ECON 101 Exam 1

As an economy moves from point to point along its production possibility frontier (PPF), what is changing?

allocation of resources within economy

The production possibility frontier will shift outward for all of these reasons EXCEPT:

an increase in the unemployment rate.

Suppose we see the following willingness to pay for a ticket to the Green Day at Red Rocks concert. If ticket prices are lowered from $30 to $20:

both quantity demanded and total consumer surplus will increase.

In a voluntary exchange:

both the producer and the consumer can experience a net benefit.

If an economy has to sacrifice increasing amounts of good X for each additional unit of good Y produced, then its production possibility frontier is:

bowed out from the origin.

A resource is anything that:

can be used in production.

Suppose the price of gasoline increases 10% and quantity of gasoline demanded in Orlando drops 5% per day. Demand for gasoline in Orlando is:

price inelastic.

If the price of a good increases by 15% and the quantity demanded falls by 20%, demand is:

price-elastic

(Figure: Consumer and Capital Goods) Examine the figure Consumer and Capital Goods. Point Z:

is unattainable, all other things unchanged.

(Figure: Wine and Wheat) Examine the figure Wine and Wheat. If this economy is producing 12 tons of wheat and 9,000 bottles of wine, then the economy:

is using its resources efficiently.

Figure: Production Possibility Frontier for Tealand) Examine the figure Production Possibility Frontier for Tealand. In the figure, if Tealand is producing 10 million scones and 10 million cups of tea (point A), then the economy:

is using its resources inefficiently.

f a country specializes according to its own comparative advantage and then trades with other nations:

it can consume at a higher level than the domestic production possibility frontier.

(Figure: The Demand Curve for Oil) Examine the figure The Demand Curve for Oil. In the figure, the price elasticity of demand between $20 and $21 is:

price-inelastic, because the price elasticity is less than 1.

When the price goes down, the quantity demanded goes up. The price elasticity measures how:

responsive the quantity change is in relation to the price change.

Producer surplus is positive when:

the price the producer is willing to charge is less than the market price.

If demand is elastic, then:

the quantity effect dominates the price effect, and a decrease in price causes total revenue to rise.

The most Alex is willing to pay for the last ticket to the Billy Bragg concert is $15, whereas Jake is willing to pay up to $25. Alex is first in line and buys a ticket for $15. He then resells his ticket to Jake for $20. By reselling the ticket instead of going to the concert himself, Alex caused:

the sum of the consumer and producer surplus to increase.

Table: Producer Surplus and Phantom Tickets) Examine the table Producer Surplus and Phantom Tickets. Assuming that each student has only one ticket to sell, if these students can sell their Phantom tickets for only $5, then:

the total producer surplus for the five students will be $4.

Opportunity cost is:

the value of the best alternative forgone in making any choice.

Bar owners often offer lower beer prices to women than they do to men. This will enhance bar revenues if:

women have an elastic demand for beer.

Suppose that you have a choice between two activities. The first activity is going to the movies, which costs $10 for a ticket and $15 for popcorn, candy, and a drink. The second activity is going to a football game where your ticket is free but food and drinks cost you $15. What is the opportunity cost of going to the movies?

$10 and the enjoyment from the football game

When the price of chocolate-covered peanuts increases from $1.55 to $2.00, the quantity demanded decreases from 220 to 180. If the price is $1.55, total revenue is _____, and if the price is $2.00, total revenue is _____.

$341; $360

(Figure: The Demand for Shirts) Examine the figure. At a price of $30, total revenue is _____, and at a price of $10, total revenue is _____.

$9,000; $5,000

(Figure: The Demand for Shirts) Examine the figure The Demand for Shirts. Using the midpoint method, the price elasticity of demand for the segment DE is approximately:

.7

Suppose that the country of Ologolia has a linear production possibility frontier in the production of boats and smartphones. It can produce 3 smartphones per hour of labor time or 4 boats per hour of labor time. What is the opportunity cost of producing one boat in Ologolia?

.75 smartphone

(Table: Price Elasticity) Examine the table Price Elasticity. What is the price elasticity of demand between $1.25 and $1.00? (125,150)

.82

Assume the price of a candy bar decreases from $1.00 to $0.80 and the quantity demanded does not change. If other things are unchanged, the price elasticity of demand, using the midpoint formula, is:

0

Suppose at a price of $1.73 per gallon, residents of Tacoma purchase 1 million gallons of gas every week and enjoy a total consumer surplus of $730,000. If gas prices increase to $2.46 per gallon and the demand for gas is perfectly inelastic in Tacoma, residents will end up with a total consumer surplus equal to:

0

(Figure: The Demand Curve for Crossings) Examine the figure The Demand Curve for Crossings. This graph examines the demand for crossing a bridge over a very large river. Using the midpoint method, the price elasticity of demand between $0.90 and $1.10 is approximately:

1.0

(Table: Price Elasticity) Examine the table Price Elasticity. What is the price elasticity of demand between $1.75 and $1.50?

1.86

(Table: Music Downloads) Examine the table Music Downloads. Two consumers, Eli and Madison, like to download songs to their MP3 players, and the table represents their willingness to pay for each downloaded song. If an individual song can be downloaded at a price of $1, what is the total consumer surplus received by these consumers?

11

Table: Quantity Supplied and Quantity Demanded) Examine the table Quantity Supplied and Quantity Demanded. If this market is in equilibrium and the demand and supply curves are linear, then the value of consumer surplus is:

1225

The table describes the individual seller costs associated with selling Krispy Kreme doughnuts for a fund-raiser.

15

(Figure: The Demand Curve) Examine the figure The Demand Curve. If the price is $8, total revenue is _____. If the price is $7, total revenue is _____.

16;21

(Table: Willingness to Pay for Basketball Sneakers) Refer to the table Willingness to Pay for Basketball Sneakers. Assuming that each player wants to buy only one pair of sneakers, if the price of basketball sneakers is $130, how many pairs will be purchased?

2

If Farmer Sam MacDonald can produce 200 pounds of cabbages and 0 pounds of potatoes or 0 pounds of cabbages and 100 pounds of potatoes and he faces a linear production possibility frontier for his farm, the opportunity cost of producing an additional pound of potatoes is _____ pound(s) of cabbage.

2

If the price of chocolate-covered peanuts decreases from $1.05 to $0.95 and the quantity demanded increases from 180 bags to 220 bags, then the price elasticity of demand (using the midpoint method) is:

2.0

The publisher of an economics textbook finds that when the book's price is lowered from $70 to $60, sales rise from 10,000 to 15,000. Using the midpoint method, the price elasticity of demand is:

2.6

(Figure: Producer Surplus III) Examine the figure Producer Surplus III. If the price of the good is $2, producer surplus will equal:

20

The opportunity cost of the third bicycle is _____ tents.

20 Correct: In order to produce 3 bicycles, resources must be shifted away from producing tents to producing bicycles. At alternative C, 85 tents are produced. At alternative D when 3 bicycles are produced, only 65 tents are produced, so the opportunity cost is 20 tents.

(Figure: Wireless Mouse Market I) Examine the figure Wireless Mouse Market I. Use the graph to calculate consumer surplus when the market is at equilibrium.

2000

(Table: Production Possibilities Schedule I) Examine the table Production Possibilities Schedule I. If the economy produces 2 units of consumer goods per period, it can produce at most _____ units of capital goods per period.

24

(Figure: The Market for Hamburgers I) Examine the figure The Market for Hamburgers I. The figure shows the weekly market for hamburgers in Tuscaloosa. If the price of a hamburger falls from $2 to $1.50, the gain in consumer surplus to consumers who are persuaded to buy at the lower price (and who were not buying when the price was $2) is equal to:

25

(Figure: The Market for Lattes) Examine the figure The Market for Lattes. What is the price elasticity of demand between the prices of $2 and $2.50 per cup, using the midpoint formula?

3.00

(Table: Price Elasticity) Examine the table Price Elasticity. What is the price elasticity of demand between $2.00 and $1.75?

3.00

(Table: Consumer Surplus) Examine the table Consumer Surplus. Assuming that each student wants to buy, at most, one ticket, if the tickets to The Nutty Nutcracker are free and there is no other market for tickets, the total consumer surplus for the five students is:

320

(Table: Pumpkin Market) Examine the table Pumpkin Market. There are two consumers, Andy and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table. There are two producers of pumpkins, Cindy and Diane, and their costs are shown in the table. The equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity, Andy buys _____ pumpkins and his consumer surplus is _____.

3: $6

Mark and Rasheed are at the bookstore buying new calculators for the semester. Mark is willing to pay $75 and Rasheed is willing to pay $100 for a graphing calculator. The price for a calculator at the bookstore is $65. How much is total consumer surplus?

45

Examine the table Comparative Advantage I. The opportunity cost of producing 1 box of cell phones for Finland is:

5 boxes of herring

(Figure: The Demand for e-Books) Examine the figure The Demand for e-Books. What is the price elasticity of demand (using the midpoint method) when the price decreases from $6 to $4? (60-90)

5/9

Egg producers know that the elasticity of demand for eggs is 0.1. If they want to increase sales by 5%, they will have to lower the price by:

50%

(Figure: The Market for Hamburgers) Examine the figure The Market for Hamburgers. The maximum total surplus for the market is _____, and it occurs at a price equal to _____.

600; 1.50

Figure: Sugar and Freight Trains (Figure: Sugar and Freight Trains) Examine the figure Sugar and Freight Trains. Suppose the economy is operating at point C. The opportunity cost of producing the fourth freight train would be:

80 tons of sugar

Smallville has a linear production possibility frontier in the production of good X and good Y. It can produce 6 of X per hour or 8 of Y per hour. Suppose it has 240 hours of labor and divides labor hours equally between good X production and good Y production. What is the maximum amount of good Y it can produce given its allocation of labor hours?

960 Y

(Figure: Market for Headphones) Sony raises its price on noise-canceling headphones from $50 to $55 because of inflation. This increase in prices changes the producer surplus in the marketplace. Using the figure, which geometric area shows the increase in producer surplus gained by the original sellers of Sony's headphones?

A

Of the four demand curves in the figure above, which is perfectly elastic?

A (horizontal)

(Figure: Market for Coffee) The figure describes the demand (D), supply (S), equilibrium (E), equilibrium price (P), and equilibrium quantity (Q) in the market for coffee. Given this graph, identify the total net benefit to society from the production and consumption of the good.

A + B

Ahmed, Boris, Roberto, and Sunil all want to attend a football game. The admission price is $48. Ahmed is willing to pay $59 for the ticket. Boris is willing to pay $39. Roberto is willing to pay $45, and Sunil is willing to pay $55. Based on this information, who will go to the game?

Ahmed and Sunil

(Figure: Market for Lattes) Starbucks lowers it price on a venti latte from $4.00 to $3.00 due to stiff competition from McDonald's. This decrease in price changes the consumer surplus in the marketplace. Using the figure, which geometric area shows the increase in consumer surplus gained by the new buyers of Starbucks' lattes?

B

ssume that we have a production possibilities frontier (PPF). Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier, and Point D is located outside (to the right) the frontier. Which points represent efficient production points?

B and C

If the actual cost of a scarf is $1,500, which of the following statements is true?

Bridget, Krista, and Megan will buy a scarf.

(Figure: Demand Curves) Examine the figure Demand Curves. Which graph shows a perfectly inelastic demand curve?

C (vertical)

Which of the following statements is true about the substitution effect?

It measures the change in the quantity consumed as the consumer substitutes away from the relatively more expensive good toward other relatively cheaper goods.

In Kessy's old kitchen, he could bake 10 cookies or mix 15 glasses of lemonade in one day. Now Kessy has a larger oven and refrigerator. How does this affect his production possibility frontier?

It shifts out his production possibility frontier.

Katherine has a physics exam tomorrow. However, a free lecture by one of her favorite authors is taking place this evening. Katherine decides to attend the lecture instead of studying for her exam. Which is a correct statement?

Katherine's opportunity cost is the cost of getting to the lecture event itself plus the reduction in her physics exam grade by not studying tonight.

Mario is willing to mow one lawn for $18; he will mow a second for $22, and a third for $28. Assume that the market rate for lawn mowing is $24. How many lawns will Mario mow? What will be his total revenue? What will be his producer surplus?

Mario will mow two lawns for a total revenue of $48; his producer surplus will be $8.

Suppose that in Australia it takes 2 hours of labor to harvest 10 bushels of apples and 4 hours of labor to harvest 10 bushels of tomatoes. Further, suppose that a worker in Brazil can harvest 10 bushels of apples in 4 hours or 10 bushels of tomatoes in 5 hours. Which of the following statements is TRUE? Of these two countries, Brazil has a comparative advantage in producing tomatoes. Of these two countries, Brazil has a comparative advantage in producing apples. Brazil has an absolute advantage in producing both goods. In trade between these two countries, Australia would gain and Brazil would lose.

Of these two countries, Brazil has a comparative advantage in producing tomatoes. Correct: In Australia, the opportunity cost of harvesting 10 bushels of tomatoes is 20 bushels of apples. In Brazil, the opportunity cost of harvesting 10 bushels of tomatoes is 12.5 bushels of apples. Since Brazil gives up fewer bushels of apples for 10 bushels of tomatoes, it has the lower opportunity cost.

Graciela is willing to sell 1 dozen roses for $50, while Giuseppe is willing to sell 1 dozen roses for $60. Carlos is willing to buy 1 dozen roses for $60, while Yuriko is willing to pay $50. If the market price is $52, how many roses are sold and what is the sum total of consumer and producer surplus after the transaction(s)?

One dozen roses will be sold, and the total consumer and producer surplus will be $10.

(Figure: Consumer Surplus II) Examine the figure Consumer Surplus II. If the price falls from P2 to P1, consumer surplus increases by the area:

P1P2BF.

A model that helps economists think about the trade-offs that every economy faces is called:

PPF

Suppose the price of a Vespa drops from $6,000 to $5,000 because of new mass production methods. Which of the following statements is correct given this change in price?

The change in consumer surplus is equal to $3,400.

Assume that there is a production possibilities frontier (PPF). Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier, and Point D is located outside (to the right) of the frontier. Which of the following points represent feasible (attainable) production points?

Points A, B, and C are feasible.

In Colorado, there has been a drought, and rural communities are fighting with urban areas over water. This statement best represents this economic concept:

Resources are scarce

It is cheaper to produce corn in Kansas than in Death Valley, California because corn needs a lot of water and moderate temperatures. This statement best represents which economic concept?

Resources should be used as efficiently as possible to achieve society's goals.

What happens to the price elasticity of demand as we move down to the right along a straight-line demand curve?

The demand becomes relatively less elastic.

Which of these is a key factor in the effectiveness of well-functioning markets?

The right to use and dispose of your private property as you see fit

If total surplus rises, which statement must have occurred?

There was an increase in demand or an increase in supply.

The income effect refers to:

a change in the quantity demanded of a good caused by a change in the buyer's real income caused by a change in the price of a good or service.

If an economy has to sacrifice only one unit of good X for each unit of good Y produced, regardless of the output mix, then its production possibility frontier has:

a constant negative slope

Producer surplus is represented by the area _____ the supply curve and _____ the price.

above; below

(Figure: Demand for Notebook Computers) Examine the figure The Demand for Notebook Computers. Total revenue at point S equals the:

area 0PSM

If resources are scarce it means that they:

cannot provide enough goods or services to satisfy all human material wants and needs.

The substitution effect of a change in the price of a good implies that, as good A gets more expensive when compared to good B, the consumer will:

decrease the quantity consumed of good A.

(Table: Pumpkin Market) Examine the table Pumpkin Market. There are two consumers, Andy and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table. There are two producers of pumpkins, Cindy and Diane, and their costs are shown in the table. The equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. If Ben buys one less pumpkin and Diane sells one more pumpkin than in equilibrium, total surplus will _____ by _____.

decrease; $2

(Figure: Consumer and Producer Surplus) Examine the figure Consumer and Producer Surplus. In the figure, if the price is held below the equilibrium price in this market, producer surplus _____ and total surplus _____.

decreases; decreases

During a drought, the price elasticity of demand for water is less than one. During a flood, the price elasticity of demand for water is greater than one. This means that the:

demand for water is inelastic during a drought and elastic during a flood.

When each and every market in the economy maximizes total surplus, then the economy as a whole is:

efficient

If a good is a luxury, then we would expect the price elasticity of demand to be:

elastic

Figure: The Linear Demand Curve II) Examine the figure Linear Demand Curve II. At prices greater than $7, demand is _____, whereas prices below $7 are _____, and demand at $7 is _____.

elastic; inelastic; unit-elastic

Suppose that Chile and Peru produce both corn and aluminum and do not trade. If Chile has a lower opportunity cost than Peru in producing corn and Peru has a lower opportunity cost than Chile in producing aluminum, then:

eru would be made better off by producing aluminum exclusively and trading with Chile to obtain corn. Correct: Both countries can be made better off by specializing in the good for which they have the lowest opportunity cost, and then trading. In this question, Peru has a lower opportunity cost than Chile in producing aluminum, so Peru should specialize in aluminum production and then trade with Chile to obtain corn.

If the price of chocolate-covered peanuts decreases from $1.15 to $1.05 and the quantity demanded increases from 190 bags to 220 bags, then the price elasticity of demand (using the midpoint method) is:

greater than 1.0

Abe starts exercising regularly, and after a few months he can do twice as much of everything—in a single day Abe can now make 10 hamburgers or 8 milkshakes rather than the 5 hamburgers and 4 milkshakes he made in the past. Because of this, Abe's production possibility frontier:

has shifted right, but his opportunity costs of making milkshakes are unchanged.

Joe manages a popular nightclub and lately revenues have been disappointing. Joe's bouncer suggests that raising drink prices will increase revenues, but his bartender suggests that decreasing drink prices will increase revenues. Joe is not sure who is right, but he does know that:

his bouncer thinks the demand for drinks is inelastic, whereas his bartender thinks the demand for drinks is elastic

What do you have to know in order to calculate the price elasticity of demand?

how much of the good was purchased at two different prices

Jane is a utility-maximizing consumer who is consuming the optimal quantity of wallets and eyeglasses and spending her entire budget. The price of wallets falls. Jane will:

increase her consumption of wallets if wallets are a normal good, as the income effect reinforces the substitution effect.

In the market for corn, a primary input in the production of ethanol, total surplus _____ when the price of ethanol increases. Assume that the supply of corn is upward sloping.

increases

Demand for vegetables at a small farmers' market is steady, but the supply of vegetables has decreased because of a drought. This is good news for farmers if demand is:

inelastic and the price effect outweighs the quantity effect.

If an economy has NOT achieved efficiency, there must exist ways to:

make some people better off without making others worse off.

Maximum total surplus in the market for chocolate occurs when:

market is in equilibrium

Market failure refers to a situation in which:

markets fail to reach an efficient outcome

If the state government allocates additional spending on education, the opportunity cost is:

measured in terms of the best alternative use for that money.

An efficient outcome is one in which:

no individual can be made better off without making someone else worse off.

Economists usually make the assumption that production is subject to increasing opportunity costs because:

not all resources are equally suited to producing every good.

A "market failure" occurs when a market fails to be efficient, and it can be caused when:

one party, in an attempt to capture more surplus, prevents mutually beneficial trades from occurring.

The income effect of a price change of e-Books is the effect on consumption due to a change in:

purchasing power caused by a change in the price of the good.

Price elasticity of demand measures the responsiveness of:

quantity demanded to changes in price.

What is measured along the horizontal axis in a graph of the production possibility frontier?

quantity of one good produced

If a good is an inferior good and its price rises, quantity demanded will:

rise according to the income effect.

(Figure: Consumer and Capital Goods) Examine the figure Consumer and Capital Goods. Technological improvements will likely:

shift the production possibility frontier outward to Curve 2.

For goods that absorb a ______ share of the typical consumer's spending, the _______ effect is essentially the sole reason why the demand curve slopes downward.

small; substitution effect

Gains from trade arise because of:

specialization

The demand for a good becomes relatively more elastic as:

substitutes for the good become more available.

Consumer surplus is:

the difference between the price that consumers are willing to pay for a good and the amount they actually pay.

Producer surplus is:

the difference between the price that producers receive and the amount for which they are willing to sell the good.

Zoe's grandparents are excited about finally paying off their mortgage, because, as they say, "Our cost of housing is now zero." Zoe should explain to them the economic principle of:

they base their conclusions on models that make different assumptions.

Suppose that one person working in Mexico can produce either 20 yards of cloth or 80 baskets, and that one person working in Turkey for the same length of time can produce either 15 yards of cloth or 30 baskets. Which of the following statements is then TRUE?

turkey has a comparative advantage in cloth; Mexico has a comparative advantage in baskets.

While buying refreshments for an upcoming party, you notice that a six-pack of Americana Beer costs $2 and a six-pack of Bavarian Beer costs $4. You buy the six-pack of Bavarian Beer, although you wonder if maybe two six-packs of Americana Beer would have been a better choice. The opportunity cost of the Bavarian Beer is:

two six-packs of Americana Beer.

Peanut butter is an inferior good. If there is an increase in income and the supply of peanut butter is upward sloping, total surplus in the peanut butter market:

will decrease

You can spend $100 on either a new economics textbook or a new CD player. If you choose to buy the new economics textbook, the opportunity cost is:

your enjoyment of the new CD player.