. B) equal to 0. C) positive yet almost equal to 0. D) greater than 0.

6. The pair of items that is likely to have the largest positive cross-price elasticity of demand is:

A) coffee and tea. B) skis and ski boots. C) pizza and pepperoni. D) milk and cookies.

7. Raina consumes 100% more mechanical pencils when the price of felt-tip pens increases by 50%. For Raina, pencils and pens are ________, and the cross-price elasticity of demand is ________.

A) complements; 1/2 B) substitutes; –1/2 C) complements; 2 D) substitutes; 2


Figure: Supply Curves

8. (Figure: Supply Curves) Look at the figure Supply Curves. Which graph shows a perfectly elastic supply curve?

A) A B) B C) C D) D

9. If the absolute value of the price elasticity of demand is greater than 1, then: A) small percentage changes in the price will lead to much larger changes in the percentage

change in the quantity demanded. B) small percentage changes in the price will lead to even smaller changes in the percentage

change in the quantity demanded. C) percentage changes in the price will lead to equal percentage changes in the quantity

demanded. D) changes in the price will have no impact on changes in the quantity demanded.


Figure: The Linear Demand Curve

10. (Figure: The Linear Demand Curve) Look again at the figure The Linear Demand Curve. As a producer, you are interested in maximizing your total revenues in this market. What is the price at which you should sell your good? What is the corresponding total revenue?

A) $10; $100 B) $20; $200 C) $0; $100 D) $5; $100

11. Which of the following is an example of an excise tax? A) a tax of $0.41 per gallon of gas B) a tax of 12.4% of your wages C) a tax on the value of your property D) a one-time local government tax of $50

12. If an excise tax is levied on suppliers, then the incidence of the tax: A) is typically on the consumer more than the producer. B) is typically on the producer more than the consumer. C) is typically split equally between the producer and the consumer. D) cannot be determined without more information.

13. State governments levy excise taxes on cigarettes because: A) they want to subsidize tobacco farming. B) they want to discourage cigarette smuggling. C) it is an easy way to raise tax revenue while discouraging smoking. D) they want to reduce deadweight loss.

14. If the government decides to impose a $700 tax on U.S. citizens traveling abroad, then the deadweight loss from this tax will be:

A) relatively small. B) relatively large. C) zero. D) absorbed by foreign governments.


Figure: Income Tax Payments

15. (Figure: Income Tax Payments) Look at the figure Income Tax Payments. Which panel or panels best represent the effects of a progressive income tax?

A) A B) B C) C D) A and B

16. ________ and ________ are the largest sources of state and local tax revenue. A) Profit taxes; sales taxes. B) Property taxes; sales taxes. C) Payroll taxes; income taxes. D) Sales taxes; income taxes.

17. If personal income up to and including $25,000 is not taxed, income of $25,001 to $50,000 is taxed at 10%, and income over $50,000 is taxed at 20%, then a family earning an income of $75,000 will pay an average tax rate of:

A) 5%. B) 7.5%. C) 10%. D) 20%.


Figure: Tax Incidence

18. (Figure: Tax Incidence) Look at the figure Tax Incidence. All other things unchanged, the effect of an excise tax imposed on gasoline in the long run is most likely illustrated by panel ________, and the greater share of the burden of the excise tax (shown by the tax wedge in each panel) is borne by ________.

A) A; buyers B) B; sellers C) B; buyers D) A; sellers

19. In a Ricardian model of international trade, the production possibility frontiers are ________, indicating that the opportunity cost of increasing the production of one item relative to another ________.

A) convex; is constant B) concave; increases C) straight lines; is constant D) straight lines; decreases

20. In a single year, the Netherlands can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, Belgium can raise 50 tons of beef or produce 750 boxes of tulips. In autarky, the price of one ton of beef in the Netherlands is:

A) 100 tons of beef. B) 1,000 boxes of tulips. C) 10 boxes of tulips. D) 0.1 box of tulips.

21. Saudi Arabia has a tremendous comparative advantage in petroleum. Which of the following is a source of this comparative advantage?

A) mild temperatures B) large reserves of crude oil C) no opportunity cost associated with oil production D) high tariffs on oil from other nations


Figure: The Domestic Supply and Demand for SUVs in the United States

22. (Figure: The Domestic Supply and Demand for SUVs in the United States) Look at the figure The Domestic Supply and Demand for SUVs in the United States. Suppose the world price equals $50,000 and there is free trade. Calculate the loss of consumer surplus when there is free trade.

A) $41,250 million B) $30,000 million C) $52,500 million D) $22,250 million

23. If a country has the comparative advantage in producing cloth, we would predict that in the market for cloth, the autarky price would be ________ the world price and the country would choose to________ cloth.

A) less than; export B) greater than; export C) less than; import D) the same as; export

24. Assume that the United States imposes a quota on Columbian coffee. Relative to the equilibrium world price that would exist in the absence of quotas, it is likely that the equilibrium price of coffee in the United States will ________ and the equilibrium price of coffee in Columbia will ________.

A) decrease; remain the same B) remain the same; increase C) increase; increase D) increase; decrease

25. In autarky, a country's production and consumption points must be identical. A) True B) False

26. Since the production of clothing is labor-intensive relative to the production of wheat and China is labor-abundant relative to most countries, we would expect China to export clothing.

A) True B) False


Figure: The Gains from International Trade

27. (Figure: The Gains from International Trade) Look at the figure The Gains from International Trade. In the figure, each country must trade ________ to consume at combination C.

A) 1 computer for 1/2 box of roses B) 2 computers for 1 box of roses C) 1/2 computer for 1 box of roses D) 1 computer for 1 box of roses


Scenario: Accounting and Economic Profit

Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job that paid $60,000 per year and started Wang's Wicker Furniture Store. He rented a showroom for $15,000 for the year, purchased capital equipment that depreciates $5,000 each year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. Instead of using the capital for his own business he could rent it to a rival firm and earn $5,000 a year, In his first year, his revenue was $150,000.

28. (Scenario: Accounting and Economic Profit) The implicit cost of capital for Wang's Wicker Furniture Store is:

A) $0. B) $2,000. C) $5,000. D) $50,000.


Figure: The Marginal Benefit Curve

29. (Figure: Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve. According to the marginal benefit curve, the total benefit of mowing six lawns is approximately:

A) $19. B) $35. C) $154. D) $200.

30. The ________ is the amount by which an additional unit of an activity increases its total benefit.

A) average benefit B) net benefit C) marginal benefit D) top benefit


31. (Table: Expected Exam Scores from Studying Economics and Accounting) Look at the table Expected Exam Scores from Studying Economics and Accounting. With 3 total hours of study time, the opportunity (or marginal) cost in terms of your accounting score of spending the first hour studying economics is ________ points.

A) 0 B) 5 C) 10 D) 15

32. Economists' and psychologists' attempts to understand and explain why people make decisions that appear to be irrational is the field of study called:

A) international economics. B) irrational economics. C) rational economics. D) behavioral economics.

33. If the marginal cost of any activity is constant at $4, then at the optimal quantity of the activity, the marginal benefit will be $4.

A) True B) False

34. If the marginal cost curve is upward sloping, as output increases, marginal costs will: A) increase. B) decrease. C) stay constant. D) become downward sloping.

35. Utility is the: A) difference between a firm's total revenue and its total economic cost. B) good not adequately provided by a free market and usually provided by the government. C) satisfaction consumers derive from their consumption of goods and services. D) lowest price that buyers are willing to pay for a given quantity of a good.


36. (Table: Exercise and Utility) Look at the table Exercise and Total Utility. The table shows Marta's total utility from hours of exercise at the gym. Given this information, what can be said about Marta's marginal utility from exercise?

A) Marginal utility initially decreases but eventually increases as more exercise is consumed. B) Marginal utility always decreases as more exercise is consumed. C) Marginal utility initially increases but eventually decreases as more exercise is consumed. D) Marginal utility initially increases but eventually stays constant as more exercise is

consumed.

37. How much utility is gained by spending an additional dollar on coffee pots? A) the average utility of coffee pots divided by the price of coffee pots B) MUPots/PPots

C) TUPots/PPots

D) MUCoffee/PCoffee

38. If Vanessa buys more pomegranates and fewer bananas, the ________ of pomegranates will _______, and the ________ of bananas will ________.

A) marginal utility; fall; marginal utility; rise B) marginal utility; rise; marginal utility; fall C) total utility; fall; marginal utility; rise D) marginal utility; rise; total utility; rise

39. Melika spends all her income on two goods, magazines and carry-out lunches. The price of a magazine is $5, and the price of a carry-out lunch is $7. At the current consumption bundle, the marginal utility of magazines is 10, and the marginal utility of carry-out lunches is 21. To maximize utility given her income, Melika should:

A) increase her consumption of carry-out lunches and decrease her consumption of magazines.

B) increase her consumption of magazines and decrease her consumption of carry-out lunches.

C) continue to consume the current bundle. D) consume equal amounts of magazines and carry-out lunches.

40. Joseph consumes pizza and soda. He is currently consuming three units of pizza and two units of soda. The price of pizza is $5 and the price of soda is $1. If he is consuming the optimal consumption bundle and his marginal utility of pizza is 50, then his marginal utility of soda is:

A) 50. B) 10. C) 5. D) impossible to determine unless you know Joseph's income.

41. Consider the market for strawberries. Which of the following statements most likely applies to the strawberry market?

A) The income elasticity of demand for strawberries is negative. B) The price elasticity of supply of strawberries is greater in the short run than it is in the

long run. C) The price elasticity of demand for strawberries is lower in the long run than it is in the

short run. D) The cross-price elasticity of demand for strawberries with respect to the price of

raspberries is positive.

42. Kayla and Jada are roommates in New York City. Both Kayla and Jada recently received raises. Kayla now buys more CDs than before, but Jada buys fewer. Kayla behaves as if CDs are ________ goods, and Jada's income elasticity of demand for CDs is ________.

A) normal; positive B) normal; negative C) inferior; positive D) inferior; negative


Figure: The Market for Blue Jeans

43. (Figure: The Market for Blue Jeans) Look at the figure The Market for Blue Jeans. The government recently levied a $10 tax on the producers of blue jeans. What area or areas in the graph identify the loss of producer surplus due to the tax?

A) d + e B) e C) d D) d + e + f


Figure: The Market for Tea in Sri Lanka

44. (Figure: The Market for Tea in Sri Lanka) Look at the figure The Market for Tea in Sri Lanka. In autarky, the price of tea in Sri Lanka is P1. When the economy is opened to trade, the price rises to PW. Sri Lanka will ________ tea and the volume of trade will equal ________.

A) import; QT – CT

B) export; QT – CT

C) import; Q1 – QT

D) export; CT – Q1

45. (Figure: The Market for Calculators) Look at the figure The Market for Calculators. The world price, PW, equals $100. The government imposes a quota restricting imports to 25 calculators. If import licenses are granted to foreigners, the net loss due to the import quota is equal to areas:

A) K + L. B) G + J. C) G + H + I + J. D) G + H + I + J + K + L.

Answer Key - PREPTEST-2

1. A 2. B 3. D 4. A 5. A 6. A 7. D 8. D 9. A 10. A 11. A 12. D 13. C 14. B 15. B 16. D 17. C 18. A 19. C 20. C 21. B 22. A 23. A 24. D 25. True 26. True 27. D 28. C 29. C 30. C 31. D 32. D 33. True 34. A 35. C 36. C 37. B 38. A 39. A 40. B 41. D 42. B 43. A 44. B 45. C

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