ECON1001 – Introductory Microeconomics

Mid-semester exam sample

Section 1 (multiple choice):

1. Beer and wine are two substitute products that are both sold in a competitive market. Barley is an essential ingredient in the production of beer; grapes are an input into making wine.

We observe that when price increases in both the beer and wine market, the quantity traded of beer falls and there is an increase in the quantity traded in the wine market.

Which of the following scenarios is consistent with the observation in the two markets, outlined above?

a. Recent years of new plantings increase the supply of wine-quality grapes.

b. A bumper year with perfect conditions in the grain growing regions increases yields of barley.

c. A health campaign by the Federal government has the effect of curtailing beer consumption.

d. Drought conditions reduce the barely yields in grain growing regions.

e. A successful advertising campaign results in people willing to buy more beer.

The following information applies to questions 2-5.

Consider an economy with just two people, Jack and Jill, who can make only two goods: x and y. Jack takes two hours to make a unit of good x and takes four hours to make a unit of y. Jill on the other hand takes one hour to make a unit of x and three hours to make one unit of y. Each individual has 10 hours of time in total in which they can work.

2. If there is no trade between Jack and Jill, what is Jack’s total consumption of good x if he consumes only one unit of y?

a. 0 units of x.

b. 1 unit of x.

c. 2 units of x.

d. 3 units of x.

e. 4 units of x.2

3. Which of the following statements is true?

a. Jill has a comparative advantage in producing x.

b. Jack has an absolute advantage in producing x.

c. Jack has a comparative advantage in producing both goods.

d. Jack’s opportunity cost of producing 2 units of x is forgoing 2 units of y.

e. Jack has a comparative disadvantage in producing y.

4. If Jill and Jack are allowed to trade with each other, which statement is true?

a. The price of x will be between 1/4 unit of y and ½ a unit of y.

b. The price of x will be between ½ a unit of y and 2 units of y.

c. The price of x will be between 2 and 3 units of y.

d. No price exists for which trade is mutually beneficial.

e. The price of y will be between 2 units of x and 3 units of x.

5. Now suppose that, following some training from a knowledgeable relative, Jill can now produce 1 unit of good y in 2 hours. If nothing else changes, which of the following statements is true?

a. There are gains from trade to be realised if Jill and Jack specialise in producing goods y and x, respectively.

b. Jack has an absolute advantage in producing good x but not good y.

c. Jill has a comparative advantage in producing good x but has an absolute disadvantage in producing y.

d. There are gains from trade provided Jill specialises in producing good x and Jack specialises in producing good y.

e. There are no potential gains from trade.

6. “I love you so much I missed mum’s goulash to be with you.”

In economic terms, the lover talks about:

a. Scarcity.

b. Market equilibrium.

c. Opportunity cost.

d. Comparative advantage.

e. Elasticity.

7. Let demand be represented by qd = 16 – P, where qd is the quantity demanded and P is the price in dollars. Let supply be represent by qs = 3P, where qs is the quantity supplied.

Calculate the consumer and producer surplus.

a. Consumer surplus is smaller than producer surplus.

b. Consumer surplus and producer surplus are the same.

c. Consumer surplus and producer surplus are both bigger than $30.

d. Consumer surplus is $72 and producer surplus is $24.

e. Consumer surplus is $42 and producer surplus is $27.

8. Consider the following demand and supply curve for gummy bears:

Qd = 20-P

Qs = P

Suppose a $4 tax is imposed on consumers. Which of the following is true?

a. Producers do not bear any of the economic incidence of the tax.

b. The price sellers receive is $12.

c. The deadweight loss of the tax is $4.

d. The quantity of gummy bears traded in the market does not change.

e. The tax revenue is $64.

9. The total cost function of a firm that makes tea cosies is: TC = 100+q2 . Which of the following is correct?

a. ATC = 100+q

b. AVC = q

c. MC = q2

d. MC = 2

e. ATC = 100

10. Suppose a firm has a constant marginal cost and positive fixed cost. Which of the following statements is true?

a. The firm's Average Total Cost curve is U-shaped

b. The firm's Average Fixed Cost curve is upward sloping

c. The firm's Average Total Cost can be lower than its MC.

d. The firm's Average Variable Cost curve is constant

e. None of the above.

11. Suppose a demand curve is unit elastic at every point. Then:

a. The slope is of the curve is constant at every point.

b. The demand curve is not a straight line.

c. There is a price for with the quantity demanded is equal to zero.

d. A 1% increase in price results in a more than 1% increase in quantity demanded.

e. The demand curve is not downward sloping.4

Section 2 (short answer):

Question 1 (10 marks)

Planer Mungo is populated by one hundred identical clones who only consume pomegranates. Each one demands pomegranates according to the equation P = 60 – 150qd.

(i) What is the market demand for pomegranates (QD) in planet Mungo? Show your reasoning. Represent it in a well-labelled diagram. (2 marks)

(ii) A wide variety of pomegranate sellers from all around the galaxy (including three from Wollongong) are willing to provide pomegranates to planet Mungo according to the market demand equation P = 10 + QS. Represent it in the diagram. (3 marks)

(iii) Find the market equilibrium, the consumer surplus and the producer surplus. Represent them in the diagram. (3 marks)

(iv) Find the point (price and quantity demanded) for which a 1% change in price results in a 2% change in quantity demanded. (2 marks)

Question 2 (5 marks)

Over time, the population of planet Mungo increases due to advances in cloning technology. Each of the new clones also has an individual demand curve of P = 60 – 150qd.

A supercomputer from planet Zadro calculates that when price of pomegranates equals 0, the quantity demanded in the market reaches 60. When the price of pomegranates equals 60, the quantity demanded in the market is 0.

(i) Find the new market demand and the new market equilibrium. (2 marks)

(ii) By how much has the population increased? (3 marks)