Name:____________________Economics 0110 Midterm #1
Directions: Answer all questions. The exam contains 9 pages. Mark your answer to the multiple choice questions in the blank next to the question number. Each multiple choice question is worth 2 points.
_____ 1. A production possibilities frontier is a diagram which shows
a. the margin of cultivation for an economy--the frontier beyond which agriculture is unprofitable.
b. the various combinations of output the economy can produce given available resources and technology.
c. the various combinations of resources that can be used to produce a given level of output.
d. the boundary between attainable and unattainable production points given current resources.
e. both b. and d.
_____ 2. On a production possibilities frontier diagram, production is efficient if
a. the production point is inside the frontier.
b. the production point is on the frontier.
c. the production point is above the frontier.
d. the production point is on or inside the frontier.
e. both b. and c.
Questions 3 through 5 are based on the following table:
Production Possibilities for Iceland
Computers Bushels of Wheat
100 0
80 50
60 90
40 120
20 140
0 150
_____ 3. The table shows the production possibilities for Iceland. What is the cost to Iceland of increasing computer production from 60 to 80?
a. 120 bushels of wheat.
b. 90 bushels of wheat.
c. 50 bushels of wheat.
d. 40 bushels of wheat.
e. Cannot be determined without knowing the cost of labor and capital.
_____ 4. Based on the table, which of the following statements is false?
a. Production of 100 computers and no wheat is efficient.
b. Production of 60 computers and 50 bushels of wheat is inefficient.
c. Production of 40 computers and 140 bushels of wheat is attainable.
d. The maximum level of wheat production is 150 bushels.
e. Iceland cannot simultaneously produce 100 computers and 150 bushels of wheat.
_____ 5. Based on the table, what is the most accurate statement about the opportunity cost of producing an additional 20 computers in Iceland?
a. The opportunity cost of an additional 20 computers is 10 bushels of wheat.
b. The opportunity cost of an additional 20 computers is 50 bushels of wheat.
c. It is impossible to determine the opportunity cost of an additional 20 computers.
d. The opportunity cost of an additional 20 computers increases as more computers are produced.
e. None of the above are correct.
Answer questions 6-8 based on the following table:
Labor Hours Needed to Produce 1 Unit
Brazil Cuba
Sugar 20 25
Wheat 60 50
_____ 6. The opportunity cost of 1 unit of wheat in Brazil is
a. 3 sugars.
b. 6 sugars.
c. 1/3 sugar.
d. 60 labor hours.
e. need to know wage levels in Brazil in order to answer the question.
_____ 7. The opportunity cost of 1 unit of wheat in Cuba is
a. 5 sugars.
b. 2 sugars.
c. 50 labor hours.
d. � sugar.
e. need to know wage levels in Cuba in order to answer the question.
_____ 8. If Brazil and Cuba trade based on the principle of comparative advantage,
a. production of wheat will increase in Cuba.
b. production of sugar will increase in Brazil.
c. production of sugar will increase in Cuba.
d. both a. and b.
e. both will specialize in sugar.
_____ 9. Suppose that there is an increase in the price of nitrogen fertilizer, an important input in potato production. All else equal, this would result in
a. a greater demand for potatoes.
b. a smaller demand for potatoes.
c. a greater supply of potatoes.
d. a smaller supply of potatoes.
e. no effect on the demand or supply curves.
_____ 10. A supply curve slopes upward because
a. an increase in price gives producers an incentive to supply a larger quantity.
b. an increase in input prices increases supply.
c. a decrease in input prices decreases supply.
d. as more is produced, per unit costs of production fall.
e. all of the above.
_____ 11. When there is excess supply in a market,
a. there is downward pressure on price.
b. there is upward pressure on price.
c. the market could still be in equilibrium.
d. there are too many buyers chasing too few goods.
e. the supply curve must be more elastic than demand.
_____ 12. If an increase in income increases the demand for a good, then
a. the good is a substitute good.
b. the good is a complement good.
c. the good is a normal good.
d. the good is an inferior good.
e. the good is a luxury good.
_____ 13. When a market is in equilibrium
a. there is no incentive for price to change.
b. the amount that sellers want to sell matches the amount that buyers want to buy.
c. excess demand is zero.
d. excess supply is zero.
e. all of the above
_____ 14. Technological advances in an industry
a. enable firms to produce the same amount using fewer resources.
b. enable firms to produce more using the same resources.
c. reduce the costs of production
d. will produce a fall in the price and an increase in sales.
e. all of the above
_____ 15. The price elasticity of demand measures
a. how responsive buyers are to a change in their income.
b. how responsive sellers are to a change in price.
c. how responsive buyers are to a change in price.
d. how responsive price is to a shift in the demand curve.
e. two of the above
_____ 16. Suppose that an increase in price leads to a rise in total revenue. In this case
a. supply must be elastic.
b. supply must be inelastic.
c. demand must be elastic.
d. demand must be inelastic.
e. two of the above
_____ 17. Demand is said to be inelastic
a. if the price of the good responds only slightly to changes in the quantity demanded.
b. if the demand curve shifts only slightly when the price of the good changes.
c. if buyers respond substantially to changes in the price of a good.
d. if the quantity demanded changes only slightly when the price of the good changes.
e. if the quantity demanded changes only slightly when price falls but rises when the price rises.
_____ 18. A given shift in the supply curve will have a larger effect on market price if
a. demand is elastic.
b. demand is inelastic.
c. demand is unit elastic.
_____ 19. Economists calculate the price elasticity of demand as
a. the percentage change in price divided by the percentage change in quantity demanded.
b. the percentage change in quantity demanded divided by the percentage change in price.
c. the change in quantity demanded divided by the change in price.
d. the change in price divided by the change in quantity demanded.
e. the percentage change in quantity demanded divided by the percentage change in income.
_____ 20. Total Revenue is
a. the profit of a firm.
b. the total paid by buyers and received by sellers of a good.
c. the total received by sellers less the cost of production.
d. all of the above
_____ 21. Suppose that the elasticity of demand for compact disks is 3. A 10 percent reduction in CD prices will cause
a. a 3 percent increase in CD sales.
b. a reduction in total revenue for CD sellers.
c. a 30 percent increase in CD sales.
d. a 300 percent increase in CD sales.
e. a. and b.
_____ 22. If a tax is imposed on a market with elastic demand and inelastic supply,
a. buyers will bear most of the burden of the tax.
b. sellers will bear most of the burden of the tax.
c. the burden of the tax will be shared equally by buyers and sellers.
d. the burden will fall on sellers if they collect the tax and on buyers if they collect the tax.
e. it is impossible to predict how the burden will be shared.
_____ 23. A tax on the sellers of popcorn
a. leads sellers to supply a smaller quantity at every market price.
b. leads buyers to demand a smaller quantity at every market price.
c. leads sellers to supply a larger quantity at every price.
d. causes the supply curve to shift to the right.
e. two of the above
_____ 24. Gross Domestic Product is defined as
a. the market value of all final goods and services produced within a country in a given period of time.
b. the market value of all final goods and services produced by resources owned by a country's citizens in a given period of time.
c. the market value of all goods and services produced within a country in a given period of time.
d. the market value of all intermediate and final goods and services produced within a country in a given period of time.
e. two of the above
_____ 25. If Fred decides to have the oil in his car changed at a local garage instead of changing the oil himself
a. GDP will increase.
b. GDP will decrease.
c. GDP will be unaffected because the same service would have been performed in either case.
d. GDP will be unaffected because only the value of the oil and the filter is included in GDP statistics.
_____ 26. Double counting refers to
a. including the value of intermediate goods in the measurement of GDP.
b. the procedure followed by national income accountants who always check their figures twice.
c. using both income and expenditure as bases for measuring GDP.
d. using both GNP and GDP to measure the size of the economy.
e. the fact that the economy is a circle with expenditures counting the same as income.
_____ 27. The four expenditure components of GDP are
a. consumption, money supply, government purchases, and exports.
b. consumption, investment, goods, and exports.
c. consumption, investment, government purchases, and net exports.
d. consumption, investment, government purchases, and transfer payments.
e. goods, services, prices, and quantities.
_____ 28. If imports are larger than exports, net exports are
a. positive.
b. negative.
c. larger than exports.
d. larger than GDP.
e. two of the above
_____ 29. In the United States, consumption represents approximately
a. one-third of GDP.
b. one-half of GDP.
c. two-thirds of GDP.
d. three-fourths of GDP.
e. all of GDP.
_____ 30. If the GDP deflator is 200 and real GDP is $40 billion, then nominal GDP is
a. $8 billion.
b. $2 billion.
c. $80 billion.
d. $20 billion.
e. $200 billion.
_____ 31. As a gauge of an economy's economic well-being
a. nominal GDP is better than real GDP.
b. nominal and real GDP are equally useful.
c. nominal GDP times the GDP deflator provides the best measure.
d. real GDP is better than nominal GDP.
e. nominal and real GDP are equally useful.
_____ 32. Which is the most accurate statement about nominal and real GDP?
a. Nominal GDP uses constant base year prices to value the economy's production, and real GDP uses current prices.
b. Both nominal and real GDP use constant base year prices to value production.
c. Nominal GDP uses current prices to value the economy's production, and real GDP uses constant base year prices.
d. Both nominal and real GDP use current prices to value production.
e. Nominal GDP uses prices and real GDP doesn't.
_____ 33. When economists talk about growth in the economy, they measure growth as
a. the absolute dollar change in nominal GDP.
b. the percentage change in nominal GDP.
c. the percentage change in the GDP deflator.
d. the absolute dollar change in real GDP.
e. the percentage change in real GDP.
_____ 34. The CPI is a measure of
a. the overall cost of all final goods and services produced in the economy.
b. the overall cost of inputs purchased by producers.
c. the overall cost of living for a typical consumer.
d. the overall cost of stocks on the New York Stock Exchange.
e. two of the above
_____ 35. For any given year, the CPI is
a. the ratio of the price of a basket of goods and services in that year relative to the price of the same basket in the base year multiplied by 100.
b. higher than the previous year.
c. the ratio of the price of a basket of goods and services in a base year relative to the price of the same basket in the given year multiplied by 100.
_____ 36. If the CPI is 110 in 1998 and 100 in 1997, the inflation rate in 1998 is
a. 1 percent
b. 110
c. 10 percent
d. 11 percent
e. 11
_____ 37. Substitution bias in the CPI results from the fact that the index does not take into account
a. the fact that consumers substitute their purchases toward goods that have become relatively less expensive.
b. the substitution of new goods for old goods by consumers.
c. the substitution of new prices for old prices in the basket of goods.
d. the substitution of quality for quantity in consumer purchases.
e. the fact that social security payments are indexed to the CPI.
_____ 38. Over time inflation
a. increases the purchasing power of money.
b. decreases the purchasing power of money.
c. has no effect on the purchasing power of money.
d. increases the purchasing power of interest.
e. two of the above
_____ 39. Indexation is a feature of which of the following?
a. Social Security benefits
b. federal income tax brackets and personal exemptions
c. both of the above
d. neither of the above
_____ 40. The real interest rate is
a. the interest rate paid or charged by a bank.
b. the interest rate paid or charged by a bank adjusted for inflation.
c. a high interest rate.
d. the actual interest rate.
e. an interest rate that is higher than inflation.
How will each of the following influence the price and quantity of pizza traded in the market? Explain briefly and support each of your answers with graph that represents the change in market conditions. Each change should be considered independent of the other changes. (5 points each)
a. A medical study reports that eating pizza reduces the incidence of heart disease.
b. The government places a $1 tax on each pizza sold.
c. The prices of hamburgers and french fries fall.
d. Policy makers decide that the price of pizzas is too high and impose a price ceiling on pizza that is below the current equilibrium price.