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University of Michigan - ECON 101  Second Midterm Examination Economics 101     This exam has 30 questions

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University of Michigan - ECON 101 

Second Midterm Examination

Economics 101

 

 

This exam has 30 questions. Each question is worth 5 points.

 

Unless a question explicitly says otherwise, assume that all demand curves are linear and downward sloping, all supply curves are linear and upward sloping, and there are no tariffs.

 

For all questions, mark the best answer.

 

True/False

 

1. If the marginal cost curve is increasing then the average variable cost curve must also be increasing.
   1. True
   2. False 

 

2. A tariff on sugar harms domestic producers of sugar.
   1. True
   2. False 

 

3. Specialization and trade will allow a country to produce a bundle of goods that is beyond its own production possibility frontier.
   1. True
   2. False 

 

4. A firm’s average fixed cost does not depend on the level of output it produces. a. True

b. False 

 

5. It takes Barbara 3 hours to make a pie and 4 hours to make a shirt. It takes Gary 2 hours to make a pie and 5 hours to make a shirt. In order to maximize consumption, Barbara should specialize in making shirts and Gary should specialize in making pies, then they should trade. 
6. a.True

b. False

 

6. If a country imposes a tariff on an imported good and the good is still imported after the tariff is imposed, domestic sellers will gain producer surplus and the government will gain tariff revenue, but net benefits to domestic society as a whole will fall.
   1. True 
   2. False

 

 

7. Diminishing marginal product exists when the total product curve becomes steeper as the variable input increases in the short-run
   1. True
   2. False 

 

 

8. Suppose there are two people, John and Ron, and two goods, Colas and Pizza. In a given day, John can produce 400 colas or 200 pizzas while Ron can produce 200 colas or 400 pizzas. Under which of the following terms of trade will Ron and John NOT trade colas and pizzas with each other? Assume that John and Ron are willing to trade unless the trade makes them worse off. a. 1 Cola for ¼ Pizza 
   2. 1 Pizza for 1 Cola
   3. 1 Cola for ½ Pizza
   4. 1 Pizza for 2 Colas
   5. 1 Cola for 3/2 Pizzas  

 

 

10. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?
    1. The farmer is able to produce 4,600 bushels of wheat when he hires 4 workers
    2. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers
    3. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers
    4. All of the above are correct
    5. Only (a) and (b) are correct 

 

 

11. Consider the following simple two-country (A, B) and two-good (apples, bananas) economy. Consumption data for country A without trade and the gains from trade are given in the table below. With trade, fully specializing according to comparative advantage, country A exports 40 bananas and imports 40 apples. With trade, country A produces _________ bananas.

 

		Consumption Without Trade	Gains from Trade
Country  A	Apples	30	+ 10
	Bananas	60	+ 20

 

1. 1. 90
   2. 110
   3. 80
   4. 120
   5. 100

 

 

12. In 1985, the Coca-Cola Company was faced with soaring prices for cane sugar. A 1-cent increase in the price of cane sugar raised its total cost by $20 million. Rather than raise price, the company looked for a cheaper variable input and replaced cane sugar with corn sugar. Because corn was more plentiful in the United States, it was cheaper to produce. As a result of this switch, assuming they sold the same amount of drinks, the Coca-Cola Company’s 
    1. Total cost was lower, fixed cost was lower, and average variable cost was lower
    2. Average total cost was lower, average fixed cost was lower, and fixed cost was unchanged
    3. Variable cost was lower, average fixed cost was lower, and average variable cost was lower
    4. Total cost was lower, average fixed cost was unchanged, and variable cost was lower
    5. Total cost was lower, average fixed cost was lower, and marginal cost was lower

 

 

13. In the short-run, a firm’s marginal cost is equal to
    1. The change in total cost given a one unit increase in output
    2. The change in variable cost given a one unit increase in output
    3. The marginal factor cost divided by the marginal productivity of the variable input
    4. All the above are correct

e. Only (a) and (b) are correct

14. Production possibilities frontiers are usually bowed outward. This is because 
    1. The more resources a society uses to produce one good, the fewer resources it has available to produce another good.
    2. It reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced. 
    3. Resources are specialized; that is, some are better at producing particular goods rather than other goods 
    4. When a society produces more of one good, it necessarily must produce less of another goo

 

 

15. Suppose, at a given level of production in the short-run, a firm’s marginal cost is increasing, is greater than average variable cost, and is lower than average total cost. If the firm increases production, which of the following CANNOT be true at the higher level of output?
    1. Average total cost is higher than before 
    2. Average total cost is the same as before
    3. Average total cost is less than before
    4. Average variable cost is higher than before 
    5. Average variable cost is less than before 

 

 

16. When a country allows trade and becomes an importer of a good, which of the following would NOT be true?
    1. The price received by domestic producers of the good decreases.
    2. Domestic employment in that industry will increase.
    3. The losses of domestic producers exceed the gains of domestic consumers. d. All of the above

e. (b) and (c) 

 

 

17. Suppose both Canada and the United States can produce cars and wheat. The United States can produce either 30 units of wheat or 60 cars or some linear combination of the two. Canada can produce either 80 units of wheat or 40 cars or some linear combination of the two. Suppose that, after specialization and trade, the U.S. consumes 40 cars and 20 units of wheat and Canada consumes 60 units of wheat and some amount of cars. At what price would they trade cars for wheat in order for this set of consumption bundles to occur? (assume that they collectively produce and consume the maximum amount of cars and wheat possible)
    1. 1 car for ½ units of wheat
    2. 1 car for 1 unit of wheat 
    3. 1 car for 3/2 units of wheat
    4. 1 car for 2 units of wheat
    5. 1 car for 3 units of wheat

 

 

 

 

 

19. A firm is currently producing 200 units of output. The marginal cost for the last unit of output is $8. At that quantity, its marginal cost is between its average variable cost and its average total cost. Which of the following is a possible combination of its variable and fixed cost at that quantity?
    1. VC = $1,300; FC = $200
    2. VC = $1,400; FC = $150
    3. VC = $1,500; FC = $200 
    4. VC = $1,600; FC = $150
    5. VC = $1,700; FC = $100

 

 

 

 

 

 

 

 

 

21. Suppose that a worker in Oatland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Cornland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 20 workers in Oatland and 20 workers in Cornland. If the two countries do not trade, Oatland will produce and consume 400 bushels of corn and 100 bushels of oats, while Cornland will produce and consume 50 bushels of corn and 500 bushels of oats. If the two countries do trade, each will completely specialize in producing the crop for which it has a comparative advantage. If trade occurs, combined output for the two countries will increase by
    1. 800 bushels of corn and 1000 bushels of oats
    2. 400 bushels of corn and 500 bushels of oats
    3. 450 bushels of corn and 600 bushels of oats
    4. 350 bushels of corn and 400 bushels of oats 
    5. 400 bushels of corn and 350 bushels of oats
22. If a firm is experiencing diminishing marginal productivity from its variable input in the short-run at its current level of production, what must be true about the firm’s cost curves at that level of production?
    1. The average variable cost curve is upward sloping
    2. The average total cost curve is upward sloping
    3. The marginal cost curve is upward sloping  
    4. All of the above must be true
    5. Only (a) and (c) are correct

 

 

23. The United States has imposed tariffs on some imported goods that have been sold here by foreign countries at prices below the domestic cost of production. These tariffs
    1. Benefit the United States as a whole, because they generate revenue for the government. In addition, because the goods are priced below domestic cost, the tariffs do not harm domestic consumers.
    2. Benefit the United States as a whole, because they generate revenue for the government and increase producer surplus.
    3. Harm the United States as a whole because they reduce consumer surplus by an amount that exceeds the gain in producer surplus and government revenue. 
    4. Harm the United States as a whole because they reduce producer surplus by an amount that exceeds the increase in government revenue.

 

 

24. Average total cost equals
    1. Change in total costs divided by quantity produced.
    2. Change in total costs divided by change in quantity produced.
    3. (fixed costs + variable costs) divided by quantity produced.
    4. (fixed costs + variable costs) divided by change in quantity produce

 

 

25. Which of the following expressions is correct?
    1. Accounting profit = economic profit + implicit costs 
    2. Accounting profit = total revenue – implicit costs
    3. Accounting profit = economic profit – implicit costs
    4. Economic profit = accounting profit + explicit costs
    5. Economic profit = total revenue – implicit costs

 

 

 

 

 

 

 

 

 

 

26. Consider the following information for a particular firm in the short-run:

 

Quantity of Output	Variable Costs	Total Costs	Fixed Costs
0			$10
1	$1
2	3	$13
3	6	16
4	10
5		25
6	21		$10

 

The marginal cost of producing the sixth unit of output is:

1. 1. $1.00
   2. $3.50
   3. $5.00
   4. $5.50
   5. $6.00 

 

 

27. Eli owns a factory in which he has produced TVs for five years. He has kept track of his total cost as his level of production varies. This information is summarized below:

 

Output	Total Cost
10	$500
20	900
30	1200
40	1600
50	2100

 

From this information we can conclude that over this range of output

1. 1. Eli’s factory exhibits both economies and diseconomies of scale 
   2. Eli’s factory exhibits only diseconomies of scale.
   3. Eli’s factory exhibits only constant returns to scale
   4. Eli’s factory exhibits only economies of scale.

 

 

28. Suppose there are two people in the economy (John and Ron) and there are two goods that can be produced (Pizza and Cola). In a given day John can produce 10 pizzas or 40 colas and Ron can produce 6 pizzas or 12 colas. If John and Ron are allowed to trade with each other and both want to consume 4 pizzas each, what is the maximum amount of colas that they could collectively consume?
    1. 24
    2. 28
    3. 32 
    4. 40
    5. 52

 

29. The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for oranges. Suppose that the world price of oranges is $0.40 per orange lower than the domestic price.

Price of Orange	Quantity of Oranges Demanded (thousands)	Quantity of Oranges Supplied (thousands)
$1.00	2	11
0.90	4	10
0.80	6	9
0.70	8	8
0.60	10	7
0.50	12	6
0.40	14	5
0.30	16	4
0.20	18	3

 

If the U.S. opens up the orange market such that international trade exists, but imposes a tariff on imported oranges equal to $0.20 per orange. The amount of tax revenue that the U.S. government will receive for this tariff would be:

1. 1. $600
   2. $1,200 
   3. $2,000
   4. $2,400
   5. $6,000

 

 

30. Mark and Jeff operate a small company that produces souvenir footballs. Their fixed cost is $2,000 per month. They can hire workers for $1,000 per worker per month. Their monthly production function for footballs is as given in the accompanying table.

 

Quantity of Labor (workers)	Quantity of Footballs
0	0
1	300
2	800
3	1,200
4	1,400
5	1,500

 

If this firm decided to hire 2 workers, the average variable cost at that level of output would be_______ and the average fixed cost at that level of output would be_________  a. $1.25; $2.50

1. 2. $2.50; $2.50 
   3. $500; $1,000
   4. $500; $2,000
   5. $1,000; $2,000