SL 151 Bremmer I Name CM December 19 2008 1st In Class Exam Chapters 1 4 6 pp 603 609 and pp 609 614 Part I Multiple Choice 3 points each For each of the following questions indicate the best answer in the space provided 1 A B C D E As price falls along a linear negatively sloped demand curve total revenue always increases the price elasticity of demand increases the price elasticity of demand remains constant the price elasticity of demand decreases total revenue always decreases 2 A B C D E If a linear positively sloped supply curve cuts the vertical price axis then at every point on the supply curve the price elasticity of supply is greater than one and supply is elastic the price elasticity of supply is greater than one and supply is inelastic the price elasticity of supply is less than one and supply is inelastic the price elasticity of supply is less than one and supply is elastic the price elasticity of supply is equal to one and supply is unitary elastic 3 Given a perfectly inelastic demand curve and an upward sloping linear supply curve if a price floor is set above the equilibrium price then it would not be binding and there is no surplus or shortage the resulting shortage will be greater the more elastic the supply the resulting shortage will be greater the less elastic the supply the resulting surplus will be greater the more elastic the supply the resulting surplus will be greater the less elastic the supply A B C D E 4 A B C D E Which of the following statements is true If the cross elasticity of demand is negative then the two goods are substitutes If the income elasticity of demand is negative then the good is a normal good If demand is inelastic then a decrease in price results in an increase in total revenue Both the price elasticity of demand and the price elasticity of supply will increase the longer the time period If a product has many substitutes its price elasticity of demand will be smaller 5 A B C D E Which of the following would cause a decrease in the demand for good X An increase in the price of X An increase in population An increase in the price of good Y assuming goods X and Y are substitutes An increase in income assuming good X is a normal good An increase in the price of good K assuming good X and K are complements 6 Assume both the equilibrium price and the equilibrium quantity fall Which of the following best explain this phenomenon Given a perfectly elastic supply curve a decrease in demand A simultaneous increase in demand and decrease in supply A simultaneous decrease in both demand and supply A simultaneous increase in both demand and supply A decrease in supply A B C D E 7 A B C D E Assume a country produces guns and butter and it has a bowed out concave production possibilities curve The shape of its production possibilities curve implies resources are specialized and to produce more guns society must sacrifice larger and larger amounts of butter resources are specialized and opportunity costs decrease as production of a good increases resources are not specialized and they can freely move between production of guns and butter opportunity costs are constant Both C and D Page 1 8 A B C D E Which of the following would cause the production possibilities curve to shift out A decrease in the unemployment rate A decrease in the labor supply A decrease in the supply of natural resources An increase in the educational attainment of the work force Both A and D 9 Which of the following statements is true A Given current resources and current technology society cannot produce a point inside its production possibilities curve B Given current resources and current technology society can produce a point above its production possibilities curve but to do so would imply unemployed resources C Holding everything else constant if a country is at full production and full employment then it can produce more of both goods D Free trade allows a country to consume a bundle of goods that lies above its production possibilities curve E None of the above statements are true 10 A B C D E Assume the U S takes the world price of crude as given and it imports crude oil If the price of oil increases U S consumers will buy more oil U S oil imports will increase U S oil producers will increase output All of the above None of the above 11 Given a perfectly elastic supply curve and a straight line downward sloping demand curve if the government gives producers a 1 per unit subsidy A the equilibrium price will fall by more than 1 B the equilibrium price will fall by less than 1 C the equilibrium price will rise by exactly 1 D the equilibrium price will fall by exactly 1 E the equilibrium price won t change 12 A B C D E Raising the minimum wage will raise the incomes of all low wage workers lower the incomes of all low wage workers increase the demand for labor decrease the quantity of labor supplied raise the wages of some low wage workers and cause other low wage workers to become unemployed 13 A B C D E If country A has a comparative advantage in the production of good X over country B then the opportunity cost of producing X in country A is higher than in country B the opportunity cost of producing X in country A is lower than in country B before trade country A produces more of good X than country B country A s after trade consumption possibilities curve lies below its production possibilities curve free trade makes country A better off and country B worse off 14 A B C D E If the government wished to reduce the quantity of a product it could set a price ceiling for the product above the current equilibrium price set a price floor for the product above the current equilibrium price set a price floor for the product below the current equilibrium price give a subsidy to producers of this product give a subsidy to producers of a substitute product 15 Suppose a 0 50 excise tax is placed on cigarettes Under what circumstances will cigarette producers pay the full amount of the tax A When supply is perfectly elastic B When demand is perfectly inelastic C When supply is perfectly inelastic D When the demand curve is downward sloping and the supply curve is upward sloping E When the price elasticity of supply equals infinity at every point on the supply curve Page 2 Part II Short Answer Questions 55 points total For each of the following questions give a concise but complete answer When appropriate use math graphs or equations to help explain your answer Completely label all