Economics 201

NAME ______________________

First Midterm

Prof. Robert J. Gordon

ID # _________________

TA:

Heffner

Time:

9am

Kent

O'Quinn

Fall 2009

Roy

3pm

Put your name and circle your TA Section both on the answer sheet and the question booklet.
Answer all questions in the space provided below.
Each multiple choice question is worth 1 point and has a single best answer. There is no guessing penalty so
answer all the questions.

ANSWER SHEET
Multiple Choice:
WRITE YOUR MULTIPLE CHOICE ANSWERS IN CAPITAL LETTERS!!!
If we can't read it, it's wrong.

11

16

21

26

12

17

22

27

13

18

23

28

14

19

24

29

10

15

20

25

30

MC Total:

______

Short Answer:
Numbers in parentheses indicate point value.

1.

China will produce_____ wheat and_____beans (1),

while Kenya will produce_____ wheat and _____beans (1).
Then China gives_____ to Kenya and Kenya gives_____ to China (2).
In the end, China consumes_____ and Kenya consumes_____ (2).

2.

a) Demand equation: _______________(2).

b) Supply equation: ________________(2).
c) Demand price is _____(1).
d) Supply price is _____(1).
e) Wedge is _____(2).
f) DWL is _____(2).

3.

a) Equilibrium price is _____(1) and equilibrium quantity is_____ (1).

b) CS before is _____(2), CS after is _____ (2), and the change in CS is _____(1).
c) Subsidy per unit is _____(4).
d) Total expenditure on subsidy is _____ (1).
e) DWL is _____ (2).

Economics 201
First Midterm

NAME ______________________

Prof. Robert J. Gordon

ID # _________________

QUESTIONS

Section 1: Multiple Choice (30 points)

(In this section each question is worth 1 point)
1 Which of the following is the best example of making a choice at the margin?
A) buying a new car
B) quitting your job
C) drinking another cup of coffee
D) attending college
2 The phrase gains from trade refers to the:
A) profits obtained from sales of a good or service.
B) increase in total output that is realized when individuals specialize in
particular tasks and trade with each other.
C) gains that one obtains by taking advantage of an uninformed buyer and selling at a
higher than average price.
D) gains that one obtains by taking advantage of a temporary discount or sale price.
3 Opportunity cost is:
A) about half of the monetary cost of a product.
B) the dollar payment for a product.
C) the benefit derived from a product.
D) the value of the best alternative forgone in making any choice.
4 The command economy in Poland in the classroom reading featured a toilet paper
shortage. What are the possible causes of this shortage?
A) Polish bureaucrats set the price of toilet paper too high.
B) Polish bureaucrafts set the price of toilet paper too low.
C) Bureaucrats had no incentive to produce the toilet paper that people wanted.
D) A and C
E) B and C
5 The production possibility frontier is bowed out from the origin because:
A) resources are not equally suited for the production of both goods.
B) resources are scarce.
C) economic growth leads to inefficiency.
D) resources are inefficiently used.

Fall 2009

6 One of the course packet readings emphasized that communism played on two human appetites.
These are:
A) desire for justice and vengeance.
B) desire for justice and to improve the efficiency of the market economy.
C) desire for vengeance and to improve the efficiency of the market economy.
D) desire for improve the efficiency of the market economy and the productivity of workers.
7 Specialization and trade should lead to all of the following except:
A) individuals learning specific skills and earning a salary.
B) a decrease in total economic output.
C) higher living standards.
D) the exchange of goods and services in markets.
Use the following to answer questions 8-10:
Table: Comparative Advantage

8 Sweden has an absolute advantage in producing:

A) cell phones only.
B) herring only.
C) both cell phones and herring.
D) neither cell phones nor herring.
9 Finland has a comparative advantage in producing:
A) cell phones only.
B) herring only.
C) both cell phones and herring.
D) neither cell phones nor herring.
10 The opportunity cost of producing 1 unit of herring for Finland is:
A) 10 units of cell phones.
B) 1/5 unit of cell phones.
C) 5 units of cell phones.
D) 1/10 unit of cell phones.

11 Student expectations to get grades of A and outrage at getting B and C grades are due to:
A) parental pressure.
B) unfairness of professors.
C) expectations based on top performance in high school.
D) feeling that hard work should be rewarded with A grades.
E) C and D
12 Which of the following would be a normative economic statement?
A) Government has grown too large and should be reduced.
B) There has been an increase in the rate of inflation.
C) The unemployment rate is higher in Europe than in the United States.
D) All of these are normative economic statements.
13 A shift of the demand curve for Luis's Pizza would not be caused by a change in the:
A) buyers' incomes.
B) price of Luis's Pizza.
C) price of Humberto's Pizza.
D) popularity of Luis's Pizza.
14 Which of the following is NOT used to evaluate the value of human life:
A) earnings foregone.
B) income taxes paid.
C) value of experience lost.
D) military death benefits.
15 If peanut butter is an inferior good, what do you suppose would happen to the price and
quantity of peanut butter as incomes fall during an economic recession?
A) The price would increase and the quantity would decrease.
B) The price and quantity would both increase.
C) The price and quantity would both decrease.
D) The price would decrease and the quantity would increase.
16 The demand curve for meals at a local Applebee's will shift to the left if:
A) the Olive Garden offers a 10% discount coupon in the local newspaper.
B) the price of a meal at Applebee's rises.
C) local incomes increase and Applebee's is a normal good.
D) the price of gasoline falls in the local area.

17 What is the difference between a shortage and scarcity?

A) Scarcity will always exist because choices must be made, but a shortage will
only exist if the price is kept below the equilibrium level.
B) Scarcity is a result of two or more alternative uses and will always exist, and
quantities of supply and demand adjusting to flexible prices will create shortages.
C) A shortage will exist when a good is scarce.
D) There is no distinction between the two. They are the same thing.
Use the following to answer questions 18-19:
Figure: Supply and Demand of Wheat

18 A price of ________ will result in a ________.

A) $6; shortage
B) $8; surplus
C) $8; shortage
D) $4; surplus
19 If there were an increase in demand of 2,000 bushels at each price, the equilibrium price
and quantity would be ________ and ________ units, respectively.
A) $5; 5,000
B) $6; 7,000
C) $7; 7,000
D) $8; 8,000
20 Corn is an energy intensive crop to grow (particularly oil), but it can also be converted into ethanol,
which can be burned as fuel. Last year oil prices rose sharply, which affected costs of production and the
demand for ethanol. What would this do to the market for corn?
A) Price rises while quantity falls.
B) Both price and quantity fall.
C) Unclear effect on price, but quantity falls.
D) Price rises, but the effect on quantity is unclear.

21 The number of taxi cab licenses allowed in New York City:

A) increases over time with the population of New York City.
B) increases over time with the increase of the price level of living in New York City.
C) remains fixed.
D) remains fixed until the existing mayor loses his/her re-election campaign.
Use the following to answer question 22:
Table: Supply and Demand of Good X
P
$5
$10
$15
$20
Qd
800
700
500
300
Qs
0
100
200
300

$25
240
400

$30
220
500

$35
200
600

$40
100
700

$45
50
800

22 How much would be sold in the above market if there were a price floor of $10?
A) 700
B) 100
C) 300
D) 600
23 Consumer surplus
A) is a concept that helps us make normative statements about the desirability of market outcomes.
B) is represented on a graph by the area below the demand curve and above the price.
C) is a good measure of economic welfare if buyers' preferences are the primary concern.
D) All of the above are correct.
24 Kristi and Rebecca sell lemonade on the corner. It costs them 7 cents to make each cup. On a certain day,
they sell 40 cups, and their producer surplus for that day amounts to $15.20. Kristi and Rebecca sold each
cup for
A) 15 cents.
B) 30 cents.
C) 45 cents.
D) 55 cents.
25 Taxes cause deadweight losses because they
A) lead to losses in surplus for consumers and for producers that, when taken together,
exceed tax revenue collected by the government.
B) distort incentives to both buyers and sellers.
C) prevent buyers and sellers from realizing some of the gains from trade.
D) All of the above are correct.

26 Agricultural subsidies in the US:

A) are higher than in anywhere else in the world.
B) are lower than in anywhere else in the world.
C) are higher than those in Europe.
D) have declined as a percent of farm receipts since 1986.
E) subsidize corn but not cotton.
Use the following to answer question 27-28:
Figure: Supply and Demand of Good X

27 The per unit burden of the tax on buyers is:

A) P3 - P1.
B) P3 - P2.
C) P2 - P1.
D) Q2 - Q1.
28 The amount of tax revenue received by the government is equal to the area:
A) P3 A C P1.
B) A B C.
C) P2 D A P3.
D) P1 C D P2.
29 Coca Cola Classic
A) benefits from subsidies on corn production.
B) is a complement in demand with Pepsi-Cola.
C) is an inferior good.
D) is a complement in supply with leather.
30 Subsidies to corn
A) Do not involve dead-weight losses because subsidies are different from taxes.
B) Do not contribute to obesity in the United States.
C) Make corn prices higher than otherwise.
D) Make corn prices lower than otherwise.

Section 2: Short Answer (30 points)

Question 1 (6 points)
Use the table below to answer the question below
CHINA
Pre-trade bundle

WHEAT
12
3
0

KENYA
BEANS
0
3
4

WHEAT
6
3
0

BEANS
0
3
6

The table above provides you with PPF information for each of the two countries. The middle row in the table above
shows the closed economy bundles for each country.
Prove that the two countries can gain from trade by providing a possible combination of production for each country
and consumption for each country after they open up to trade by filling the blanks (in your answer sheet):
China will produce_____wheat and_____beans, while Kenya will produce_____wheat and _____beans. Then
China gives_____to Kenya and Kenya gives_____to China. In the end, China consumes_____and Kenya
consumes_____.
(HINT: You must choose a price for trading wheat for beans that is in between the original opportunity cost for
China and the original opportunity cost for Kenya).

China's OCbeans =3 wheat and Kenya's OCbeans=1wheat. Kenya has CA on beans and China has CA on wheat.
China produces 12 wheat and Kenya produces 6 beans.
China gives Kenya 6 wheat in return for 3 beans
China consumes 6 wheat and 3 beans, and Kenya consumes 6 wheat and 3 beans, which makes both better off.

Question 2 (10 points)

The following figure represents the market for X in some town.

a) Derive the demand equation (in the form P=a-bQ, where 'a' and 'b' are some numbers) (2 points)
a=100; b=(100-40)/(0-60)=1; P=100-Q
b) Derive the supply equation (in the form P=c+dQ, where 'c' and 'd' are some numbers) (2 points)
c=10; d=(40-10)/60-0)=1/2; P=10+1/2Q
Suppose the government decides to regulate the number of X. It decides to sell 40 licenses at market price. Given this
quota:
c) What is the demand price? (1 point)
P=100-40=60
d) What is the supply price? (1 point)
P=10+1/2(40)=30
e) What is the 'wedge' and what is the total quota rent? (2 points)
Wedge=30 and quota rent=30*40=1200
f) What is the deadweight loss caused by this quota? (2 points)
DWL=30*(60-40)/2=300

Question 3 (14 points)

Assume that the market for apples can be described by the equations P=10-Q and P=Q/3. (A good sketch of the
supply and demand diagram should make this question easier to answer)
(a) What are the equilibrium price and quantity? (2 points)
P= $2.5 and Q=7.5
(b) Consumers complain that the current price is too high, so they lobby for a price ceiling. At a ceiling of $1, do
they gain? Explain by calculating the change in consumer surplus with and without the proposed price ceiling.
(5 points)
(HINT: you are just being asked to calculate the change in consumer surplus; you are NOT being asked to
calculate the deadweight loss. That comes below in part (e))
CSbefore = (10-2.5)(7.5)/2 = 28.125
At P=1.00, Qs = 3(1) = 3 and when Qd=3, P=10-3=7 (on demand curve)
CSafter = (10-7)(3)/2 + (7-1)(3) = 4.5+18=22.5
dCS = 22.5-28.125=-5.625
Since apples keep doctors away, as part of their new health care proposal, the government not only imposes the price
ceiling but decides to subsidize the production of apples.
(c ) What is the size of the subsidy for each apple necessary to sustain the price of $1 for consumers without shortages
or surpluses? (4 points)
(HINT: What is demand when price is $1? Then, recall that a subsidy creates a wedge between the price paid to
producers and the price paid by consumers. Alternatively, determine an imaginary supply curve that includes the effect
of the subsidy.)
At Pd=1.00, Qd=10-1=9.
When Qs=9, Ps=9/3=3.
Subsidy = Ps-P=3-1=2.
(d) What is the total amount spent by the government on this subsidy? (1 points)
Total production is 9 so Subsidy expenditure = (9)(2)=18
(e) What is the size of the deadweight loss caused by this subsidy? (2 points)
DWL = (9-7.5)(2)/2= 1.5

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