Eco100 (Pesando) Practice Test #1 by ruj15698

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                             Eco100 (Pesando) Practice Test #1
Part I – Multiple Choice (Questions from 1999 – 2002)

1. (2002) Consider the following household. In 5 hours, Brian can cook 5 meals or clean 6 rooms. In 5
   hours, Mila can cook 30 meals or clean 10 rooms. Select the best statement.
           a.     Brian has an absolute advantage in the production of both goods.
           b.     Since Mila is better at producing both goods, she should produce both.
           c.     Brian has a comparative advantage in cooking.
           d.     Mila should specialize in cooking.
           e.     None of the above.

2. (2001) Doctor ‘R’Us has 10 workers. Each worker can produce a maximum of either 2 units of medical
   services or 5 units of secretarial services a day. One day, the firm decides it would like to produce 10
   units of medical services and 30 units of secretarial services. This output level is:
           a.     efficient.
           b.     unattainable.
           c.     inefficient.
           d.     costless.
           e.     none of the above.

3. (1999 and 2001) Suppose that France will have unusually bad weather, and that next year’s wine crop
   will be substantially reduced. Select the best statement.
           a. French wine supply will rise as price rises.
           b. If the demand for French wine is elastic, the revenue received by wine producers will
              increase.
           c. The initial change in the market will create a surplus of French wine.
           d. In the final equilibrium, price and quantity will be higher.
           e. None of the above.

4. (2001) If the price elasticity of demand is zero, then as the price falls:
           a.     total revenue does not change.
           b.     quantity demanded does not change.
           c.     quantity demanded falls to zero.
           d.     total revenue increases from zero.
           e.     none of the above occurs.

5. (2000) A technological improvement lowers the cost of producing coffee. At the same time,
   preference for coffee decreases. The equilibrium quantity of coffee will:
             a.   rise.
             b.   fall.
             c.   remain the same.
             d.   rise or fall, depending on whether the price of coffee falls or rises.
             e.   Rise or fall, depending on the relative shifts of demand and supply curves.



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6. (2000) The market of coffee is initially in equilibrium with supply and demand curves of the usual
   shape. Pepsi is a substitute for coffee. Consider the market for coffee. Coffee is a normal good. A
   decrease in income will:
            a.   increase the price and increase the quantity of coffee bought and sold.
            b.   increase the price and decrease the quantity of coffee bought and sold.
            c.   decrease the price and increase the quantity of coffee bought and sold.
            d.   decrease the price and decrease the quantity of coffee.
            e.   none of the above.


7. (1999) Business people speak about price elasticity of demand without using the actual term. Which
   one of the following statement reflects elastic demand for a product?
            a. “A price cut won’t help me. It won’t increase sales, and I’ll just get less money for each
               unit.”
            b. “I don’t think a price cut will make any difference to my bottom line. What I may gain
               from selling more I would lose on the lower price.”
            c. “My customers are real bargains hunters. Since I set my prices just a few cents below my
               competitors, customers have flocked to the store and sales are booming.”
            d. “With the recent economic recovery, people have more income to spend and sales are
               booming, even at the previous prices.”
            e. None of the above.


8. (2002) Other things remaining the same, an increase in the supply of a good will:
            a.   increase the consumer surplus.
            b.   decrease the consumer surplus.
            c.   leave consumer surplus unchanged.
            d.   have an effect on consumer surplus that cannot be determined.
            e.   have an effect on consumer surplus that depends on the source of the supply change.


9. (2002) Billy likes candy bars and popcorn. Candy bars sell for $0.50 each and popcorn sells for $1
   per bag. Currently he is maximizing his utility. The price of candy rises to $1 per candy bar. Which
   statement is true, if he is now maximizing his utility?
            a.   The marginal utility of popcorn will increase.
            b.   Marginal utility per dollar spent will be equal to 2.
            c.   Total utility will be higher.
            d.   The marginal utility of candy will decrease.
            e.   The marginal utility of candy will be equal to the marginal utility of popcorn.


10. (2001) Broomhilda is initially maximizing her utility in the consumption of all goods, including good
    X. The price of good X doubles. To maximize her utility, her quantity of X consumed must:
            a.   rise until the marginal utility of X has doubled.
            b.   fall to one-half its previous level.
            c.   fall until the marginal utility of X has doubled.
            d.   fall until the marginal utility of X falls to one-half its previous level.
            e.   yield infinite bliss.


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Part 2 – Short Answer

1. Economic Way of Thinking (Question from 2000)
As a promotion, one store decides to give away a new CD for free. Not surprisingly, there is a
line of “customers” and it takes one-half hour of waiting in line to get the free CD. What is the
true economic cost of the “free’ CD? Explain and provide a numerical illustration to support
your economic reasoning.




2. Elasticity (Question from 1998)
Two drivers – Tom and Jerry – each drive up to a gas station. Before looking at the price, each
places an order. Tom says, “I’d like 10 gallons of gas”. Jerry says, “I’d like $10 of gas.” What is
each driver’s price elasticity of demand? Explain.




3. Demand and Supply: Applications (Question from 1999)
Explain, briefly, whether the following statements are true or false.

a) If the government levies a large tax on the buyers of ammunition, the result will be a large
  increase in the price of guns.




b) If the demand curve for a good is perfectly elastic, then consumer surplus will be large.




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4. International Trade (Question from 2001)
England and Scotland both produce scones and sweaters. An English worker can produce 20
scones per hour or 2 sweaters per hour. A Scottish worker can produce 25 scones per hour or 5
sweaters per hour.

a) On the same diagram, draw the production possibilities frontiers for both England and
   Scotland.




b) In England and Scotland, what is the opportunity cost of producing scones and sweaters?




c) If trade occurs, which good will England export? Which good will Scotland export?




d) It is proposed that, if trade occurs, the trade ratio should be 5 scones for each sweater. If this
   were the case, would England benefit from trade? Would Scotland benefit from trade?
   Illustrate your answer with an appropriate diagram.




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5. Demand and Supply (Question from 2002)

a) What will happen to the market price of apples if apples are discovered to help prevent colds
   and a fungus kills 10 percent of existing apple trees. Illustrate your answer with a diagram:




b) How would an increase in required levels of automobile insurance affect the market price of
   new automobiles.




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6. Demand and Supply: Applications (Question from 1999)
In London, during World War II, the weekly demand and supply curves for a carton of eggs
were as follows:

             Price($)              Quantity Demanded             Quantity Supplied
                 4                        10000                        1000
                 6                         8000                        2000
                 8                         6000                        3000
                10                         4000                        4000
                12                         2000                        5000

a) What is the equilibrium price and quantity of a carton of eggs?

b) To protect consumers, the government imposes a price ceiling of $6 on each carton of eggs.
   What is the new quantity demanded? The new quantity supplied? Is there a surplus or a
   shortage of eggs? Illustrate your answer with a diagram.




c) If those consumers who were able to buy eggs at the price ceiling of $6 per carton were to
   resell the eggs in an illegal or “black market”, what price would they obtain? Why does this
   price differ from the price ceiling? Illustrate your answer with a diagram.




d) Suppose, because living in London is becoming unpleasant, a significant number of people
   move away. As a result, the demand for cartons of eggs declines by 3,000 at each possible
   price. The price ceiling is removed. What is the new equilibrium price and quantity of a
   carton of eggs?


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