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VANCOUVER ISLAND UNIVERSITY

ECON211: Principles of Microeconomics, Spring 2013

MIDTERM EXAM I

Name (Last, First): ______________________________________________

ID #: ______________________________________________

Signature: _______________________________________________

THIS EXAM HAS TOTAL 10 PAGES INCLUDING THE COVER PAGE

Instructions:

Total marks 70 and you have 75 Minutes to complete the exam.

Please answer your MCQs in the table provided on the last page and short questions in the space provided.

For short answer questions You must show your all work to get full marks. If you do not show work, you may not

get full marks even for a correct answer.

Use the marks assigned to each question as a guide to allocating your time across questions.

Good Luck on Your Exam

Midterm Exam I, ECON211 February 13, 2013

PART A

(There are 30 MCQ in this section, worth 30 marks) 1. In the Canadian economy, most decisions regarding resource allocation are made by:

a. business firms only.

b. negotiation between unions and firms.

c. consumers and producers interacting in the price system

d. Legal contract

e. The various levels of government

2. Mutually beneficial gains from trade come from a. Absolute advantage b. Self-sufficiency c. Comparative advantage d. China

3. Economics can best be described as a. the study of how to reduce inflation and unemployment b. a normative science c. the study of the use of scarce resources to satisfy unlimited human wants d. the study of how a society ought to allocate its resources e. the application of sophisticated mathematical models to address social problems

4. Consider butter and margarine, which are substitutes. When the price of butter falls, the demand curve for margarine is likely to

a. remain stationary, although its price will rise b. shift to the right c. shift to the left d. remain stationary e. remain stationary, although its price will fall

5. Consider cars and gasoline. Other things being equal, when the price of cars decreases, the demand for gasoline is likely to

a. remain unchanged. b. remain unchanged because cars and gasoline are produced independently of one another c. increase because the two goods are complements d. remain unchanged because cars and gasoline are two distinct markets e. decrease because the two goods are complements

6. The positive slope of the supply curve indicates that a. as price goes up, quantity supplied will increase b. consumers will want to buy less at higher prices c. as price goes up, quantity supplied will decrease d. as price goes up, quantity supplied will remain constant e. if the costs of production increase, the quantity supplied will have to increase also

7. A rightward shift in the supply curve indicates a. that more is demanded at each price b. an increase in the quantity supplied at each price c. that an increase in income results in an increase in the quantity demanded at each price d. that suppliers are now making more profit e. decrease in the quantity supplied at each price


8. The slope of the production possibility frontier below is

a. 0.04 b. 2 c. -0.02 d. 50 e. -2

9. Shift in the supply curve from to might be caused by

a. additional suppliers entering the industry b. a decrease in demand for X c. an improvement in the technology of producing good X d. a rise in the costs of producing good X e. a decrease in the price of X

10. The supply and demand schedules for dozens of roses are given below:

Price Quantity Supplied per period Quantity Demanded per period

$10 200 500

$20 300 450

$30 400 400

$40 500 350

$50 600 300

When the price is $50, there will be an excess ______ Supply ____ for/of ___300___ ____ roses.


11. When the percentage change in quantity supplied is less than the percentage change in price that brought it about, supply is said to be a. Unit elastic b. Elastic c. Zero elastic d. Unelastic e. Inelastic

12. Suppose that the quantity of beer demanded falls from 103,000 litres per week to 97,000 litres per week as a result of a 5 percent increase in its price. The price elasticity of demand for beer is therefore a. 6.0 b. Impossible to compute unless we know the before and after prices c. 1.97 d. 1.2 e. 0.6

13. If two goods, X and Y, have a positive cross-elasticity of demand, then we know that they a. are both inferior goods b. each have a price elasticity greater than one c. are substitute d. Undefined e. are complements

14. Government price controls are policies that attempt to maintain the a. quantity sold at less than the quantity bought b. the price at some disequilibrium value c. market price at equilibrium d. quantity bought at less than the quantity sold e. none of these responses is correct

15. Cars and horses are likely to a. substitute goods b. complementary goods c. inferior goods d. independent goods e. luxury goods

16. Suppose that, in a two-good world, the price of the first good has increased from $3.00 to $4.00 and the price of the second good has increased from $150 to $200. The relative price of the first good a. is completely unrelated to the price of the second good b. remained constant c. cannot be determined from the above data d. has risen e. has fallen

17. At any disequilibrium price, whether controlled or not, the quantity actually exchanged is determined by a. the elasticity of demand b. the lesser of quantity demanded and quantity supplied c. the elasticity of supply. d. the greater of quantity demanded and quantity supplied. e. government decree.


Use the figure below to answer two following questions

18. Demand is unit inelastic

a. over the entire demand curve in diagram 1 b. over the entire demand curve in diagram 3 c. section (a) of the demand curve in diagram 1 d. over section (b) of the demand curve in diagram 1

19. Demand is perfectly inelastic

a. over the entire demand curve in diagram 3 b. over the entire demand curve in diagram 2 c. over the entire demand curve in diagram 1 d. section (a) of the demand curve in diagram 1 e. over section (b) of the demand curve in diagram 1

20. Choose the correct statement a. Human capital is the resource that organizes labour, land and capital b. The quality of labour depends on human capital c. Human capital includes all the tools and instruments that businesses use to produce goods and services d. Today in Canada, over 95 percent of the population have completed high school

21. Choose the statement that best describes how endogenous variables differ from exogenous variables. a. An endogenous variable is a flow, while an exogenous variable is a stock b. An endogenous variable is a function of the exogenous variable, and both are stock variables c. An exogenous variable is a function of the endogenous variable, and both are flow variables d. An endogenous variable is explained outside the theory and influences an exogenous variable in a way

determined by the theory e. An endogenous variable is explained within the theory, while an exogenous variable influences the

endogenous variables but is determined outside the theory

22. The mathematical expression of a relationship between two or more variables is usually known as a. a theory b. an assumption c. an observation d. a function e. a definition.


23. When considering how a family's level of consumption changes in response to changes in its income, a. both of the variables are independent b. both of the variables are dependent c. consumption is the dependent variable and income is the independent variable d. there is no relationship between the variables e. income is the dependent variable and family consumption is the independent variable

24. The "law of demand" hypothesizes that, other things being equal, a. price and demand vary inversely b. the higher the price, the lower the quantity demanded c. price and quantity demanded are positively related d. the lower the price, the greater the demand e. the higher the income, the higher the quantity demanded

25. An important assumption underlying a demand schedule is that a. everything else except the product's price is being held constant b. income has little significance to household demand c. quantity demanded and demand mean the same thing d. the numbers are not important; the general relationship between the variables is e. household tastes rarely change

26. At some music concerts we observe long lineups for tickets, and some unsatisfied customers who cannot get tickets. One explanation for this observation is that

a. CD prices have increased b. the market price for concert tickets is at its equilibrium value, but concert goers line up for tickets out of habit c. the market price for concert tickets is below its equilibrium price d. the market price for concert tickets is above its equilibrium price e. concert goers are not rational

27. When a product's price has an inverse relationship with total expenditure, then demand has a price elasticity of a. Zero b. inverse proportions c. greater than one d. less than one e. one

28. The elasticity of supply for some product will tend to be larger a. the less time firms have to adjust to price changes b. the harder it is for firms to shift from the production of this product to another c. the easier it is for firms to shift from the production of this product to another d. the higher is the elasticity of demand for the product

29. Suppose the cross-elasticity of demand for two goods, domestic beer and imported beer, is positive. If the price of imported beer falls, then quantity demanded will

a. not enough information to answer this question b. rise for both domestic and imported beer c. fall for domestic beer and rise for imported beer d. fall for both domestic and imported beer e. rise for domestic beer and fall for imported beer

30. Behaviour in free-market economies is a. determined by a central authority b. mostly affected by elements of tradition and government command c. mostly directed by self interest d. based primarily on custom and habit


PART B

(In this part, there are some short answer questions, worth 45 marks)

1. Calculate elasticities for the following cases with appropriate names. Identify what types of goods they

are, and comment on the value of the elasticity, i.e., elastic or inelastic:

Example:

a. (5 marks) A 10 percent increase in the price of cars reduces the quantity demanded for cars by 4

percent.

The (own) price elasticity of demand:

It’s an inelastic demand good.

, it’s a normal good, and a necessity.

b. (5 marks) A 10 percent increase in the gasoline price reduces the demand for new cars by 4 percent.

The cross price elasticity of demand:

Inelastic demand for cars due to gasoline price change

, car and gasoline are complementary.

c. (5 marks) A 10 percent increase in the income reduces the demand for used cars by 4 percent.

The income elasticity of demand:

, used cars are now inferior goods.


2. (5 marks) Using a diagram, carefully explain the difference between a change in quantity demanded and

a change in demand

A change in quantity demanded is a result of the product’s own price change. We move along the

demand function from one point to another point if there is any change in price.

If there is any change in other factor than own price, there is a change in demand. At the same price

the demand for the good changes. For instance, if the income increases, the consumer’s purchasing

power increases, he can now afford more of the good, which is shown by a rightward shifting in the

demand curve

Price Demand

$1.50

$1.00

3000 4200 Quantity

$1.00

3000 4000 Quantity


3. Consider the market for rental housing in Yourtown. The demand and supply schedules for

rental housing are given in the table.

Price

($/month)

Quantity demanded

(‘000 of units)

Quantity Supplied

(‘000 of units)

1100 40 80

1000 50 77

900 60 73

800 70 70

700 80 67

600 90 65

500 100 60

a. (5 marks) In a free market for rental housing, what is the equilibrium price and quantity?

Equilibrium condition:

Quantity demanded =Quantity supplied:

At the price $800,

So, the equilibrium price is $800 and equilibrium quantity is 70,000 units

b. (5 marks) Suppose the current price is equal to $500/month. Describe the effect on rental

housing market.

$500/month rent is lower than the equilibrium price. At any price lower than the equilibrium price

will create disequilibrium situation in the market.

At $500, the quantity demanded is 100,000 but the quantity supplied is only 60,000 units.

So, the excess demand or shortage is=


4. Choiceland has 250 workers and produces only two goods, and Broccoli. Labour is the only factor of production, but some workers are better suited to producing than Broccoli (and vice versa). The table below shows the maximum levels of output of each good possible from various levels of labour input

Annual

production of

Annual

production of

Broccoli

0 1300

20 1200

45 900

60 600

70 350

75 0

a) (5 marks) Draw the PPB for Choiceland on a scale diagram, with the production of on the

horizontal axis and the production of on the vertical axis.

1300

900 600 0, 0 45 60 75


b) (5 marks) Compute the opportunity cost of producing an extra 15 units of ipad if the economy is

initially producing 45 units of and 900 units of . How does this compare to the

opportunity cost if the economy were initially producing 60 units of ipad?

Opportunity cost = Give up/get

Opportunity of an extra ipad, if we start from (45,900) point is equal to

.

But for 15 ipad the opportunity cost is how many broccoli we are giving up, which is 300 units. So the

opportunity cost of 15 units of ipad is 300 broccoli

If we are initially at (60, 600) point, the opportunity cost of 15 ipad is 600 broccoli.

The opportunity cost of 15 ipads is increasing as we produce more of ipad. Because, when we

exhaust resource of a production unit to produce more of another good, in the end resource

utilization in other good production gets inefficient. In other words, if we produce more of a good

the marginal cost of production increases – the opportunity cost increases.


Name: ______________________________________________

Signature: _______________________________________________

Please answer your MCQs in the following table

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.

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