Spring 2002 Multiple Choice

1
Spring 2002 Multiple Choice

• 1. Tiger Woods can mow the grass of a golf course
  in 2 hours. In these 2 hours he could be taping a
  commercial for Nike and earn US100,000. Forrest
  Gump can mow the grass in 4 hours and in these 4
  hours he could earn US40 working at McDonalds.
• A) Tiger Woods has an absolute advantage in
  mowing grass.
• B) Forrest Gump has a comparative advantage in
  mowing grass.
• C) They would trade if Tiger Woods pays Forrest
  Gump between US40 and US100,000.
• D) All of the above.

2
Spring 2002 Multiple Choice

• 1. Tiger Woods can mow the grass of a golf course
  in 2 hours. In these 2 hours he could be taping a
  commercial for Nike and earn US100,000. Forrest
  Gump can mow the grass in 4 hours and in these 4
  hours he could earn US40 working at McDonalds.
• A) Tiger Woods has an absolute advantage in
  mowing grass.
• B) Forrest Gump has a comparative advantage in
  mowing grass.
• C) They would trade if Tiger Woods pays Forrest
  Gump between US40 and US100,000.
• D) All of the above.

3
Spring 2002 Multiple Choice

• 2. England and Italy produce only butter and
  potatoes according to the following table
• England Italy
• Butter (lbs. per unit of worker) 2 1
• Potatoes (lbs. per unit of worker) 2 1
• Number of workers 1000 3000
• a. England has an absolute advantage in the
  production of butter and Italy has an absolute
  advantage in the production of potatoes
• b. England has an absolute advantage in the
  production of potatoes and Italy has an absolute
  advantage in the production of butter
• c. England has an absolute adv. in both the prod.
  of butter potatoes
• d. Italy has an absolute adv. in both the
  production of butter potatoes.

4
Spring 2002 Multiple Choice

• 2. England and Italy produce only butter and
  potatoes according to the following table
• England Italy
• Butter (lbs. per unit of worker) 2 1
• Potatoes (lbs. per unit of worker) 2 1
• Number of workers 1000 3000
• a. England has an absolute advantage in the
  production of butter and Italy has an absolute
  advantage in the production of potatoes
• b. England has an absolute advantage in the
  production of potatoes and Italy has an absolute
  advantage in the production of butter
• c. England has an absolute adv. in both the prod.
  of butter potatoes
• d. Italy has an absolute adv. in both the
  production of butter potatoes.
• Reason England can produce more of each with the
  same number of resources. The number of workers
  is immaterial.

5
Spring 2002 Multiple Choice

• 2. England and Italy produce only butter and
  potatoes according to the following table
• England Italy
• Butter (lbs. per unit of worker) 2 1
• Potatoes (lbs. per unit of worker) 2 1
• Number of workers 1000 3000
• England Italy will agree to trade if the price
  of 1 lb. of butter is
• A) Between 1 2 lbs. of potatoes.
• B) Between 1/2 2 lbs. of potatoes.
• C) Between 1/2 1 lbs. of potatoes.
• D) None of the above.

6
Spring 2002 Multiple Choice

• 2. England and Italy produce only butter and
  potatoes according to the following table
• England Italy
• Butter (lbs. per unit of worker) 2 1
• Potatoes (lbs. per unit of worker) 2 1
• Number of workers 1000 3000
• England Italy will agree to trade if the price
  of 1 lb. of butter is
• A) Between 1 2 lbs. of potatoes.
• B) Between 1/2 2 lbs. of potatoes.
• C) Between 1/2 1 lbs. of potatoes.
• D) None of the above the opportunity cost of the
  two is the same.

7
Spring 2002 Multiple Choice

• 4. The following table shows Lynns utility from
  days skiing
• Total Days Skiing Total Utility
• 0 0
• 1 200
• 2 300
• 3 350
• 4 340
• If each day skiing will cost Lynn 60 what will
  be her consumer surplus from skiing?
• a. 350 b.180
• c. 170 d. We dont know how many days Lynn will
  choose, so we cannot calculate C.S.

8
Spring 2002 Multiple Choice

• 4. The following table shows Lynns utility from
  days skiing
• Total Days Skiing Total Utility
• 0 0
• 1 200
• 2 300
• 3 350
• 4 340
• If each day skiing will cost Lynn 60 what will
  be her consumer surplus from skiing?
• a. 350 b.180 CS TU - TE 300 - 120 180 for
  Q3
• c. 170 d. We dont know how many days Lynn will
  choose, so we cannot calculate C.S.

9
Spring 2002 Multiple Choice

• 5. Which of the following could not shift out the
  market demand curve for a good?
• a) Increase in income of the population.
• b) Increase in price of the good.
• c) Increase in population.
• d) Increase in the price of substitutes for the
  good.

10
Spring 2002 Multiple Choice

• 5. Which of the following could not shift out the
  market demand curve for a good?
• a) Increase in income of the population.
• b) Increase in price of the good.
• c) Increase in population.
• d) Increase in the price of substitutes for the
  good.
• Reason a change in the price of a good results
  in a shift along the demand curve, not a shift of
  the demand curve.

11
Spring 2002 Multiple Choice

• 6. If the supply curve is perfectly inelastic
  and the demand curve has an elasticity (in
  absolute value) of 0.7 and we impose a per-unit
  tax in this market on the demand side, then
• a. Consumers and Producers share the burden of
  the tax.
• b.Consumers pay the whole tax, while producers do
  not pay anything.
• c. Producers pay the whole tax, while consumers
  do not pay anything.
• d.None of the above.

12
Spring 2002 Multiple Choice

• 6. If the supply curve is perfectly inelastic
  and the demand curve has an elasticity (in
  absolute value) of 0.7 and we impose a per-unit
  tax in this market on the demand side, then
• a. Consumers and Producers share the burden of
  the tax.
• b.Consumers pay the whole tax, while producers do
  not pay anything.
• c. Producers pay the whole tax, while consumers
  do not pay anything. Reason supply perfectly
  inelastic.
• d.None of the above.

13
Spring 2002 Multiple Choice

• 7. Suppose that the supply and the demand for
  blank CDs can be characterized by
• Supply Qs 100 3P
• Demand Qd 160 P
• where Qs is the supply of CDs, and Qd is the
  demand for CDs. What is the equilibrium price?
• a. 10 b. 30
• c. 15 d. 75

14
Spring 2002 Multiple Choice

• 7. Suppose that the supply and the demand for
  blank CDs can be characterized by
• Supply Qs 100 3P
• Demand Qd 160 P
• where Qs is the supply of CDs, and Qd is the
  demand for CDs. What is the equilibrium price?
• The equilibrium price is a P such that Qs(P)
  Qd(P), or
• 100 3P 160 P
• 4P 60
• P 15.

15
Spring 2002 Multiple Choice

• 8. Suppose that the supply and the demand for
  blank CDs can be characterized by
• Supply Qs 100 3P
• Demand Qd 160 P
• where Qs is the supply of CDs, and Qd is the
  demand for CDs. If a tax of 5 is imposed per CD,
  the number of CDs purchased after the tax will
  be
• a. Less than 145 CDs. b. 145 CDs.
• c. More than 145 CDs. d. We do not have
  enough information to answer this.

16
Spring 2002 Multiple Choice

• 8. Suppose that the supply and the demand for
  blank CDs can be characterized by
• Supply Qs 100 3P
• Demand Qd 160 P
• where Qs is the supply of CDs, and Qd is the
  demand for CDs. If a tax of 5 is imposed per CD,
  the number of CDs purchased after the tax will
  be
• At a price of 15, without tax there would be
• Qs(15) Qd(15) 100 315 145
• Taxes will reduce the number bought, so less than
  145 CDs will be bought.

17
Spring 2002 Multiple Choice

• 9. Which one of the following could not occur if
  there was a price ceiling on a good?
• A).A surplus would develop
• B).Equilibrium price would be below the ceiling
• C).A black market would arise
• D).Less firms would enter the industry

18
Spring 2002 Multiple Choice

• 9. Which one of the following could not occur if
  there was a price ceiling on a good?
• A).A surplus would develop
• B).Equilibrium price would be below the ceiling
• C).A black market would arise
• D).Less firms would enter the industry
• Reason a surplus only occurs when the quantity
  supplied is greater than the quantity demanded.
  Normally, this would cause prices to drop, and a
  price ceiling wont prevent this. A price floor
  would.

19
Spring 2002 Multiple Choice

• 10. In January, 2,500 quarts of ice cream are
  sold in Boston at 2 a quart. In February, the
  price went down by 10 and the quantity sold
  increased by 2. This means that the price
  elasticity for ice cream (disregarding the minus
  sign) is
• A. 1
• B. .2
• C. 2
• D. .1

20
Spring 2002 Multiple Choice

• 10. In January, 2,500 quarts of ice cream are
  sold in Boston at 2 a quart. In February, the
  price went down by 10 and the quantity sold
  increased by 2. This means that the price
  elasticity for ice cream (disregarding the minus
  sign) is
• A. 1
• B. .2 Elasticity DQ/DP 2/10
• C. 2
• D. .1

21
Spring 2002 Multiple Choice

• 11. A consultant has suggested that the Eatwell
  food truck lower its prices to increase revenue.
  The consulted must be assuming that
• a. The food at Eatwell has close substitutes and
  thus demand elasticity is greater than 1.
• b. The food at Eatwell has few close substitutes
  and thus demand elasticity is greater than 1.
• c. The food at Eatwell has close substitutes and
  thus demand elasticity is less than 1.
• d. The food at Eatwell has few close substitutes
  and thus demand elasticity is less than 1.

22
Spring 2002 Multiple Choice

• 11. A consultant has suggested that the Eatwell
  food truck lower its prices to increase revenue.
  The consulted must be assuming that
• a. The food at Eatwell has close substitutes and
  thus demand elasticity is greater than 1.
• b. The food at Eatwell has few close substitutes
  and thus demand elasticity is greater than 1.
• c. The food at Eatwell has close substitutes and
  thus demand elasticity is less than 1.
• d. The food at Eatwell has few close substitutes
  and thus demand elasticity is less than 1.

23
Spring 2002 Multiple Choice

• 12. One of the benefits of the market system in
  allocating goods is that
• a. Everyone who can produce a good produces it.
• b. Everyone who wants a good buys it.
• c. Consumers who value the good the most buy
  it.
• d. Producers with the highest opportunity
  costs produce it.

24
Spring 2002 Multiple Choice

• 12. One of the benefits of the market system in
  allocating goods is that
• a. Everyone who can produce a good produces it.
• b. Everyone who wants a good buys it.
• c. Consumers who value the good the most buy
  it.
• d. Producers with the highest opportunity
  costs produce it.

25

• Spring 2002 Short Answer
• 1. Over the Christmas shopping season of 2000 a
  local department store sold 250 scarves at 35
  each. The following year (2001) they sold only
  220 scarves despite a lower price of 30 each.
  Use the general model of supply demand curve to
  explain this change by answering the following
  questions
• a. Draw typical Supply Demand curves for
  scarves with an equilibrium price quantity that
  reflect the situation in year 2000.
• b. What shift of the demand curve is consistent
  with the change between 2000 2001? Show this
  graphically explain.
• c. Suppose that only thing that changed between
  2000 2001 is that incomes declined. What does
  this imply about income elasticity? Is this a
  normal or an inferior good?
• d. Now suppose incomes did not change between
  2000 2001. What other reason may cause the
  shift in demand you described in part b?
• e. Could the changes from 2000 to 2001 be
  explained by a shift of the supply curve alone?
  Explain.

26

• Spring 2002 Short Answer
• 1. Over the Christmas shopping season of 2000 a
  local department store sold 250 scarves at 35
  each. The following year (2001) they sold only
  220 scarves despite a lower price of 30 each.
  Use the general model of supply demand curve to
  explain this change by answering the following
  questions
• a. Draw typical Supply Demand curves for
  scarves with an equilibrium price quantity that
  reflect the situation in year 2000.
• Answer graph a supply demand that intersect at
  Q250 P35
• 6 points as follows
• D S curves 2 points
• Label Axis (ex P Q scarves) 2 points
• Show correct equilibrium (Q250, P35) 2 points.

27

• Spring 2002 Short Answer
• 1. Over the Christmas shopping season of 2000 a
  local department store sold 250 scarves at 35
  each. The following year (2001) they sold only
  220 scarves despite a lower price of 30 each.
  Use the general model of supply demand curve to
  explain this change by answering the following
  questions
• b.What shift of the demand curve is consistent
  with the change between 2000 2001? Show this
  graphically explain.
• Answer In the new equilibrium prices are lower
  but quantity demanded is lower too, this is
  consistent with a shift in of the D-curve.
• 5 points as follows
• New D-curve 2 points
• New equilibrium 2 points
• Explanation 1 point.

28

• Spring 2002 Short Answer
• 1. Over the Christmas shopping season of 2000 a
  local department store sold 250 scarves at 35
  each. The following year (2001) they sold only
  220 scarves despite a lower price of 30 each.
  Use the general model of supply demand curve to
  explain this change by answering the following
  questions
• c. Suppose that only thing that changed between
  2000 2001 is that incomes declined. What does
  this imply about income elasticity? Is this a
  normal or an inferior good?
• Answer We see that as income declined demand
  shifted in. That means that income elasticity is
  positive so this is a normal good. Note that
  E(I)?Q/?I, here both numerator denominator
  are negative so that E(I) must be positive.
• 5 points as follows
• Income elasticity positive 3 points (1 for
  stating fact, 2 for explanation as above)
• Normal good 2 points.

29

• Spring 2002 Short Answer
• 1. Over the Christmas shopping season of 2000 a
  local department store sold 250 scarves at 35
  each. The following year (2001) they sold only
  220 scarves despite a lower price of 30 each.
  Use the general model of supply demand curve to
  explain this change by answering the following
  questions
• d. Now suppose incomes did not change between
  2000 2001. What other reason may cause the
  shift in demand you described in part (b)?
• Answer Thee are many possible correct answers
  here. Examples include A change in the taste for
  scarves such as a decline in their trendiness,
  global warming and there by a reduced need for
  scarves.
• 5 points as follows
• 3 for a possible change
• 2 for relating that change to the correct shift
  in demand.
• Clarification An answer that states that tastes
  changes without explaining in which direction
  would get only 3 points.

30

• Spring 2002 Short Answer
• 1. Over the Christmas shopping season of 2000 a
  local department store sold 250 scarves at 35
  each. The following year (2001) they sold only
  220 scarves despite a lower price of 30 each.
  Use the general model of supply demand curve to
  explain this change by answering the following
  questions
• e. Could the changes from 2000 to 2001 be
  explained by a shift of the supply curve alone?
  Explain.
• Answer No. If only supply changed we would have
  to get from the original equilibrium to the new
  one by moving along the demand curve. And that
  would mean D-curve is upward sloping which
  contradict our assumptions.
• 5 points as follows
• 2 for this would mean a movement along D-curve
  (or similar notion)
• 3 for rest of logic.
• Note If you wrote yes, as long as demand is
  upward sloping you can get a maximum of 4 points
  here.

31

• Spring 2002 Short Answer
• 2. Italy has three workers. They can all produce
  wine and/or beer but they have different
  abilities, according to the following table
• ITALY Worker 1 Worker 2 Worker 3
• Wine (barrels) 1 1 4
• Beer (Kegs) 2 5 1
• a. Draw Italys PPF. (Explain briefly).
• b. What is the opp. cost of increasing the prod
  of wine from 2 to 3 barrels?
• c. Suppose that in Italy wine and beer are
  consumed in equal amounts. Identify the
  consumption point in the PPF graph derived in
  part a above. (Explain briefly.)
• d. Suppose Spain (a country that also produces
  wine beer) is prepared to trade with Italy at a
  price of 2 barrels of wine for every keg of beer.
  Would Italy agree to trade? Would it change its
  production point (and if so, to what)? Would it
  export or import wine from Spain? Explain.

32

• Spring 2002 Short Answer
• 2. Italy has three workers. They can all produce
  wine and/or beer but they have different
  abilities, according to the following table
• ITALY Worker 1 Worker 2 Worker 3
• Wine (barrels) 1 1 4
• Beer (Kegs) 2 5 1
• a. Draw Italys PPF. (Explain briefly).
• 6 Points as follows
• 2 points for any PPF (as long as axis correct)
• 2 extra pints for correct PPF
• 2 points for explanation/calculation etc.

beer
ITALY
8 7 5
wine
4 5 6
33
beer

• Spring 2002 Short Answer
• 2. Italy has three workers. They can all produce
  wine and/or beer but they have different
  abilities
• ITALY Worker 1 Worker 2 Worker 3
• Wine (barrels) 1 1 4
• Beer (Kegs) 2 5 1
• b. What is the opportunity cost of increasing the
  production of wine from 2 to 3 barrels?
• Answer As you increase production of wine from 2
  to 3 barrels you must shift an extra part of
  worker 3 from beer making to wine making.
  Specifically you must give up ¼ of his time
  making beer, so you give up ¼ barrels of beer.
  The O.C. of wine at that point is therefore ¼
  kegs of beer.
• 6 points as follows
• 2 for correct answer.
• 4 for explanation (either algebraic, graphic or
  in words as above).

ITALY
8 7 5
wine
4 5 6
34

• Spring 2002 Short Answer
• 2c. Suppose that in Italy wine and beer are
  consumed in equal amounts. Identify the
  consumption point in the PPF graph derived in
  part a above. (Explain briefly.)
• Answer Italy would produce consume 5 barrels
  of wine and five barrels of beer. You can see
  this by either finding the intersection of the
  45-degree line with the PPF, or by noting that if
  workers 1 3 produce wine and worker 2 produces
  beer we have 5 units of each. This point must be
  indicated in the PPF correctly.
• 6 points as follows
• 2 for (5,5)
• 2 for adding it to PPF as requested
• 2 points for explanation (graphic or algebraic).

Beerwine
beer
ITALY
8 7 5
Consumption point
wine
4 5 6
35

• Spring 2002 Short Answer
• d. Suppose Spain (a country that also produces
  wine beer) is prepared to trade with Italy at a
  price of 2 barrels of wine for every keg of beer.
  Would Italy agree to trade? Would it change its
  production point (and if so, to what)? Would it
  export or import wine from Spain? Explain.
• Answer Yes. Italy would be prepared to trade.
  Italy would now produce wine with worker 3 as
  their O.C. of wine is greater that the price
  ratio of 2 wine to 1 beer (or 1 wine to ½ beer).
  Workers 1 2 would produce beer. Italy is now
  producing 4 units of wine 7 units of beer. In
  order to continue the consumption at a ratio of
  11 it must sell (or export) beer and buy (or
  import) wine.
• 8 points as follows
• 2 for yes to trade.
• 2 for new production point (4 wine, 7 beer)
• 2 for explanation of how to get new production
  point
• 2 points for Italy exporting beer

Beerwine
beer
ITALY
8 7 5
Consumption point
wine
4 5 6