Midterm1 Practice

Instructions
1. Your exam consists of two problems and 25 multiple choicequestions.
2. Each problem accounts for 25 points with 2 points for each multiple choice.
3. You must write your answers to the problems in the space provided.
4. You must turnoff your cellphone and keep it out of sight
5. On your table you are only allowed a blank piece of paper, pencil or pen and a standard
calculator.
Please Print Clearly
Instructor: Paulo Guimaraes
ECO 201 – Paulo Guimaraes
Question 1 (25 points)
Case 1) Consider a country which produces only agricultural goods and military goods. Both goods use
capital and labor as production inputs, however, the agricultural goods are assumed to be more labor
intensive. Using two separate graphs (one for each question), draw the “original” production possibility
frontier (military goods on the horizontal axis, agricultural goods on the vertical axis) and illustrate each
of the following situations:
a) The country experiences large increases in immigration
b) there is a technological improvement in the production of military goods only
Case 2) Consider now the market for agricultural products and use an adequate graphical representation
to illustrate what happens to price and quantity in the following situations described below. Please
make sure that your graphs are labeled and that the “before” and “after” situations are properly
identified.
c) “due to exceptional conditions the number of farmers and cultivated farmland increases”
d) “The government lowers income taxes and all buyers have higher income”
e) “The price of imported beef goes up”

Question 2 (25 points)
In one month, a restaurant sold 3,500 personal pizzas at $3.50 per pizza. Due to an increase in the price
of a key pizza ingredient the restaurant increased the price of pizza by 20%. As a result of this price
change the total pizza revenue for the next month increased to $13,440. However, the increase in the
price of pizza led to a decline on the monthly sales of soda which decreased from 3,500 cans to 3,000
cans.
a) Find the price elasticity of demand for the change in price discussed above
b) Write up the expression for the pizza demand curve of this restaurant

d) Find the crossprice elasticity of soda with respect to pizza
e) Knowing that the supply curve for pizza at this restaurant is given by a straight line and that at the price

Multiple Choice Questions (2 points each)
1. Which of the following factors would not contribute to increasing an existing comparative advantage? A. Efficiency improvements due to learning. B. Less time lost by switching tasks. C. Productivity improvements from greater experience. D. Import restrictions.
This table shows demand for shoes in a 3 consumer market:

This graph describes the production possibilities on the island of Genovia:
3. The opportunity cost of producing one ton of agricultural products in Genovia is A. 1 fewer car. B. 1/50 fewer car. C. 1/5 fewer car. D. 1,000 fewer cars.
4. Which of the following is NOT a determinant of demand for gasoline? A. The price of automobiles. B. The price of gasoline. C. The price of diesel. D. The quantity of gasoline supplied.
5. When a government increases the cost of international trade, it is A. keeping all domestic prices artificially low. B. reducing the total amount of output available to domestic consumers. C. helping domestic consumers. D. hurting all domestic producers.

7. Economic surplus is A. the price paid to take an action. B. the benefit gained by taking an action. C. the wage someone would have to earn in order to take an action. D. the difference between the benefit gained and the cost incurred of taking an action.
8. The marginal benefit of an activity is the A. extra benefit associated with an extra unit of the activity. B. same as the total benefits of the activity. C. total benefit divided by the level of the activity. D. total benefit associated with an extra unit of the activity.
9. Samia saw a pair of jeans that she was willing to buy for $35. The price tag, though, said they were $29.99. Therefore, A. Samia should buy the jeans because the price is less than her reservation price. B. Samia should not buy the jeans because the price is not equal to her reservation price. C. Samia should buy the jeans because the price is more than her reservation price. D. Samia should not buy the jeans because they will be of lower quality than she expected.
10. If the elasticity of demand for your favorite singer's CD is 1.4, this means A. a 1% increase in the price leads to a 14% reduction in quantity demanded. B. a 10% decrease in the price leads to a 140% increase in quantity demanded. C. few substitutes exist. D. a 5% increase in the price leads to a 7% decrease in quantity demanded.

12. You have noticed that there is a persistent shortage of teachers in an inner-city school district in your city. Based on this observation, you suspect that A. There is an excess supply of teachers. B. The reservation price among teachers is lower than for other professions. C. The wage for teachers at those schools is higher than at other schools in the city. D. The wage for teachers at those schools is lower than the equilibrium wage.
13. The key to resolving the apparent paradox of international trade increasing total output yet facing much political opposition is noting that A. only the wealthy benefit from trade. B. no one benefits from trade. C. everyone does not benefit equally from trade. D. economists are mistaken about the increase in output.
Karim and Hamid live together and share household chores. They like to cook some meals ahead and eat leftovers. Suppose that in one hour Karim and Hamid can do the following:

15. In Cuba, a bureaucratic committee makes the production decisions for the country's firms and factories. Therefore Cuba is an example of a A. capitalist economy. B. mixed economy. C. centralized economy. D. pure free-market economy.
Point A on a linear production possibilities curve represents a combination of 12 coffees and 3 cappuccinos, and point B represents 3 coffees and 6 cappuccinos. Suppose coffees are on the vertical axis and cappuccinos are on the horizontal axis.
16. The opportunity cost of a cup of coffee is A. 9 cappuccinos B. 3 cappuccinos C. 1/3 of a cappuccino D. 6 cappuccinos
Jaafar is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes $2 for every window he cleans. Jaafar is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below:
Cleaning time (hr/day) Total number of windows cleaned
0 0
1 7
2 11
3 14
4 16
5 17

You own a pizza shop called "Pizza's' Us". Currently you are paying your cooks an hourly wage of $20. You sell a medium pizza for $10 a pie. By hiring more cooks, you can increase your pizza production as shown in the following table.
18. How many cooks should you hire to maximize your net benefit? A. 5 B. 3 C. 4 D. 1
19. If cross price elasticity is positive but less than one, the two goods are A. complements. B. inelastically demanded. C. substitutes. D. normal.

21. If both supply and demand decrease simultaneously, the new equilibrium price is ___________ and the new equilibrium quantity is _________________. A. lower; lower B. indeterminate; lower C. indeterminate; higher D. lower; indeterminate

Mustafa divides his time between studying Physics and studying Economics. He has discovered that he can earn grades as shown on this production possibilities curve.


Midterm1 Practice

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