EXAM CODE: 01

Part 1: Multiple choice questions: (1.6 points each)

1. Both households and societies face many decisions because

a. resources are scare
b. populations may increase or decrease over time
c. wages for households and therefore society fluctuate with business cycles.
d. people, by nature, tend to disagree

2. When society requires that firms reduce pollution, there is

a. a tradeoff only if some firms are force to close
b. no tradeoff, since everyone benefits from reduced pollution
c. no tradeoff for a society as a whole, since the cost of reducing pollution falls only on
the firms affected by the requirements
d. a tradeoff because of reduced incomes to the firms’s owners, workers, and customers

3. Which of the following is NOT included in the decisions that every society must make?
a. what goods will be produced
b. who will produce goods
c. what determines consumer preference
d. who will consume the good

4. The opportunity cost of an item is

a. the number of hours needed to earn money to buy it
b. what you give up to get the item
c. usually less than the dollar value of the item
d. the dollar value of the item

5. A good is considered either a normal good or an inferior good based on

a. the quality of the good
b. the price of the good
c. personal preference toward the good
d. the amount of a person’s income
6. Suppose that the scientists find evidence that proves chocolate pudding lowers cholesterol.
We would expect to see
a. no change in the demand for chocolate pudding.
b. a decrease in the demand for chocolate pudding.
c. an increase in the demand for chocolate pudding.
d. a decrease in the supply of chocolate pudding.

7. An increase in the price of oranges would lead to

a. an increased supply of oranges.
b. a reduction in the prices of inputs used in orange production.
c. an increased demand for oranges.
d. a movement up the supply curve for oranges

8. A perfectly competitive firm

a. takes its price as given by market conditions
b. sets its price to undercut other firms selling similar product
c. chooses its price to maximize profits
d. picks the price that yields the largest market share
9. Italian company opens a pasta company in the U.S. The profits from this pasta company
are included in
a. both U.S. and Italian GNP.
b. both U.S. and Italian GDP.
c. U.S. GDP and Italian GNP.
d. U.S. GNP and Italian GDP.

10. Which of the following is NOT included in GDP?

a. services such as those provided by lawyers and hair stylists
b. unpaid cleaning and maintenance of houses
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in the United States

11. Which of the following statements best reflects a price-taking firm?

a. if the firm were to charge more than the going price, it would sell none of its goods
b. the firm has an incentive to charge less than the market price to earn higher revenue.
c. the firm can sell only a limited amount of output at the market price before the the
market price will fall
d. price-taking firm maximizes profit by charging a price above marginal cost.
12. Suppose that good X has a negative income elasticity of demand. This implies that the good
is
a. a normal good
b. a necessity
c. an inferior good
d. a luxury

13. Which of the following is NOT a determinant of the price elasticity of demand for a
product?
a. time
b. price
c. market definition
d. substitutes

14. In a competitive market free of government regulation.

a. price adjusts until quantity demanded is greater than quantity supplied
b. price adjusts until quantity demanded is less than quantity supplied
c. supply adjusts to meet demand at every price.
d. price adjusts until quantity demanded equals quantity supplied

15. If the price of good A decreases, the demand for good B increases. Which statement is
true?
a. A and B are substitute goods
b. A and B are complimentary goods
c. there is no relation between A and B
d. there is not enough to give answer

16. Which of the following would not be a determinant of demand?

a. the prices of the inputs used to produce the good
b. income
c. tastes
d. the price of a related good

17. A supply curve is directly affected by

a. technology
b. government regulations
c. input costs
d. all of the above
18. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When
the price falls to $0.40, the quantity demanded increases to 600. Given this information and
using the midpoint method, you know that the demand for bubble gum is
a. inelastic
b. elastic
c. unit elastic
d. perfect inelastic

19. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would
result in a
a. 4.0 percent decrease in the quantity demanded.
b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 400 percent decrease in the quantity demanded.

20. If this year the CPI is 125 and last year it was 120, then we know that
a. all goods have become more expensive.
b. the price level has increased.
c. the inflation rate has increased.
d. all of the above are correct

21. The price of imported athletic shoes produced by a U.S. company operating in Thailand
increases. By itself what effect will this change have on the GDP deflator and on the CPI?
a. the GDP deflator and the CPI will both increase.
b. the GDP deflator will increase and the CPI will be unaffected.
c. the GDP deflator and the CPI will both be unaffected
d. the GDP will be unaffected and the CPI will increase

22. The increase in total cost when one more unit is produced is known as
a. Opportunity cost
b. Average cost
c. Marginal cost
d. Fixed cost

23. A measurement showing how quantity demanded of good 1 varies with a price change of
good 2 is
a. price elasticity of demand
b. income elasticity of demand
c. cross-price elasticity of demand
d. budget elasticity of demand
 24. Year 2019, a domestic automobile company produces $600 million worth of cars.
Consumers buy $500 million of them. How much does the GDP 2019 increase in this
case?
a. $ 500 million
b. $ 600 million
c. $ 1,100 million
d. None of the above are correct
25. For elastic demand curve
a. total revenue rises as price rises
b. total revenue falls as price rises
c. total revenue does not change as price rises
d. total revenue automatically changes even price unchanged

Part 2: True or False? Briefly explain. (2.5 points/question)

1. If a firm is producing a level of output where marginal cost is greater than marginal
revenue, it should increase output to maximise profits.
2. If there is an improvement in the technology of producing a product, the supply curve for
that product will shift to the left.
3. Income elasticity of demand is used to determine whether goods are inferior or normal
goods.
4. An increase in nominal U.S. GDP necessarily implies that the United States is producing a
larger output of goods and services.

Part 3: Problems (35 points)

Problem 1 (20 points)

Peter owns the only well in town that produces clean drinking water. He faces the following
demand, marginal revenue, and marginal- cost curves

Demand: P = 50-Q

Marginal revenue: MR = 50-2Q

Marginal cost: MC = 5+Q

a. Assuming that Peter maximizes profit, what quantity does he produce? What price does he
charge?
b. Show the above results on graph
Problem 2 (15 points)

Suppose In a simple economy, people consume only 2 goods, food and clothing. The market basket
of goods used to compute the CPI has 50 units of food and 10 units of clothing.

Food Clothing

2002 price $4 $10

2003 price $6 $20

a. What are the percentage increases in the price of food and in the price of clothing?
b. What is the percentage increase in the CPI?
c. Do these price changes affect all consumers to the same extent? Explain.

Part 4: Short answers (15 points)

a. U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us,
and what does it not tell us, about the well-being of U.S. residents?
b. For a firm that produces necessities, what policy for a firm to increase the total revenue? (Hint,
based on elasticity to explain)