Economics 101-300

Winter 2007
Midterm Examination
Form 1
February 21st, 2007
I am the person registered for this class and I am filling in my own scantron form and no other.
I have not conversed, exchanged notes, looked at other forms, allowed another student to look at my
form, or in any other way cheated while taking this examination.
I have not used a graphing calculator during this examination. I have used an arithmetic calculator
only (or none). I am not sharing calculators.
This examination, and the scantron form I am submitting, is solely my work.
_____________________________________________
Your first and last name, printed
_____________________________________________
Your signature
__________________________________
Your section number

GSI
Andres
Laura
Dan
Seb
Erik

Section Information
Section Number
302, 303
305, 307
304, 309
308
301, 306

Scratch paper for your use during the exam

Economics 101-300
Winter, 2007
Midterm Examination
February 21st, 2007
Form 1
READ ME
INSTRUCTIONS: Please do not talk with any other students and do not share papers or
calculators. Please take all cell phones off of the desk and turn off. Please remember to fill out
the honor code form and detach it from your exam. Please remember to fill in your UM ID
number, your discussion section number, and the form number of the exam on your scantron
sheet. We will not grade scantrons without names, UM id numbers, form numbers, and
section numbers (between 301 and 309).You will turn in only the honor code form and
your scantron form.
Please read each question carefully. Using the scantron form, fill in the letter that you choose
to be the correct answer. Please make sure that all of the appropriate identifying information
has been filled in on the scantron form. You may use the pages of the exam as scratch paper. If
you have a question, raise your hand and we will do our best to get to you quickly and answer
your question (if we can). Grades will be posted after spring break, sooner if it is possible.
Take your time, and good luck!
1) Which of the following is a positive (as opposed to a normative) statement?
a)
b)
c)
d)
e)

Competitive markets maximize efficiency but ought to promote equity as well.

Competitive markets should not lead to equality.
Unequally distributed income is a bad outcome.
A government tax on a good reduces efficiency.
Efficiency is highly overrated as an economic goal.

2) Which of the following will cause a shift in the supply curve in the domestic cell phone market?
I. Firms start to use cheap subcontractors abroad to produce phones.
II. A new technology becomes available to produce cell phones more cheaply.
III. Cell phones are shown to cause brain damage, therefore fewer people want them.
IV. The price of silicon (a vital component in cell phone manufacturing) increases.
a)
b)
c)
d)
e)

I only
II and III only
I and IV only
I, II, and IV only
IV only

3) Three weeks ago, the market for Economics 101 tutors was in equilibrium at a price of $30 per
hour and a quantity of 25 tutor hours. However, a number of students suddenly realized that
they had an exam coming up, and they wanted additional tutoring. Assuming an upward sloping
supply curve and a downward sloping demand curve (and no other changes), which of the
following price and quantity pairs could be the new equilibrium today as a result of this change?
a)
b)
c)
d)
e)

P = $45, Q = 20 tutor hours

P = $25, Q = 40 tutor hours
P = $30, Q = 45 tutor hours
P = $35, Q = 35 tutor hours
P = $25, Q = 15 tutor hours

4) Suppose the Ann Arbor city government wants to tax users of downtown entertainment to help
pay for new parking spaces. If the city imposes a tax on movie tickets and, as a result, the new
equilibrium price of movie tickets increases to $9.00, then, using the graph below and assuming
equilibrium before the tax, compute the revenues to the city government from the movie ticket
tax. How much will the revenue be?

P ($)
13

11

1
10

a)
b)
c)
d)
e)

$100
$50
$125
$75
$150

25

40

55

70

Movie tickets

5) The city of Ann Arbor imposes a $6,000 per car tax on any purchase of a sport utility vehicle
(SUV). What would be the deadweight loss from the tax if the market supply and demand
curves prior to the tax are as shown below?
P ($)
(thousands)
33

30

27

24

21

18

15
100

a)
b)
c)
d)
e)

200

300

400

500

SUVs

$200,000
$150,000
$300,000
$100,000
$500,000

6) The supply curve in the market for compact fluorescent light bulbs (CFL) is given by the
equation Qs = 30 + 15P. Many states, including Michigan, have implemented or proposed new
energy plans, which often include pamphlets praising the CFL. In the past year in Michigan,
while supply hasnt changed, demand has increased from Qd = 210 - 15P to Qd = 240 - 15P?
What is the increase in consumer surplus in the CFL market as a result.
a)
b)
c)
d)
e)

300
312.5
200
127.5
283.5

7) Caf Felix, a competitive coffee shop, wants to ensure that it maximizes profits. A recent
exploration of its production and cost data suggests that the firm may be doing otherwise. Caf
Felix asks you to advise them on what to do, given the following information:

Profit = 700
TC = 3500
AFC = 2
AVC = 3
MC = 8
a)
b)
c)
d)
e)

The firm should increase its price

The firm should shut down in the short run
The firm is now in the correct position
The firm should increase its output
The firm should decrease its output

8) Jen has $160 to spend on books and records this month. The table below shows Jens marginal
utility from both books and records. Books cost $40 each while records cost $20 each. How
should Jen spend her $160 on books and records in order to maximize utility?
Quantity
1
2
3
4
5
6
7
8
a)
b)
c)
d)
e)

Marginal
Utility of
Records
120
100
90
80
60
50
40
30

Marginal
Utility of
Books
100
80
60
50
40
20
15
10

2 books, 4 records
4 books, 0 records
1 book, 5 records
1 book, 6 records
0 books, 8 records

9) Sam has $20 in income, which he uses to purchase potatoes and clams, his only consumption
possibilities. The price of potatoes is $2 per pound and the price of clams is $4 per pound.
Which of the following bundles will Sam never buy if he is a utility maximizer?
a)
b)
c)
d)
e)

2 clams and 6 potatoes

4 clams and 2 potatoes
5 clams and 0 potatoes
3 clams and 4 potatoes
1 clam and 7 potatoes

10) This past year, two things have changed in the market for local produce on the Big Island of
Hawaii. First, local farmers banded together to promote locally-grown produce. These efforts
have been successful at getting restaurants to purchase more of their products. Secondly, Hawaii
was hit by an earthquake that damaged the reservoir, the main source of water to the farmers. As
a result, the price of water, an input used by farmers, increased. Thinking about the impact of
these two changes leads you to understand that the market price of local produce has
____________, while the quantity of local produce traded has _____________.
a)
b)
c)
d)
e)

Increased, changed indeterminately

Decreased, changed indeterminately
changed indeterminately, Increased
Increased, Decreased
Decreased, Increased

11) Laura and her officemates bought a pizza from In and Out and are trying to figure out how to
allocate the pizza amongst themselves. Which of the following would not be Pareto efficient?
a) They split the pizza evenly amongst themselves and everyone finished their share.
b) Todd just came back from the gym and claimed that he was starving. He hoarded the pizza
and ate the entire pizza by himself.
c) They split the pizza evenly. Dmitry decided that he didnt want to eat his portion right away
and put it in the refrigerator for later. He forgot about it and it was later thrown away by the
cleaning staff.
d) Josh and Dmitry ran away with the pizza and shared it between themselves, leaving Todd
and Laura hungry during class.
e) Mike visited their office. Since Laura was already full, she offered her leftovers to Mike,
which he gladly ate.
12) In an effort to reduce carbon dioxide emissions, the government wants to implement a policy
that reduces the quantity of SUVs sold in the U.S. If the graph below represents the competitive
market equilibrium, which of the following statements is false?
a) A price ceiling of $54,000 would reduce the quantity sold by 100.
b) A price floor of $56,000 would create a surplus of 200 SUVs.
c) A $2000 tax and a quota restricting quantity to 900 would result in the same amount of
reduction.
d) By implementing a $1000 tax, the government would raise $1 million in tax revenue.
e) A binding price floor would increase the quantity producers are willing to sell.

Market for SUVs

Price

56,000
55,000
54,000
D

900

1000

1100

Quantity

13) The following is the cost information for Le Dog, a hole in the wall hot dog vendor in Ann
Arbor. Le Dogs owner sees you in line with your economics textbook and offers you free lunch
if youll consult with the firm about its production. You open Le Dogs books and you see the
following information. When you look around town, you see that there is a hot dog trailer on
every corner and you surmise that the hot dog market is competitive. What do you tell Le Dog
to do to maximize profits?
Total Revenue = $65
Average Fixed Cost = $1.50
Producer Surplus = $60
Profit = $30
ATC is at a minimum
a)
b)
c)
d)
e)

Le Dog is producing the right quantity of hot dogs

Le Dog should increase its production of hot dogs
Le Dog should decrease its production of hot dogs
Le Dog should shut down immediately
There is not enough information to tell

14) Suppose Spam (a canned pork product) is considered an inferior good and that when the price of
Spam changes, the income effect is larger than the substitution effect. If this is the case, all of
the following are true except:
a)
b)
c)
d)
e)

A successful Spam advertising campaign will increase the demand for Spam.
The demand curve for Spam slopes upward.
Higher prices of Ham (a substitute pork product) will decrease demand for Spam.
Spam is a Giffen good.
An increase in consumer income will decrease the demand for Spam.

15) If the price of a good equals the minimum of long run average total cost, fixed costs are zero for
all firms in the industry, and labor is the only variable input in production, then all of the
following are true except:
a)
b)
c)
d)
e)

There will be no entry into the industry.

There will be no exit from the industry.
All firms make zero profit.
Output per worker is maximized.
Producer surplus for all firms is positive.

16) Suppose the supply curves for Coke and Pepsi are the same (i.e., firms that produce Coke and
Pepsi have the same cost structures), but the price-elasticity of demand of Coke is lower at any
given price than the price-elasticity of Pepsi. Assume downward sloping demand curves and
upward sloping supply curves. Which of the following sentences is true?
a) If the Government sets a certain excise tax in both markets, the deadweight loss in the
market for Coke will be greater than the deadweight loss in the market for Pepsi.
b) If the Government gives an identical subsidy in both markets, the deadweight loss in the
market for Coke will be smaller than the deadweight loss in the market for Pepsi.
c) At any given price, the quantity demanded of Coke will be lower than the quantity
demanded of Pepsi.
d) At any given price, the quantity demanded of Coke will be higher than the quantity
demanded of Pepsi.
e) None of the above is true.
17) It is believed that at Sebs current consumption level of cigarettes, the price elasticity of his
demand is 0.66. The price of cigarettes in Ann Arbor will increase from $5 per pack to $7 per
pack next month. If Seb is currently smoking 25 packs a month, how many packs per month
will Seb smoke after the price change? (Hint: use the midpoint formula)
a)
b)
c)
d)
e)

20
16
14
28
18

18) Laura wants to give her mother a gift and is thinking about buying her a new car. If she buys it
through the internet, the car will arrive the next day, and will cost $20,000. If, however, she
goes to the dealer, she will spend 2 hours of her time (which she values at $40 per hour) and $10
in gas, she will get the car on the same day at a price of $20,200. After analyzing these
alternatives, Laura, a rational consumer, chooses to purchase the car from a dealer. How much
does Laura value having the car one day earlier?
a)
b)
c)
d)
e)

At least $250
At least $290
At most $290
At most $250
Cannot tell from the information provided

19) Your brother is about to graduate from college and must choose between two job offers.
Chrysler has offered him a 2 year job which pays $50,000 today and $50,000 a year from today.
Ford has offered him a job that pays $70,000 today and $20,000 a year from today. Which
interest rate would induce your brother to choose the job at Ford?
a)
b)
c)
d)
e)

10%
25%
40%
55%
Your brother should choose the job at Chrysler irrespective of the interest rate because the
expected value is higher at any interest rate.

20) The government would like to impose a tax on cigarettes. Suppose that demand for packs of
cigarettes follows the equation Qd = 200 0.5P, and the supply of cigarettes follows the
equation Qs = 2P. If the government imposes a tax of $10 per pack, how many cigarettes will
be traded after the tax?
a)
b)
c)
d)
e)

160
164
170
180
156

21) Your total utility from hamburgers and bubble gum in a month can be summarized as follows:
Number of Burgers

Total Utility

Number of
Packs of Gum

Total Utility

1
2
3
4
5
6

10
20
27
32
34
35

1
2
3
4
5
6

1
2
3
4
5
6

The dormitory in which you live has 2 meal options. You can either pay a flat monthly fee of $12
and purchase hamburgers at a price of $2 each, or forgo the fee and purchase hamburgers at a price
of $5 each. Furthermore, the price of a pack of gum is $1.
Given this information, what would a utility maximizing consumer with a $25 monthly budget do?
a)
b)
c)
d)
e)

Pay the monthly fee, consume 6 hamburgers and spend the remaining money on bubble gum
Pay the monthly fee, consume 5 hamburgers and spend the remaining money on bubble gum
Pay the monthly fee, consume 4 hamburgers and spend the remaining money on bubble gum
Not pay the monthly fee, consume 5 hamburgers
Not pay the monthly fee, consume 4 hamburgers and spend the remaining money on bubble
gum

22) The market for screws is currently in long run equilibrium. The price of screws is $2 per screw
and each of the identical firms in the industry are producing 100 screws. If the AVC of each of
the firms at their current production level is $1.50, what would be each firms AFC if they were
to produce 500 screws?
a)
b)
c)
d)
e)

10 cents per screw

25 cents per screw
50 cents per screw
$1 per screw
Cannot tell from the information provided

23) Consider the market for health care. Suppose the demand for emergency health care is perfectly
price inelastic, while the demand for preventative health care is elastic. The two kinds of health
care are substitutes. The government has decided that it wants to reduce total expenditures
(whether the expenditure is made by the government, by consumers, or both) on emergency
health care. Which of the following policies can accomplish this?
a)
b)
c)
d)
e)

Subsidize emergency health care.

Increase taxes on emergency health care.
Increase taxes on preventative health care.
Subsidize preventative health care.
Impose a binding price floor on preventative health care.

24) Last week, the Intergovernmental Panel on Climate Change released a 21-page report for
policymakers where the group of climate experts unanimously linked -- with "90 percent"
certainty -- the increase of average global temperatures since the mid-20th century to the
increase of manmade greenhouse gases in the atmosphere.The report found it was "likely" -"more likely than not" in some cases -- that manmade greenhouse gases have contributed to
hotter days and nights, and more of them, more killer heat waves than before, heavier rainfall
more often, major droughts in more regions, stronger and more frequent cyclones and
"increased incidence" of extremely high sea levels (CNN, February 3rd, 2007). The Bush
administration wants to do its part to reduce automobile emissions, but Bush has publicly
admitted on TV that our nation is addicted to oil. If that is true, then the demand for gasoline
is perfectly price inelastic. Given this, and a regularly upward sloping supply curve, which of
the following policies would be successful in reducing gasoline consumption?
a)
b)
c)
d)
e)

The government imposes a binding price floor on gas.

The government imposes a binding price ceiling on gas.
The government raises taxes on gas sales.
The government begins to subsidize gasoline production.
The government reduces income taxes.

25) You are given the following information about Red Hot Lovers, a hot dog stand that has a fixed
cost of 200 and whose only variable input is employees:
Number of Hot Dogs
200
400
600
800
1000
1200

Employee Days Required

1
3
6
10
15
21

Red Hot Lovers is a price-taker in a competitive market. The current price of hot dogs is $2 per
dog. The current wage for employees is $90 per day. Based on this information, how many hot
dogs should Red Hot Lovers make to maximize its profits?
a)
b)
c)
d)
e)

200
400
600
800
1000