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MIDTERM 1 - ECONOMICS 1311-8

September 26, 2024

Name____________________________________________

This exam contains 20 multiple choice questions each worth 3 points and 4 short answer questions each
worth 15 points (120 point total). All questions on this exam should be answered.

You have 75 minutes to complete this exam; GOOD LUCK!

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Choose the single best answer for the following 20 questions.

1. When economists say goods are scarce, they mean

a. consumers are too poor to afford the goods and services available.
b. consumers are unwilling to buy goods unless they have very low prices.
c. goods are generally freely available from nature in most countries.
d. the desire for goods and services exceeds our ability to produce them with the limited
resources available.

2. Andre, a wheat farmer, is deciding whether or not to add fertilizer to his crops. If he adds 1 pound of
fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal
analysis, Andre should add fertilizer if it costs less than
a. $12.50 per pound.
b. $20 per pound.
c. $80 per pound.
d. $100 per pound.

3. Which of the following is a normative economic statement?

a. If we doubled the size of welfare payments, we would reduce the number of homeless
persons.
b. Companies should be concerned with more than just their profits.
c. An increase in spending on airport security will reduce the number of hijackings.
d. If social security were to be privatized, workers would earn a higher rate of return on their
retirement contributions.

4. Legislation to protect red-cockaded woodpeckers created incentives that resulted in premature

harvesting of trees the woodpeckers like to nest in. This is an example of which of the following?
a. Association is not causation.
b. the fallacy of composition
c. the use of ceteris paribus conditions in economic analysis
d. Good intentions do not always lead to desirable outcomes.

5. Melanie has a choice of driving or flying from Durham, North Carolina to Knoxville, Tennessee for a
one-day business trip. If she travels by air, she will be able to work seven hours in Knoxville, while if she
drives, she will only have time to work four hours once there. Her expected income from each hour of
work in Knoxville is $40. If Melanie a rational decision maker, she will chose to fly if and only if the
price differential (air cost minus driving cost) is less than
a. $40.
b. $120.
c. $160.
d. $280.

6. If the Internet makes it easier for sellers to find buyers and makes it easier for buyers to learn about the
products that are available for sale, we would expect that
a. the volume of trade will decline.
b. transaction costs will rise.
c. the gains from trade will increase.
d. buyers and sellers will be worse off.
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7. The student government associations at several universities have experimented with purchasing
bicycles to leave around campus for everyone's use. Anyone who needs the bike can use it, and they are
not allowed to lock the bike up or take it home, but rather must leave it on campus for someone else to
use. Economic theory would predict that
a. students will take better care of these commonly owned bicycles than they do their own
bicycles.
b. students will take equally as good care of these commonly owned bicycles as they do their
own bicycles.
c. students will not take as good of care of these commonly owned bicycles as they do their
own bicycles.
d. because universities have a lot of money, these bikes will be better maintained than the
ones owned privately by college students who tend to have little money.

8. With time, which one of the following strategies would most likely result in an outward shift in the
production possibilities curve of an economy?
a. passage of legislation reducing the workweek to 30 hours
b. instituting a tax policy encouraging consumption at the expense of investment
c. instituting a tax policy encouraging investment at the expense of consumption
d. an increase in the marginal income tax rate, which would reduce the work effort of
individuals

9. Which of the following would lead to an increase in the demand for designer blue jeans?
a. a decrease in the price of designer blue jeans
b. a reduction in the price of the cotton used to produce the jeans
c. an increase in the income of youthful Americans
d. an increase in the price of the cotton used to produce the jeans

10. Assume that black beans and rice are consistently in the diet of one particular family. How could you
tell if these goods were complements, substitutes, or unrelated goods?
a. If the price of black beans rose and the consumption of rice remained the same, they
would be substitutes.
b. If the price of black beans rose and the consumption of rice increased, they would be
substitutes.
c. If the price of black beans rose and the consumption of rice decreased, they would be
substitutes.
d. If the price of black beans rose and the consumption of both goods remained the same,
they would be complements.

11. Which of the following would increase the supply of laptop computers?
a. higher wage rates for the workers that produce laptop computers
b. a technological improvement that lowers the cost of producing laptop computers
c. an increase in the price of computer chips used to produce laptop computers
d. all of the above

12. Which of the following would most likely increase the price of automobiles?
a. a decrease in the price of steel used to produce automobiles
b. an increase in the price of gasoline
c. a decrease in consumer income
d. the United Auto Workers union obtaining a substantial wage increase for auto workers
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13. Which of the following would cause an increase in the price of gasoline and an expansion in the
equilibrium quantity?
a. an increase in the price of crude oil, a key ingredient required for the production of
gasoline
b. the introduction of a miracle carburetor that substantially improves the gas mileage of
automobiles
c. a recession that substantially reduces the income of households
d. an increase in the popularity and use of Sport Utility Vehicles that consume a lot of
gasoline per mile driven

14. An increase in the number of students attending college would tend to

a. reduce the demand for college professors.
b. decrease the number of college professors employed.
c. increase the demand for college professors.
d. reduce the wage for college professors.

15. Economists have argued that rent control is "the best way to destroy a city, other than bombing." Why
would economists say this?
a. They anticipate that low rents will cause low-income people to move into the city,
reducing the quality of life for other people.
b. They anticipate that rent control will benefit landlords at the expense of tenants, increasing
inequality in the city.
c. They anticipate that rent controls will cause a construction boom, which will make the city
crowded and more polluted.
d. They anticipate that rent control will eliminate the incentive to maintain buildings, leading
to a deterioration of the city.

16. Which of the following about minimum wage is true?

a. Most minimum wage workers are employed more than 40 hours per week.
b. Economic analysis indicates an increase in the minimum wage would increase the training
opportunities available to inexperienced workers.
c. Most minimum wage workers are heads of families with incomes below the poverty level.
d. Most minimum wage workers are employed part-time, and they are often members of a
household with an income well above the poverty level.

17. Suppose that a tax is placed on a particular good. If the sellers end up bearing most of the tax burden,
this indicates that the
a. demand is more inelastic than supply.
b. supply is more inelastic than demand.
c. government has required that buyers remit the tax payments.
d. government has required that sellers remit the tax payments.

18. Assume that a college student purchases only diet soda and potato chips. The substitution effect
associated with a decrease in the price of potato chips will result in
a. an increase in the consumption of diet soda only.
b. a decrease in the consumption of diet soda only.
c. an increase in the consumption of potato chips and a decrease in the consumption of diet
soda.
d. a decrease in the consumption of potato chips and an increase in the consumption of diet
soda.
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19. Use the table below to choose the correct answer.

Income Tax
(dollars) (dollars)
10,000 2,000
20,000 4,000
40,000 8,000

The tax schedule shown here is

a. regressive.
b. proportional.
c. progressive.
d. proportional up to $20,000 and regressive beyond that.

20. A local restaurant offers an "all you can eat" barbeque special. You pay $9.00, and then you can eat
as many servings as you desire at no additional cost. It would follow that you will stop eating when
a. your marginal utility (or value) derived from eating another serving is zero.
b. your total utility (or value) derived from all of the servings consumed just equals $9.00.
c. your marginal utility (or value) derived from another serving equals $9.00.
d. it is physically impossible for you to eat any more.
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Answer the 4 following questions.

1. Use supply and demand diagram to show the change in the equilibrium price and quantity
when the events listed below occur.
(a) In the market for butter, what will happen if price of margarine falls?

(b) In the market for DVD players, if the price of DVDs rises?

(c) In the market for wine, if the average wage of grape harvesters falls 10%?

(d) In the gasoline market, if the price of oil is expected to fall next week?
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2. The following are the expressions for the supply and demand curves in widgets market:
P = 40 – 0.3 Qd and supply is given by P = 10 + 0.2 Qs.
where Qd is the quantity demanded, Qs is the quantity supplied, and P is the price per widget in
dollars.

(a) Find the equilibrium price and quantity.

(b) What are consumer and producer surplus at equilibrium?

(c) If the government imposes price floor at $25 per widget, calculate the surplus/shortage of
widgets, and the number of widgets sold in the market.

(d) Assume no price floor or ceiling exists. Suppose that the government imposes a $5 per
widget tax on widget sellers. Find the new equilibrium price.

(e) How is the tax burden is split between the sellers and the buyers?
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3. Suppose Maria has $8 to spend. She can purchase either eggs or milk. Eggs cost $1 each and
milk cost $2 each. The following table gives her total utility for each good. (Show your work.)
Number
of Units Total Utility Eggs Total Utility Milk

1 20 24
2 32 44
3 43 62
4 53 76
5 62 82

(a) If Maria wants to maximize her total utility, what combination of eggs and milk should she
consume?

(b) Suppose that the price of eggs increases to $2, what combination of eggs and milk should she
consume?

(c) Graph Maria’s demand curve for eggs.

(d) Are eggs and milk complements or substitutes or neither?

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4. The small island nation of Utopia is populated by two workers, Alf and Barney. Each worker
can either grow wheat or corn. Alf can grow 2 bushels of wheat a year or 1 bushel of corn a
year. Barney can grow 8 bushels of wheat a year or 2 bushels of corn a year.

(a) Calculate the opportunity costs for each farmer for each good.

(b) State for which good each farmer has a comparative advantage.

(c) Are there any goods for which Alf or Barney has an absolute advantage? If so, which ones?

(d) What is the range of possible exchange rates between Alf and Barney for one bushel of
wheat?