Spring 2002 Multiple Choice

1. Spring 2002 Multiple Choice 1. Tiger Woods can mow the grass of a golf course in 2 hours. In these 2 hours he could be taping a commercial for Nike and earn US$100,000. Forrest Gump can mow the grass in 4 hours and in these 4 hours he could earn US$40 working at McDonald’s. A) Tiger Woods has an absolute advantage in mowing grass. B) Forrest Gump has a comparative advantage in mowing grass. C) They would trade if Tiger Woods pays Forrest Gump between US$40 and US$100,000. D) All of the above.

2. Spring 2002 Multiple Choice 1. Tiger Woods can mow the grass of a golf course in 2 hours. In these 2 hours he could be taping a commercial for Nike and earn US$100,000. Forrest Gump can mow the grass in 4 hours and in these 4 hours he could earn US$40 working at McDonald’s. A) Tiger Woods has an absolute advantage in mowing grass. B) Forrest Gump has a comparative advantage in mowing grass. C) They would trade if Tiger Woods pays Forrest Gump between US$40 and US$100,000. D) All of the above.

3. Spring 2002 Multiple Choice 2. England and Italy produce only butter and potatoes according to the following table: England Italy Butter (lbs. per unit of worker) 2 1 Potatoes (lbs. per unit of worker) 2 1 Number of workers 1000 3000 a. England has an absolute advantage in the production of butter and Italy has an absolute advantage in the production of potatoes; b. England has an absolute advantage in the production of potatoes and Italy has an absolute advantage in the production of butter; c. England has an absolute adv. in both the prod. of butter & potatoes; d. Italy has an absolute adv. in both the production of butter & potatoes.

4. Spring 2002 Multiple Choice 2. England and Italy produce only butter and potatoes according to the following table: England Italy Butter (lbs. per unit of worker) 2 1 Potatoes (lbs. per unit of worker) 2 1 Number of workers 1000 3000 a. England has an absolute advantage in the production of butter and Italy has an absolute advantage in the production of potatoes; b. England has an absolute advantage in the production of potatoes and Italy has an absolute advantage in the production of butter; c. England has an absolute adv. in both the prod. of butter & potatoes; d. Italy has an absolute adv. in both the production of butter & potatoes. Reason: England can produce more of each with the same number of resources. The number of workers is immaterial.

5. Spring 2002 Multiple Choice 2. England and Italy produce only butter and potatoes according to the following table: England Italy Butter (lbs. per unit of worker) 2 1 Potatoes (lbs. per unit of worker) 2 1 Number of workers 1000 3000 England & Italy will agree to trade if the price of 1 lb. of butter is: A) Between 1 & 2 lbs. of potatoes. B) Between 1/2 & 2 lbs. of potatoes. C) Between 1/2 & 1 lbs. of potatoes. D) None of the above.

6. Spring 2002 Multiple Choice 2. England and Italy produce only butter and potatoes according to the following table: England Italy Butter (lbs. per unit of worker) 2 1 Potatoes (lbs. per unit of worker) 2 1 Number of workers 1000 3000 England & Italy will agree to trade if the price of 1 lb. of butter is: A) Between 1 & 2 lbs. of potatoes. B) Between 1/2 & 2 lbs. of potatoes. C) Between 1/2 & 1 lbs. of potatoes. D) None of the above; the opportunity cost of the two is the same.

7. Spring 2002 Multiple Choice 4.The following table shows Lynn’s utility from days skiing: Total Days Skiing Total Utility 0 0 1 200 2 300 3 350 4 340 If each day skiing will cost Lynn $60 what will be her consumer surplus from skiing? a. 350 b.180 c. 170 d. We don’t know how many days Lynn will choose, so we cannot calculate C.S.

8. Spring 2002 Multiple Choice 4.The following table shows Lynn’s utility from days skiing: Total Days Skiing Total Utility 0 0 1 200 2 300 3 350 4 340 If each day skiing will cost Lynn $60 what will be her consumer surplus from skiing? a. 350 b.180; CS = TU - TE = 300 - 120 = 180 for Q=3 c. 170 d. We don’t know how many days Lynn will choose, so we cannot calculate C.S.

9. Spring 2002 Multiple Choice 5. Which of the following could not shift out the market demand curve for a good? a) Increase in income of the population. b) Increase in price of the good. c) Increase in population. d) Increase in the price of substitutes for the good.

10. Spring 2002 Multiple Choice 5. Which of the following could not shift out the market demand curve for a good? a) Increase in income of the population. b) Increase in price of the good. c) Increase in population. d) Increase in the price of substitutes for the good. Reason: a change in the price of a good results in a shift along the demand curve, not a shift of the demand curve.

11. Spring 2002 Multiple Choice 6.If the supply curve is perfectly inelastic and the demand curve has an elasticity (in absolute value) of 0.7 and we impose a per-unit tax in this market on the demand side, then: a. Consumers and Producers share the burden of the tax. b.Consumers pay the whole tax, while producers do not pay anything. c. Producers pay the whole tax, while consumers do not pay anything. d.None of the above.

12. Spring 2002 Multiple Choice 6.If the supply curve is perfectly inelastic and the demand curve has an elasticity (in absolute value) of 0.7 and we impose a per-unit tax in this market on the demand side, then: a. Consumers and Producers share the burden of the tax. b.Consumers pay the whole tax, while producers do not pay anything. c. Producers pay the whole tax, while consumers do not pay anything. Reason: supply perfectly inelastic. d.None of the above.

13. Spring 2002 Multiple Choice 7. Suppose that the supply and the demand for blank CDs can be characterized by: Supply: Qs = 100 + 3P Demand: Qd = 160 – P where Qsis the supply of CDs, and Qd is the demand for CDs. What is the equilibrium price? a. $10 b. $30 c. $15 d. $75

14. Spring 2002 Multiple Choice 7. Suppose that the supply and the demand for blank CDs can be characterized by: Supply: Qs = 100 + 3P Demand: Qd = 160 – P where Qsis the supply of CDs, and Qd is the demand for CDs. What is the equilibrium price? The equilibrium price is a P such that Qs(P)= Qd(P), or 100 + 3P = 160 – P 4P = 60 P = 15.

15. Spring 2002 Multiple Choice 8. Suppose that the supply and the demand for blank CDs can be characterized by: Supply: Qs = 100 + 3P Demand: Qd = 160 – P where Qsis the supply of CDs, and Qd is the demand for CDs. If a tax of $5 is imposed per CD, the number of CDs purchased after the tax will be: a. Less than 145 CDs. b. 145 CDs. c. More than 145 CDs. d. We do not have enough information to answer this.

16. Spring 2002 Multiple Choice 8. Suppose that the supply and the demand for blank CDs can be characterized by: Supply: Qs = 100 + 3P Demand: Qd = 160 – P where Qsis the supply of CDs, and Qd is the demand for CDs. If a tax of $5 is imposed per CD, the number of CDs purchased after the tax will be: At a price of $15, without tax there would be Qs(15) = Qd(15)= 100 + 3*15 = 145 Taxes will reduce the number bought, so less than 145 CDs will be bought.

17. Spring 2002 Multiple Choice 9. Which one of the following could not occur if there was a price ceiling on a good? A).A surplus would develop B).Equilibrium price would be below the ceiling C).A black market would arise D).Less firms would enter the industry

18. Spring 2002 Multiple Choice 9. Which one of the following could not occur if there was a price ceiling on a good? A).A surplus would develop B).Equilibrium price would be below the ceiling C).A black market would arise D).Less firms would enter the industry Reason: a surplus only occurs when the quantity supplied is greater than the quantity demanded. Normally, this would cause prices to drop, and a price ceiling won’t prevent this. A price floor would.

19. Spring 2002 Multiple Choice 10. In January, 2,500 quarts of ice cream are sold in Boston at $2 a quart. In February, the price went down by 10% and the quantity sold increased by 2%. This means that the price elasticity for ice cream (disregarding the minus sign) is: A. 1 B. .2 C. 2 D. .1

20. Spring 2002 Multiple Choice 10. In January, 2,500 quarts of ice cream are sold in Boston at $2 a quart. In February, the price went down by 10% and the quantity sold increased by 2%. This means that the price elasticity for ice cream (disregarding the minus sign) is: A. 1 B. .2 Elasticity = %DQ/%DP = 2/10 C. 2 D. .1

21. Spring 2002 Multiple Choice 11. A consultant has suggested that the Eatwell food truck lower its prices to increase revenue. The consulted must be assuming that: a. The food at Eatwell has close substitutes and thus demand elasticity is greater than 1. b. The food at Eatwell has few close substitutes and thus demand elasticity is greater than 1. c. The food at Eatwell has close substitutes and thus demand elasticity is less than 1. d. The food at Eatwell has few close substitutes and thus demand elasticity is less than 1.

22. Spring 2002 Multiple Choice 11. A consultant has suggested that the Eatwell food truck lower its prices to increase revenue. The consulted must be assuming that: a. The food at Eatwell has close substitutes and thus demand elasticity is greater than 1. b. The food at Eatwell has few close substitutes and thus demand elasticity is greater than 1. c. The food at Eatwell has close substitutes and thus demand elasticity is less than 1. d. The food at Eatwell has few close substitutes and thus demand elasticity is less than 1.

23. Spring 2002 Multiple Choice 12. One of the benefits of the market system in allocating goods is that: a. Everyone who can produce a good produces it. b. Everyone who wants a good buys it. c. Consumers who value the good the most buy it. d. Producers with the highest opportunity costs produce it.

24. Spring 2002 Multiple Choice 12. One of the benefits of the market system in allocating goods is that: a. Everyone who can produce a good produces it. b. Everyone who wants a good buys it. c. Consumers who value the good the most buy it. d. Producers with the highest opportunity costs produce it.

25. Spring 2002 Short Answer 1. Over the Christmas shopping season of 2000 a local department store sold 250 scarves at $35 each. The following year (2001) they sold only 220 scarves despite a lower price of $30 each. Use the general model of supply & demand curve to explain this change by answering the following questions: a. Draw typical Supply & Demand curves for scarves with an equilibrium price & quantity that reflect the situation in year 2000. b. What shift of the demand curve is consistent with the change between 2000 & 2001? Show this graphically & explain. c. Suppose that only thing that changed between 2000 & 2001 is that incomes declined. What does this imply about income elasticity? Is this a normal or an inferior good? d. Now suppose incomes did not change between 2000 & 2001. What other reason may cause the shift in demand you described in part b? e. Could the changes from 2000 to 2001 be explained by a shift of the supply curve alone? Explain.

26. Spring 2002 Short Answer 1. Over the Christmas shopping season of 2000 a local department store sold 250 scarves at $35 each. The following year (2001) they sold only 220 scarves despite a lower price of $30 each. Use the general model of supply & demand curve to explain this change by answering the following questions: a. Draw typical Supply & Demand curves for scarves with an equilibrium price & quantity that reflect the situation in year 2000. Answer: graph a supply & demand that intersect at Q=250 & P=35 6 points as follows: • D & S curves: 2 points • Label Axis (ex: P & Q; $ & scarves): 2 points • Show correct equilibrium (Q=250, P=35): 2 points.

27. Spring 2002 Short Answer 1. Over the Christmas shopping season of 2000 a local department store sold 250 scarves at $35 each. The following year (2001) they sold only 220 scarves despite a lower price of $30 each. Use the general model of supply & demand curve to explain this change by answering the following questions: b.What shift of the demand curve is consistent with the change between 2000 & 2001? Show this graphically & explain. Answer: In the new equilibrium prices are lower but quantity demanded is lower too, this is consistent with a shift in of the D-curve. 5 points as follows: • New D-curve: 2 points • New equilibrium: 2 points • Explanation: 1 point.

28. Spring 2002 Short Answer 1. Over the Christmas shopping season of 2000 a local department store sold 250 scarves at $35 each. The following year (2001) they sold only 220 scarves despite a lower price of $30 each. Use the general model of supply & demand curve to explain this change by answering the following questions: c. Suppose that only thing that changed between 2000 & 2001 is that incomes declined. What does this imply about income elasticity? Is this a normal or an inferior good? Answer: We see that as income declined demand shifted in. That means that income elasticity is positive so this is a normal good. Note that E(I)=%Q/%I, here both numerator & denominator are negative so that E(I) must be positive. 5 points as follows: • Income elasticity positive: 3 points (1 for stating fact, 2 for explanation as above) • Normal good: 2 points.

29. Spring 2002 Short Answer 1. Over the Christmas shopping season of 2000 a local department store sold 250 scarves at $35 each. The following year (2001) they sold only 220 scarves despite a lower price of $30 each. Use the general model of supply & demand curve to explain this change by answering the following questions: d. Now suppose incomes did not change between 2000 & 2001. What other reason may cause the shift in demand you described in part (b)? Answer: Thee are many possible correct answers here. Examples include: A change in the taste for scarves such as a decline in their trendiness, global warming and there by a reduced need for scarves. 5 points as follows: • 3 for a possible change • 2 for relating that change to the correct shift in demand. • Clarification: An answer that states that tastes changes without explaining in which direction would get only 3 points.

30. Spring 2002 Short Answer 1. Over the Christmas shopping season of 2000 a local department store sold 250 scarves at $35 each. The following year (2001) they sold only 220 scarves despite a lower price of $30 each. Use the general model of supply & demand curve to explain this change by answering the following questions: e. Could the changes from 2000 to 2001 be explained by a shift of the supply curve alone? Explain. Answer: No. If only supply changed we would have to get from the original equilibrium to the new one by moving along the demand curve. And that would mean D-curve is upward sloping which contradict our assumptions. 5 points as follows: • 2 for this would mean a movement along D-curve (or similar notion) • 3 for rest of logic. • Note: If you wrote ‘yes, as long as demand is upward sloping’ you can get a maximum of 4 points here.

31. Spring 2002 Short Answer 2. Italy has three workers. They can all produce wine and/or beer but they have different abilities, according to the following table: ITALY Worker 1 Worker 2 Worker 3 Wine (barrels) 1 1 4 Beer (Kegs) 2 5 1 a. Draw Italy’s PPF. (Explain briefly). b. What is the opp. cost of increasing the prod of wine from 2 to 3 barrels? c. Suppose that in Italy wine and beer are consumed in equal amounts. Identify the consumption point in the PPF graph derived in part a above. (Explain briefly.) d. Suppose Spain (a country that also produces wine & beer) is prepared to trade with Italy at a price of 2 barrels of wine for every keg of beer. Would Italy agree to trade? Would it change its production point (and if so, to what)? Would it export or import wine from Spain? Explain.

32. Spring 2002 Short Answer 2. Italy has three workers. They can all produce wine and/or beer but they have different abilities, according to the following table: ITALY Worker 1 Worker 2 Worker 3 Wine (barrels) 1 1 4 Beer (Kegs) 2 5 1 a. Draw Italy’s PPF. (Explain briefly). 6 Points as follows: • 2 points for any PPF (as long as axis correct) • 2 extra pints for correct PPF • 2 points for explanation/calculation etc. beer 8 7 5 ITALY 4 5 6 wine

33. beer 8 7 5 ITALY 4 5 6 wine Spring 2002 Short Answer 2. Italy has three workers. They can all produce wine and/or beer but they have different abilities: ITALY Worker 1 Worker 2 Worker 3 Wine (barrels) 1 1 4 Beer (Kegs) 2 5 1 b. What is the opportunity cost of increasing the production of wine from 2 to 3 barrels? Answer: As you increase production of wine from 2 to 3 barrels you must shift an extra part of worker #3 from beer making to wine making. Specifically you must give up ¼ of his time making beer, so you give up ¼ barrels of beer. The O.C. of wine at that point is therefore ¼ kegs of beer. 6 points as follows: • 2 for correct answer. • 4 for explanation (either algebraic, graphic or in words as above).

34. Beer=wine beer 8 7 5 ITALY Spring 2002 Short Answer 2c. Suppose that in Italy wine and beer are consumed in equal amounts. Identify the consumption point in the PPF graph derived in part a above. (Explain briefly.) Answer: Italy would produce & consume 5 barrels of wine and five barrels of beer. You can see this by either finding the intersection of the 45-degree line with the PPF, or by noting that if workers 1& 3 produce wine and worker 2 produces beer we have 5 units of each. This point must be indicated in the PPF correctly. 6 points as follows: • 2 for (5,5) • 2 for adding it to PPF as requested • 2 points for explanation (graphic or algebraic). Consumption point 4 5 6 wine

35. Beer=wine beer 8 7 5 ITALY Spring 2002 Short Answer d. Suppose Spain (a country that also produces wine & beer) is prepared to trade with Italy at a price of 2 barrels of wine for every keg of beer. Would Italy agree to trade? Would it change its production point (and if so, to what)? Would it export or import wine from Spain? Explain. Answer: Yes. Italy would be prepared to trade. Italy would now produce wine with worker #3 as their O.C. of wine is greater that the price ratio of 2 wine to 1 beer (or 1 wine to ½ beer). Workers 1 & 2 would produce beer. Italy is now producing 4 units of wine & 7 units of beer. In order to continue the consumption at a ratio of 1:1 it must sell (or export) beer and buy (or import) wine. 8 points as follows: • 2 for yes to trade. • 2 for new production point (4 wine, 7 beer) • 2 for explanation of how to get new production point • 2 points for Italy exporting beer Consumption point 4 5 6 wine