Econ 202 Principles of Microeconomics Spring 2014 University of Mississippi Prof David Fragoso Gonzalez Final Exam Practice Version Answer Key 1 1 25 pts Denise decides to spend three hours working overtime rather than watching a video with her friends She earns 10 an hour Her opportunity cost of working is a the 30 she earns working b the 30 minus the enjoyment she would have received from watching the video c the enjoyment she would have received had she watched the video d nothing since she would have received less than 30 of enjoyment from the video Explanation the opportunity cost of working is what you give up in order to work Denise gave up watching a video with her friends 2 1 25 pts Consider the graph below where the production possibilities frontier for two countries Genovia and Florin is represented Which of the following is true in the a Genovia has the comparative advantage in the production of both goods b Florin has the comparative advantage production of both goods c Genovia has the comparative advantage in the production of cars while Florin has the comparative advantage in the production of electronic goods d Genovia has the comparative advantage in the production of electronic goods while Florin has the comparative advantage in the production of cars Explanation The country with a comparative advantage in the production of a good is the country that faces the lowest opportunity cost of producing that good As you remember the opportunity cost of the good represented on the horizontal axis of a PPF graph electronic goods in this case is the slope of the PPF as the slope tells us how many units of the other good in this case cars each country is giving up on producing in order to produce one more unit of that good Florin s PFF is flatter than Genovia s which means that Florin must have a comparative advantage in the production of electronic goods Since the opportunity cost of making a car is equal to the inverse of the opportunity cost of making an electronic good it must be that Genovia s opportunity cost of making a car is lower than that of Florin s and so we know that Genovia has the comparative advantage in the production of cars 3 1 25 pts Specialization and trade a can only occur in a country if that country has an absolute advantage in some good b allow a country to consume outside its PPF c shift the PPF to the right d shift the PPF to the left Explanation When a country does not trade its consumption is equal to its production which means that consumption is represented graphically by a point sitting on the PPF line However trade creates gains that allow countries to consume outside of the PPF 4 1 25 pts The production possibilities frontier is used to illustrate some basic economic ideas including a scarcity explanation without scarcity an economy could produce any amount not just those limited by the economy s PPF b opportunity cost explanation opportunity cost is represented by the slope of the PPF in order to produce more of one good the economy is giving up on some units of the other c economic growth explanation we can illustrate economic growth on the PPF by shifting the PPF line d All of the above are correct 5 1 25 pts When economists make a positive statements they are speaking not as policy advisers but as scientists b positive statements they are speaking not as scientists but as forecasters c normative statements they are speaking not as policy advisers but as scientists d normative statements they are speaking not as policy advisers but as model builders 6 1 25 pts An increase in the price of a good will a increase demand b decrease demand c increase quantity demanded d decrease quantity demanded Explanation First note that an increase decrease in demand is represented by a shift of the demand curve to the left or to the right When price changes there is not shift in the curve just a movement ALONG the curve D is correct over C because of the law of demand when price goes up quantity demanded goes down along the curve 7 1 25 pts Which of the following would shift the demand curve for gasoline to the right a a decrease in the price of gasoline NO movement along the curve b an increase in consumer income assuming gasoline is a normal good c an increase in the price of cars a complement for gasoline NO shift to the left d a decrease in the expected future price of gasoline NO shift to the left as people will try to wait until price goes down 8 1 25 pts If an increase in income decreases the demand for a good then the good is a n a substitute good b complementary good c normal good d inferior good 9 1 25 pts You wear either shorts or sweatpants every day You notice that sweatpants have gone on sale so your demand for a sweatpants will increase NO the quantity demanded of sweatpants will increase not the demand b sweatpants will decrease c shorts will increase d shorts will decrease YES shorts and sweatpants are substitutes Since sweatpants are cheaper the demand for shorts will decrease 10 1 25 pts Holding all other things constant a higher price for ski lift tickets would a increase the number of skiers b increase the price of skis c decrease the number of skis sold d decrease the demand for other winter recreational activities Explanation Ski lift tickets and skis are complements if it is more expensive to use the lift fewer people will want to go skiing and therefore fewer skis will be sold 11 1 25 pts If Miguel expects to earn a higher income next month he may choose to a save more now and spend less of his current income on goods and services b save less now and spend more of his current income on goods and services c decrease his current demand for goods and services d move along his current demand curves for goods and services Explanation this question asks you to identify the role of expectations about the future Since Miguel expects to earn more he doesn t have to save as much and can spend more now 12 1 25 pts The law of supply states that other things equal when the price of a good a falls the supply of the good rises b rises the quantity supplied of the good rises c rises the supply of the good falls d falls the quantity supplied of the good rises 13 1 25 pts Suppose the number of buyers in a market increases and a technological advancement occurs also What would we expect to happen in the market a Equilibrium price would decrease but the impact on equilibrium quantity would be ambiguous b Equilibrium price would increase but the