Mid Term Be

BASIC ECONOMICS
MID-TERM TEST
INSTRUCTIONS
1. The exam has7 pages and it consists of four parts
(i) Part I: 30 multiple-choice questions (1 point each)
(ii) Part II: 4 true-false questions (5 points each)
(iii) Part III: 2 short questions (10 points each)
(iv) Part IV: 2 calculating exercises (15 points each)
2. Time allowed: 100 minutes.
3. Calculators are permitted. Books, notes, reference materials, etc. are prohibited.
Do all your work on the exam itself. Write clearly. Good luck!
Student Name:________________________
Class:_______________________________
Student ID:_____________________________
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Part 1: Multiple choice questions: (1.6 points each)
1. Both households and societies face many decisions because

a. resources are scare
b. populations may increase or decrease over time
c. wages for households and therefore society fluctuate with business cycles.
d. people, by nature, tend to disagree
2. When society requires that firms reduce pollution, there is
1
a. a tradeoff only if some firms are force to close
b. no tradeoff, since everyone benefits from reduced pollution
c. no tradeoff for a society as a whole, since the cost of reducing pollution falls
only on the firms affected by the requirements
d. a tradeoff because of reduced incomes to the firms’s owners, workers, and
customers
3. Which of the following is NOT included in the decisions that every society
must make?
a. what goods will be produced
b. who will produce goods
c. what determines consumer preference
d. who will consume the good
4. The opportunity cost of an item is

a. the number of hours needed to earn money to buy it
b. what you give up to get the item
c. usually less than the dollar value of the item
d. the dollar value of the item
5. A good is considered either a normal good or an inferior good based on

a. the quality of the good
b. the price of the good
c. personal preference toward the good
d. the amount of a person’s income
6. Suppose that the scientists find evidence that proves chocolate pudding lowers
cholesterol. We would expect to see
a. no change in the demand for chocolate pudding.
b. a decrease in the demand for chocolate pudding.
c. an increase in the demand for chocolate pudding.
d. a decrease in the supply of chocolate pudding.
7. An increase in the price of oranges would lead to
2
a. an increased supply of oranges.
b. a reduction in the prices of inputs used in orange production.
c. an increased demand for oranges.
d. a movement up the supply curve for oranges
8. A perfectly competitive firm

a. takes its price as given by market conditions
b. sets its price to undercut other firms selling similar product
c. chooses its price to maximize profits
d. picks the price that yields the largest market share
9. Italian company opens a pasta company in the U.S. The profits from this
pasta company are included in
a. both U.S. and Italian GNP.
b. both U.S. and Italian GDP.
c. U.S. GDP and Italian GNP.
d. U.S. GNP and Italian GDP.
10. Which of the following is NOT included in GDP?

a. services such as those provided by lawyers and hair stylists
b. unpaid cleaning and maintenance of houses
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in the United States
11. Which of the following statements best reflects a price-taking firm?

a. if the firm were to charge more than the going price, it would sell none of its
goods
b. the firm has an incentive to charge less than the market price to earn higher
revenue.
c. the firm can sell only a limited amount of output at the market price before the
the market price will fall
d. price-taking firm maximizes profit by charging a price above marginal cost.
12. Suppose that good X has a negative income elasticity of demand. This implies
that the good is
a. a normal good
b. a necessity
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c. an inferior good
d. a luxury
13. Which of the following is NOT a determinant of the price elasticity of demand
for a product?
a. time
b. price
c. market definition
d. substitutes
14. In a competitive market free of government regulation.

a. price adjusts until quantity demanded is greater than quantity supplied
b. price adjusts until quantity demanded is less than quantity supplied
c. supply adjusts to meet demand at every price.
d. price adjusts until quantity demanded equals quantity supplied
15. If the price of good A decreases, the demand for good B increases. Which
statement is true?
a. A and B are substitute goods
b. A and B are complimentary goods
c. there is no relation between A and B
d. there is not enough to give answer
16. Which of the following would not be a determinant of demand?

a. the prices of the inputs used to produce the good
b. income
c. tastes
d. the price of a related good
17. A supply curve is directly affected by

a. technology
b. government regulations
c. input costs
d. all of the above
4
18. When the price of bubble gum is $0.50, the quantity demanded is 400 packs
per day. When the price falls to $0.40, the quantity demanded increases to
600. Given this information and using the midpoint method, you know that
the demand for bubble gum is
a. inelastic
b. elastic
c. unit elastic
d. perfect inelastic
19. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in
price would result in a
a. 4.0 percent decrease in the quantity demanded.
b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 400 percent decrease in the quantity demanded.
20. If this year the CPI is 125 and last year it was 120, then we know that
a. all goods have become more expensive.
b. the price level has increased.
c. the inflation rate has increased.
d. all of the above are correct
21. The price of imported athletic shoes produced by a U.S. company operating
in Thailand increases. By itself what effect will this change have on the GDP
deflator and on the CPI?
a. the GDP deflator and the CPI will both increase.
b. the GDP deflator will increase and the CPI will be unaffected.
c. the GDP deflator and the CPI will both be unaffected
d. there is totally no difference between GDP deflator and CPI because both
measure the change in overall price in the economy
22. Which of the following would unambiguously cause a decrease in the

equilibrium price of cotton shirts?
a. an increase in the price of wool shirts and a decrease in the price of raw cotton
b. a decrease in the price of wool shirts and a decrease in the price of raw cotton
c. an increase in the price of wool shirts and an increase in the price of raw cotton
5
d. a decrease in the price of wool shirts and an increase in the price of raw cotton
23. A measurement showing how quantity demanded of good 1 varies with a price change of good 2
is
a. price elasticity of demand
b. income elasticity of demand
c. cross-price elasticity of demand
d. budget elasticity of demand
24. Tiffany is offered a Job in Minneapolis that pays $80,000. She is offered a
similar job in Memphis for $64,000. Which set of CPI’s would make the two
salaries have almost the same purchasing power?
a. 90 in Minneapolis and 80 in Memphis
b. 90 in Minneapolis and 72 in Memphis
c. 90 in Minneapolis and 66 in Memphis
d. None of the above are correct
25. For elastic demand curve

a. total revenue rises as price rises
b. total revenue falls as price rises
c. total revenue does not change as price rises
d. total revenue automatically changes even price unchanged
Part 2: True or False? Briefly explain. (2.5 points/question)

1. A marginal change is a small incremental adjustment to an existing plan of action
2. If there is an improvement in the technology of producing a product, the supply
curve for that product will shift to the left.
3. Income elasticity of demand is used to determine whether goods are inferior or
normal goods.
4. An increase in nominal U.S. GDP necessarily implies that the United States is
producing a larger output of goods and services.
Part 3: Problems (35 points)

Problem 1 (20 points)
Peter owns the only well in town that produces clean drinking water. He faces the
following demand, marginal revenue, and marginal- cost curves
Demand: P = 50-Q
6
Marginal revenue: MR = 50-2Q
Marginal cost: MC = 5+Q
a. Assuming that Peter maximizes profit, what quantity does he produce? What price
does he charge?
b. Show the above results on graph
Problem 2 (15 points)
Suppose In a simple economy, people consume only 2 goods, food and clothing. The
market basket of goods used to compute the CPI has 50 units of food and 10 units of
clothing.
Food Clothing
2002 price $4 $10
2003 price $6 $20
a. What are the percentage increases in the price of food and in the price of
clothing?
b. What is the percentage increase in the CPI?
c. Do these price changes affect all consumers to the same extent? Explain.
Part 4: Short answers (15 points)

a. U.S. real GDP is substantially higher today than it was 60 years ago. What does this
tell us, and what does it not tell us, about the well-being of U.S. residents?
b. Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a
3 percent increase in diamond rings? Explain.
c. For a firm that produces necessities, what policy for a firm to increase the total
revenue? (Hint, based on elasticity to explain)

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BASIC ECONOMICS

Part 1: Multiple choice questions: (1.6 points each)

1. Both households and societies face many decisions because

2. When society requires that firms reduce pollution, there is

4. The opportunity cost of an item is

5. A good is considered either a normal good or an inferior good based on

7. An increase in the price of oranges would lead to

8. A perfectly competitive firm

10. Which of the following is NOT included in GDP?

11. Which of the following statements best reflects a price-taking firm?

14. In a competitive market free of government regulation.

16. Which of the following would not be a determinant of demand?

17. A supply curve is directly affected by

22. Which of the following would unambiguously cause a decrease in the

25. For elastic demand curve

Part 2: True or False? Briefly explain. (2.5 points/question)

Part 3: Problems (35 points)

Part 4: Short answers (15 points)

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