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Possible questions that could be on the midterm
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Econ Question: Chapter 1.1

Along this production possibilities boundary, the opportunity cost of producing bicycles is A.constant. Question 2:

Consider the figures above. In Economy B, the opportunity cost of making Answer: Butter in terms of guns is higher than in Economy A.

Question 3:

A farmer owns 10 acres of land. He can either plant potatoes or corn. Each acre of land yields either 10 kilograms of potatoes or 5 bushels of corn. Now suppose that a more productive corn seed is discovered, which results in an acre of land yielding 20 bushels of corn. If corn is on the vertical axis and potatoes on the horizontal axis, then consider the following statements about the effect of the more productive corn on the production possibilities boundary (PPB) and opportunity cost. Statement I: Statement II: Statement III:

The PPB has become steeper. The opportunity cost of corn has increased from 0.5 kilograms of potatoes to 2 kilograms of potato The maximum corn production has increased from 100 bushels to 400 bushels.

Chapter 1.2 Katie and Hugh are producing pies and jars of pickles. Katie can produce either 500 jars of pickles orv 400 pies per month. Hugh can produce either 700 jars of pickles or 400 pies per month. Currently, each divide their time equally between production of the two goods per month: Katie produces 250 jars of pickles and 200 pies while Hugh produces 350 jars of pickles and 200 pies. In order for Katie and Hugh to jointly gain from specialization, which of the following changes should take place? Explanation: Comparative & absolute advantage Katie’s oopportunity cost of pie: 500/400=1.25 Hugh’s opportunity cost of pie: 700/400= 1.75 Katie’s opportunity cost of pickles: 400/500= 0.8 Hugh’s opportunity cost of pickles: 400/700=0.57 Answer: Katie should produce more pies and fewer jars of pickles. In the circular flow of income, the allocation of resources is largely decided by firms and households acting independently. Chapter 1.3 Question: The government intervenes in the market by creating laws of ownerships and contract. In a command economy, most decisions are planned by the government. The allocation of different jobs to different people referred to as the specialization of labour. The specialization within the production process of particular product is referred to as the division of labour. When people specialize in their activities, it becomes necessary for them to trade to obtain most of the things they need or want. Trade is facilitated by money because it eliminated the cumbersome system of barter. The rapid reduction in both transportation and communication costs has greatly contributed to the globalization of the world economy. In a free market economy, most decisions are left to the price systems. Within a pure market economy we will never see central planning. Chapter 2.1:

Which of the following is a normative statement? Economists should clarify their normative views when making positive statements. Normative statements are based on the value judgments. Chapter 2.2 An economic theory requires, among other things, a set of assumption about how things behave. Exogenous variable: the theory that is explained outside of the theory Endogenous variable: the theory that is explained inside the theory Chapter 2.3 1. A) Suppose you want to create a price index for the price of a particular physics textbook over ten years in your university bookstore. The price of the book on September 1 of each year is shown in the table. Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Price 88 91 95 99 107 113 119 127 133 133 139

Price Index 100 88/91x100= 103.4 108.0 112.5 121.6 128.4 135.2 144.3 151.1 151.1 158.0

What is the percentage increase in the price of the book between the base year and 2014? b. The percentage increase in the price of the book between the base year and 2014 is 28.4% ((128.4-100)/(100))x100= 28.4% c. What is the percentage increase in the price of the book from 2017 to 2019? The percentage increase in the price of the book from 2017 to 2019 is 4.6%. (158.0-151.1/151.1)x 100 Chapter 3.1: Consider cars and gasoline. Other things being equal, when the price of cars increases, the demand for gasoline is likely to decrease because the two goods are complements. The term quantity demanded refers to desired purchases by consumers, whereas quantity exchanged refers to actual purchases by consumers. Quantity demanded refers to the quantity of widgets demanded per periods of time. The quantity demanded of widgets is 1000 units is not meaningful unless we know the time period over which the 1000 units are demanded. Quantity demanded is a flow variable.

A demand curve represents the relationships between quantity demanded and price, ceteris peribus. The negative slope indicates that when the price decreases, quantity demanded increases.

The Latin phrase meaning other things being equal is ceteris paribus. When we want to study the effects of changes in one variable at a time, we hold all other variable constant.

Chapter 3.2 A rightward shift in the supply curve for a good may be caused by any of the following except an increase in price. How does an increase in the price of beef meat influence the market for cow hides? Note that beef meat and cow hides are complements in production.

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There would be rightward shift in the supply curve.

Suppose that some resource X is necessary to produce some good Y. If the price of X falls the supply curve of good Y shifts to the right.

4.1 Price elasticity of of demand

Using average values, from 2006-2007, the cross elasticity of demand for Jolt equals 1.50. (Change in demand for Jolt/ Average demand for Jolt)/ (change in price of coke/average price of coke) (5000-3000/5000+3000)/(1.4-1/1.4+1)=1.5

Income elasticity: (Change in demand for jolt/average demand for jolt)/(change in income/ average in income) (3000-5000)/(5000+3000)/(40000-60000/40000+60000)= -1.25

Chapter 4.2: Price Elasticity of Supply If the supply curve is very inelastic and the demand curve shirts to the left then, price will decrease by a large amount and quantity by a small amount.

If the price elasticity of supply is 1.0, then this value can be interpreted as quantity supplied increases 1% for every 1% increase in price.

The determinants of price elasticity of supply for frozen orange juice include: how costs behave as output is varied.

Chapter 5.1 A binding floor leads to excess supply. Which of the following is a method by which government might deal with this excess supply?

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The governemt buys the unsold output and distributes it to low income persons

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The government pays firms to not produce beyond the quantity demanded

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The governemt buys the unsold output and stores it.

A governemt might choose to implement a price floor to give into powerful political groups, satisfy notions of equity, keep specific prices up.

If a price floor is to be binding or effective, it must be set above the equilibrium price.

If the price mechanisms is allowed to work freely, excess demand is eliminated by price increases.

Chapter 5.2

Suppose however, the city imposes the controlled price shown in the figure. In this case, in the short run, the market experiences an excess demand of 5 thousands units.

In the long run, if the controlled price remains in place, the market will show a shortage of 18 thousands units. This analysis indicates that as time passes, rent controls will cause housing shortages to worsen.

Binding rent controls lead to a shortage (excess demand) in the availability of rental housing. The short run supply curve for rental housing is quite inelastic; the long run supply curve is quite elastic. A housing shortage caused by rent controls grows larger over time. The group that benefits the most from rent controls is existing tenants. The two groups that are most harmed by rent controls are future tenants and landlords. Chapter 5.3

If the price of soybeans is at its market-clearing equilibrium level, p*, identify the areas on the graph that sum to this market's total economic surplus. (Select all that apply.) Answer: 2,3,4,5,6 b. Suppose the government imposes an output quota at Q1. Identify the areas on the graph that represent the reduction in economic surplus as a result of this government's imposition of the quota. (Select all that apply.) Answer: 5,6 Geoff is willing to pay $18 for a sixth entrance to a mountain bike park. The market price for entrance is $12.5. The bike park is willing to accept $8.75. The total economic surplus generated from Geoff's sixth trip to the bike park is $9.25. 18-8.75=9.25

Chapter 6.1 If marginal utility is negative, total utility is decreasing. Chapter 6.2 In what situations do the substitution effect and the income effect work in the same direction to produce a downward sloping demand curve? -

A normal good for which the income effect is greater than the substitution effect A normal good for which the income effect is less than the substitution effect Any normal good

In what situations do they have opposing effects? - An inferior good with an upward sloping demand curve - Any inferior good - A giffen good - An inferior good with a downward sloping demand curve. If the price of an inferior good rises, the income effect will increase consumption of the good, and the substitution effect will decrease its consumption.

If the price of a movie ticket is $10, then Sue’s consumer surplus will be $32....