Midterm 1 60 minutes Econ 1101 Principles of Microeconomics October 11 2010 Exam Form A Name Student ID number Signature Teaching Assistant Section The answer form the bubble sheet and this question form will both be collected at the end of the exam Fill in the information above and then on the answer form please write the following information name student ID number recitation number Form A see the bottom part of the answer sheet for this bubble Fill in the corresponding bubbles Sign your name on the answer form You will be awarded 2 bonus points for filling the correct name ID and form number on the answer form There are 33 questions All questions are multiple choice Each question has a single answer Select the best answer for each question and fill in the corresponding bubble on the answer sheet Use a Number 2 pencil to fill in your answer You are not permitted to use calculators or to open books or notes 1 Questions 1 5 consider the market for sugar For each of the following situations determine what happens to the equilibrium quantity Qsugar and equilibrium price Psugar of sugar 1 Scientists invent a new cost effective way to make ethanol out of sugar sugar a Q and Psugar b Qsugar and Psugar c Qsugar and Psugar d Qsugar and Psugar 2 Scientists invent a new way to make sugar out of sugar cane that lowers the cost of the production process a Qsugar and Psugar b Qsugar and Psugar c Qsugar and Psugar d Qsugar and Psugar 3 Corn prices fall Sugar and corn syrup are both used as sweeteners a Qsugar and Psugar b Qsugar and Psugar c Qsugar and Psugar d Qsugar and Psugar 4 Suppose sugar is a necessity good and incomes decrease a Qsugar and Psugar b Qsugar and Psugar c Qsugar and Psugar d Qsugar and Psugar 5 Two things happen i Scientists invent a new way to make sugar out of sugar cane that lowers the cost of the production process and ii corn prices fall a Qsugar and we can t tell what happens to Psugar b Qsugar and we can t tell what happens to Psugar c Psugar and we can t tell what happens to Qsugar d Psugar and we can t tell what happens to Qsugar 2 You are the Independent System Operator ISO in an electricity market You have received the bid information in the table below for a double auction Each buyer s bid is an offer to buy one Mhw of electricity Each seller s bid is an offer to sell one Mhw of electricity Buyers Arthur Brian Chuck Dale 6 Sellers Alice Beth Cindy Dolly Bid Offer to purchase in 7 1 10 2 What price clears the market a 1 b 2 c 7 d 8 e 10 7 8 Bid Offer to sell in 2 10 7 8 What quantity clears the market a 0 b 1 c 2 d 3 e 4 A new kind of consumption good the smidget is invented in Econland Suppose the impact of the invention on the widget market is that the price Pwidget increases while the quantity Qwidget remains unchanged A possible explanation for why this happened is that widgets and smidgets are and the supply curve for widgets is Fill in the blanks a complements perfectly elastic b complements perfectly inelastic c substitutes unit elastic d substitutes perfectly inelastic e substitutes perfectly elastic 3 Consider the following conditions that may or may not apply about a market 1 2 3 4 9 All goods are normal goods The market structure is perfect competition There are no externalities in the market The social pie is equitably distributed The First Welfare Theorem states that the unregulated market is Pareto efficient if which of the above conditions hold a 1 and 2 b 2 and 3 c 2 3 and 4 d 3 and 4 e 1 2 3 and 4 10 In an efficient allocation which of the following conditions necessarily holds a The marginal valuation of the last unit of consumed must be greater than the marginal cost of the last unit produced b Supply is perfectly elastic c There is no producer surplus since all the surplus goes to consumers d The lowest cost producers produce e Excess demand is allocated according to uniform rationing 11 Which of the following statement is true about the effects of a binding price floor in a market as compared to the free market allocation a Consumer surplus decreases producer surplus may or may not decrease b Consumer surplus increases producer surplus may or may not decrease c Producer surplus decreases consumer surplus may or may not decrease d Producer surplus increases consumer surplus may or may not decrease 4 Reservation Prices and Costs in Econland for a Widget Name of D Reservation Cost to Name of Person price for one make S widget one widget Person dollars dollars D1 9 1 S1 D2 8 2 S2 D3 7 3 S3 D4 6 4 S4 D5 5 5 S5 D6 4 6 S6 D7 3 7 S7 D8 2 8 S8 D9 1 9 S9 D10 0 10 S10 12 The table above provides reservation prices and costs for the inhabitants of Econland Suppose we have an allocation where S1 S2 and S3 each produce a widget and D1 D2 and D3 each consume a widget This is not Pareto efficient because a S8 could produce a widget and give it to D8 in exchange for 5 and both would be better off b D1 can sell his widget to D4 for 5 and both are better off c In the efficient allocation 6 widgets are produced d S4 can produce a widget and give it to D4 in exchange for 4 50 and both would be better off e 13 a and b are both correct answers Suppose in Econland there is a price ceiling of 4 with no resales Which of the possible alternatives are true 1 2 3 4 D1 D2 D3 and D4 will consume We don t know who is going to consume S1 S2 S3 and S4 will produce We don t know who is going to produce a 1 and 3 b 1 and 4 c 2 and 3 d 2 and 4 14 In an industry 1 demand is perfectly inelastic and 2 supply is perfectly elastic If a tax is imposed in this industry bear the entire burden of the tax and equilibrium quantity Fill in the blanks a Buyers decreases b Buyers is unchanged c Sellers decreases d Sellers is unchanged 5 10 9 8 7 6 5 4 3 2 1 0 S D 0 1 2 3 4 5 6 7 8 9 10 Quantity The above diagram gives information about demand and supply for widgets in Econland The next few questions ask you to determine the impact of a tax of 6 in Econland To answer the questions it is recommended that you first fill out the table below and then use the table to answer the questions 15 Variable Free Market …