Midterm Review Questions

Chapters 1-4,7-9,19 Instructor: Aysel Bandad

1. Rick buys a 1966 Mustang for $3,000, planning to restore and sell the car. He goes on to spend $9,000
restoring the car. At this point he can sell the car for $10,000. As an alternative, he can spend an
additional $3,000 replacing the engine. With a new engine the car would sell for $13,000. Rick should

a. complete the repairs and sell the car for $13,000.

b. sell the car now for $10,000.
c. never try such an expensive project again.
d. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.

2. A certain production possibilities frontier shows production possibilities for two goods, jewelry and
clothing. Which of the following concepts cannot be illustrated by this model?

a. the flow of dollars between sellers of jewelry and clothing and buyers of jewelry and clothing
b. the tradeoff between production of jewelry and production of clothing
c. the opportunity cost of clothing in terms of jewelry
d. the effect of economic growth on production possibilities involving jewelry and clothing

3. “Allowing all individuals access to Medicare and Medicaid for health insurance is the fair thing to do”
is an example of a

a. contradiction in economic theory.

b. positive economic statement.
c. negative economic statement.
d. normative economic statement.

4. Production possibilities frontiers are usually bowed outward. This is because

a. the more resources a society uses to produce one good, the fewer resources it has available to
produce another good.
b. it reflects the fact that the opportunity cost of producing a good decreases as more and more of that
good is produced.
c. of the effects of technological change.
d. resources are specialized; that is, some are better at producing particular goods rather than other
goods.

5. Ford Motor Company announces that next month it will offer $3,000 rebates on new Mustangs. As a
result of this information, today’s demand curve for Mustangs

a. shifts to the right.

b. shifts to the left.
c. shifts either to the right or to the left, but we cannot determine the direction of the shift from the
given information.
d. will not shift; rather, the demand curve for Mustangs will shift to the right next month.

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

6. Which of the following might cause the supply curve for an inferior good to shift to the right?

a. an increase in input prices

b. a decrease in consumer income
c. an improvement in production technology that makes production of the good more profitable
d. a decrease in the number of sellers in the market

7. Saddle shoes are not popular right now, so very few are being produced. If saddle shoes become
popular, then how will this affect the market for saddle shoes?

a. The supply curve for saddle shoes will shift right, which will create a shortage at the current price.
Price will increase, which will decrease quantity demanded and increase quantity supplied. The
new market equilibrium will be at a higher price and higher quantity.
b. The supply curve for saddle shoes will shift right, which will create a surplus at the current price.
Price will decrease, which will increase quantity demanded and decrease quantity supplied. The
new market equilibrium will be at a lower price and higher quantity.
c. The demand curve for saddle shoes will shift right, which will create a shortage at the current
price. Price will increase, which will decrease quantity demanded and increase quantity supplied.
The new market equilibrium will be at a higher price and higher quantity.
d. The demand curve for saddle shoes will shift right, which will create a surplus at the current price.
Price will decrease, which will increase quantity demanded and decrease quantity supplied. The
new market equilibrium will be at a lower price and higher quantity.

8. As we move downward and to the right along a linear, downward-sloping demand curve,

a. both slope and elasticity remain constant.

b. slope changes but elasticity remains constant.
c. both slope and elasticity change.
d. slope remains constant but elasticity changes.

9. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease
the quantity demanded of tuna by
a. 1.05%, and tuna sellers' total revenue will increase as a result.
b. 1.05%, and tuna sellers' total revenue will decrease as a result.
c. 2.14%, and tuna sellers' total revenue will increase as a result.
d. 2.14%, and tuna sellers' total revenue will decrease as a result.

10. For which of the following types of goods would the income elasticity of demand be positive and
relatively large?

a. all inferior goods

b. all normal goods
c. goods for which there are many complements
d. luxuries

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

Figure 1
Price
Supply
28

26

24

22

20

18

16

14

12

10

6 Demand
4

10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 Quantity

11. Refer to Figure 1. Assume demand increases and as a result, equilibrium price increases to $22 and
equilibrium quantity increases to 110. The increase in producer surplus due to new producers entering
the market would be

a. $90.
b. $210.
c. $360.
d. $480.

12. Refer to Figure 1. If 110 units of the good are being bought and sold, then
a. the marginal cost to sellers is equal to the marginal value to buyers.
b. the marginal value to buyers is greater than the marginal cost to sellers.
c. the marginal cost to sellers is greater than the marginal value to buyers.
d. producer surplus is greater than consumer surplus.

13. Whether a good is a luxury or necessity depends on the

a. price of the good.

b. preferences of the buyer.
c. intrinsic properties of the good.
d. scarcity of the good.

14. If the government removes a binding price floor from a market, then the price paid by buyers will

a. increase, and the quantity sold in the market will increase.

b. increase, and the quantity sold in the market will decrease.
c. decrease, and the quantity sold in the market will increase.
d. decrease, and the quantity sold in the market will decrease.

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

For each of three potential buyers of apples, the table displays the willingness to pay for the first three
apples of the day. Assume Xavier, Yadier, and Zavi are the only three buyers of apples, and only three
apples can be supplied per day.
Figure 2

15. Refer to Figure 2. In this market, a minimum wage of $7.25 is

a. binding and creates a labor shortage.

b. binding and creates unemployment.
c. nonbinding and creates a labor shortage.
d. nonbinding and creates neither a labor shortage nor unemployment.

16. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the
government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the

a. demand curve for physicals shifts to the right.

b. supply curve for physicals shifts to the left.
c. quantity demanded of physicals increases, and the quantity supplied of physicals decreases.
d. number of physicals performed stays the same.

17. Rent control

a. is an example of a price ceiling.

b. leads to a larger shortage of apartments in the long run than in the short run.
c. leads to lower rents and, in the long run, to lower-quality housing.
d. All of the above are correct.

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

18. In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand
curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets
is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the
government is able to raise $800 per month in tax revenue. We can conclude that the equilibrium
quantity of widgets has fallen by

a. 40 per month.
b. 50 per month.
c. 75 per month.
d. 100 per month.
Figure 3

19. Refer to Figure 3. Acme, Inc. is a seller of the good. Acme sells a unit of the good to a buyer and
then pays the tax on that unit to the government. Acme is left with how much money?

a. $8.00
b. $9.00
c. $10.50
d. $12.00

20. Refer to Figure 3. How is the burden of the tax shared between buyers and sellers? Buyers bear

a. three-fourths of the burden, and sellers bear one-fourth of the burden.

b. two-thirds of the burden, and sellers bear one-third of the burden.
c. one-half of the burden, and sellers bear one-half of the burden.
d. one-fourth of the burden, and sellers bear three-fourths of the burden.

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

21. The supply curve for motor oil is the typical upward-sloping straight line, and the demand curve for
motor oil is the typical downward-sloping straight line. When motor oil is taxed, the area on the
relevant supply-and-demand graph that represents the deadweight loss is

a. larger than the area that represents consumer surplus in the absence of the tax.
b. larger than the area that represents government’s tax revenue.
c. a triangle.
d. All of the above are correct.

22. Suppose Rebecca needs a dog sitter so that she can travel to her sister’s wedding. Rebecca values dog
sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as she receives at least
$175. Rebecca and Susan agree on a price of $185. Suppose the government imposes a tax of $30 on
dog sitting. The tax has made Rebecca and Susan worse off by a total of
a. $30.
b. $25.
c. $10.
d. $5.
Figure 4
The vertical distance between points A and B represents a tax in the market.
Price

12

11

10 Supply
A
9

4
B
3

1
Demand
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Quantity

23. Refer to Figure 4. The imposition of the tax causes the price paid by buyers to

a. decrease by $2.
b. increase by $3.
c. decrease by $4.
d. increase by $5.

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

24. Refer to Figure 4. The amount of deadweight loss as a result of the tax is

a. $2.50.
b. $5.
c. $7.50.
d. $10.

Interdependence and the Gains from Trade-Chapter 19

25. Spain is an importer of computer chips, taking the world price of $12 per chip as given. Suppose Spain
imposes a $5 tariff on chips. As a result,
a. Spanish consumers of chips and Spanish producers of chips both gain.
b. Spanish consumers of chips gain and Spanish producers of chips lose.
c. Spanish consumers of chips lose and Spanish producers of chips gain.
d. Spanish consumers of chips and Spanish producers of chips both lose.

26. Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in
three hours or he can trim a tree in two hours.
a. Travis has an absolute advantage over Ricardo in trimming trees.
b. Travis has a comparative advantage over Ricardo in mowing lawns.
c. Ricardo has a comparative advantage over Travis in trimming trees.
d. All of the above are correct.

Scenario 1
The before-trade domestic price of peaches in the United States is $40 per bushel. The world price of
peaches is $52 per bushel. The U.S. is a price-taker in the market for peaches.

27. Refer to Scenario 1. If trade in peaches is allowed, the United States

a. will become an importer of peaches.
b. will become an exporter of peaches.
c. may become either an importer or an exporter of peaches, but this cannot be determined.
d. will experience increases in both consumer surplus and producer surplus.

28. Refer to Scenario 1. If trade in peaches is allowed, the price of peaches in the United States
a. will increase, and this will cause consumer surplus to decrease.
b. will decrease, and this will cause consumer surplus to increase.
c. will be unaffected, and consumer surplus will be unaffected as well.
d. could increase or decrease or be unaffected; this cannot be determined.

29. Refer to Scenario 1. If trade in peaches is allowed, the price of peaches in the United States
a. will be greater than the world price.
b. will be equal to the world price.
c. will be less than the world price.
d. could be greater than, equal to, or less than the world price; this cannot be determined.
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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

Figure 5
The figure illustrates the market for wool in Scotland.

Price
75
70
65
Domestic supply
60 A
55 World
price
50 B G
D
45 H
40 F

35 C
Domestic demand
30
25
20
15
10
5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Quantity

30. Refer to Figure 5. From the figure it is apparent that

a. Scotland will experience a shortage of wool if trade is not allowed.

b. Scotland will experience a surplus of wool if trade is not allowed.
c. Scotland has a comparative advantage in producing wool, relative to the rest of the world.
d. foreign countries have a comparative advantage in producing wool, relative to Scotland.

31. Refer to Figure 5. With trade, Scotland will

a. export 11 units of wool.
b. export 5 units of wool.
c. import 15 units of wool.
d. import 6 units of wool.

32. Refer to Figure 5. In the absence of trade, total surplus in Scotland is represented by the area
a. A + B + C.
b. A + B + C + D + F.
c. A + B + C + D + F + G.
d. A + B + C + D + F + G + H.
33. Refer to Figure 5. When trade is allowed,

a. Scotland producers of wool become better off and Scotland consumers of wool become worse off.
b. Scotland consumers of wool become better off and Scotland producers of wool become worse off.
c. both Scotland producers and consumers of wool become better off.
d. both Scotland producers and consumers of wool become worse off.

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

Figure 6
Uzbekistan’s Production Possibilities Frontier Azerbaijan’s Production Possibilities Frontier

34. Refer to Figure 6. If Uzbekistan and Azerbaijan each divides its time equally between making bolts
and making nails, then total production is

a. 15 bolts and 40 nails.

b. 25 bolts and 70 nails.
c. 30 bolts and 80 nails.
d. 50 bolts and 140 nails.
Figure 7

35. Refer to Figure 7. With free trade, consumer surplus is

a. $400 and producer surplus is $200.
b. $400 and producer surplus is $800.
c. $1,600 and producer surplus is $200.
d. $1,600 and producer surplus is $800.
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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

36. Refer to Figure 7. With trade and a tariff, consumer surplus is

a. $808 and producer surplus is $200.
b. $808 and producer surplus is $392.
c. $1,024 and producer surplus is $200.
d. $1,024 and producer surplus is $392.

37. Refer to Figure 7. With trade and a tariff, total surplus is

a. $1,224.
b. $1,416.
c. $1,512.
d. $1,704.

38. Refer to Figure 7. Relative to the free-trade outcome, the imposition of the tariff
a. decreases imports of the good by 16 units and increases domestic production of the good by 8
units.
b. decreases imports of the good by 16 units and increases domestic production of the good by 16
units.
c. decreases imports of the good by 24 units and increases domestic production of the good by 8
units.
d. decreases imports of the good by 24 units and increases domestic production of the good by 24
units.

39. Refer to Figure 7. The amount of revenue collected by the government from the tariff is
a. $32.
b. $288.
c. $368.
d. $720.

Table 1
Assume that Jamaica and Norway can switch between producing coolers and producing radios at a
constant rate. The following table shows the number of coolers or number of radios each country can
produce in one day.

Output Produced
in One Day
Coolers Radios
Jamaica 12 6
Norway 24 3

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 Midterm Review Questions
Chapters 1-4,7-9,19 Instructor: Aysel Bandad

40. Refer to Table 1. Jamaica’s opportunity cost of one cooler is

a. 0.5 radios, and Norway’s opportunity cost of one cooler is 0.125 radios.
b. 0.5 radios, and Norway’s opportunity cost of one cooler is 8 radios.
c. 2 radios, and Norway’s opportunity cost of one cooler is 0.125 radios.
d. 2 radios, and Norway’s opportunity cost of one cooler is 8 radios.

41. Refer to Table 1. Suppose Jamaica decides to increase its production of radios by 12. What is the
opportunity cost of this decision?

a. 3 coolers
b. 6 coolers
c. 12 coolers
d. 24 coolers

42. Refer to Table 1. Jamaica has an absolute advantage in the production of

a. coolers and Norway has an absolute advantage in the production of radios.

b. radios and Norway has an absolute advantage in the production of coolers.
c. both goods and Norway has an absolute advantage in the production of neither good.
d. neither good and Norway has an absolute advantage in the production of both goods.

43. Refer to Table 1. Jamaica has a comparative advantage in the production of

a. coolers and Norway has a comparative advantage in the production of radios.

b. radios and Norway has a comparative advantage in the production of coolers.
c. both goods and Norway has a comparative advantage in the production of neither good.
d. neither good and Norway has a comparative advantage in the production of both goods.

44. Refer to Table 1. Jamaica should specialize in the production of

a. coolers and Norway should specialize in the production of radios.
b. radios and Norway should specialize in the production of coolers.
c. both goods and Norway should specialize in the production of neither good.
d. neither good and Norway should specialize in the production of both goods.

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