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Economics 304K SAMPLE EXAM I Helen Schneider Fall 2018

Student Name: ____________________________________

UT EID _____________

INSTRUCTIONS

1. There are three sections in this exam.

2. ANSWER ALL QUESTIONS. TOTAL POINTS = 100 3. Part I: 15 multiple choice questions (2 points each) Part II: 3 true/false questions (10 points each) Part III. 1 problem (40 points) 4. Read all questions carefully. 5. Write legibly and remember to LABEL ALL GRAPHS.

6. Total time = 50 minutes.

GOOD LUCK

Part I. Multiple Choice. Do the following 15 multiple choice questions: Read each question carefully and CIRCLE the best answer. THERE IS ONLY ONE ANSWER TO EACH QUESTION. It often helps to jot down a quick graph or do some work next to the question before searching for the answer. 1. What will happen in the rice market if buyers are expecting higher rice prices in the near future? a. The demand for rice will increase. b. The demand for rice will decrease. c. The demand for rice will be unaffected. d. The supply of rice will increase. 2. Suppose there is an increase in steel prices. We would expect the supply curve for steel barrels a. to shift rightward. b. to shift leftward. c. to become flatter. d. to remain unchanged. 3. Which of the following changes would not shift the demand curve for a good or service? a. a change in income b. a change in the price of the good or service c. a change in expectations about the future price of the good or service d. a change in the price of a related good or service 4. An advance in production technology will a. increases a firm's costs. b. allows firms to raise the price of their product. c. shifts the supply curve to the right, but the demand curve will be unaffected. d. shifts the supply curve to the right and shift the demand curve to the right. 5. For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

a. b. c. d.

The relevant time horizon is short. The good is a necessity. The market for the good is broadly defined. There are many close substitutes for this good.

6. If the demand for donuts is elastic, then a decrease in the price of donuts will a. increase total revenue of donut sellers. b. decrease total revenue of donut sellers. c. not change total revenue of donut sellers. d. There is not enough information to answer this question. 7. In which of these instances is demand said to be perfectly inelastic? a. An increase in price of 2% causes a decrease in quantity demanded of 2%. b. A decrease in price of 2% causes an increase in quantity demanded of 0%. c. A decrease in price of 2% causes a decrease in total revenue of 2%. d. The demand curve is horizontal. 8. Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is a. 2.00. b. 1.55. c. 1.00. d. 0.64. 9. A binding price floor in a market is set a. above equilibrium price and causes a shortage. b. above equilibrium price and causes a surplus. c. below equilibrium price and causes a surplus. d. below equilibrium price and causes a shortage. Figure 1

10. Refer to Figure 1. The amount of the tax per unit is a. $1.00. b. $1.50. c. $2.50.

d. $3.50. 11. Refer to Figure 1. The burden of the tax on buyers is a. $1.00. b. $1.50. c. $2.50. d. $3.00. 12. a. b. c. d.

The slope of the budget constraint is determined by the relative price of the goods measured on the axis. relative price of the goods measured on the axes and the consumer’s income. preferences of the consumer. Both b and c are correct.

13. Refer to Figure 2. Assume that the consumer depicted in the figure has an income of $10. The price of Skittles is $1 and the price of M&M’s is $2. This consumer will choose a consumption bundle a. A b. B c. C d. D 14. Refer to Figure 2. Which of the following statements is correct? a. Consumer prefers D to B since at D consumer has more M&M’s. b. Consumer is indifferent between points D, B, and C. c. Consumer is indifferent between points D, A, and C. d. Since more is preferred to less, point C may be preferred to point B in some circumstances for this consumer. 15. Refer to Figure 2. Assume that the consumer depicted in the figure has an income of $15. Which of the following price-quantity combinations would be on her demand curve for M&M’s? a. $1.5, 5 b. $3, 5 c. $3, 4 d. $5, 5 Figure 2

Part II. True/False Questions. No credit will be given for answers without explanations. If a price floor is below equilibrium price, the quantity demanded will exceed the quantity supplied.

A $5 tax on baseball gloves will always raise the price that the buyers pay for the baseball gloves by $5. Graphically illustrate your answer.

The income effect (in the work-leisure model) induces a person to work harder in response to higher wages, which tends to make the labor supply curve slope upward. Graphically illustrate your answer.

Part III. Problem. Read the problem carefully and answer all questions. Illustrate each effect on a separate graph. "President Donald Trump’s White House has said his plans to slash environmental regulations will trigger a new energy boom and help the United States drill its way to independence from foreign oil." Reuters, March 23, 2017 Congress and the President agree that the United States should decrease its dependency on foreign oil by increasing domestic production and reducing its use of gasoline. Use supply and demand diagrams to analyze the effects of the following policies on the U.S. gasoline market. a. Congress authorizes oil drilling in Alaska. b. The U.S. government subsidizes public transportation. c. Government imposes a $0.50 per gallon tax on producers. d. Consider separately the effect of the tax in (c) on the gasoline market in the short-run and in the long-run. In which case would the proposed tax be more effective or less effective in reducing the quantity of gasoline consumed....