Page 1 Econ 2010 (sec 100), Fall 2010 First Midterm, Version A Name: __________________________ Date: _____________ With some comments from Edward on some of the questions. Almost 80% got question 44 incorrect. People who got it correct know their demand and WTP stuff. Around 60% had difficulties with 11, 18 and 29. The objective is to include questions everyone gets right and to include questions that only the best students get right. For example 98% got question three right. 1. A severe drought in California destroys many red grapes. As a result of the drought, consumer's surplus from the consumption of grape products likely _________. A) decreases because the profits of grape producers decline B) is unaffected but producer surplus declines C) decreases because the price of grapes goes up D) increases because more expensive wine tastes better 2. If action A makes you better off and me worse off, before action A is undertaken the allocation is A) There is not enough information to tell whether the allocation is efficient before A is undertaken. B) Efficient C) Inefficient The answer would have been “efficient” if the question had said something like, “From the current situation, there is no action that would make you better off and not make me worse off. 3. An economy is said to have a comparative advantage in the production of a good if it can produce that good: A) outside its production possibilities curve. B) with more resources than another economy. C) at a lower opportunity cost than another economy. D) with a higher opportunity cost than another economy.Page 2 4. Which of these two statements is correct? A) The opportunity cost of activity A is always expressed by units of activity A B) The opportunity cost of activity A in terms of activity B is the inverse of the opportunity cost of activity B in terms of activity A. A) Only A B) Only B C) Both A and B D) Neither A nor B 5. Assume that Brazil gives up 3 automobiles for each ton of coffee it produces, while Peru gives up 7 automobiles for each ton of coffee it produces. A) Brazil has a comparative advantage in automobile production and specialize in the production of automobiles. B) Brazil has a comparative advantage in automobile production and should specialize in coffee production C) Brazil has a comparative advantage in coffee production and should specialize in the production of automobiles D) Brazil has a comparative advantage in coffee production and should specialize in the production of coffee Use the following to answer question 6: 6. (Table: Consumer Surplus) If the price of a ticket to see The Nutty Nutcracker is $50, then Narum's consumer surplus is: A) $15. B) $240. C) $50. D) $60.Page 3 7. The existence of government intervention in markets suggests: A) individual actions have no side effects. B) equilibrium will be achieved through this intervention. C) markets can efficiently manage the allocation of goods. D) markets may not always achieve efficiency. Market failure (the inability of the market system to achieve efficiency) is one of the primary reasons for government intervention. For example, public expenditures on national defense occur because the market system, left to its own devices, would produce an inefficient amount of national defense—to little. 8. For low-skilled workers in the country of South Africa, supply for low-skilled workers is greater than demand. This could be caused by. A) More workers wanting to work at the equilibrium wage than the number of workers the firms want to hire at the minimum wage. B) The law that says only those with a high-school education can work. C) The minimum wage set above the equilibrium wage. D) Low-skilled workers being poor, so wanting to work more at the equilibrium wage. We discussed a NYTimes article about this in class. Note that D) says the workers want to work more at the equilibrium wage, but, by definition of equilibrium, this cannot be true at the equilibrium wage because at the equilibrium wage everyone is working as much as they want at that wage. 9. George purchased a large chocolate shake from Dairy Queen. Now that he is two thirds finished, he is starting to feel full. George thinks to himself, "Should I take one more sip, or stop now?" This is an example of _______. A) Opportunity Cost B) Specialization C) A Marginal Decision D) None of the abovePage 4 10. An example from the class notes: In places like Aspen, if wood-burning fireplaces and stoves are unregulated there will be too much smoke from an efficiency point of view: Aspen is a box canyon and the smoke has nowhere to go. The city government is considering requiring permits for wood-burning devices. Which of the following narratives is, in Edward's view, both correct and most informative? A) This is an example where a binding quota, achieved by requiring but limiting the number of permits, can increase efficiency (achieves the efficient number of wood-burning devices) rather than causing inefficiency. B) When equilibrium is achieved in the market for permits those with the highest WTP for permits will hold all of the permits. C) The city government can correct the inefficiency by requiring a permit/medallion for each wood-burning device. D) Without government intervention the market is failing. All of the answers are correct. In Edward’s view, A) is most informative. 11. Economists believe that resources should be used as efficiently as possible to: A) reduce inequity. B) maximize profits. C) eliminate scarcity. D) help achieve society's goals. Efficiency and equity are different things. Scarcity just is; it is not something that can be eliminated. The goal is not to maximize profits. 12. If disequilibrium exists in a market: A) it must be because the government has intervened in the market, resulting in the market's failure to reach equilibrium. B) it will continue unless there is government intervention. C) no individual would be better off doing something different. D) there are opportunities available to people to make themselves better off. 13. Jeanette is willing to pay $100 for the first pair of shoes, $80 for the second pair, $55 for the third, and $30 for the fourth. If each pair costs $50, Jeanette will buy ______ pairs of shoes and her total consumer surplus from the shoes is ______. A) 3; $85 B) 4; $85 C) 3; $235 D) 3; $150Page 5 14. The United States has which type of economic system? A) Mixed Economy