Midterm 1
1) The production possibilities frontier model shows that
A) if consumers decide to buy more of a product its price will increase.
B) a market economy is more efficient in producing goods and services than is a centrally planned economy.
C) economic growth can only be achieved by free market economies.
D) if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of
another good.
2) The points inside the production possibilities frontier are _________________.
I. unattainable
II. efficient
III. such that in order to produce more of one good, the production of the other good should be sacrificed.
IV. are possible to produce with the available resources.
A) only I B) II and IV C) III and IV D) only IV
3) If the production possibilities frontier is ________, then opportunity costs are constant as more of one good
is produced.
A) bowed out B) bowed in C) non-linear D) linear
4) An inward shift of a nation's production possibilities frontier can occur due to
A) a reduction in unemployment. C) a change in the amounts of one good desired.
B) a natural disaster like a hurricane or bad earthquake. D) an increase in the labor force.
5) Absolute advantage means the ability to produce a good or service
A) by using less amount of resources. C) of a higher quality than any other producer.
B) at a lower opportunity cost than any other producer. D) at a higher profit than any other producer.
6) An increase in the demand for gas in U.S. due to changes in consumer tastes, accompanied by a decrease in the
supply of gas as a result of bad weather in U.S. reducing the number of oil refineries, will result in
A) a decrease in the equilibrium quantity of gas and a decrease in the equilibrium price.
B) an increase in the equilibrium price of gas and no change in the equilibrium quantity.
C) an increase in the equilibrium price of gas; the equilibrium quantity may increase or decrease.
D) a decrease in the equilibrium quantity of gas; the equilibrium price may increase or decrease.
7) An increase in the demand for gas in U.S. due to changes in consumer tastes, accompanied by an increase in the
supply of gas as a result of a new trade agreement between OECD countries (the main suppliers of gas) and U.S.,
will result in
A) a decrease in the equilibrium quantity of gas and no change in the equilibrium price.
B) an increase in the equilibrium price of gas and no change in the equilibrium quantity.
C) an increase in the equilibrium price of gas; the equilibrium quantity may increase or decrease.
D) an increase in the equilibrium quantity of gas; the equilibrium price may increase or decrease.
8) A small decrease in the demand for gas in U.S. due to changes in consumer tastes, accompanied by a relatively
big increase in the supply of gas (compared to the decrease in demand) as a result of a new trade agreement
between OECD countries and U.S., will result in
A) an increase in the equilibrium quantity of gas and a decrease in the equilibrium price.
B) an increase in the equilibrium price of gas and no change in the equilibrium quantity.
C) an increase in the equilibrium price of gas; the equilibrium quantity may increase or decrease.
D) a decrease in the equilibrium quantity of gas; the equilibrium price may increase or decrease.
9) "Because margarine and butter are substitutes, an increase in the price of butter will cause the demand for
margarine to increase. This initial shift in demand for margarine results in a higher price for margarine; this higher
price will cause the demand curve for margarine to shift to the right." Which of the following correctly comments
on this statement?
A) The statement will be true if consumer tastes for margarine and butter do not change.
Midterm 1 Due Wednesday, July 18
B) The statement is false because a change in margarine's price would not change the demand for margarine.
C) The statement is false because butter is an inferior good; margarine is a normal good.
D) The statement is false because an increase in the price of butter will cause the demand for margarine to decrease.
10) Which of the followings would cause an increase in both the equilibrium price and quantity of bread?
A) an increase in demand and a decrease in supply
B) a decrease in supply
C) an increase in demand and a decrease in supply greater than the increase in demand
D) an increase in supply and an increase in demand greater than the increase in supply
11) The income effect of a price change refers to the impact of a change in
A) income on the price of a good.
B) demand when income changes.
C) the quantity demanded when income changes.
D) the price of a good on a consumer's purchasing power.
14) Refer to Figure 1. A point on the red solid line is _____________ with Pakistan's current technology and
resources.
A) attainable but not efficient C) unattainable
B) attainable and efficient D) attainable but inefficient
15) Refer to Figure 1, which of the following statements must be true for China to have a comparative advantage
for cotton production over Pakistan?
A) China's opportunity cost of producing 1 pound of cotton must be higher than ½ pound of cashew.
B) China must produce 320 bolts of cotton by devoting all of its resources to cotton production or 80 pounds of
cashew by devoting all of its resources to cashew production.
C) China must produce 300 bolts of cotton by devoting all of its resources to cotton production or 200 pounds of
cashew by devoting all of its resources to cashew production.
D) China must produce more than 240 bolts of cotton by devoting all of its resources to cotton production.
16) Which of the following statements about price elasticity of demand is false?
A) The value of the price elasticity of demand is the reciprocal of the value of the demand curve's slope.
B) If quantity demanded changes by a larger percentage than the percentage change in price, demand is elastic.
C) The value of the price elasticity of demand along a downward-sloping demand curve is always negative.
D) The elasticity is different on every point of a linear downward-sloping demand.
The solid black line is Pakistan's production possibilities frontier.
12) According to Figure 1, Pakistan's opportunity cost of producing 1 pound of
cashew is__________.
A) 2 bolts of cotton C) 1/2 bolts of cotton
B) 2 bolts of cashew D) 1/2 bolts of cashew
13) According to Figure 1, the red dashed line may represent
A) A technological improvement in the cashew industry
B) A vaccine that makes a cashew tree to produce more cashew at once
C) A vaccine that significantly reduces the vulnerability of cotton plants to bad
weather conditions or harmful insects
D) An improvement that affects every produce in the agricultural industry.
Figure-2 shows the amount of cashew or cotton that Pakistan or China can produce in one day by devoting all of its
resources to the production of one good.
18) According to Figure 2, which of the following statements is true?
A) China should use most of resources for cotton, but must also produce some cashew, too, because it can produce
more of both goods.
B) China should only produce cotton only because it can produce more cotton than Pakistan.
C) Pakistan should specialize in cotton production, while China should produce only cashew.
D) Pakistan should specialize in cashew production, while China should produce only cotton.
For Figure 2, suppose that Pakistan's daily production is 70 pounds of cashew and 100 bolts of cotton, and China's
daily production is 120 pounds of cashew and 120 bolts of cotton before specialization.
19) According to Figure-2, which of the following statements is true?
A) The cashew production goes down, but the cotton production increases by 80 bolts.
B) The total production of cashew and cotton increases by 30 pounds and 10 bolts, respectively.
C) The total production of cashew and cotton increases by 10 pounds and 20 bolts, respectively.
D) The cotton production does not increase. Only the cashew production increases.
20) Suppose that Pakistan and China will trade. Considering the information in Figure-2 and questions 17-19,
which trade makes both countries better off?
A) Pakistan sells 120 bolts of cotton to China and buys 70 pounds of cashew from China.
B) Pakistan sells 100 bolts of cotton to China and buys 40 pounds of cashew from China.
C) Pakistan sells 100 pounds of cashew to China and buys 120 bolts of cotton from China.
D) Pakistan sells 100 pounds of cashew to China and buys 70 bolts of cotton from China.
Consider the market for a good called KUDA.
I. The price of substitute goods increases.
II. The price of a complementary goods increases.
III. Recent research shows that KUDA is bad for your cholesterol.
IV. KUDA is improved to help your muscle and bone health.
V. Technology advances in KUDA production.
VI. KUDA workers go to a strike which ends with an increase in their wage.
VII. Bad weather destroys the KUDA resources.
VIII. KUDA's price is expected to increase in the future.
IX. An increase in the price of a good that is a substitute-inproduction for KUDA.
X. An increase in the price of a good that is a complement-inproduction for KUDA.
21) The equilibrium price and quantity decrease if ____ and _____ simultaneously, assuming that the magnitude of the change in demand is greater.
A) I and VII C) II and VII
B) IV and V D) I and X
22) Supply for KUDA decreases and demand for KUDA increases if
A) IX and IV C) VI and III
B) VI and II D) IX and II
23) The equilibrium price increases but the equilibrium quantity decreases if
A) IX B) II C) I D) X
17) According to Figure 2, which of the following statements is true?
A) Pakistan doesn't have an absolute advantage for either good, but has a
comparative advantage for cashew.
B) China has an absolute advantage and a comparative advantage for cotton.
C) Pakistan has a comparative advantage for cotton.
D) China has a comparative advantage for cashew and cotton.
24) If KUDA can be stored for a long time and if KUDA's price is expected to increase in the future,
A) only current demand decreases C) current demand increases and current supply decreases
B) only current supply decreases D) current demand increases and current supply increases
25) The equilibrium price decreases but the equilibrium quantity increases in the KUDA market if _____ and
______simultaneously.
A) V and III, assuming that the magnitude of change in demand is greater.
B) X and I, assuming that the magnitude of change in supply is greater.
C) VII and I, assuming that the magnitude of change is supply is greater.
D) IX and IV, assuming that the magnitude of change in demand is greater.
26) A demand curve which is ________ represents perfectly inelastic demand.
A) downward sloping B) horizontal C) vertical D) upward sloping
27) Which of the following statements is true about elasticity?
A) Elasticity is constant along a linear demand curve as the slope is also constant along a linear demand curve.
B) The absolute value of elasticity is high at high prices and low quantities, and low at low prices and high quantities along the demand curve.
C) The absolute value of elasticity is low at high prices and low quantities, and high at low prices and low quantities along the demand curve.
D) The elasticity is positive at high prices and low quantities, and negative at low prices and high quantities along the demand curve.
28) If, for a given percentage increase in price, quantity demanded falls by a proportionately smaller
percentage, then demand is
A) unit-elastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic.
29) If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the
demand for golf balls is
A) unit-elastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic.
30) If the price of steel increases drastically, the quantity of steel demanded by the building industry will
fall significantly over the long run because
A) buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.
B) buyers of steel are less sensitive to a price change if they have more time to adjust to the price change
C) sales revenue in the building industry will fall sharply.
D) profits will fall by a greater amount in the long run than in the short run.
31) Assuming that a black market is created, which of the following is not a result of imposing a rent ceiling?
I. There is a reduction in the quantity demanded of apartments.
II. Some producer surplus is converted to consumer surplus.
III. Consumers face a higher price than the competitive equilibrium price.
IV. The effect of rent ceiling on consumer surplus is ambiguous because although there are less apartments available to consumers, they can rent an apartment at a low rent due to the rent ceiling.
A) Only II B) II and III C) I and III D) II and IV
32) When there are few close substitutes available for a good, demand tends to be
A) perfectly inelastic. B) relatively inelastic. C) perfectly elastic. D) relatively elastic.
33) If the demand for a life-saving drug is perfectly inelastic and the price doubles the quantity demanded
A) also doubles. B) decreases by 50%. C) is cut in half. D) remains constant.
36) Bringing oil to the market is a relatively difficult and costly process. The whole process from exploration to pumping significant amounts of oil can take years. Hence, the amount of oil that is ready and available to
consumers does not change much. What does this indicate about the price elasticity of supply for oil?
A) The elasticity is likely to be very high and supply is inelastic.
B) The elasticity is likely to be close to zero and supply is perfectly elastic.
C) The elasticity is likely to be low and supply is highly inelastic.
D) The elasticity is likely to be low and supply is highly elastic.
37) Suppose the California Nurses Union successfully secured a 12 percent increase in the wages of registered nurses. If a hospital responds by reducing the quantity of registered nurses hired and increasing the quantity of
physician's assistants hired, what conclusion can you draw?
A) Physician's assistants are more valuable in terms of their productivity.
B) The price elasticity of demand for registered nurses is negative while the price elasticity of demand for physician's assistants is positive.
C) The cross-price elasticity of demand between registered nurses and physician's assistants is positive.
D) The cross-price elasticity of demand between registered nurses and physician's assistants is negative.
38) Over longer periods of time, increases in oil prices provide firms with incentives to explore and recover oil.
What does this indicate about price elasticity of supply for oil in the long run?
A) The elasticity is likely to be higher in the long run than in the short run.
B) The elasticity is likely to be lower in the long run than in the short run.
C) The elasticity approaches 0 in the long run as supplies are depleted.
D) The elasticity is unstable in the long run because oil supplies may be depleted.
34) Refer to Figure 3. Suppose the market is initially in equilibrium at price P0 and then the government imposes a tax
on every unit sold. Which of the following statements best describes the impact of the tax?
A) The consumer will bear a smaller share of the tax burden if the demand curve is D0.
B) The consumer's share of the tax burden is the same whether the demand curve is D0 or D1.
C) The consumer will bear a smaller share of the tax burden if the demand curve is D1.
D) The consumer will bear the entire burden of the tax if the demand curve is D1 and the producer will bear the entire burden of the tax if the demand curve is D0.
35) Refer to Figure 4. Suppose the market is initially in equilibrium at price P0 and now the government imposes a tax
on every unit sold. Which of the following statements best describes the impact of the tax? For demand curve D0
A) the producer bears a greater share of the tax burden if the supply curve is S1.
B) the producer bears a greater share of the tax burden if the supply curve is S0.
C) the producer's share of the tax burden is the same whether the supply curve is S0 or S1.
D) the producer bears the entire burden of the tax if the supply curve is S0 and the consumer bears the entire burden of the tax
if the supply curve is S1.
41) The cross-price elasticity of demand between pretzel and mustard would be
A) negative if subscribers consider the services substitutes for each other.
B) positive if subscribers consider the services complements to each other.
C) negative if subscribers consider the services complements for each other.
D) negative no matter if subscribers consider the services substitutes or complements for each other.
45) A demand curve that is horizontal indicates that the commodity
A) has few substitutes. C) is a necessity.
B) must be very cheap. D) has a large number of very close substitutes.
46) The highest price that consumers are willing to pay for one unit of a good is at a point where
A) the marginal benefit of consuming the product is equal to the marginal cost of consuming it.
B) the consumer surplus is equal to the producer surplus.
C) the marginal benefit of consuming the product is higher than the marginal cost of producing it.
D) the marginal benefit of consuming a product is equal to the highest price that they are willing to pay.
47) Which of the following items is likely to have the highest income elasticity of demand?
A) a bus ride C) a vacation home in the Swiss Alps
B) a meal at Taco Bell D) a tank of gasoline
48) Which of following statements is true regarding sensitivity to a price change?
A) Business travelers would be more sensitive to a change in flight tickets' price than the leisure travelers.
B) Senior citizens would be more sensitive to a change in cholesterol medicine's price than young citizens.
C) Students would be more sensitive to a change in textbooks' prices than nonstudents.
D) Local citizens would be more sensitive to a change in hotel prices than vacationers.
39) Which goods are substitutes?
A) X and Y C) X and Z
B) Y and Z D) X, Y, and Z
40) Which goods are complements?
A) X and Y C) X and Z
B) Y and Z D) X, Y, and Z
42) Calculate the price elasticity of demand at point B.
A) -2/5 B) 5/2 C) -5/2 D) -11/3
43) Calculate the price elasticity of demand at point C.
A) -4/3 B) 2/3 C) -9/5 D) -1
44) Approximately at which point on the demand curve the demand is unit-elastic?
A) At point C C) Between point C and D
B) At point D D) Between point D and E
51) Refer to Figure 7. If a black market is not created, the deadweight loss that is created by the rent ceiling is A) zero, because the rent ceiling is not binding B) C+E C) C+E+F D) E+F
52) Refer to Figure 7. Assume that a black market is created. Which of the following statements is true?
A) The price in the black market increases to P2.
B) The price in the black market increases to P1.
C) The price remains at R.
D) The deadweight loss as a result of rent ceiling in the black market case is smaller than the deadweight loss as a
result of rent ceiling in the case where a black market is not created.
53) Refer to Figure 7. Suppose that the government sets a rent floor at P1. Find the area that represents consumer surplus _____ and the area that represents the producer surplus _______.
A) CS=A+B+C; PS= D+E+G C) CS=A PS=B+C+D+E+G
B) CS=A; PS= B+D+G D) CS=A+B PS=D+G
54) Refer to Figure 7. If the government sets a rent floor at P1, which of the following statements is false?
A) The rent floor will be binding.
B) There is no deadweight loss because the rent floor is not binding.
C) The deadweight loss is equal to the area C+E.
D) The deadweight loss is the same in the case where there is a rent ceiling without a black market.
55) Refer to Figure 7. If the government imposes a rent floor equal to R, the total surplus and the deadweight loss are equal to _______ and ______, respectively.
A) TS=A+B+D+G; DWL=C+E C) TS=A+B+C+D+E+G; DWL=zero
B) TS=A+B+D+G; DWL=C+E+F D) TS=A+B+C+D+E+F+G; DWL=zero.
Figure 7 shows the demand and supply curves for rental apartments. The government believes that the equilibrium rent is too high and tries to help
consumers by setting a rent ceiling at R.
49) Refer to Figure 7. A rent ceiling is imposed and a black market is not created. The area that represents consumer surplus is _____, and the area
that represents the producer surplus is _______.
A) CS=A; PS=B+E C) CS= A+B+C+D+E; PS=G
B) CS=A+B+D; PS=G D) CS= A+B+C; PS=D+E+G
50) Refer to Figure 7. A rent ceiling is imposed and a black market is not created. The change in consumer surplus is______, and the change in
producer surplus is________.
A) (D-C); -(D+E) C) (D+E); -(D+E)
B) -(B+C); (B-D) D) zero; zero
56) Refer to Figure 8. By using the midpoint method, calculate the price elasticity of supply at the equilibrium point.
A) -2 B) 2 C) 1 D)1/2
57) Refer to Figure 8. If the absolute value of the price elasticity of demand at the equilibrium point is 2, which statement about the
equilibrium point is false?
A) Supply is more elastic than the demand curve.
B) Supply is unit elastic.
C) Demand is more elastic than supply.
D) Consumers are more sensitive than suppliers to a price change.
58) Refer to Figure 8. Suppose that the government imposes a tax of $300 on consumers. After the tax, the equilibrium quantity is ____ cellphones, the price paid by consumers is $____, and the price received by sellers is
$____ per unit.
A) 6,000; $450; $300 B) 6,000; $450; $150 C) 4,000; $500; $200 D) 4,000; $600; $300
59) Refer to Figure 8. Suppose that the government imposes a tax of $300 on consumers. The tax burden of consumers is $____, and the tax burden of sellers is $____.
A) $200; $100 B) $50; $250 C) $100; $200 D) $50; $100
60) Refer to Figure 8. After the tax is imposed, Consumer Surplus=_____, Producer Surplus=_____,
Government's Tax Revenue=______, and Deadweight Loss=_______.
A) CS=$450, PS=$900, GTR=$1800, DWL=$150 C) CS=$200, PS=$200, GTR=$1800, DWL=$150
B) CS=$200, PS=$400, GTR=$1200, DWL=$600 D) CS=$400, PS=$600, GTR=$1200, DWL=$400
63) Refer to Figure 8. Suppose that the government of the neighbor village also imposes a consumer tax of $300.
Which of the following statement(s) is true? A) The price paid by neighbor village consumers is higher than the price paid by Taxvillians because their demand
curve is more elastic.
B) The amount that is sold in the neighbor village is more than the amount that is sold in Taxville after the tax.
C) The price paid by neighbor village consumers is higher than the price paid by Taxville consumers because the Taxville consumers' tax burden is smaller than the neighbor village consumers' tax burden.
D) The Taxville sellers transfer a bigger part of the tax to their consumers compared to the amount of tax that the neighbor village sellers transfer to their consumers.
64) Refer to Figure 8. Suppose that the government of the neighbor village also imposes a consumer tax of $300.
Which of the following statement(s) is true?
A) The government in the neighbor village would get a greater tax revenue if the supply or the demand curve was more elastic.
B) The Taxville government's tax revenue is greater because the supply curve in Taxville is more inelastic.
C) The tax revenue of the neighbor village's government is greater because it collects more tax per unit than the Taxville government.
D) The tax revenue of Taxville's government is greater because it collects more tax per unit than the neighbor village government.
65) Suppose the demand curve for a good is horizontal and the supply curve is upward sloping. If the government proposes a unit tax for this product,
A) sellers bear the entire burden of the tax.
B) the tax burden will be shared among the government, buyers and sellers.
C) buyers bear the entire burden of the tax.
D) the tax burden will be shared by buyers and sellers.
61) Refer to Figure 8 and Table 1. Calculate the price elasticity of supply of the neighborhood sellers at the equilibrium point by
using two closest points and the midpoint formula.
A) -2 B) 2 C) ½ D)1
62) Refer to Figure 8 and Table 1. Find the true
statement(s).
I. The supply of Taxville sellers is more elastic than the supply of neighbor sellers.
II. Taxville sellers would pay more tax than the neighbor sellers when a tax is imposed on consumers.
III. Neighbor sellers would share the tax burden equally with the consumers in the neighbor village when a tax is imposed.
A) Only I C) I and II
B) Only II D) II and III
66) The actual division of the burden of a tax between buyers and sellers in a market is called
A) tax incidence. B) tax liability. C) tax bearer. D) tax parity.
67) The government imposes a tax on beer. Buyers will pay the entire burden of the tax if the
A) supply curve for beer is vertical.
B) demand curve for beer is vertical.
C) demand curve for beer is horizontal.
D) demand curve is downward sloping and the supply curve is upward sloping.
68) The additional cost associated with undertaking an activity is called
A) net loss. B) marginal cost. C) opportunity cost. D) foregone cost.
69) The highest valued alternative that must be given up to engage in an activity is the definition of
A) economic equity. B) marginal benefit. C) opportunity cost. D) marginal cost.
70) At the competitive equilibrium
I. The quantity supplied is equal to quantity demanded.
II. Marginal benefit that consumers get from consuming the last unit is higher than the marginal cost of the last unit produced, and the difference is maximized in order to maximize the benefits that consumers get
from the consumption of the good.
III. There is no shortage, but there is excess supply.
IV. The economic surplus is maximized.
V. The deadweight loss is positive, but minimized.
VI. The market is efficient.
A) I, II, and IV. B) I, IV, and VI. C) I, II, and VI D) III, IV, and VI.
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