Midterm practice

Section 1: Multiple Choice Questions (25 marks)

Mark your answer on the grid attached. Do NOT DETACH THE GRID UNDER ANY
CIRCUMSTANCES. You will not be given extra time to fill out the grid at the end, so make sure you are
doing that simultaneously

1. According to the graph shown, if price in this market is currently $8, there would be
a. shortage of 20 units and price would tend to rise.
b. surplus of 20 units and price would tend to fall.
c. shortage of 40 units and price would tend to rise.
d. surplus of 40 units and price would tend to fall.
e. No shortage or surplus

2. Which of the following events would cause a movement upward and to the left along the
demand curve for olives?

a. The number of buyers of olives decreases.

b. Consumer income decreases, and olives are a normal good.
c. The price of pickles decreases, and pickles are a substitute for olives.
d. The price of olives rises.

3. The vertical distance between points A and C represent a tax in the market.
The amount of deadweight loss associated with the tax is equal to
a. Areas W and Y
b. Areas X and Z
c. Area W
d. Area Y

4. For the two questions below, consider a firm that has the following cost function.
Fixed Cost = 10. Variable Cost according to:
Quantity Produced Variable Cost
0 0
1 10
2 22
3 35
4 50
5 67
6 86
7 109
What is the marginal cost of the 6th unit produced?
a. $ 6
b. $ 16
c. $ 19
d. $ 86

5. In the market for shirts, which of the following best describes the effect of a decrease in
consumer income and an improvement in technology of producers?
a. Equilibrium price increases, equilibrium quantity increases
b. Equilibrium price increases, change in equilibrium quantity uncertain
c. Change in equilibrium price uncertain, equilibrium quantity increases
d. Equilibrium price decreases, change in equilibrium quantity uncertain
e. Change in equilibrium price uncertain, equilibrium quantity decreases
6. In the market for shirts, which of the following best describes the effect of an improvement
in technology of producers if the elasticity of demand is 0 and the elasticity of supply is 2.0?
a. Equilibrium price increases, equilibrium quantity increases
b. Equilibrium price increases, change in equilibrium quantity uncertain
c. Equilibrium price decreases, equilibrium quantity unchanged
d. Change in equilibrium price uncertain, equilibrium quantity increases
e. Equilibrium price increases, equilibrium quantity unchanged

7. When the price of oranges increases from $4 to $6 per bag, the quantity demanded of oranges
decreases from 800 to 700. The price elasticity of demand curve over this price rage is equal
to___. Use the midpoint method for your calculation.
a. 3
b. 3/7 or 0.4286
c. 1/3 or 0.333
d. ¼ or 0.25

8. The following is the demand and supply schedule of pizza.

Suppose Dawn News publishes an article that discusses the negative effect of pizza consumption
on acne, causing demand to decrease to one half of what it was before. The new equilibrium
price and quantity are
a. $4. and 20.
b. $6 and 30
c. $8 and 40
d. $10 and 30.

9. Suppose an economy is producing only bread and milk and the below table gives the PPF for
this economy (Use this table to answer the two questions below)

Bread (loaves) Milk (gallons)

40 0
30 20
20 35
10 45
0 50

Given the table above, what is the opportunity cost of increasing the production of bread from 10
to 20 loaves?
a. 5 gallons of milk
b. 10 gallons of milk
c. 20 gallons of milk
d. 15 gallons of milk

10. Given the above table, which of the following statement accurately describes the production
possibilities for this economy?

a. the OC of an additional 10 loaves of bread is 20 gallons of milk

b. the OC of an additional 10 loaves of bread is 10 gallons of milk
c. the OC of an additional 10 loaves of bread increases as more bread is produced
d. Not enough information

11. If the cross elasticity of demand between coffee and tea is positive, an increase in the price
of tea will shift the demand curve for
a. tea rightward.
b. tea leftward.
c. coffee rightward.
d. coffee leftward.

12. Suppose that the cost of producing widgets increases at the same time that widgets become
less popular. Given this information, which of the following is true?
a. The equilibrium quantity will decrease and the equilibrium price will increase.
b. The equilibrium quantity may increase, decrease, or remain the same while the
equilibrium price will increase.
c. The equilibrium quantity may increase, decrease, or remain the same while the
equilibrium price will decrease.
d. The equilibrium quantity will decrease while the equilibrium price may increase,
decrease, or remain the same.

13. If the price of a donut is $2.00 and the price of a soda is $0.50, the opportunity cost of a
donut (in terms of soda) is:
a. .50
b. 1.0
c. 2.00
d. 4.00

14. Using the concept of opportunity costs, which of the following statements is false? A. As
commodity X is traded for commodity Y, opportunity costs may increase, remain constant, or
decrease.
B. If the opportunity cost of good X (in terms of good Y) is decreasing then the opportunity
costs of good Y (in terms of good X) would be decreasing.
C. If the value you place on the action you take is higher than you expected it to be, the
opportunity costs are not affected.
 D. If two individuals receive the same benefit from a given action their opportunity cost
of taking that action would also be the same.

15. Which of the following statements is true?

a. The short run supply curve is more elastic than the long run supply curve.
b. The long run demand curve for durable goods is more elastic than the short run demand
curve
c. Short run demand curves for non-durable goods are more elastic
d. Long run demand curves for durable goods are less elastic

16. The marginal seller is

a. the seller who cannot compete with the other sellers in the market.
b. the seller who would leave the market first if the price were any lower.
c. the seller who can produce at the lowest cost.
d. the seller who has the greatest producer surplus.

17. Suppose that a unit tax of $2 is imposed on producers and that the initial equilibrium price of
the good is $10. With a vertical demand curve and an upward-sloping supply curve, we can
predict that
a. the price faced by consumers is 12 after the tax.
b. the price faced by consumers is 8 after the tax.
c. the price faced by consumers is 10 after the tax.
d. the price faced by consumers is 11 after the tax.
e. none of the above.

18. Under which of the following conditions that producers will not be able to pass a penny to
the consumers. (i.e. producers will bear the entire tax burden). Suppose that the demand is
normal (i.e. it has a negative slope).
a. when the elasticity of supply is 2.5.
b. when the elasticity of supply is infinite large.
c. when the elasticity of supply is equal to unity.
d. when the elasticity of supply is zero.

19. According to the graph below, the price that sellers will receive after the tax is imposed
is___.
a. $1
b. $2
c. $3
d. $4
20. According to the graph above, the amount of the tax borne by sellers is ___.
a. $1
b. $2
c. $3
d. $4

Structured questions
Q1. For the following scenario, use a well-labelled supply and demand diagram to illustrate the e ffect of
the given shock on the equilibrium price and quantity in the market for bus rides. Explain whether there is
a shift in the demand curve, the supply curve, or neither.

Wages of bus drivers increase. At the same time, incomes of consumers generally increase. Consumers do
not like taking a bus to school and would prefer not to take a bus if they could afford other means of
transport. [10]

Market is for bus rides: so an increase in the wages is an increase in the cost of production of bus rides,
so the supply curve will shift to the left. The demand also shifts to the left. Since both supply and demand
decrease, the market quantity must fall, but the effect on price is ambiguous. A decrease in supply should
increase price, but a decrease in demand could decrease price. The overall effect is ambiguous. You may
illustrate your answer with one possibility out of the three discussed in class.

Q2. Consider the market for pizza using S&D. Show the effect of each of the following on
equilibrium price and quantity of each of the following: (explain what shifts and why). Draw two separate
graphs. [9]
a. Opening new pizza parlors
Must have fully labeled supply and demand graph showing beginning and ending equilibria. In this case,
the Supply of pizza shifts to the right (increases) due to the new firms (increased market size) resulting in
lower prices and increased quantity.
b. A decrease in the price of hamburgers

Assuming hamburgers are a substitute, as the price of a substitute decreases, the demand for
pizza will also decrease. This results in a shift to the left (decrease) of Demand resulting in
lower prices and quantity.

c. New burger chains open up

The demand curve for burgers shifts to the right, but nothing happens to the market for pizzas.

Q3. A student says "an increase in price causes a decrease in demand", I say that is wrong. Explain. [5]

An increase in price only causes a movement along the demand curve. The phrase decrease in demand
means that the demand curve shifts. The demand curve NEVER shifts because of a price change

Q4. True/False, Explain. “An increase in the supply of sanitisers raises the supply, but not the quantity
demanded. [5]
False. The increase in demand for sanitizers results in an increased quantity supplied.

Bonus: What is the exception? Draw that case. [2]

Vertical supply curve.

5. Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the
coffee bean crop. Use appropriately labeled diagrams to answer the following questions.
a. What happens to the price of coffee beans? P rises
b. What happens to the price of a cup of coffee? P rises
c. What happens to total expenditure on cups of coffee?
Expenditure rises
d. What happens to the price of donuts? What happens to total expenditure on donuts?
As donuts and coffee are complements, the demand for donuts falls. The demand curve shifts backward,
and the price of donuts will fall but not by too much as the demand curve is quite steep. The TE will fall
as a result, but not by too much.