ECON 201: Introduction to Macroeconomics Professor Robert Gordon Midterm Exam 1: October 20, 2014
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Directions: This test is in two parts, a multiple choice question part and a short-answer part. Use this answer packet to complete the exam. Calculators are permitted. Books, notes, reference materials, etc. are prohibited. Good luck!
Part 1: Referring to the questions in the Multiple Choice Questions Packet, choose the one alternative that best completes the statement or answers the question. Each question is worth one point. There is no penalty to guessing, so be sure to answer all of them. Write your answers in the following table using capital letters.
1. The government of a small town has decided to ban smoking in all restaurants, stores, and government offices. This is an example of which principle? A) One person's spending is another person's income. B) When markets fail to achieve efficiency, government intervention can improve society's welfare. C) There are gains from trade. D) Resources should be used as efficiently as possible to achieve society's goals.
Use the following to answer questions 2-3:
2. Look at the table Production of Good Z and Good X in Urbanville. If this represents the production possibility frontier and Urbanville is producing 5 of Z and 50 of X, then this combination is: A) feasible but inefficient. B) feasible and efficient. C) not feasible but efficient. D) neither feasible nor efficient. 3. Look at the table Production of Good Z and Good X in Urbanville. Suppose this represents the production possibility frontier and Urbanville is currently producing 15 of Z and 45 of X. This combination is: A) both allocatively and productively efficient. B) productively efficient. C) allocatively efficient. D) neither productively nor allocatively efficient. 4. If the opportunity cost of manufacturing automobiles is lower in the United States than in Britain and the opportunity cost of manufacturing airplanes is higher in the United States than in Britain, then the United States will: A) export both airplanes and automobiles to Britain. B) import both airplanes and automobiles from Britain. C) export airplanes to Britain and import automobiles from Britain. D) import airplanes from Britain and export automobiles to Britain.
5. If they bake only cakes, in a single day George can bake 10 cakes and Greta can bake 5 cakes. If they make only pies, in a single day George can bake 10 pies while Greta can bake 4 pies. We know that: A) George has an absolute advantage and a comparative advantage in making cakes. B) George has an absolute advantage and a comparative advantage in making pies. C) Greta has an absolute advantage and a comparative advantage in making cakes. D) Greta has an absolute advantage and a comparative advantage in making pies. 6. The U.S. production possibility frontier would ________ if all computers using Microsoft operating systems contracted a virus that deleted all information on those computers. A) shift in B) shift out C) not change D) cannot be determined from the information provided 7. If a supply curve is represented by the equation Q = 10 + 2P, what is its slope? A) 1/2 B) 1 C) 2 D) 5 8. If Benjamin considers sushi to be a normal good and if his income increases by 20%, his purchases of sushi will: A) decrease by 20%. B) increase. C) decrease. D) not change. 9. Good X and good Y are substitutes. Holding all other things constant, this means that when the price of good X increases, the: A) demand for good X will increase. B) demand for good Y will increase. C) demands for both good X and good Y will both increase. D) demand for good Y will decrease. 10. Alice goes to the local supermarket to purchase one package of her favorite taco shells. She often pays $1.50 for a package, but she finds they are on sale for $1 each. According to the law of demand, one can expect Alice to: A) purchase an alternative good. B) purchase more than one package of taco shells. C) decide not to purchase taco shells on this visit. D) buy only one package of taco shells.
Use the following to answer questions 11-13: Figure: Supply and Demand in the Orange Juice Market
11. Suppose a hurricane hits Florida, where oranges are grown. What will be the most likely new equilibrium point in the orange juice market? A) A B) B C) D D) E 12. Suppose most people drink orange juice only with champagne. What will be the new equilibrium point in the orange juice market if a law banning alcohol passes? A) A B) B C) D D) E 13. A reputable scientist asserts in a major scientific publication that drinking orange juice will increase your life span. What will be the most likely new equilibrium point in the orange juice market? A) A B) B C) D D) E
Use the following to answer question 14: Table: Market for Apartments
14. If a government price ceiling of $700 is imposed on this market, an inefficiency will result in the form of a: A) surplus of 0.6 million apartments. B) shortage of 0.6 million apartments. C) surplus of 0.2 million apartments. D) shortage of 0.2 million apartments. 15. Economists in general agree that rent controls are: A) an efficient and equitable way to help low-income families. B) an inefficient but sometimes effective way to help low-income families. C) an efficient method of dealing with the shortages created during price ceilings. D) the only way to solve the problem of poverty. 16. Which of the following is an example of a quantity control? A) the Medicare reimbursement schedule for physicians. B) the minimum wage. C) unemployment insurance. D) limits on the number of red snappers that can be caught in the Gulf of Mexico. 17. Suppose the United States removes the current sugar quotas and the market price of sugar drops. In the candy bar market, we would expect consumer surplus to: A) increase. B) decrease. C) not change. D) Consumer surplus cannot be determined without information about the supply curve.
Use the following to answer questions 18-19: Figure: The Market for Round-Trip Airline Flights
18. The supply and demand graph represents the market for round-trip airline flights between Boston and New York. Suppose the mayor of New York decides to limit the number of flights to Q1 to reduce air pollution. What area or areas represent consumer surplus after the quota is in place? A) a B) a + b + c C) c + e D) b + d + f 19. Suppose the mayor of New York decides to limit the number of flights to Q1 to reduce air pollution. What area or areas represent producer surplus after the quota is in place? A) a B) a + b + c C) c + e D) b + d + f
Use the following to answer questions 20-23: Figure: The Shrimp Market
20. If the government imposes a quota limiting sales of shrimp to 500 pounds, the quota rent per pound is: A) $15. B) $10. C) $5. D) The quota rent cannot be determined from the information provided. 21. If the government imposes a quota limiting sales of shrimp to 250 pounds, the quota rent per pound is: A) $17.50. B) $10. C) $7.50. D) $0.
22. If the government imposes a quota limiting sales of shrimp to 1,000 pounds, the quota rent per pound is: A) $15. B) $10. C) $5. D) $0. 23. If the government imposes a quota limiting sales of shrimp to 250 pounds, it would have the same effect as a price ________ of ________. A) floor; $17.50 B) floor; $10 C) floor; $7.50 D) The answer cannot be determined from the information provided. 24. Consider the market for corn. What happens if there is an increased demand for corn tortillas and at the same time a new corn seed becomes available that dramatically increases the per-acre yield? A) Price and quantity decrease. B) The change in price is indeterminate; quantity decreases. C) The change in price is indeterminate; quantity increases. D) Price increases; the change in quantity is indeterminate.
Part 2: Solve the following problems in the provided space. Show all your work clearly. Problem 1 (10 points) Tom and Jerry work after school for 4 hours each day. They can either make lemonade or milkshakes. If Tom spends all his time making lemonade, he can make 40oz, while if he spends all his time making milkshakes he can make 8 milkshakes. If Jerry spends all his time making lemonade, he can make 60oz, while if he spends all his time making milkshakes he can make 4 milkshakes.
1. (1 pts) Tom decided to make 10oz of lemonade. How many milkshakes can he make? ___________
2. (3 pts) The opportunity cost of a milkshake for Tom is _______________________________ while the opportunity cost of a milkshake for Jerry is _______________________________. Therefore, _____________ has the comparative advantage in producing milkshakes.
3. (1 pts) Who has the absolute advantage in making lemonade? ________________________
4. (2 pts) Jerry is going to start working 6 hours a day (instead of 4). He decided to make 4 milkshakes. How much lemonade can he make? _________________
5. (3 pts) Tom got a lemon squeezer for his birthday. He is now making 25oz of lemonade and 6 milkshakes. If he was to spend all his time making lemonade, how much could he make? ________________________
Problem 2 (10 points) Consider the market of Northwestern Students living in Elder wanting to take Uber cabs down to the Mark II lounge. Suppose the (inverse) demand curve for students is given by P = -Q + 90 and the (inverse) supply curve for drivers is given by P = 0.5 Q. a) (4 points) Graph these curves below, compute the equilibrium prices and quantities, and compute the consumer and producer surpluses in this market. Draw the surpluses on your diagram. Be sure to label everything.
b) (3 points) Now suppose there is a big rainstorm on Friday night, and this makes road conditions hazardous. The rain does not dampen the spirits of the students, but it makes the drivers more reluctant to drive. As a result, the market price rises to $34 and the market quantity decreases to 56 rides. Explain why this “surge pricing” occurred and draw a new diagram below depicting it.
c) (3 points) Suppose the city of Chicago considers “surge pricing” unfair to consumers, and mandates that Uber can never charge more than the market price in part (a) for a ride from Elder to Mark II. Illustrate what this means on your diagram below and label the resulting consumer surplus, producer surplus, and deadweight loss.
Problem 3 (10 points) Consider the demand and supply for Chicago Bulls tickets, at United Center. Given below are quantities demanded and supplied for two possible prices. Moreover, due to the seating capacity of United Center, there is a limit on the maximum number of seats that can be supplied. Let this value be 400. Assume linear demand and supply throughout this question. Price 20 0
Quantity Demanded 300 600
Quantity Supplied 200 0
1. (2 pts) Find the equation of the demand curve
2. (2 pts) Find the equation of the supply curve.(Hint: Take into account that there is an upper limit of 400 on the quantities supplied)
3. (3 pts) Find the equilibrium quantity and price
4. (3 pts) David Rose has recovered from injury (for now). As a result, there is an upward parallel shift in demand. In particular at price 0 the quantity demand is 1120. Find the equilibrium.
Answer Key 1. B 2. A 3. B 4. D 5. B 6. A 7. A 8. B 9. B 10. B 11. A 12. C 13. B 14. B 15. B 16. D 17. A 18. A 19. D 20. C 21. B 22. D 23. A 24. C Problem 1 1-6 2-5oz, 10oz, Tom 3-Jerry 4-30 oz 5- 100 oz Problem 2 a) P=30, Q=60, CS=1800, PS=900 Problem 3 1) Qd=-15P+600
2) Qs=10p when p<=40 and Qs=400 when p>40 3) P=24, Q=240 4) P=48, Q=400