ECONOMICS 104

EXAM 1

FALL 1999

PLEDGE:______

NAME:______

Multiple Choice and True/False: 3 points each.

Questions 1-5 refer to the graph below. S is the original supply curve. S+T is the supply curve after a tax has been imposed.

  1. The amount of the tax is
  1. $0.50.
  2. $1.00.
  3. $1.50.
  4. $2.00.
  1. The government revenue from the tax is
  1. $950.
  2. $1000.
  3. $3800.
  4. $4000.
  1. The tax is borne
  1. mostly by buyers.
  2. mostly by sellers
  3. equally by buyers and sellers.
  4. mostly by the government.
  1. True or False: The tax has increased the producer surplus.
  1. The deadweight loss due to the tax is
  1. $100
  2. $150
  3. $200
  4. $400
  1. If demand is elastic, a leftward shift of the supply curve will

a)decrease total revenue.

b)increase total revenue.

c)have no effect on total revenue.

d)decrease the demand for the good.

  1. The group most affected by a minimum wage law is
  1. high-wage, highly skilled workers.
  2. older workers across all wage levels.
  3. low-wage, low-skilled workers.
  4. middle-aged workers across all wage levels.
  1. There is a deadweight loss if the last unit produced has a
  1. marginal benefit greater than its marginal cost.
  2. marginal cost greater than its marginal benefit.
  3. marginal benefit equal to its marginal cost.
  4. (a) and (b).
  1. A point inside a production possibilities frontier
  1. is more efficient than a point on the production possibilities frontier.
  2. is better than points beyond the production possibilities frontier.
  3. indicates that too many inputs are being used to produce goods.
  4. could indicate that resources are misallocated.
  1. Marginal benefit is the benefit
  1. that your activity provides to someone else.
  2. of an activity that exceeds cost.
  3. that arises from the secondary effects of an activity.
  4. that arises from a small increase in an activity.
  1. Pam and Jane produce apples and oranges. They can gain from exchange
  1. unless one can produce more of both goods.
  2. if each specializes in the good for which she has the higher opportunity cost.
  3. unless they have the same opportunity cost of producing apples and oranges.
  4. unless they have different opportunity costs.

Questions 12-15 refer to the graph below.

  1. The lowest price at which the producer will sell her second unit of output is
  1. $50.
  2. $75.
  3. $100.
  4. $150.
  1. True or False: There is no price at which the producer’s surplus is zero.
  1. If the market price is $100, the producer surplus is
  1. $0
  2. $50
  3. $150
  4. $200
  1. If the market price is $100 and the demand curve shifts out, raising the market price to $150, then producer surplus will
  1. rise by $50
  2. rise by $100
  3. rise by $150
  4. fall by $100
  1. The willingness to pay curve is the same as
  1. the demand curve, but not the marginal benefit curve.
  2. the demand curve and the marginal benefit curve.
  3. the marginal benefit curve, but not the demand curve.
  4. neither the marginal benefit not the demand curve.
  1. A horizontal supply curve
  1. has zero elasticity
  2. has unit elasticity
  3. has infinite elasticity
  4. indicates that suppliers are unwilling to supply the good.
  1. Gruel is an inferior good.
  1. A decrease in the price causes the quantity supplied to increase.
  2. A decrease in income causes the quantity demanded to increase.
  3. Gruel has a negative price elasticity.
  4. A decrease in price causes the demand curve to shift outward.
  1. All else equal, an increase in the number of fast food restaurants would increase the
  1. price of fast-food meals.
  2. demand for fast-food meals.
  3. supply of fast-food meals.
  4. demand for substitutes for fast-food meals.
  1. At all points along a straight-line demand curve, the
  1. price elasticity and the slope stay constant.
  2. price elasticity is different and the slope is constant.
  3. price elasticity is constant and the slope changes.
  4. price elasticity is equal to the slope.

Short Answer Questions: 40 points total.

1. (15 points) The market for steel has the following demand and supply curves.

QD = 500 – 3P

QS = 100 + 2P

  1. What is the equilibrium price and quantity of steel?
  1. What is the elasticity of demand at the equilibrium price?
  1. Suppose the government imposed a price floor of $100. What would be the new equilibrium QS and QD? How much of a surplus would there be?

d. If the government decided to buy up the excess supply, how much would they have to pay?

2. (8 points) We have repeatedly claimed that individuals and society maximize their welfare when they set the marginal benefit of an action equal to its marginal cost. Explain why this is true.

3. (10 points)

The graph above shows the production possibilities frontier of Japan and Indonesia.

a. What is the opportunity cost of producing 10 units of food in Indonesia?

b. Which country has the comparative advantage in producing Clothing? Explain why.

  1. If Indonesia and China were to trade, could a trade be made that put both countries beyond their original production possibilities frontier? Describe such a trade.

4. (7 points) A recent article in the Wall Street Journal concerns the rate of logging in the American South. The article claims that restrictions on logging in the Northwest due to concerns over the spotted owl have altered the pattern of logging across the country. Using economic tools and terminology describe the market effect in the rest of the country of restrictions on logging in the Northwest.