Midterm 2 60 minutes Econ 1101 Principles of Microeconomics November 15 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 and ID on the answer form There are 35 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 1 For question 1 please fill in a on your bubble sheet as this is exam form A We are using this question to verify the exam form a Form A 2 When trade is based on trading partners must be in terms of their production possibility frontiers in order for there to be gains from trade Fill in the blanks a comparative advantage the same b comparative advantage different c increasing returns different d none of the above 3 At present the United States uses a system of quotas to limit the amount of sugar imported into the country Which of the following statements is most likely true a The quotas are probably the result of lobbying from U S consumers of sugar The quotas increase consumer surplus for the United States reduce producer surplus for the United States and harm foreign sugar producers b The quotas are probably the result of lobbying from U S producers of sugar The quotas increase producer surplus for the United States and reduce consumer surplus for the United States c The quotas are probably the result of lobbying from foreign producers of sugar The quotas reduce producer surplus for the United States increase consumer surplus for the United States and benefit foreign sugar producers d U S lawmakers did not need to be lobbied to impose the quotas because total surplus for the United States is higher with the quotas than without them 2 The questions on this page and the next page refer to the graph below Sparty consumes pizza and soda and the graph illustrates his indifference curves 32 30 28 26 24 22 s20 o18 d16 a14 12 10 8 6 4 2 0 0 4 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 pizza From Sparty s indifference curves we can determine that Sparty is indifferent between having 16 pizzas 4 sodas and a 8 pizzas 6 sodas b 16 pizzas 16 sodas c 6 pizzas 14 sodas d 18 pizzas 6 sodas e 8 pizzas 8 sodas 5 Suppose Sparty has an income of 64 that PPizza 8 and that PSoda 4 Draw Sparty s budget constraint in the above figure From this we can see that the opportunity cost of one more slice of pizza equals a soda b 1 soda c 1 5 sodas d 2 sodas e 3 sodas 3 6 At this income and prices of soda and pizza the optimal consumption bundle for Sparty is a 4 pizza 8 sodas b 8 pizza 0 sodas c 4 pizza 4 sodas d 2 pizza 12 sodas e 7 8 pizza 8 sodas Suppose the price of pizza falls to PPizza 2 Draw the new budget constraint The fall in the price of pizza causes the quantity demanded of pizza to increase by how many units a 6 b 14 c 3 d 18 e 12 8 The substitution effect of the price change increases the demand for pizza by how many units a 4 b 12 c 0 d 14 e 10 9 Go back to the original case where Sparty has an income of 64 PPizza 8 and PSoda 4 Now suppose that income doubles to 128 Draw the new budget constraint and determine the new optimal consumption bundle From this we can see that a Soda is a normal good and pizza is inferior b Soda is an inferior good and pizza is a normal good c Soda and pizza are perfect substitutes d Soda and pizza are both normal goods e Soda is a Giffen good and pizza is a luxury good 10 Suppose the price of an inferior good falls The impact of the price change on the quantity demanded is through the substitution effect and through the income effect Fill in the blanks a positive positive b positive negative c negative positive d negative negative 4 y r t n u o C r o o P y r t n u o C h c i R C M P C M P Q Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 D P 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 D P 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 The next six questions refer to the above graphs and the following scenario There are two countries the rich country and the poor country The graphs above illustrate the demand for oil in both countries Suppose the private marginal cost for oil is 2 a gallon and that there is perfect competition in the oil market Then with no government intervention the market price of oil is 2 a gallon You can see in the above graphs that in this case the rich country consumes 16 gallons and the poor country 8 gallons Total world consumption is then 24 gallons in the free market allocation There are no other countries Suppose science shows world consumption needs to be cut in half from 24 to 12 gallons to avoid a catastrophe The rest of these questions discuss various policies that will attain this goal 11 Suppose the two countries agree to each cut consumption in half and each country sets a tax on oil to do it What does the tax on oil in the poor country have to be to cut consumption from 8 to 4 gallons in the poor country a 6 b 2 c 8 d 4 e 10 12 What does the tax on oil in the rich country have to be to cut consumption from 16 to 8 gallons in the rich country a 8 b 4 c 12 d 6 e 10 5 13 Calculate the change in rich country total surplus from the tax assuming the rich country keeps the tax revenue collected from the tax and not …