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Date Created: 09/23/15
Econ 201 Practice Exam 1ANSWERS 1 Forest is a mountain man living in complete isolation in Montana He is completely self sufficient through hunting shing and farming He has not been in the city to buy anything in ve years One can infer A the scarcity principle does not apply to Forest B Forest is not required to make choices C the scarcity principle still applies because more hunting means less shing and farming D Forest is very satis ed E Forest is not rational ANSWER Despite living off the land the laws of economics still apply to our mountain man Forest He has a scarce resource his time If he spends more time on one activity he necessarily must give up some of another Best answer C Larry was accepted at three different graduate schools and must choose one Elite U costs 50000 per year and did not offer Larry any nancial aid Larry values attending Elite U at 60000 per year State College costs 30000 per year and offered Larry an annual 10000 scholarship Larry values attending State College at 40000 per year NoName U costs 20000 per year and offered Larry a full 20000 annual scholarship Larry values attending NoName at 15000 per year 2 Larry has decided to go to Elite U He must have A calculated his surplus from each choice and picked the one with the highest surplus B underestimated the bene ts of attending NoName C overestimated the bene ts of attending Elite U D ignored sunk costs E determined the opportunity cost of each choice and picked the one with the lowest opportunity cost Unfortunately the wording of this problem is probably not the best Let s look at the net money value attending each of these schools independent of the opportunity cost Elite Bene t 60000 Explicit Cost 50000 Net Bene t 10000 State Bene t 40000 Explicit Cost 30000 20000 20000 Net Bene t 20000 NoName Bene t 15000 Explicit Cost 0 Net Bene t 15000 Assuming that the opportunity cost of going to one college is the net best college choice as opposed to taking a job we can infer that Elite college has the highest opportunity cost It also has the lowest net bene t ignoring opportunity costs Therefore it would be illogical for Larry to choose Elite The best response here is C though we could also say he underestimated the cost of going to NoName however this is not as good as State Answer C 3 Amy is thinking about going to the movies tonight A ticket costs 7 and she will have to cancel her dog sittingjob that pays 30 The cost of seeing the movie is 7 B 30 C 37 D 37 minus the bene t of seeing the movie E indeterminate ANSWER It is inferred that the opportunity cost of going to the moving is forgoing the 30 she could make by dogsitting The ticket costs 7 and explicit cost for a total cost of 37 Answer C 4 Alex received a four year scholarship to State U that covered tuition and fees room and board and books and supplies As a result A attending State U for four years is costless for Alex B Alex has no incentive to work hard while at State U C the cost of attending State U is the amount of money Alex could have earned working for four years D the cost of attending State U is the net bene t bene t ituition and fees that Alex he could have received by attending Drexel the best university out of the four other schools he had been admitted E the cost of attending State U is the sum of the net bene ts bene t ituition and fees Alex would have had attending each of the four other schools to which Alex had been admitted F A and B are both true G C or D is true H C or E is true I C D or E is true ANSWER By going to State U Alex will not be working or not working full time He has a scholarship that pays for all his school fees tuition room and board books and supplies Therefore his explicit costs are 0 but his opportunity cost may be the money he forgoes by not working Note that since Alex cannot attend all four universities we can t say that the cost of attending State U is the sum of the bene ts he could receive from each of the 4 other schools that admitted him However if Drexel is the best out of the other schools then we could say that the cost of going to State U is not going to Drexel Since we don t really know which is his next best option going to work or going to Drexel we would say that that G is the best of the responses available to us 5 Moe has a big exam tomorrow He considered studying this evening but decided to go out with Curly instead Since Moe always chooses rationally it must be true that A the opportunity cost of studying tonight is the low grade he will earn on the exam tomorrow B the opportunity cost of studying tonight is less than the value Moe gets from spending time with Curly C the opportunity cost of studying tonight is equal to the value Moe gets from spending time with Curly minus the cost of earning a low grade on the exam D Moe gets more bene t from spending time with Curly than from studying E Moe gets less bene t from spending time with Curly than from studying ANSWER If Moe is rational and he decides to go out with Curly rather than study he evidently gets greater bene t from hanging with Curly than from studying Answer D Note that C is not the answer here the opportunity cost of studying is simply the net value of the time spent with Curly His surplus would be the value of studying the value of the extra points he gets on the exam minus the net value of the time spent with Curly 6 If one fails to account for opportunity costs in decision making then applying the costbene t rule will be awed because A the bene ts will be overstated B the costs will be understated C the bene ts will be understated D the costs will be overstated E the bene ts and costs will be understated ANSWER Costs explicit implicit opportunity costs If one fails to account for opportunity costs costs will be understated the person will be more likely to undertake the particular activity Answer B Your Math Professor assigns weekly homework sets You decided to keep track of the time you spent on each assignment and the grade you received and you made the following chart Assignment 1 mu l ts Assignment 4 ms minutes 98 pumls 7 For Assignment 2 your average score per minute studying was A the same as for Assignment 1 B more than for Assignment 1 C less than Assignment 1 D halfthat ofAssignment l E double that of Assignment 1 ANSWER Your average score per minute on Assignment 1 60120 12 point The Average score per minute studying on Assignment 2 70135 518 points gt 12 point ANSWER B 8 With each assignment in your math class your marginal cost and your marginal bene t A increased39 decreased B decreased39 increased C increased39 increased D stayed the same39 increased E stayed the same39 decreased Answer D Make a chart Assignment 1 gt 2 You study 15 more minutes marginal cost and you receive 10 extra points marginal bene t Assignment 2 gt 3 You study an additional 15 minutes marginal cost and you receive 12 extra points Assignment 3 gt 4 You study an additional 15 minutes marginal cost and you receive 16 extra points 9 If Leslie can produce two pairs of pants in an hour While Eva can make one pair an hour then it must be the case that A Leslie has a comparative advantage B Eva has an absolute advantage C Leslie has an absolute advantage D Eva has a comparative advantage E Leslie has both comparative and absolute advantage ANSWER First note that since we only have information on one of these goods we automatical can throw out all responses that mention comparative advantage A D and E We then only have to choose between B and C Clearly Leslie can produce twice as many pants as Eva can in 1 hour ANSWER C Shoes Pants Per Hour Per How Jenny a 2 Craig 4 3 lO Jenny39s opportunity cost of producing an extra pair of pants is C 15 pairs of shoes D 2 pairs ofshoes E 25 pairs ofshoes ANSWER Notice that for each pair of pants Jenny makes she gives up producing 32 15 pairs of shoes That is in the time it takes her to produce a pair of paints she can produce 15 pairs of shoes ANSWER C should specialize in producing A shoespants l 1 Based on their comparative advantages Craig should specialize in producing While Jenny D pants shoes E insuf cient information to say ANSWER All we need to here is gure out Who has the lower opportunity cost of producing pants We found above that the opportunity cost of producing pants for Jenny is 15 For Craig it is 43 133 pairs of shoes Clearly Craig has the lower opportunity cost of producing pants he has a comparative advantage in pants production While Jenny has a comparative advantage in shoes It would be bene cial to both parties if Craig specialized in the production of pants and exchanged pants for shoes produced by Jenny Answer D Barbara and Sherry comprise a twoperson economy Both of them work a 5hour day arbara39s we 340 335 gm gar E 2 m 5 mi 5 pp 51015 20 25 30 as 4D 455m 55 mums Med 12 Barbara must spend typing letters for every hour she devotes to copying tests A 12 hour B 1 hour C 2 hours D 15 hour E 5 hours ANSWER Though the language may have hung some people up this question is asking How many more hours must Barbara commit to type a letter versus copying a test Looking at the graph we see that in a 5hour day she can copy 50 tests or type 25 letters or some combination of the two That is in an hour she can copy 10 tests or type 5 letters Therefore it takes her twice as much time to type a letter as it does to copy a test Answer C 13 Sherry must spend typing letters for every hour she devotes to copying tests A 2 hour E 5 hours ANSWER This is similar to the previous question Sherry can copy 25 exams in 5 hours or type 50 pages or any combination of the two In an hour she can copy 5 exams or type 10 letters In other words it takes Sherry 12 the time to type a letter as it does to copy a test Answer A 14 Sherry and Barbara want to increase their total output A Sherry should specialize in copying tests while Barbara types B Sherry should specialize in typing while Barbara copies tests C Because they will become less productive over time Barbara and Sherry should change tasks at noon D BothBarbara and Sherry should spend more hours typing than copying E Both Barbara and Sherry should spend more hours copymg thantyping Answer We from 12 and 13 that Sherry is relatively faster at typing a letter compared to Barbara To increase their total output Sherry should specialize in typing and Barbara should specialize in copying ANSWER B 15 Economic growth can result from an A increase in the amount of productive resources B increase in number of the minimum wage jobs C increase in the amount of consumer goods produced D decrease in the number of workers available E None of the above Answer If we have more productive resources labor capital land we are able to produce more goods We can represent this effect as a shift in the PPC to the right ANSWER A 16 The shape slope and position of a demand curve is determined by A competition in the marketplace B consumers preferences C consumers39 wealth D by a b and c E by b and c ANSWER As noted in class preferences and a buyer s income or wealth affect their willingness to pay or reservation prices best answer Answer E Note that competition in the marketplace doesn t change the shape slope or position of the demand curve There is a subtle difference between of buyers in the marketplace and the nature of competition in the marketplace We can have 1 buyer that still acts competitively which we will de ne in due course How the buyer responds whether they are a price taker or not does not affect the shape slope or position of delnand curve Adlnittedly however a buyer would have dif culty not being a price taker in a market with lots of buyers 17 Supply curves are generally sloping because A downward more consumers will buy the good if the price falls B upward of the principle of increasing opportunity costs C downward it is less expensive to mass produce goods D upward of in ation E downward prices fall when firms specialize Answer We talked a good deal in class about the low hanging fruit That is initially we turn to the rely on the most able producers in a relative sense ie those with the lowest opportunity costs to produce for the market then turn to producers that are less able at that task have higher opportunity costs Answer B 18 Which of the following is NOT a characteristic of a market in equilibrium A Quantity demanded equals quantity supplied B Excess supply is zero C All consumers are able to purchase as much as they wish D Excess demand is zero Answer An equilibrium is no guarantee that consumers will be able to purchase all the goods they wish to purchase Answer C Price 0 2 4 6 10 Quanmy l9 Refer to the gure above Suppose all the sellers in this market started out charging a price of 8 per unit What is the most likely result A They would all make a large pro t because 8 is more than the equilibrium price B They would all just break even because 8 is their reservation price C They would be forced to lower their prices because at 8 there would be excess supply D They would be forced to lower their prices because at 8 there would be excess demand Answer We see the market clearing equilibrium price in the above graph is Pquot 6 If initially all sellers were charging a price of 8 a unit above the equilibrium price there would be an excess supply of the goods and we d expect that prices would fall Answer C Demand for coffee last Monday is shown in bold labeled DMonday Market for Coffee Price mm 1quot 4 Dulandxn39l Quantity 20 On Tuesday the news featured a story that a storm wiped out the entire coffee crop in Brazil On Wednesday A the demand function remained at DMonday but the quantity demanded increased B demand shi ed to DA in anticipation of future price increases C demand shi ed to DB in anticipation of future price increases D there would be no change in either the demand function or the quantity demanded because not enough time had passed for the storms effects to be felt Answer C In this problem we are told that the coffee crop has been wiped up However this won t necessarily have an immediate impact on the supply of coffee 0n the other hand When people learn of the impact of the storm on the coffee crop they are likely to believe that coffee prices Will be higher in the future This in turn leads customers to want to buy more of the good today the demand curve shifts to the right 21 quotAs the price of personal computers continues to fall demand increasesquot This headline is inaccurate because A a change in the price of personal computers shifts the demand curve B a change in the price of personal computers shifts the supply curve C the statement is backwards increased demand leads to lower prices D falling prices for personal computers increases quantity demanded not demand Answer D A decrease in the price of computers result in an increase in the quantity of computers demanded ie a movement down the demand curve not a shift or increase in the demand curve 22 As consumers incomes decrease the demand curve for bologna sandwiches shifts to the right Therefore bologna sandwiches are an A normal good B complement good C substitute good D inferior good Answer This problem suggests that as incomes decrease the demand for bologna sandwiches increases The most likely reason for this would be that a bologna sandwich is an inferior good ANSWER D A Price ofa cup 35 Original ofCoffee Su 1 300 pp y 250 200 150 100 Original Demand 50 Quantity of Coffee Cups sold in an hour 23 Refer to the gure above In this market if everyone s reservation price for a cup of coffee increased by 100 A the equilibrium price would increase by 100 B the equilibrium price would increase by less than 100 C the equilibrium price would increase by more than 100 D the equilibrium price would not change In this case the reservation prices for buyers would increase by 100 meaning that at each quantity consumers would be willing to pay 100 than they did previously Likewise if sellers reservation prices were to increase by a 100 across the board they would require an additional dollar to bring each unit to the market In particular we know that initially the reservation price of a buy of the 40th unit is 200 After the shock it would be 300 Likewise the marginal cost to deliver the 40th unit is initially 200 After the shock it rises to 300 Bottom line the supply curve is shifting to the left by the same magnitude as the demand curve is shifting to the right Consequently the equilibrium price rises by the full 100 but the equilibrium quantity does not change Answer A 24 Refer to the gure above Suppose the coffee lobby convinced the legislature to impose a price control requiring that coffee prices must be at least 250 at a time when the original demand function and supply function were applicable The most likely result would be A a short term excess demand for coffee followed by an increase in price B excess demand for coffee that would not correct itself because price is set by law C excess supply of coffee that would not correct itselfbecause price is set by law D new equilibrium at a price of 250 and a quantity of 50 cups E none of the above 250 is above the market clearing price of 200 If we required by law that the price must be at least 250 there would be an excess supply of coffee This excess supply would not correct itself because the price is set by law Answer C 25 This graph shows the original market forplywoodm a coastal Florida town Pine afPIywnoil m m 50 34 m 200 Jail 400 500 m amnmwfplww A 39T h r id m L A You would expect A the pnee ofplywoodto nse B me supply ofplywoodto fall C 1 D Lhapnce ofplywoodto remam constant but demandto increase E the pnee of plywoodto reman constant butthe quantity suppliedto increase ANSWER A 39 will bid up due equilibrium price ANSWE A