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Soc. Sec. #:

Multiple Choice(50):

Problem 1(10):

Problem 2(8):

Problem 3(6):

Problem 4(8):

Problem 5(8):

Problem 6(10):

Total(100):

1. The opportunity cost of any good or service is the

   • [a.] actual dollar cost of doing or making it.
   • [b.] highest price that a merchant can get for an item.
   • [c.] value of the next best alternative.
   • [d.] cost associated with a value judgment.

2. The law of demand indicates that as the price of a good increases,

   • [a.] suppliers want to sell less of it.
   • [b.] buyers want to buy less of it.
   • [c.] more of it is produced.
   • [d.] more of it is desired.

3. A consumer has five pounds of bananas and values their total utility at $2.48. If one additional pound is acquired and its marginal utility is $0.12, total utility will

   • [a.] fall to $2.36.
   • [b.] rise to $2.60.
   • [c.] stay the same.
   • [d.] rise to $2.50.

4. The elasticity of demand is a measure of:

   • [a.] the change in price divided by the change in quantity demanded.
   • [b.] the percentage change in price divided by the percentage change in quantity demanded.
   • [c.] the change in quantity demanded divided by the change in price.
   • [d.] none of the above.

5. A movement along the supply curve from left to right:

   • [a.] results in an increase in supply.
   • [b.] results in an increase in the quantity supplied.
   • [c.] is called equilibrium.
   • [d.] is a result of an increase in input prices.

6. After eating six chocolate bars in 10 minutes, Jody says, ``You would have to pay me to eat another chocolate bar!" This statement best illustrates:

   • [a.] the law of demand.
   • [b.] the substitutability among goods.
   • [c.] diminishing marginal utility.
   • [d.] that chocolate bars are an inferior good.

7. A perfectly inelastic demand curve indicates that:

   • [a.] price has no effect on quantity demanded.
   • [b.] the producer can sell as many units as desired at the market price.
   • [c.] for a given percentage change in price, the quantity demanded rises by the same percentage.
   • [d.] the percentage change in price is less than the percentage change in quantity demanded.

8. Price floors are likely to

   • [a.] result in the accumulation of surpluses.
   • [b.] increase the volume of transactions as we move along the demand curve.
   • [c.] decrease the production as producers respond to lower consumer demand at the high floor price.
   • [d.] result in the development of black markets.

9. Technical efficiency, as illustrated by the production possibilities frontier, means that:

   • [a.] at each point along the curve, a different technology is used to produce goods.
   • [b.] an economy could better use its resources to produce more output of all goods.
   • [c.] it is impossible to produce more of one good without producing less of another.
   • [d.] there may still be unemployment of some resources.

10. An inferior good is one

    • [a.] that is produced by American industries.
    • [b.] whose quantity demanded rises when the purchasers' incomes fall.
    • [c.] whose quantity supplied is greater than quantity demanded.
    • [d.] whose demand only increases with increases in income.

11. If the price of beef increases, one may expect:

    • [a.] the demand for beef to increase.
    • [b.] the supply of hamburger buns to increase.
    • [c.] the demand for pork to decrease.
    • [d.] the demand for chicken to increase.

12. Which of the following is a fixed cost for the Blumen Flower Co.?

    • [a.] flowers.
    • [b.] the labor cost of delivery people.
    • [c.] rent.
    • [d.] fertilizer.

13. The relationship between prices and the amount consumers buy at each price is known as the:

    • [a.] production possibilities frontier.
    • [b.] market schedule.
    • [c.] demand schedule.
    • [d.] supply schedule.

14. A decrease in a family's income will cause its budget line to

    • [a.] become steeper.
    • [b.] become flatter.
    • [c.] move closer to the origin.
    • [d.] move away from the origin.

15. Given a production possibilities frontier, economic growth would be illustrated by:

    • [a.] a movement from one point to another on the curve.
    • [b.] a point within the curve.
    • [c.] an outward shift of the curve.
    • [d.] an inward shift of the curve.

16. In one hour, John can prepare 2 income tax returns or 4 financial statements. In one hour, Frank can prepare 1 income tax return or 3 financial statements. Based on comparative advantage:

    • [a.] John should specialize in preparing financial statements.
    • [b.] John should specialize in preparing tax returns.
    • [c.] John should work alone, preparing both tax returns and financial statements.
    • [d.] John should do nothing.

17. The price system corrects a shortage by

    • [a.] raising the price and raising the suppliers' incentives to produce more.
    • [b.] lowering the price, and inducing consumers to buy more.
    • [c.] raising the price but encouraging consumers to buy more.
    • [d.] lowering the price and reducing the suppliers' incentives to produce.

18. The optimal quantity of goods for a consumer to purchase is given by

    • [a.] any intersection between the indifference curve and the budget line.
    • [b.] the point where the budget line touches the vertical axis.
    • [c.] a point of tangency between the budget line and the indifference curves.
    • [d.] the point at which the indifference curves become parallel to the horizontal axis.

19. Suppose a decrease in the price of rice from $0.50 a pound to $0.40 a pound induced increases in rice consumption from 18 tons to 20 tons a week in Rochester and from 180 to 200 tons in Buffalo. Then the elasticity of demand for rice is

    • [a.] greater in Buffalo than in Rochester.
    • [b.] greater in Rochester than in Buffalo.
    • [c.] equal in Rochester and Buffalo.
    • [d.] impossible to know because we can't compare the two due to different population sizes.

20. An economy that operates inside the production possibility frontier:

    • [a.] lacks the necessary technology to produce efficiently.
    • [b.] lacks the resources to produce the two goods efficiently.
    • [c.] is pricing the goods below their market value.
    • [d.] is using its available resources inefficiently.

21. Last year 1000 cases of elixer were sold at a price of $10 whereas this year 1200 cases were sold at $12. The most probable interpretation of this data is the

    • [a.] supply and demand curves are shifting to the right.
    • [b.] supply and demand curves are shifting to the left.
    • [c.] supply curve has shifted to the left.
    • [d.] demand curve has shifted to the right.

22. Mr. Smith's current rates of purchase are such that the marginal utility of shirts is 30 and the marginal utility of shoes is 24. If the prices of shirts and shoes are $20 and $60 respectively, one can conclude that Smith:

    • [a.] is spending too much on shirts and not enough on shoes.
    • [b.] is spending too much on shoes and not enough on shirts.
    • [c.] is spending his income on shirts and shoes so as to maximize his utility.
    • [d.] should buy shirts and shoes in the same respective quantities as the total utility derived from each.

23. A person has a comparative advantage in an activity if she is the individual with the lowest:

    • [a.] opportunity cost.
    • [b.] wage rate.
    • [c.] net worth.
    • [d.] tax liability.

24. Suppose a 30-cent tax per gallon is placed upon suppliers of gasoline. This will

    • [a.] increase consumer surplus.
    • [b.] shift the supply curve out and to the right.
    • [c.] have the same effect as a 30 cent tax per gallon placed upon consumers of gasoline.
    • [d.] be a victory for consumers who already pay too much in taxes.

25. Marginal cost:

    • [a.] never varies.
    • [b.] is always rising.
    • [c.] is the additional output produced by an additional unit of input.
    • [d.] is the additional cost incurred when one more unit of output is produced.

1. Supply and Demand

   • [a.] Suppose there is a freeze in Florida that affects the orange crop. Draw two separate, clearly labeled supply-demand diagrams in the space below, showing the effect of this change in the markets for orange juice and bananas. (5 points)
   • [b.] Suppose a new study suggests that drinking red wine is associated with a lower level of heart disease. Draw two separate, clearly labeled supply-demand diagrams in the space below, showing the effect of this finding on the markets for red wine and cheese. (5 points)

2. Price Controls

   • [a.] The government sets a maximum legal price of zero for several goods, name one. (2 points)
   • [b.] Draw a supply-demand diagram illustrating the effect that this regulation has on the market for the good that you have chosen. More specifically, how does this regulation affect equilibrium price and quantity? What economic term do we give to this situation? (6 points)

3. Draw two production possibilities frontiers, one which exhibits the principle of increasing costs, and one which does not, label the graphs. (6 points)

4. Suppose the government gives producers a subsidy for every unit of a good that they produce. Draw a supply-demand diagram illustrating the initial equilibrium, and the equilibrium price that producers receive and the equilibrium price that consumers pay, after the subsidy. Also, label on your picture how much this policy will cost the government. (8 points)

5. Total Utility, Marginal Utility, and Optimization:

   • [a.] Fill in the blanks of the following Table: (3 points)

     CDs	TU	MU
     1	100
     2	150
     3		20
     4		10
     5	185
     6		-5

   • [b.] Suppose the price of a CD is $10 and that Jack is consuming 2 CDs. Suppose he also gets 15 utils of marginal utility from consuming 4 movies at a price of $5 each. Is Jack maximizing his utility? If so why? If not, why not, and what should he be consuming more of? (5 points)

6. Suppose there is a price-taking firm that has total cost given by, TC(Q) = 2Q²+70, marginal cost given by, MC(Q) = 4Q, and price, P = 20.

   • [a.] What is the profit maximizing quantity for this firm to produce? What is the maximum profit? (5 points)
   • [b.] Suppose that this firm has TFC(Q) = 70 and TVC(Q) = 2Q², will this firm operate or shut down in the short run? (5 points)