CONCORDIA UNIVERSITY

Department of Economics

ECON 201
Fall 2014
Instructor: Ivan Tchinkov

MIDTERM EXAMINATION WITH ANSWERS

Version 1
Instructions:
1. Write your answers on the IBM SHEET ONLY.
2. Use a PENCIL.
3. Put your NAME and ID on the IBM sheet.
4. Put the EXAM VERSION on the top right corner of the IBM sheet.

Multiple Choice Questions (2 marks each).

1. All of the following statements, except one, are valid examples of the way economists
use the term 'scarcity'. Which is the exception?
A) Households face a scarcity of income.
B) Individuals face a scarcity of time.

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 C) Economies face a scarcity of resources.
D) The world faces a scarcity of ideas.
2.Class attendance today is nearly 100% but on most other days it is less. The likely explanation for this
would be:
A) the opportunity cost of not attending today is much higher than usual.
B) random chance.
C) the episode of “Lost” was a rerun.
D) students thought today's class was a review.
3.Maria spends her afternoon at the beach, paying $2 to rent a beach umbrella and $10 for food and drinks
rather than spending an equal amount of money to go to a movie. The opportunity cost of going
to the beach is:
A) zero, because she got food, drinks and an umbrella in return for the money.
B) the $12 she spent on the umbrella, food and drinks.
C) only $2 because she would have spent the money on food and drinks whether or not she
went to the beach.
D) the movie she missed seeing plus the $12 she spent on the umbrella, food and drinks.
4.The difference between a straight-line production possibilities frontier and one that is concave is that:
A) the concave production possibilities frontier exhibits constant opportunity costs, while the
straight line frontier does not.
B) the concave frontier reflects the problem of scarcity but the straight line frontier does not.
C) the straight line frontier reflects constant opportunity costs but the concave frontier
does not.
D) neither the straight line nor the concave frontier reflect output limits.
5.All of the following statements are false except:
A) Normative economic statements are statements of fact.
B) In positive economics, we are detached scientists and personal values do not enter our
description of economic events.
C) "The unemployment rate for September, 1987 was 5.9 percent" is a normative statement.

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 D) "The government should provide a minimum income to every citizen" is a positive
statement.
6.Economists frequently use economic models. These models:
A) are tools used in the analysis of economic relationships.
B) may be graphs expressing the relationship between two economic variables.
C) may be equations expressing a relationship between two or more variables.
D) all of the above.
7.If the CPI for 2005 was 284.1, and economists predicted an inflation rate of 3.5 per cent for 2006, the
predicted CPI at the end of 2006 was:
A) 287.1.
B) 290.1.
C) 297.5.
D) 294.
8.Suppose that the consumer price index has a value of 87 (1980 = 100) for 1987. This means that
A) on average, prices rose by 13 per cent since 1980.
B) all prices fell by 13 per cent since 1980.
C) all prices rose by 87 per cent since 1980.
D) on average, prices fell by 13 per cent since 1980.
9.A road map is like an economic model, it provides us with:
A) all the details of the real world.
B) no resemblance of the real world at all.
C) an analysis of the real world.
D) an abstraction of the real world.

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10.We do not expect economists to agree on economic issues that involve:
A) positive analysis.
B) normative analysis.
C) microeconomic analysis.
D) cost and benefit analysis.
11.All the following statements are incorrect except
A) When a market is in equilibrium, there may be either excess demand or excess supply.
B) When a market is in equilibrium, buyers are happy because price is low.
C) When a market is in equilibrium, both excess demand and excess supply are zero.
D) When a market is in equilibrium, sellers are happy because price is high.

Use the following to answer the next 4 questions:

12.Referring to figure 3.3, what is the state of the market if price is currently $5?
A) There is a surplus of 20.
B) There is a shortage of 20.
C) The quantity supplied is 80.
D) The quantity demanded is 60.
13.In figure 3.3, if there is a shortage of 40 units, what does this mean?
A) Price will fall.

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 B) Price must be $8.
C) The quantity traded is 40.
D) Buyers would be willing to pay an additional $4 per unit for the quantity that they
are now buying.
14.In figure 3.3, if there is a surplus of 20 units, what does this mean?
A) Price will rise.
B) Price must be $5.
C) The quantity traded is 80.
D) Buyers are only willing to pay $2 less than the current price in order to buy all of the
quantity supplied.
15.In figure 3.3, assume that the market was at equilibrium and that demand increases by 20 units. What
will be the new equilibrium price and quantity?
A) Price will rise by $2 and quantity traded will rise by 20 units.
B) Price will fall by $2 and quantity traded will fall by 20 units.
C) Price will rise by $1 and quantity traded will rise by 10 units.
D) Price will fall by $1 and quantity traded will fall by 10 units.
16.If goods J and K are substitutes, an increase in the price of J causes:
A) quantity demanded of J to fall and the demand curve for K to shift toward the origin.
B) a decrease in quantity demanded for J and an outward shift of K's demand curve.
C) quantity demanded of J remains constant, but the demand for K decreases.
D) the demand curve for both J and K shift.
17.All the following are complementary goods except:
A) beer and peanuts.
B) ipods and CD players.

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 C) gasoline and motor oil.
D) tennis balls and tennis rackets.
18.All the following will cause the demand curve to shift to the left except:
A) a reduction in income if the good is normal.
B) an increase in the price of a complementary good.
C) an increase in the price of a substitute good.
D) an increase in income if the good is inferior.
19.If South Carolina experiences a late frost that damages the state's peach crop, then we would expect:
A) the demand curve for peaches to shift downward and to the left.
B) the supply curve for peaches to shift outward and to the right.
C) the demand curve for peaches to shift upward and to the right.
D) the price of nectarines, a substitute fruit, to rise.
20.We can expect the demand for a product to decrease if:
A) the number of buyers in the market increases.
B) the price of the product rises.
C) the price of a complementary good increases.
D) the price of a substitute good increases.
21.If the price elasticity of demand for a particular good is greater than zero but less than one, then the:
A) percentage change in quantity demanded is greater than the percentage change in price.
B) price is above the midpoint on the demand curve if the demand curve is linear.
C) percentage change in quantity demanded equals the percentage change in price.

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 D) percentage change in price is greater than the percentage change in quantity
demanded.
22.Which of the following will affect a good's price elasticity of demand?
A) The number of substitute goods available.
B) The tastes and preferences of consumers.
C) The ease of substitution between goods.
D) All of the above.
23.Suppose that the price elasticity of demand for gasoline is 2.0 when suddenly its price increases by 15
percent. The quantity demanded changes by:
A) 15 percent.
B) 20 percent.
C) 30 percent.
D) 10 percent.
24.One reason why coffee producers have at times destroyed part of their crop instead of putting it on the
market is:
A) they acted irrationally.
B) the demand for coffee is elastic, so by lowering quantity supplied prices increase.
C) they believed that the demand for coffee was inelastic; growers reduced quantity
supplied in order to increase both price and revenue.
D) they believed that the demand for coffee was unit elastic, so a reduced supply increased
both price and total revenue.
25.Given the following four possibilities, which one results in an increase in total consumer expenditures?
A) Demand is unitary elastic and price falls.
B) Demand is elastic and price rises.
C) Demand is inelastic and price falls.
D) Demand is inelastic and prices rises.

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26.Given the following cases, in which one will total spending not fall?
A) Demand is inelastic and product price decreases.
B) Demand is elastic and product price rises.
C) Demand is inelastic and product price rises.
D) Demand is unit elastic and price decreases.
27.All of the following statements are incorrect except:
A) demand is more elastic in the short run than in the long run.
B) the time period available for adjustment to changes in a good's price does not affect the
elasticity of demand for the good.
C) the longer the time period consumers have to adjust to price changes, the more elastic
will be demand.
D) the long-run demand curve for a good is steeper than the good's short-run demand curve.
28.The demand for gasoline is more price elastic in the long run than in the short run because:
A) individuals will respond to the price change in the long run by adjusting their
consumption and driving habits.
B) as time passes, the cost of producing gasoline falls.
C) over the long run, individuals' incomes will rise in order to off-set rising prices.
D) over the long run, the law of demand does not hold.
29.When two goods are substitutes for each other:
A) the cross-price elasticity of demand is negative.
B) the cross-price elasticity of demand equals zero.
C) the cross-price elasticity of demand is positive.
D) the cross-price elasticity of demand may be either positive or negative.
30.If the percentage increase in quantity demanded of good X is larger than the percentage decrease in the
price of good Y, the cross-price elasticity is:

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 A) greater than zero but less than one.
B) greater than unity.
C) equal to unity.
D) equal to zero.
31.If your income falls and you increase your demand for hamburger, then this suggests that hamburger is
a(n):
A) normal good.
B) substitute good.
C) inferior good.
D) complementary good.
32.Suppose that an increase in consumer income of 5% causes the consumption of a good to fall from 10
to 7 units , then using the initial quantity as the reference quantity, the income elasticity is:
A) -10.
B) -7.
C) -5.
D) -6.
33.All of the following statements are correct except:
A) for an inferior good, an increase in income causes its budget share to fall.
B) for an inferior good, as income rises, more of consumers' income is spent on it.
C) if a good is a necessity, an increase in income causes its budget share to fall.
D) for a luxury good, an increase in income causes that good's budget share to rise.
34.Suppose that average incomes increased from $30,000 to $34,000, and the quantity demanded of a
product increased from 45 to 55. What type of product must this be?
A) Substitute product.

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 B) Inferior product.
C) Luxury product.
D) Necessity.
35.If the government wishes to discourage smoking by tax increases the policy will be more effective if:
A) demand is price inelastic.
B) supply is price elastic.
C) demand is income elastic.
D) demand is price elastic.
36.Why do some people argue that attempts to reduce much of the crime in our society by governments
"getting tough" on crime will not be successful?
A) Because much of the crime in our society is drug related and the supply of illegal drugs is
very inelastic.
B) Because much of the crime in our society is drug related and the supply of illegal drugs is
very elastic.
C) Because much of the crime in our society is drug related and the demand for illegal drugs
is very elastic.
D) Because much of the crime in our society is drug related and the demand for illegal
drugs is very inelastic.
37.A reduction in consumer surplus accompanied by an exact same amount of increase in producer
surplus will:
A) leave economic surplus unchanged.
B) result in relatively higher economic surplus.
C) result in relatively lower economic surplus.
D) make everyone in the society worse off.
38.An effective price ceiling will cause:
A) producer surplus to fall.
B) total economic surplus to rise.

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 C) quantity supplied to exceed quantity demanded.
D) quantity supplied to increase.
39.Which of the following statements best characterizes the inefficiency induced by a price floor?
A) Consumers are encouraged to consume too much.
B) The extra cost of the last unit produced is greater than the extra benefit of the last
unit consumed.
C) Producers are encouraged to produce too little.
D) The enforcement of the price floor is extremely costly.
40.A tax of $1 on each unit a producer sells will:
A) shift supply to the right.
B) decrease quantity supplied.
C) shift supply to the left.
D) increase quantity supplied.

Use the following to answer the next 5 questions:

41.Referring to figure 5.3, at the equilibrium price A, the total economic surplus is:
A) MLI.
B) AKC.
C) MAC.

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 D) MKC.
42.Referring to figure 5.3, from the original equilibrium at C, an increase in the cost of production that
shifts S to S' causes a loss in producer surplus due to:
A) OF of output not produced.
B) FB of output not produced.
C) OB of output not produced.
D) overproduction of output.
43.Referring to figure 5.3, if S' represents a tax-inclusive supply curve, then consumer surplus after the
tax is imposed is:
A) MAC.
B) MEI.
C) MAHI.
D) EAHI.
44.Referring to figure 5.3, if S' represents the tax-inclusive supply curve, then producer surplus after the
tax is imposed is:
A) HJC.
B) AKC.
C) GJK.
D) EGJCI.
45.Referring to figure 5.3, the total cost of the trades that do not occur after the tax is imposed is
represented by the area:
A) IFBC.
B) OKCB.
C) JFBC.
D) OLIF.

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46.When a good generates an externality in the market:
A) society's scarce resources are allocated efficiently.
B) someone is affected who is not involved in the buying or selling of the good.
C) the good's price reflects the externality.
D) government intervention can never improve the market's performance.
47.Which one of the following statements is incorrect?
A) If there are positive benefits associated with a good outside of its own market, too little of
the good is being produced.
B) An external cost or benefit is not included in a good's market price.
C) If there are external costs associated with a good, there is an under-allocation of
resources in the production of the good.
D) The externalities associated with the production or consumption of a good may be either
positive or negative.
48.As more and more of the environment is cleaned up:
A) the marginal benefit of pollution reduction increases.
B) firms become more willing to undertake programs that improve environmental quality.
C) the marginal benefit of pollution reduction declines.
D) the ratio of marginal benefits to marginal costs becomes much greater than 1.
49.In a free market, goods with negative externalities will:
A) be under-produced in the market place.
B) have the marginal valuation of the externality reflected in their price.
C) be produced to the point at which the marginal social benefit equals the marginal social
cost of the last unit produced.
D) be overproduced at the market equilibrium.
50.Which of the following is not guaranteed by the efficiency of the market equilibrium?
A) Price represents the value of an extra unit of consumption.
B) Rich and poor will have adequate access to the good.
C) Price represents the cost of an extra unit of production.
D) Neither shortage nor surplus will exist.

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