Izmir University of Economics Name & Last Name:

Department of Economics, Fall 2013 Student ID #:

ECON 101- Principles of Microeconomics

1st Midterm Exam

Note: The duration of the exam is 90 minutes. Good luck!

Part1: Each multiple choice questions is worth 2 points. The whole section is worth 30 points.

1) Economics is best defined as the study of how people, businesses, governments, and societies:
A) choose abundance over scarcity.
B) attain wealth.
C) make choices to cope with scarcity.
D) use their infinite resources.

2) In broad terms, the difference between microeconomics and macroeconomics is that:

A) they use different sets of tools and ideas.
B) macroeconomics studies the effects of government regulation and taxes on the price of
individual goods and services whereas microeconomics does not.
C) microeconomics studies decisions of individual people and firms and macroeconomics
studies the entire national economy.
D) microeconomics studies the effects of government taxes on the national unemployment rate.

3) When firms in an economy start producing more computers and fewer televisions, they are
answering the ________ question.
A) "when" B) "for whom" C) "why" D) "what"

4) On Saturday morning, you rank your choices for activities in the following order: go to the library,
work out at the gym, have breakfast with friends, and sleep late. You go to the library. Your
opportunity cost is:
A) zero because you do not have to pay money to use the library.
B) working out at the gym.
C) working out at the gym, having breakfast with friends, and sleeping late.
D) not clear because not enough information is given.

5) Scarcity is a situation in which:

A) most people can get only bare necessities.
B) people cannot satisfy all their wants.
C) people can satisfy all their wants.
D) some people can get all they want and some cannot.

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Refer to the information provided below to answer questions 6, 7, and 8.

In an hour, Sue can produce 40 caps or 4 jackets and Tessa can produce 80 caps or 4 jackets.

6) Sue’s opportunity cost of producing a cap is ___________ jacket(s).

A) 10 B) 20 C) 0.1 D) 0.05

7) Tessa’s opportunity cost of producing a cap is ___________ jacket(s).

A) 10 B) 20 C) 0.1 D) 0.05

8) If Sue and Tessa specialize in producing the good in which each of them has a comparative
advantage, and they trade one jacket for 15 caps, who gains from the specialization and trade?
A) Sue B) Tessa C) Both Sue and Tessa D) None of them.

9) Households are on the ________ side of input (factor) markets and on the ________ side of
output (product) markets.
A) supply; demand B) demand; supply
C) demand; demand D) supply; supply

10) When there is underproduction in a market,

A) the total of consumer and producer surplus is maximized.
B) market price is too low.
C) there is a deadweight loss.
D) there is excess quantity demanded.

11) Which of the following is a resource as economists use the term?

A) Money B) Common stock
C) Capital D) Corporate bonds

Refer to the information provided in Figure 1 below to answer questions 12, 13, and 14.

Figure.1

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12) Refer to Figure 1. Which of the following areas represents consumer surplus?
A) A B) B C) C D) E

13) Refer to Figure 1. Which of the following areas represents producer surplus?
A) A B) B C) C D) E

14) Refer to Figure 5. Which of the following areas represents deadweight loss?
A) A
B) B
C) C
D) There is no deadweight loss in this market.

15) Which of the following statement is positive?

A) All fast-food restaurants should sell healthy-choice meals.
B) We ought to drive our cars less and take public transportation more.
C) On average, Americans have a greater body mass index than citizens from any other country in
the world.
D) The unemployment benefits should be increased.

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Part 2: Answer all of the questions. This section is worth 70 points. Read the questions carefully,
and show all your work where asked, otherwise you will not be given full credit for the question.

1. (18 pts) The table shows Sunland’s production possibilities.

Combination Food Sunscreen

(kilograms per month) (liters per month)
A 200 and 0
B 100 and 400
C 50 and 600
D 0 and 800

a. (3 pts.) Draw the PPF through the four points (Place food on the vertical axis).

b. (5 pts.) What is the opportunity cost of Sunland moving from combination B to combination
C? Show all your work.

The opportunity cost of going from point B to point C (producing 200 liters more sunscreen )
50 kilograms of food.

c. (5 pts.) Plot the point that represents the combination of 100 kilograms of food and 300 liters
of sunscreen on the graph you drew in part (a) . Label it point E. What can you say about the
employment of resources at point E? Explain.

The combination E would be inside the production possibilities frontier, which suggests
inefficient use of resources. There is mismanagement and waste. A reallocation of resources
can yield an increase in both goods.

d. (5 pts.) Explain how this economy might be able to produce 150 kilograms of food and 500
liters of sunscreen?

This is an unattainable production combination. The economy could produce at this point
with the benefits of an increase in resources or a technological advance.

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2. (18 pts.) Suppose the automobiles market in Turkey is in equilibrium and the automobiles are
normal goods.

a. (3 pts.) On a graph, draw this situation and label the equilibrium point A. Show the corresponding
equilibrium price and the equilibrium quantity. Make sure that you label each axis.

P D0 S0

b. (5 pts.) Suppose the incomes of the individuals in this market decrease. Predict the effects of this
event on automobiles market. On a separate graph below, draw this situation and label the new
equilibrium point B. Compare the new equilibrium price and quantity with the initial equilibrium.

P D1 D0 S0

The decrease in the incomes of individuals leads to a fall in both the equilibrium price and the
equilibrium quantity.

c. (5 pts.) Go back to (a). Suppose robots cut car production costs. Predict the effects of this event on
automobiles market. On a separate graph below, draw this situation and label the new equilibrium
point C. Compare the new equilibrium price and quantity with the initial equilibrium.

P D0 S0 S1

The equilibrium price decreases and the equilibrium quantity increases.

d. (5 pts.) Go back to (a). Suppose the price of gasoline increases. Predict the effects of this event on
automobiles market. On a separate graph below, draw this situation and label the new equilibrium
point C. Compare the new equilibrium price and quantity with the initial equilibrium.

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P D1 D0 S0

Both the equilibrium price and the equilibrium quantity will decrease.

3. (18 pts.)The figure below shows the market for cotton fabric:

a. (3 pts.) What is the equilibrium price and quantity? How can you tell?

The equilibrium price is $5 and the equilibrium quantity is 900 yards of fabric. The
quantity demanded is equal to quantity supplied at $5, therefore this is the equilibrium.

b. (4 pts.) If the price in the market is $3, is there an excess demand or an excess supply? How
large is the excess demand or excess supply? Show all your work. Show this situation on the
graph above.

If the price is $3, there is an excess demand because the quantity demanded > quantity
supplied. There size of the excess demand is 1100-700=400 yards of fabric.

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 c. (4 pts.) Explain how market forces will act to eliminate the disequilibrium when the price in
the market is $3.

When there is excess demand, price tends to rise. When the price in the market rises, quantity
demanded falls and quantity supplied rises until an equilibrium is reached at which quantity
demanded and quantity supplied are equal.

d. (4 pts.) In order to protect cotton fabric consumers, the government decides to place a
maximum price of $3 on cotton fabric and will not allow the price to rise above $3. What is
this price control called? Discuss and explain the effects of this price control on the market.

This price control is called the price ceiling. At $3, an excess demand will emerge. Since this is
a government imposed price, this excess demand will persist and will not be eliminated.
Because the price system is not allowed to function, an alternative rationing mechanism has to
be found to distribute the available cotton fabric.

e. (3 pts.) Now suppose that the government decides to protect producers and will place an
effective price floor. Where should the government place the price floor?

The government should place the price floor above the equilibrium price.

4. (16 pts.) When the price of a good increased by 10 percent the quantity demanded of it decreased by
2 percent.

a. (5 pts.) Calculate the price elasticity of demand. Is the demand for the good elastic, unit
elastic, or inelastic? Show your work.

Price elasticity of demand= %∆Q/%∆P=2%/10%=0,2< 1.

A price elasticity less than one means that demand is inelastic.

b. (3 pts.) Are substitutes for this good easy to find or does it have poor substitutes?

Because the demand for the good is inelastic, it most likely has poor substitutes.

c. (5 pts.) Explain how the total revenue from the sale of the good would change if its price were
increased? Show your work.

When demand is inelastic, a price rise increases the total revenue.

d. (3 pts.) Explain which of the following goods this good is more likely to be: orange juice,
gasoline, toothpaste, clothing, blue jeans, and theater tickets.

This good is most likely a toothpaste, gasoline, or clothing.