The Idea of Allocative Efficiency Refers To

Dr. Stephen Chiu Form B

ECON1001I 1st term 2009-2010

Mid Term Exam One

Subclass (E or F): ______

Name: ______

University Number: ______

(1) Don’t open this exam until you are told to do so. Read the entire exam before you start. The exam is worth 100 total points.

(2) Follow the instructions at the beginning of each section. Please answer in permanent ink. No pencil please.

(3) There are two parts in this exam covering 6 pages.

(6) GOOD LUCK! Dr. Stephen Chiu Form B Part I. Answer all question (70 points). Choose the best answer for each question and write it down in the following table. No scores will be given if you only circle your choice in the question but do not write down.

Your answers

1. ______2. ______3. ______4. ______5. ______

6. ______7. ______8. ______9. ______10. ______

11. ______12. ______13. ______14. ______15. ______

16. ______17. ______18. ______19. ______20. ______

21. ______22. ______23. ______24. ______25. ______

26. ______27. ______28. ______29. ______30. ______

31. ______32. ______33. ______34. ______35. ______

1) Estimates of the income elasticity of demand for health care indicate that it is about one. These estimates suggest that spending on health care should: a. increase proportionately with income. b. increase faster than income. c. increase less than income. d. not increase or decrease with income.

2) Laura's total utility from consuming 8, 9, and 10 bonbons is 35, 42, and 45, respectively. Her marginal utility from the 9th bonbon is ______utils. a. 42 b. 9 c. 7 d. 4.67 e. 77

3) Assume that Jonas has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. Use this information to answer questions 29-30. Jonas can buy a maximum of _____ loaves of bread or a maximum of _____ jars of peanut butter. a. 20;10 b. 15;15 c. 10;20 d. 10;5 e. 5;10

4) Larry has a comparative advantage in writing a term paper if he a. can write a paper faster than the other students in class. b. has an absolute advantage in writing a term paper. c. always earns an A on his papers. d. has a low opportunity cost for writing a term paper. e. All of the above must be true for Larry to have a comparative advantage. 5) Which of the following statements is always true?

2 Dr. Stephen Chiu Form B a. Comparative advantage implies absolute advantage. b. Absolute advantage implies comparative advantage. c. Comparative advantage does not require absolute advantage. d. Absolute advantage requires comparative advantage. e. Comparative advantage requires absolute advantage.

6) “In 1994 Ford sold 500,000 Escorts at an average price of $7,200 per car: in 1995, 600,000 Escorts were sold at an average price of $7,500 per car.” These statements: a. suggest that the demand for Escorts decreased between 1994 and 1995. b. imply that Escorts are an inferior good. c. suggest that the demand for Escorts increased between 1994 and 1995. d. illustrate that the supply curve for Escorts is downward sloping. e. constitute an exception to the law of demand in that they suggest an upward sloping demand curve.

7) An “increase in the quantity demanded” means that: a. given supply, the price of the product can be expected to decline. b. price has declined and consumers therefore want to purchase more of the product. c. the demand curve has shifted to the right. d. the demand curve has shifted to the left.

8) If a product is in surplus supply, we can conclude that its price: a. is below the equilibrium level. b. is above the equilibrium level. c. will rise in the near future. d. is in equilibrium.

9) Graphically, the horizontal sum of all individual demand curves is known as: a. consumer’s tastes and preferences b. the market demand curve. c. the equilibrium price. d. consumer sovereignty.

Price of A per unit Quantity of B demanded Quantity of C demanded $100 400 400 120 380 420

10) Refer to the above data. Which of the following is most likely to be true? a. B and C are both substitute products for A. b. B and C are both complementary products for A. c. C is a substitute for A; B is a complement to A. d. C is a complement to A; B is a substitute for A.

11) According to the lecture, Adam Smith’s famous doctrine of the Invisible Hand, introduced in the Wealth of Nations in 1776, was anticipated by ______in his works. a. Max Lerner b. Confucius c. Leibniz d. Sima Qian

3 Dr. Stephen Chiu Form B

A B C D E F Capital goods 5 4 3 2 1 0 Consumer goods 0 5 9 12 14 15

12) If the economy is producing at production alternative C, the opportunity cost of the tenth unit of consumer goods will be: a. 4 units of capital goods. b. 2 units of capital goods. c. 3 units of capital goods. d. 1/3 of a unit of capital goods. e. 1 unit of capital goods.

13) Which of the following would cause an increase in the demand curve? a. the price of production inputs fall b. the price of a substitute good falls c. consumer incomes increase d. production technology improves

14) If peanut butter and jelly are complements, a decrease in the price of jelly will cause the equilibrium price of peanut butter to ______and the quantity to ______. a. increase; increase b. decrease; decrease c. increase; decrease d. decrease; increase

15) Which of the following is an example of a normative statement? a. The Hang Seng Index reached over 32,000 in September 2009 b. 10% of the population live on Hong Kong island c. The Hong Kong unemployment rate has reached an alarming level d. Hong Kong had a budget surplus last year

16) If the marginal utility of Coke divided by the marginal utility of Lemonade is 3.0 and the price ratio is 2.5, one could conclude that: a. the individual will spend any additional money on Coke b. the individual will spend any additional money on Lemonade c. the individual is at an interior solution d. cannot tell from the information given

17) If price elasticity of demand for a good is inelastic; total expenditures will ______as the price rises: a. Increase b. Decrease c. stay the same d. depends the amount of the price changes

18) If the income elasticity was –0.79, this would mean that the good was ______, and that an increase in income would cause a ______in demand. a. normal; increase b. normal; decrease c. inferior; increase d. inferior; decrease

19) If only two possible goods are available and income is always completely spent, then: a. only one of them can be an inferior good b. there can be no inferior goods c. only one of them can be a normal good d. there can be no normal goods

4 Dr. Stephen Chiu Form B 20) Sara likes to watch sporting events (S) and playing video games (V). Her utility function is of the form: U=10*S*V. Currently, she is watching 2 sporting events and playing 6 video games. Another bundle which would lie on the same indifference curve, i.e., which would make her equally happy, would be? a. 5 sporting events; 3 video games b. 0 sporting events; 12 video games c. 4 sporting events; 4 video games d. 4 sporting events; 3 video games

21) Given the usual shape, if the supply and demand curves both increase, we would expect that: a. the equilibrium quantity to increase b. the equilibrium quantity to decrease c. the equilibrium quantity to stay the same d. cannot tell from the information given

22) Which of the following would cause an increase in the demand curve? a. the price of production inputs fall b. the price of a substitute good falls c. consumer incomes increase d. production technology improves

23) Which of the following would cause the demand curve of a normal good X to shift to the left? a. a drop in the price of X b. an increase in the price of a substitute c. a decrease in consumer income d. none of the above

24) Given the price of pretzels is $1.50 a bag and the price of potato chips is $2.00 a bag, if pretzels was measured on the vertical axis, the slope of the budget constraint would be: a. 3/4 b. 4/3 c. –3/4 d. –4/3

25) If an economy is operating at a point inside the production possibility frontier, then a. Society’s resources are being inefficiently utilized. b. The curve will move leftward. c. Society’s resources are being used to produce too many consumer goods. d. Economic policy must retard further growth of the economy.

Guns (hundreds) 1 2 3 4 5 Butter (tons) 20 18 15 10 3

26) The table above shows the production possibility frontier for the economy of Hong Kong Island. If this economy were to produce 3 (hundred) guns and 12 (ton of) butter, a. It would be operating beyond its production possibility frontier. b. It would be utilizing its resources with maximum efficiency. c. It would be on its production possibility frontier. d. It could utilize resources more efficiently to produce 3 more (tons of) butter without sacrificing any guns.

27) Suppose that in one week Alice can produce 5 pairs of shoes or 4 bookshelves while Roger can produce 10 pairs of shoes or 6 bookshelves. Then according to the comparative advantage theory Alice should specialize in the production of a. Shoes. b. Bookshelves.

5 Dr. Stephen Chiu Form B c. Either shoes or bookshelves. d. Neither shoes nor bookshelves.

28) Changes in which of the following items will cause a shift of the demand curve for cigars? a. An increase in the price of the tobacco used to produce cigars. b. An increase in the productivity of cigar-rolling machines. c. A new government policy which raises the legal smoking age to twenty-five. d. None of the above.

29) A decrease in the demand for beef due to concerns over cholesterol will cause a. Lower beef prices. b. Higher beef prices. c. An increase in the supply of beef. d. A decrease in the supply of beef.

30) During the Great Depression in the US of the 1930’s, average family incomes dropped by about 35% nationwide. During this same time period, the price of children’s shoes dropped about 20% and the quantity purchased annually dropped about 40%. This indicates that a. The demand for children’s shoes was price elastic. b. The supply of children’s shoes was price inelastic. c. The demand for children’s shoes was income elastic. d. Children’s shoes were inferior goods during the Depression.

31) Back a few years ago, a prominent person said the following, “My thesis in this lecture is that macroeconomics in this origin sense has succeeded: Its central problem of depression- prevention has been solved, for all practical purposes, and has in fact been solved for many decades.” Who is this person? a. Kenneth Arrow b. Martin Weitzman c. Robert Lucas d. Alan Greenspan

32) In the market for unskilled labor, the long-run a. Demand for labor is less elastic than the short-run demand. b. Demand for labor is more elastic than the short-run demand. c. Supply of labor is less elastic than the short-run supply. d. Supply of labor is more elastic than the short-run supply.

33) In economics, another term for satisfaction is a. Income b. price reduction c. marginality d. utility

34) If Sam has $60 each week to spend on gasoline and coffee, and their respective prices are $1.50 per gallon and $3.00 per pound, which of the following equations represents his budget line? (Qg is quantity of gasoline, Qc quantity of coffee) a. $60.00=$1.50/Qg + $3.00/Qc b. $60.00=Qg/$1.50 + Qc/$3.00 c. $60.00=$1.50 * Qg + $3.00 * Qc d. $60.00=$1.50 * Qg - $3.00 * Qc

35) The cost that a firm incurs for a resource that it already owns is called a. an explicit cost b. an implicit cost c. an accounting cost d. a nontaxable cost

6 Dr. Stephen Chiu Form B

Part II. Answer both questions (30 points).

1) The Department of Economics allots to each faculty member a $100 annual budget which can be used only for long-distance telephone calls. Assume that each faculty member spends his/her entire budget and no more or less. What is the faculty’s price elasticity of demand for department- provided long-distance telephone service? Explain your answer in no more than 30 words. (15 points)

(2) Identify each of the following as: (1) a change in demand or (2) a change in the quantity demanded. (15 points)

(a) Grape consumption falls because of a consumer boycott.

(b) Grape consumption falls because of a tax on grape producers.

(c) Grape consumption rises because of a good harvest.

End of paper