BRANDEISTJNIVERSITY of Economics Department

Economics2a Introduction to Econornics Mr. Coiner Fall,20O5

First Exam
Name:

(12:00 or 1:00): Section Insffuctions:

1. Write your name and sectionabove. 2. Make sure not to get stuck on any one question. It's not worth it. 3. On the fust part of the test (multiple choice), mark your answer in the spacenext to the question. 4. On the secondpart of the test (problems),write your answer in the colored book. Show your work or explain your reasoning so that you can get as much credit as possible' Part i. Multiple Choice. 1. In the production possibilities graph shown, what is the opportunity cost to society of the

Movement from point C to pointA? A) 900 oranges Ortrlz s B) 600oranges C) 300oranges D) 1000bananas 4oo E) 500bananas ?t?0 doo

Labor Hours Neededto Make 1 Pound Of: Potatoes Meat 10 5 Farmer 4 L Rancher

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2. According to the table shown above,for the Farmer, the opportunity cost of I pound of meat is A) 5 hours of labor B) 2 poundsof potatoes C) 7zpoundsofpotatoes D) 5 poundsofpotatoes 3. According to the table shown above,for the Rancher,the opportunity cost of 1 pound of meat is A) t hour oflabor B) % pound ofpotatoes C) 4 poundsofpotatoes D) 1 pound of potatoes 4. According to the table shown above,the Farmer has an absolute advantagein in Rancherhas a comparative advantage A) potatoes,potatoes B) neither good, potatoes C) neither good, meat D) meat. meat and the

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5. According toti,"aiugrllnffim hou", theopportuniril"r, or t ,n"$to*u.tnu i,
A. B. C. D. 1/40book l/8 book 8 books 40 books

6. According to thediaEamshown above, Martha in should specialize George should specialize in _.

A. B. C. D. books,meals books,neithergood both goods,meals meals,books

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7. What will happenin the rice markettoday if buyersare expectinghigher pricesin the near future? A. The demandfor rice will decrease. B. The demandfor rice will increase C. The supply of rise will increase D. The demandfor rice will be unaffected 8 Suppose that Johnreceives a pay increase. We would expect A. John's demandfor inferior goodsto decrease. B. John's demandfor normal goodsto remain unchanged C. John's demandfor normal goodsto decrease D. John's demandfor inferior goodsto increase 9. Elasticity of demand is closely related to the slope of the demand curve. The _ demandcurve, the more responsivebuyers are to a changein price. A. Closerto the verticalaxis. B. Further to the right C. Steeper D. Flatter the

10. Suppose that you own a business that makesand sellsjewelry boxes. A consultanttells you that she has determinedthat you face an elastic demandfor your jewelry boxes. All else equal, if you want to increaseyour total revenue you should A. not changethe price ofyourjewelry boxes B. decrease the price ofyourjewelry boxes C. increase the price ofyourjewelry boxes D. we cannotdetermine from the information siven 11. The demandfor beeris likely to A. be less price sensitivethan the demand for Budweiser B. be more price sensitivethan the demand for Budweiser C. have the sameprice sensitivity as the demand for Budweiser D. be perfectly elastic 12. Rent conhol reduces A. the quality of housing B. rents C. the quantity of housing D. all of the above answer are correct

3 13. Under rent control,landlordscease to be responsive to tenants'concernsabout the quality of housingbecause A. with shortagesand waiting lists, they have no incentiveto maintain and improve their property B. they know they can never pleasetheir tenants C. the law no longer requires them to maintain their buildings D. they seeit as a way of protesting againstthe conffols

14. The priceof Pepsifalls sharply.As a result,the equilibrium marketprice of Coke the equilibrium market quantity of Coke sold surplusin , andproducer
A. B. C. D. E. the Coke market increases, increases, increases increases, increases, decreases increases,decreases,decreases decreases, decreases, decreases decreases.increases.increases

15. Lynne is willing to sell eachof her paintingsfor $50. Shesellsthem, and earnsproducer surplus of$40 on each painting.Lynne'scostis per painting and shesells the

paintings for _ A. $50,$40 B, $50,$90 c. $10, $s0 D. $40,$80 E. $90,$50

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16. Which of the following is NOT conect? A. the only difference between taxers on buyers and sellersis who sendsthe money to the government B. the wedgebetweenthe buyers' price and the sellers'price is the same,regardless of whether the tax is levied on buyers or sellers C. laxes on buyers and sellersare equivalent D. if the tax is on sellers, the supply curve shifts up; if the tax is on buyers, the demand curve shifts down E. ifthe tax is on sellers,sellersbear a largerpart ofthe burden;ifthe tax is on buyers,buyers bear a larger part of the burden I'1. If A. B. C. D. a tax is imposed on a market with inelastic demandand elastic supply, the burden of the tax will be sharedequally betweenbuyers and sellers buyers will bear most of the burden of the tax sellers will bear most of the burden of the tax it is impossible to determine how the burden of the tax will be shared

I 8. The before-trade price of cotton in Egypt is $200 per ton. The world price of cotton is $300 per ton. Egypt is a small nation. If trade in cottonis allowed,Egyptian consumersurpluswill and consumer surplus plus producer , Egyptian producer surplus will _, surpluswill _ . A. increase, increase. increase B. decrease, increase,increase C. increase, decrease, increase D. increase, be unaffected, increase E. be unaffected, increase, increase

19. The infant-industry argument A. is basedon the belief that protecting industrieswhen they are young will pay off later B. is basedon the beliefthat protectingindustries producinggoodsand services for infants is necessary if a country is to have healthy children C. hasthe supportof most economists D. hasprovento be correctin nearly all cases 20. Suppose that a steelmili emits a certainamountof air poilution. The social cost of producing the steelincludes A. the privatecostsofthe steelproducers pay for the steel and the price consumers B. the privatecostsofthe steelproducers and the coststo the bystanders affectedby the pollution C. the coststo the bystanders affectedby the pollution only D. the price consumers pay for the steel Part II. Problems. Write your answerin the coloredbook. Show your work. 1. For eachof the following events,indicatehow the event will affect the market for applepie. For eachevent,say which curve shifts,say in which directionit shifts,say what happens to the equilibrium price of applepie, and what happens to the equilibrium quantity of applepie sold. Answer eachpart separately.(HINT: It is very helpful to draw a diagram.) a) The price of applesrises. b) The price ofchocolate cakefalls. c) The surgeongeneralannounces studieswhich show that consumptionof applepie reduces wrinkles. The table below showsthe behaviorof the price of good X, salesof good X, and salesof good Y over the pastfive months, During this time, the supply curve for good X has graduallyshifted to the left. Assumethat other things(e.g.,income,the price of good Y, etc) haveremainedconstant over the pastfive months. Price of Good X 30 cents 40 cents 50 cents 60 cents 70 cents Salesof Good X Salesof Good Y

2.

Month May June July August September a) b) c)

100 90 80
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60

50 55 60 65 70

Betweenthe point on the demandcurve for X wherethe price is 30 cents,and the point on the demand curve for X where the price is 70 cents,what is the elasticity of demand? Basedon your answerto part a, is the demandfor X elasticor inelastic? Are X and Y complementsor substitutes?

3. The diagramon the right showsthe market for orangejuice. a) What areasin the diagram representthe juice? Total Value to buyersof 1000units of orange b) Suppose the government imposesa price ceiling of $1 per quart of orangejuice. With this ceiling f,in place, what quantity of orangejuice is produced? | .?5 c) What area in the diagram represents the juic" S, Total Cost of producingthis quantity of orange (the quantity from part b)?

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4. The diagram on the right shoesthe market for P DVD players. The demandand supply curves shown are the onesthat prevail ifthere is no salestax on DVD players. Now supposethat the government enactsa saiestax of$8 per DVD player. It does not matterwho legally pays the tax, but if it helps, you could imagine that sellersmust pay the tax. With this tax in place: a) What is the price paid by buyers for a DVD player? b) What is the quantityof DVD playerssold? c) What areasrepresentthe lossesto consumers from the salestax? d) What areasrepresentthe lossesto producers from the salestax? e) What areasrepresentgovernmentrevenue? the deadweight loss D What areasrepresent of the tax?

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5. The diagam on the right showsthe market for asparagusin the small nation of Terra Verda. is $10 per bushel. The world price of asparagus a) At first, Terra Verda does not trade at all with the rest of the world. What is the price insideTema Verda? of asparagus s what is the 2o b) Under free trade in aaparagus, *{t producedin Terra Verda? quantity of asparagus Terra Verda imposesa tariff c) Now suppose c lo of $5 on each imported bushel of asparagus. With this tariff in place, what quantity of asparagus does Terra Verda import? d) What areasin the diagram representthe l0 2o 3o 3i lossesto Terra Verda's consumersfrom the tariff? e)What area or areasin the diagram show the gains to Terra Verda's producersfrom the tariff? flWhat area or areasshow the dead weight loss of the tariff? qo+ 6. When one personplantsa pretty gardenin her front P lawn, her neighborsget somebenefit(they get to look at the garden as they walk by, and their property values '1O4 may go up as well). The diagramon the right shows the demand and supply curves for flower seeds,as well as the Marginal SocialBenefit curve for flower seeds. 6o a) What is the market quantity of flower seeds? t{8+ b) What is the sociallyefficient quantity of flower seeds? c) In order to "fix" the problem here and cause the market quantity to equal the efficient quantity, we would want to (tax, subsidize) saleof flower seeds.Fill in the blank. d) How large (in $) shouldthe tax or subsidybe?

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