MECO 6201 Summer 2003 Test 1 Peter Lewin

Multiple choice- select the best alternative.

Please keep the question paper and hand in your scantron.

This is a closed book test.

Solution and grade distribution (to follow) at end.

1. The study of economics cannot proceed without the assumption that
1. all human action is selfish
2. all human action is rational
3. all human action is self interested
4. all of the above
5. b and c of the above

2. Opportunity cost is
1. the same thing as historical cost
2. the value of the most preferred alternative sacrificed
3. always greater than historical cost
4. the same thing as accounting cost

3. Consider Figure 1 above. The production possibility curves both exhibit

1. decreasing costs
2. constant costs
3. increasing costs
4. no costs

4. Consider Figure 1 above. Comparing Curve 1 with Curve 2, along Curve 2
1. fish is cheaper to produce
2. fish is more expensive to produce
3. fish costs the same to produce
4. fish cannot be produced

5. Consider Figure 1 above (you may assume that both fish and fruit are valuable).
1. Curve 1 is preferred
2. Curve 2 is preferred
3. Curve 1 is equivalent to Curve 2
4. life is short

6. Consider Figure 2 above. The production possibility curve exhibits
1. decreasing costs
2. constant costs
3. increasing costs
4. no costs

7. Consider Figure 2 above. Comparing point A with point B, at point B
1. fish is cheaper to produce
2. fish is more expensive to produce
3. fish costs the same to produce
4. fish cannot be produced

8. Which of the following is necessary for the smooth functioning of a free market economy?
1. understanding and respect for private property
2. a commitment to being selfish
3. high levels of taxation
4. a and c of the above

9. Which of the following economists is know as the father of economics
1. Adam Fergusson
2. Adam Smith
3. David Ricardo
4. Carl Menger

10. “It is not from the benevolence of the butcher that we get our meat.” This statement is drawn from an illustration of the functioning of
1. “the heavy foot”
2. “the guiding hand”
3. “the invisible hand”
4. “life in the big city”

11. Market demand curves are likely to be _________ than individual demand curves
1. steeper
2. flatter
3. the same slope
4. more infinite

12. Consider Figure 3 above. The two demand curves D₁ and D₂ have the same slope. The price elasticity of demand at point A is ___________ at point B.
1. greater than
2. smaller than
3. the same as
4. all of the above are possible

13. Consider Figure 3 above. The two demand curves D₁ and D₂ have the same slope. The price elasticity of demand at point A is ___________ at point C.
1. greater than
2. smaller than
3. the same as
4. all of the above are possible

14. Consider Figure 3 above. The two demand curves D₁ and D₂ have the same slope. The INCOME elasticity of demand at point A is ___________ at point B.
1. greater than
2. smaller than
3. the same as
4. it is not possible to determine income elasticity from this diagram

15. When the price of gasoline rises steeply, what will be the immediate effect on the market for long road trips?
1. The demand for road trips will fall.
2. The quantity demanded of road trips will fall.
3. The supply of road trips will fall.
4. The quantity supplied of road trips will fall.

16. The relationship between road trips and gasoline can between described by saying they are
1. substitutes
2. complements
3. both of the above
4. none of the above

17. When the price of houses rise, what will be the immediate effect on the market for houses?
1. The demand for houses will fall.
2. The quantity demanded of houses will fall.
3. The supply of houses will fall.
4. The quantity supplied of houses will fall.

18. Which of the following would cause the supply curve for houses to shift to the left?
1. A rise in the price of houses.
2. A fire that destroyed 75% of the lumber used to build houses.
3. A change in the law abolishing the tax exemption for mortgage interest payments.
4. A fall in the average income of families in the economy

19. Consider Figure 4 above. Which of the following most likely represents the relationship between income levels and food consumption?
1. Curve #1
2. Curve #2
3. Curve #3
4. a and b of the above

20. Consider Figure 4 above. Which of the following most likely represents the relationship between income levels and the purchases of expensive jewelry?
1. Curve #1
2. Curve #2
3. Curve #3
4. a and b of the above

21. Consider Figure 4 above. Consider the two points identified on Curve #2 as A and B. Which of the following is true?
1. the income elasticity of demand at point A is greater than at point B
2. the income elasticity of demand at point A is less than at point B
3. the income elasticity of demand at point A is equal to that point B
4. the income elasticity of demand at point A is equal to 1
5. c and d of the above

22. Consider Figure 4 above. Which of the curves illustrates the case of a normal good?
1. Curve #1
2. Curve #2
3. Curve #3
4. all of the above
5. none of the above

23. Consider Figure 4 above. Which of the curves illustrates the case of an inferior good?
1. Curve #1
2. Curve #2
3. Curve #3
4. all of the above
5. none of the above

24. Which of the following would shift the supply curve for coffee to the left?
1. an innovation in agricultural techniques that allows growers to produce coffee less expensively.
2. a late frost in Brazil that destroys 75% of its coffee bean crop.
3. an increase in the wages paid to coffee bean pickers.
4. a rise in the popularity of espresso, cappuccino, and other exotic coffee drinks.

25. Which of the following would cause an increase in the demand for movie rentals?
1. a new nationwide movie rental chain opens.
2. movie theaters raise their prices.
3. the royalties paid to movie actors increase.
4. the price of video cassette recorders (VCRs) rises.

26. A simultaneous increase in both the demand for houses and the supply of houses must increase
1. the number of houses bought and sold
2. the price of houses
3. both the equilibrium price and quantity of houses
4. the shortage of houses in the market

27. The resolution to the diamond-water paradox involves the insight that
1. the marginal utility of water is less than the marginal utility of diamonds
2. the total utility of water is greater than the total utility of diamonds
3. the average utility of water is less than the average utility of diamonds
4. a and b of the above

28. Consider figure 5. An shift in the supply curve from S₁ to S₂ will

a. increase the value of consumer surplus

b. reduce the value of consumer surplus

c. leave the value of consumer surplus unchanged

d. have an indeterminate effect on the value of consumer surplus

29. Consider figure 5. At which point will the sum of producer and consumer surplus be maximized?

a. point E

b. point F

c. both of the above

d. none of the above

30. Consider Figure 6. What effect will an imposition of a minimum wage at the level indicated have on consumer surplus?

a. it will increase it

b. it will decrease it

c. it will not affect it

d. it is impossible to say

31. Consider Figure 6. If W_min was actually a MAXIMUM price imposed on the market, a salary cap. What effect would this restriction have on consumer surplus?

a. it will increase it

b. it will decrease it

c. it will not affect it

d. it is impossible to say

32. For every dollar increase in the minimum wage, the increase in unemployment or job losses caused will be greater

a. the steeper the demand curve for labor

b. the flatter the demand curve for labor

c. the steeper the supply curve for labor

d. the flatter the supply curve for labor

e. b and d of the above

33. A per unit excise tax will be paid for entirely by the buyer when

a. the demand curve is vertical

b. the demand curve is horizontal

c. the demand curve is gently downward sloping

d. the supply curve is vertical

e. the supply curve is horizontal

34. A per unit excise tax will be paid for entirely by the seller when

a. the demand curve is vertical

b. the demand curve is horizontal

c. the demand curve is gently downward sloping

d. the supply curve is vertical

e. the supply curve is horizontal

35. A fixed percentage excise tax on any market, will

a. decrease consumer surplus

b. increase consumer surplus

c. decrease producer surplus

d. increase producer surplus

e. a and c of the above

36. A flat tax on wages earned will

a. decrease the amount of labor demanded

b. decrease the amount of labor supplied

c. both of the above

d. none of the above

37. Assume that the demand for affordable housing is constant – the demand curve is not shifting. The effects of rent control in reducing the amount of affordable housing are likely to be

a. greater in the long run than in the short run

b. wear out in the long run

c. the same in the short and long run

d. none of the above

38. Imagine a steep rise in the price of gasoline. The demand for large gas-intensive automobiles will

a. fall more in the long run than in the short run

b. not be affected

c. rise as people become used to paying more for gas

d. none of the above

39. Suppose Joe purchases 10 six-packs of beer per month when his monthly income is $100. Joe receives a raise at work, giving him an extra $40 per month in take-home pay, and Joe now purchases 12 six-packs of beer per month. What is Joe's income elasticity of demand for beer measured over the relevant income range?
1. 2.
2. 1.
3. 0.5
4. 0.05.

40. The price elasticity of demand for a good is -0.20 over the relevant price range. By how much must the price of the good decrease in order for quantity demanded to rise by 6%?
1. 3%.
2. 4.8%.
3. 12.4%.
4. 30%.

GRADE DISTRIBUTION:

If you score is greater than or equal to: your grade is

29	A
24	B
else	C

Solution:

1. e

2. b

3. b

4. a

5. b

6. c

7. b

8. a

9. b

10. c

11. b

12. a

13. a

14. d

15. a

16. b

17. b

18. b

19. c

20. a

21. e

22. d

23. e

24. b or c

25. b

26. a

27. d

28. a

29. c

30. c

31. d

32. e

33. a

34. d

35. e

36. c

37. a

38. a

39. c

40. d