Quiz 1

ECN150

Spring 2006

WakeForestUniversity

Instructor: McFall

Directions: This quiz contains two sections. The first section consists of 10 multiple choice questions. Select from the list the answer that best answers the question or completes the sentence provided. Each correct answer is worth seven points. The second section consists of three short answer questions. Please ask a question if you have one. Good luck!

Section I- Multiple Choice (7 points/answer)

The PPF for Atlantis pictured below. Use it to answer questions 1-3.

Agriculture

A

BF

E C

D

Manufacturing

  1. Atlantis will face the highest opportunity cost of obtaining units of Manufacturing by reallocating resources when it moves from

a) point A to B.b) point B to C.c) point C to D.d) point E to B.

  1. In order to reach point F, Atlantis would have to

a)increase the amount of capital in the society.

b)increase the amount of technology in the society.

c)Increase the amount of human capital in the society.

d)One or all of the above.

e)None of the above.

  1. The bowed nature of the PPF suggests

a)that Atlantis faces the Law of Increasing Costs.

b)That the opportunity cost of producing at point E is zero.

c)That there are resources that are best suited for manufacturing and resources that are best suited for agriculture production.

d)All of the above.

e)Only a) and b) are correct.

f)Only a) and c) are correct.

  1. If there is an asymmetric shift in the PPF such that only the intercept on the Agriculture axis shifts away from the origin, then

a)the opportunity cost of obtaining another unit of agriculture will fall at all levels of agriculture production.

b)Atlantis will consume more units of agriculture.

c)Atlantis will no longer face the Law of Increasing Costs.

d)All of the above are correct.

Use the information regarding Jeff’s budget constraint to answer questions 5-7.

Jeff consumes turkey sandwiches (t) and cigarettes (c). His income is $40/week. At most, he can consume 10 units of cigarettes. The opportunity cost of a turkey sandwich is 2 units of cigarettes.

  1. Given the information from above, we can conclude that

a)Jeff’s budget constraint is 40 = 8c + 4t.

b)the price of a turkey sandwich is $2/unit.

c)3 turkey sandwiches and 6 units of cigarettes is a possible level of consumption for Jeff.

d)All of the above are correct.

e)None of the above is correct.

  1. If Jeff earns a raise and has an income of $50/week, then

a)his budget constraint will rotate around the cigarette intercept.

b)his budget constraint will shift out in a parallel fashion.

c)The opportunity cost of cigarettes will be unchanged.

d)Both a) and c) are correct.

e)Both b) and c) are correct.

  1. Which picture and description describes correctly what will happen to Jeff’s budget constraint after the price of cigarettes increases?

a) t

The opportunity cost of cigarettes will increase.

c

b)

t

The opportunity cost of turkey sandwiches will rise.

c

c)

t

The opportunity cost of turkey sandwiches will fall.

c

d) None of the above.

Big Nation can make at most 80 units of CD players or 50 units of oil. Desert Country can make at most 40 units of CD players or 50 units of oil. Use this information to answer questions 8-9.

  1. Given the information from above, which of the following statements is (are) true? (More than one correct answer is possible.)

a)Big Nation has the comparative advantage in CD player production because the opportunity cost of it producing a CD player, 5/8 units of oil, is less than the opportunity cost of Desert Country producing a CD player.

b)Big Nation has the comparative advantage in oil production because the opportunity cost of it producing a unit of oil is larger than the opportunity cost of Desert Country producing a unit of oil.

c)Big Nation will not want to trade with Desert Country because there are no terms of trade that will make it better off by doing so.

d)None of the above is true.

  1. Given the information from above, which of the following statements is (are) true? (More than one correct answer is possible.)

a)Desert Country will want at least 5/4 CD players per unit of oil it delivers to Big Nation.

b)Big Nation will give at most 5/4 CD players per unit of oil it receives from Desert Country.

c)Desert Country can expect to get at least 8/5 CD players for each unit of oil it delivers to Big Nation.

d)None of the above are correct.

  1. What is a subsidy?

a)A cash payment from a government to a domestic producer of a good.

b)A legislative act that insulates domestic producers from foreign competition.

c)A per unit tax on the importation of a foreign produced good.

d)Both a) and b).

e)Both b) and c).

Short Answer Questions

Directions: Answer question #1 and either question #2 or #3.

  1. Use the Law of Increasing Costs to explain why European farmers’ corn yields are about three times the size of the yields that US farmers produce. (A farmers’ yield is a measure of how productive he is. Yield can be measured in bushels per acre, for instance.) (15 points)
  1. Identify three incentives (direct or indirect) that the European Union and the US face in eliminating subsidies or tariffs and explain briefly each. (15 points)
  1. We discussed that a type of economic trade-off can be characterized as being long run v. short run in nature. In terms of our discussion of trade, we identified some incentives that countries face in maintaining or eliminating subsidies or tariffs. How is the size of the incentive to innovate that domestic producers face affected by the size of the subsidies or tariffs that are established by governments? (As usual, don’t forget to explain clearly your answer.) (20 points)