ECON 111 Study Guide - Midterm Guide: Energy Intensity, Kuznets Curve, Free Trade

1. The Houston Chronicle reported that in Houston, the average price of new homes has decreased, while at the same time, the number of new homes sold has increased. This situation could be explained by which one of the following: (draw curves before answering)

1. An Increase in demand
2. An Increase in supply
3. A Decrease in demand
4. A Decrease in supply

2. In another market, the average price of new homes fell, while at the same time, the number of new homes sold decreased. The situation would best be explained by (Draw the curves before answering)

1. An Increase in Demand
2. An Increase in Supply
3. A Decrease in demand
4. A Decrease in supply

3. A consumer is said to have achieved maximum total utility when:

1. Purchases of Good A give the same satisfaction as purchases of Good B.
2. Purchases of the last dollar spent on Good A give the same satisfaction as purchases of the last dollar spent on Good B.
3. The average purchases per dollar of Good A give the same satisfaction as the average purchases per dollar of Good B.
4. The total utility derived from Good A is the same as the marginal utility derived from Good B.

4. You are given the following information about a firm's present output position: MPP (Marginal Physical Product) of Land = 12; MPP of Labor = 16; Price of Land = $2; Price of Labor = $4. With no additional money to spend, this firm should:

5. A firm achieves the least cost in production by substituting factors until

1. their factor prices are equal
2. their marginal products are equal to the factor prices
3. their marginal products are each equal to zero
4. the ratios of their marginal product equal the ratio of their prices
5. none of the above

6.The economy is currently on its production possibilities frontier (PPF). A politician says that it is possible to get more of everything--more infrastructure, more schools, more national defense, more spending on social programs, and so on. The politician is

1. correct if he is assuming a rightward-shifting PPF.
2. incorrect if he is assuming a rightward-shifting PPF.
3. correct if he is assuming a PPF that does not change.
4. none of the above

7. Assume your swimsuit business is at its maximum profit position, and one new change occurs: consumer incomes decrease. If swimsuits are normal goods, the equilibrium price of swimsuits will __________, and the CONSUMER surplus will ________.

1. increase, increase
2. decrease, decrease
3. increase, decrease
4. decrease, increase

8. Firms that shuts-down in the short-run still must pay:

1. Marginal cost
2. Variable cost
3. Fixed cost
4. Total cost

9. The term externalities refer to:

1. Black-market economic activity.
2. The impact on markets of imported goods.
3. The costs and benefits of a market activity borne by a third party.
4. The inequitable distribution of income.

10. If full external costs are not internalized, firms will tend to allocate more of society's scarce resources to produce than is societally warranted, and if full external benefits are not internalized, firms will allocate less of society's resources to produce than is societally justified. True/False.

11. Joe was very careful about smoking in his home until he bought a fire insurance policy. After buying the policy, he became careless. His attitude is: "I'm insured. What do I care if this place burns down; I'll just collect the money". Joe's attitude is an example of ______________.

12. Megatrust Bank had historically scrutinized loans very carefully and extended them, only to persons whom they considered very creditworthy. They made relatively few loans. However, after the government provided guarantees to sub-prime loans, Megatrust relaxed its standards and increased its loan volume. (And its default rate as well.) This is an example of _______________.

13. In the short-run, if a perfectly competitive firm finds itself operating at a loss, it will

1. Reduce the size of its plant to lower fixed costs.
2. Raise the price of its product.
3. Shut down.
4. Continue to operate as long as it covers its variable cost.

14. If income today is more equally distributed than it was in 1960, a Lorenz Curve depicting today's distribution would be

1. More bowed and to the left of the 1960's curve.
2. More bowed and to the right of the 1960's curve.
3. Less bowed and to the left of the 1960' curve.
4. Less bowed and to the right of the 1960's curve.

15. Which of the following statements is true?

1. As output increases, the average fixed cost becomes smaller and smaller.
2. Average fixed cost does not change as output increases.
3. The marginal cost curve intersects the average fixed cost curve at its minimum point.
4. When marginal cost is greater than average fixed cost, average fixed cost increases.
5.  

16. A firm in any of the market structures we have studied will maximize its profit (or minimizes its loss) when its

1. Average costs are at a minimum
2. Marginal revenue and marginal cost are the same.
3. Marginal revenue is less than marginal cost.
4. Marginal revenue is zero.

17. If the demand for a good increase, when the price of other good increases, these goods are

1. Capital goods
2. Substitute goods
3. Complementary goods
4. Luxury goods

18. Which of the following pairs of products are complementary goods?

1. mobile phones and laptops
2. pens and pencils
3. sugar and artificial sweeteners
4. radios and television
5. toothbrushes and toothpaste

19. The amount of a good that is given up to produce another good is:

1. Scarcity
2. Specialization
3. Opportunity cost
4. Trade
5. Efficiency

20. The most important characteristic of the equilibrium price is that it:

1. Guarantees that producers earn a profit.
2. Increases the quantity demanded.
3. Clears the market.
4. Decreases the quantity supplied.

21. Rank the following market structures based on the number of participating firms: From the fewest number of firms to the most number of firms:

1. Oligopoly
2. Perfect Competition
3. Monopoly
4. Monopolistic Competition

22. If firms in a monopolistically competitive market are earning economic profits which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?

1. an increase in demand
2. a decrease in demand
3. a downward shift in their marginal cost curve
4. an upward shift in their marginal cost curve

23. If labor in Mexico is less productive than labor in the United States in all areas of production, 

1. neither nation can benefit from trade
2. Mexico can benefit from trade but the United States cannot
3. Mexico will not have a comparative advantage in any good
4. both nations can benefit from trade

24. Which of the following statements is false?

1. The typical monopolistically competitive firm could reduce its average total cost if it produced more output.
2. Monopolistically competitive firms advertise to increase the elasticity of the demand curve they face.
3. Expensive advertising might help consumers if it is a signal that the product is good.
4. Brand names acquired at great cost might help consumers by assuring quality.

25. Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigs in surrounding states. Which of the following principles does this best illustrate:

1. people respond to incentives
2. rational people think at the margin
3. a trademark can make everyone better off
4. markets are usually a good way to organize economic activity

Question 1 If it was impossible to have a comparative advantage, there would be no gains from trade. True False 4 points

Question 2 If the price of Good X is $10 and price of Good Y is $15, the slope of the budget constraint is 1.5. True False 4 points

Question 3 If the demand and supply curves have equal slopes in absolute value, the burden of a commodity tax will be split equally regardless of on whom the tax is placed. True False 4 points

Question 4 Suppose that supply is fixed at 100 units and demand is Q = 500 P. A price ceiling of $100 creates a shortage of 400 units. True False 4 points

Question 5 Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run. True False 4 points

Question 6 Firms should exit the industry if average costs are greater than marginal costs. True False 4 points

Question 7 If a 3.67 percent increase in price causes a 1.97 percent decrease in quantity demanded, then total revenue must fall following an increase in price. True False 4 points

Question 8 Which of the following choices best illustrates the concept of Adam Smith's invisible hand ? A Vietnamese farmer grows rice; an exporter ships it to the United States, and a grocer in New York sells it to a customer. A fishery's stock of fish becomes depleted due to overfishing as boats from around the world converge. A government regulates a firm to clean up the pollutants it has released as part of its production process. An apartment building is built, which provides much needed housing, on the site of the only playground for children in that town. 4 points

Question 9 Figure: Labor Supply and Welfare Refer to the figure. The budget constraint is: ABC. BD. ABDC. ABD. 4 points Question 10 The price of coffee has increased, yet evidence suggests the demand for coffee has been stable. A possible explanation is that: there has been no change in the supply of coffee. there has been increased use of subsidies in coffee production. wages of workers in coffee production might have decreased. wages of workers in coffee production might have increased. 4 points Question 11 Which of the following statements is TRUE regarding profit maximization in competitive markets? I. When all firms pursue profits, none of them achieve profits. II. When all firms pursue profits, only the most innovative will achieve profits. III. Production is divided in such a way that total costs of production are minimized. I only II only I and III only II and III only 4 points Question 12 Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that: France should specialize in producing phones and import computers from Sweden. France should specialize in producing computers and import phones from Sweden. France should produce both phones and computers, and import nothing from Sweden. France should import both phones and computers from Sweden. 4 points Question 13 Potato chips and popcorn are substitutes. A subsidy for potato chips will ______the demand for popcorn and the quantity of popcorn sold will ______. (Table: Barrels of Oil) Refer to the table. What is the total amount of producer surplus (per barrel of oil) earned by all four producers if the market price per barrel of oil is $51? Table: Barrels of Oil Minimum willingness to sell Country a single barrel of oil Country A $32.00 Country B 16.00 Country C 17.25 Country D 56.99 increase; increase increase; decrease decrease; decrease decrease; increase 4 points Question 14 In the market for Good X a necessity good without any good substitutes the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall: more heavily on buyers, given that demand is more inelastic than supply. evenly between buyers and sellers. more heavily on sellers, given that supply is more inelastic than demand. more heavily on buyers, given that demand is more elastic than supply. 4 points Question 15 A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do? lobby the Fed to lower interest rates on six-month T-bills buy a futures contract that fixes the dollar cost of 500,000 euros in six months buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans sell a naked option to cover the output spread 4 points Question 16 Which of the following scenarios would cause a speculator to buy low and sell high ? Farmers expect to have a bumper harvest of corn next year. Imports of corn begin to flood the country. The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year. The government is expected to subsidize corn production for farmers. 4 points Question 17 In a market with a price ceiling which of the following is TRUE? Buyers and sellers experience unexploited gains from trade. Resources are allocated to their most efficient uses. The supply of goods is sold by the sellers with the lowest costs. The supply of goods is bought by the buyers with the highest willingness to pay. 4 points Question 18 Consider the following statements: I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand. II. Relative to a no-trade situation, international trade causes prices of all goods to rise. I is true; II is false. I is false; II is true. Both I and II are true. Both I and II are false. 4 points Question 19 As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its: average cost curve. average product curve. marginal cost curve. marginal product curve. 4 points Question 20 An increase in demand and a decrease in supply occur in a market. What happens to the equilibrium price and quantity? The equilibrium price decreases; the change in the equilibrium quantity is ambiguous. The equilibrium price decreases; the equilibrium quantity increases. The equilibrium price increases; the change in the equilibrium quantity is ambiguous. The equilibrium price increases; the equilibrium quantity decreases.