Economics

Midterm Exam
Multiple Choice (Total 75 points)
1. Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the money
in a bank account for a year and earn 5 percent interest. The opportunity cost of spending the money
today, in terms of what you could have after one year, is
a. $0.
b. $15.
c. $305.
d. $315.
2. Market failure can be caused by
a. low consumer demand.
b. equilibrium prices.
c. externalities and market power.
d. high prices and foreign competition.
3. If Martina’s income increases and, as a result, she chooses to buy more lattés per month at each price, then
her demand curve will
a. shift to the right.
b. shift to the left.
c. not shift; instead, Martina will move along her demand curve downward and to the right.
d. not shift; instead, Martina will move along her demand curve upward and to the left.
4. Soup is an inferior good if the demand
a. for soup falls when the price of a substitute for soup
rises.
b. for soup rises when the price of soup falls.
c. curve for soup slopes upward.
d. for soup falls when income rises.
5. If a surplus exists in a market, then we know that the actual price is
a. above the equilibrium price, and quantity supplied is greater than quantity demanded.
b. above the equilibrium price, and quantity demanded is greater than quantity supplied.
c. below the equilibrium price, and quantity demanded is greater than quantity
supplied.
d. below the equilibrium price, and quantity supplied is greater than quantity
demanded.
6. When consumers face rising gasoline prices, they typically
a. reduce their quantity demanded more in the long run than in the short run.
b. reduce their quantity demanded more in the short run than in the long run.
c. do not reduce their quantity demanded in the short run or the long run.
d. increase their quantity demanded in the short run but reduce their quantity demanded in the long

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 run.

7. Demand is said to be inelastic if

a. buyers respond substantially to changes in the price of the good.
b. demand shifts only slightly when the price of the good changes.
c. the quantity demanded changes only slightly when the price of the good changes.
d. the price of the good responds only slightly to changes in demand.
8. When the price of an eBook is $15.00, the quantity demanded is 400 eBooks per day. When the price falls
to $10.00, the quantity demanded increases to 700. Given this information and using the midpoint method,
we know that the demand for eBooks is
a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.
9. Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an
increase in the demand for cheese causes the price of cheese to increase by 15%, then the quantity
supplied of cheese will increase by
a. 0.4% in the short run and 4.6% in the long run
b. 1.7% in the short run and 0.7% in the long run.
c. 9% in the short run and 21% in the long run.
d. 25% in the short run and 10.7% in the long run.
10. When demand is elastic, a decrease in price will cause
a. an increase in total revenue.
b. a decrease in total revenue.
c. no change in total revenue but an increase in quantity demanded.
d. no change in total revenue but a decrease in quantity demanded.
11. Holding all other factors constant and using the midpoint method, if a tractor manufacturer increases
production from 80 to 100 units when price increases by 15 percent, then supply is
a. inelastic, since the price elasticity of supply is equal to
0.68.
b. inelastic, since the price elasticity of supply is equal to
1.48.
c. elastic, since the price elasticity of supply is equal to 0.68.
d. elastic, since the price elasticity of supply is equal to 1.48.
12. A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.80, the
bakery would be willing to supply 1,100 bagels. Using the midpoint method, the price elasticity of supply
for bagels is about

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 a. 0.62.
b. 0.77.
c. 1.24.
d. 1.63.

13. Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly
inelastic. If a tax is imposed in this market, then the

a. buyers will bear a greater burden of the tax than the sellers.

b. sellers will bear a greater burden of the tax than the buyers.

c. buyers and sellers are likely to share the burden of the tax equally.

d. buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the
greater burden of the tax without more information.
14. Allen tutors in his spare time for extra income. Buyers of his service are willing to pay $40 per hour for as
many hours Allen is willing to tutor. On a particular day, he is willing to tutor the first hour for $10, the
second hour for $18, the third hour for $28, and the fourth hour for $40. Assume Allen is rational in
deciding how many hours to tutor. His producer surplus is
a. $40.
b. $64.
c. $12.
d. $56.
15. Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the
tax burden, when the
a. tax is placed on the sellers of the product.
b. tax is placed on the buyers of the product.
c. supply of the product is more elastic than the demand for the
product.
d. demand for the product is more elastic than the supply of the
product.
16. The deadweight loss from a tax
a. does not vary in amount when the price elasticity of demand changes.
b. does not vary in amount when the amount of the tax per unit changes.
c. is larger, the larger is the amount of the tax per unit.
d. is smaller, the larger is the amount of the tax per unit.
17. Last year, Tess bought 5 handbags when her income was $54,000. This year, her income is $60,000, and
she purchased 7 handbags. Holding other factors constant, it follows that Tess’s income elasticity of
demand is about

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 a. 0.32, and Tess regards handbags as inferior
goods.
b. 0.32, and Tess regards handbags as normal goods.
c. 3.17, and Tess regards handbags as inferior
goods.
d. 3.17, and Tess regards handbags as normal goods.
18. Suppose that a decrease in the price of good X results in fewer units of good Y being demanded. This
implies that X and Y are
a. complementary goods.
b. normal goods.
c. inferior goods.
d. substitute goods.

19. When a shortage exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied until the shortage is
eliminated.
b. raise price, which decreases quantity demanded and increases quantity supplied until the shortage is
eliminated.
c. lower price, which increases quantity demanded and decreases quantity supplied until the shortage is
eliminated.
d. lower price, which decreases quantity demanded and increases quantity supplied until the shortage is
eliminated.
20. Suppose that corn farmers want to increase their total revenue. Knowing that the demand for corn is
inelastic, corn farmers should
a. plant more corn so that they would be able to sell more each year.
b. increase spending on fertilizer in an attempt to produce more corn on the acres they farm.
c. reduce the number of acres on which they plant corn.
d. contribute to a fund that promotes technological advances in corn production.
21. When a tax is imposed on the sellers of a good, the
a. demand curve shifts downward by less than the amount of the tax.
b. demand curve shifts downward by the amount of the tax.
c. supply curve shifts upward by less than the amount of the tax.
d. supply curve shifts upward by the amount of the tax.
22. Which of the following observations would be consistent with the imposition of a binding
price ceiling on a market? After the price ceiling becomes effective,
a. a smaller quantity of the good is bought and sold.
b. a smaller quantity of the good is demanded.
c. a larger quantity of the good is supplied.
d. the price rises above the previous equilibrium.
23. If the government levies a $5 tax per MP3 player on buyers of MP3 players, then the price paid by buyers
of MP3 players would likely

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 a. increase by more than $5.
b. increase by exactly $5.
c. increase by less than $5.
d. decrease.
24. A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the
market for red grapes
a. increases, and the consumer surplus in the market for red wine increases.
b. increases, and the consumer surplus in the market for red wine decreases.
c. decreases, and the consumer surplus in the market for red wine increases.
d. decreases, and the consumer surplus in the market for red wine decreases.

25. Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie’s
willingness to pay was $100, Kendra’s willingness to pay was $95, and Kristen's willingness to pay was
$80. Which of the following statements is correct?
a. Had the price of the cell phone been $95 rather than $80, Katie and Kendra definitely would have been
buyers and Kristen definitely would not have been a buyer.
b. Having bought the cell phone, Kristen is better off than she would have been had she not bought it.
c. For the three individuals together, consumer surplus amounts to $35.
d. The fact that all three individuals paid $80 for the same type of cell phone indicates that each one placed
the same value on that cell phone.

Ⅱ. Essay questions (Total 25 points)

Figure 1.
1. Refer to Figure 1. (5 points)
(a) Suppose that the equilibrium price is $4 per gallon. At a price of $2 per gallon, will there be a surplus or
shortage of units in this market? Please explain.
(b) Explain the excess supply and excess demand, how to return to the equilibrium price and quantity.

2. Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the
coffee bean crop. Use appropriately labeled diagrams to answer the following questions. (9 points)

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 (a) What happens to the price of coffee beans? Please explain.
(b) What happens to the price of a cup of coffee? What happens to total expenditure on cups of coffee?
Please explain.
(c) What happens to the price of donuts? What happens to total expenditure on donuts? Please explain.

Figure 2.
3. Refer to Figure 2. (11points)
(a) If the government set a price floor at $130, would there be a shortage or surplus? Please explain.
(b) Suppose the government sets a price ceiling at $50 for this product. Is this price ceiling binding? What
will happen to the market if it is binding? Please explain.
(c) At the equilibrium price, what is the producer surplus in the market?
(d) If the government imposes a price ceiling of $50 in this market, what is the new producer surplus?

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