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#### University of Michigan - ECONOMICS 101 Name:___________________________________ Second Midterm Examination Economics 101 November  2013   This exam has 30 questions

University of Michigan - ECONOMICS 101

Name:___________________________________

Second Midterm Examination

Economics 101

November  2013

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

Unless a question explicitly says otherwise, assume that all demand curves slope downward and all supply curves slope upward.

True/False

1. An increase in consumer demand for a good will cause an outward shift in the PPF a.True

b. False

1. Suppose the government establishes a tax of 10% on all consumption goods. Adam earns \$10,000 per year and spends all his income on consumption goods. Kate earns \$20,000 per year and spends 50% of her income on consumption goods. This tax would be considered a proportional tax.
1. True
2. False

1. If a tariff is placed on imported watches and the world price plus the tariff is less than the domestic price that would exist in the absence of trade, the price of domestically produced watches will rise by the amount of the tariff.
1. True
2. False

1. Jonathan can make a bird house in 3 hours. He can make a bird feeder in 1 hour. The opportunity cost to Jonathan of making a bird house is 1/3 bird feeder.
1. True
2. False

1. If producers attempt to pass the full amount of a tax increase onto consumers by raising the price by the full amount of a tax, they will be left with unwanted inventories of the good. a. True

b. False

1. Suppose that a firm can hire a unit of labor for \$5 per hour and a unit of capital for \$10 per hour regardless of how many units of labor or capital they hire. Initially, the firm is hiring 8 units of labor and 8 units of capital each hour and is producing 60 units of output each hour. The firm then decides to cut all of its inputs in half. When they do so, they end up producing 40 units of output per hour. Over this range of output, the firm is experiencing economies of scale.  a.True

b. False

1. If the statutory incidence of a tax falls on demanders instead of suppliers, then all the economic outcomes of the tax will be the same except the quantity demanded will be lower relative to the case where the statutory incidence falls on suppliers.
1. True
2. False

1. If the United States decreases the tariff on imported tuna steaks, this will
1. Reduce the number of tuna steaks imported into the United States and reduce production of tuna steaks in the United States
2. Increase the number of tuna steaks imported into the United States and increase the production of tuna steaks in the United States.
3. Reduce the number of tuna steaks imported in the United States and increase the production of tuna steaks in the United States
4. Increase the number of tuna steaks imported in the United States and reduce the production of tuna steaks in the United States

1. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. For many years the two countries traded, each completely specializing in producing the grain for which it has a comparative advantage. Now, however, war has broken out between them and all trade has stopped. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. By how much has the combined yearly output of the two countries declined?
1. 10 units of corn and 10 units of wheat
2. 20 units of corn and 20 units of wheat
3. 30 units of corn and 30 units of wheat
4. 40 units of corn and 40 units of wheat
5. 60 units of corn and 60 units of wheat

1. Which of the following statements DOES NOT correctly describe the relationship between production costs:
1. The average total cost at Q = 10 is the sum of the average variable cost at Q = 10 and the average fixed cost at Q = 10.
2. The total cost at Q = 10 is the fixed cost at Q = 10 plus the sum of the marginal costs for each of the 10 units.
3. The marginal cost at Q = 10 is the difference between the total cost at Q = 10 and the total cost at Q = 9
4. The marginal cost at Q = 10 is the sum of the variable costs for each of the 10 units.
5. The marginal cost at Q = 10 is the difference between the variable cost at Q = 10 and the variable cost at Q = 9

1. Consider the following supply and demand schedules for a particular good:
 Price of the Good Quantity Demanded Quantity Supplied \$10 0 60 9 10 50 8 20 40 7 30 30 6 40 20 5 50 10 4 60 0 3 70 0 2 80 0 1 90 0

If a \$4 per-unit tax was imposed on this good, then the portion of the tax revenue paid for by suppliers would be ______________ and the portion paid for by consumers would be_______ a. \$20, \$20

1. \$30, \$10
2. \$10, \$30
3. \$40, \$40
4. \$100, \$100

1. Adam owns a firm. His fixed cost is \$100 per day. His only variable cost is labor and he pays each of his workers \$40 a day. The average variable cost at the 9th unit produced each day is \$9. In order to produce a 10th unit, Adam must hire a new worker. The marginal productivity of this worker is 4 units per day. What is the average total cost at the 10th unit produced? a. \$9.1
1. \$14.9
2. \$19.1
3. \$19.5
4. \$20

1. Suppose that policymakers are considering placing a tax on either of two markets. Assume the equilibrium price and quantity are the same in both markets prior to the tax and that the tax rate is the same in both markets. In Market A, the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the same tax will have only a small effect on the price consumers pay, but it will have a large effect on the equilibrium quantity. In which market will the tax have a larger deadweight loss? a. Market A
1. Market B
2. Deadweight loss will be the same in both markets
3. There is not enough information to answer the question

1. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Suppose that Mike wants to consume 3 tables and sandy wants to consume 3 tables and 12 chairs. At what price will they trade tables for chairs?
1. 1 Chair for each Table
2. ½ Chairs for each Table
3. 4 Chairs for each Table
4. 1 Chair for .75 Tables
5. They would not be able to consume these bundles

1. Suppose a tax is imposed on labor. Relative to a nearly horizontal labor supply curve, a labor supply curve that is nearly vertical:
1. Will result in a larger deadweight loss
2. Will raise a smaller amount of tax revenue
3. Will have a smaller impact on the quantity supplied of labor
4. All of the above
5. Both (b) and (c) are correct

1. The difference between production possibilities frontiers that are bowed out and those that are linear is that
1. Bowed out production possibilities frontiers illustrate tradeoffs where linear production possibilities frontiers do not
2. Bowed out production possibilities frontiers show decreasing opportunity cost where linear ones show constant opportunity cost
3. Bowed out production possibilities frontiers are the result of perfectly shiftable resources where linear production possibilities frontiers are not
4. Bowed out production possibilities frontiers show increasing opportunity cost where linear ones show constant opportunity cost
5. Both (b) and (c) are correct

1. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that consumer surplus in Aquilonia is now higher for
1. Steel, lower for incense, and the same for rugs
2. Incense and steel, but not rugs
3. Incense and rugs, but not steel
4. Steel and rugs, but not incense
5. Incense, lower for steel, and the same for rugs

1. Consider the following information:
 Worker Marginal Product 1 5 2 7 3 10 4 11 5 8 6 6 7 4

Assume that all workers are paid the same wage and that labor is the only variable cost. From this information we can conclude that the firm’s marginal cost in the short-run

1. Declines as output increases from 0 to 33, but increases after that
2. Declines as output increases from 0 to 11, but increases after that
3. Increases as output increases from 0 to 11, but declines after that
4. Continually increases as output increases

1. If two firms are identical in all respects except that one has more capital than another, the total product curve for the firm with more capital:
1. Must equal the total product curve for the firm with less capital
2. Will lie above the total product curve for the firm with less capital
3. Will lie below the total product curve for the firm with less capital
4. Will show no diminishing marginal returns

1. Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges \$25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting \$130 worth of seeds on his farm. He expects that the seeds he planted will yield \$300 worth of wheat. Tony’s economic profit for the day is (assume he can only work 10 hours)
1. -\$130
2. -\$80
3. \$130
4. \$145
5. \$170

1. 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 d. All the above are correct

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

For the following question, use the graph below.

1. Ben and Jerry were currently both producing at point A on their production possibilities frontier. If both decided to fully specialize in what they had a comparative advantage in and trade, and 4 pounds of cones were traded for 2 pounds of ice cream, the gains from trade would be
1. 8 pounds of cones for Ben and 4 pounds of ice cream for Jerry
2. 1 pound of cones for Ben and 1 pound of ice cream for Jerry
3. 2 pounds of ice cream for Ben and 2 pounds of cones for Jerry
4. 1 pound of ice cream for Ben and 1 pound of cones for Jerry
5. 2 pounds of ice cream for Ben and 1 pound of cones for Jerry

1. Suppose there are two countries (Sealand and Westfall) and two-goods (Bananas and Fish). In a given month, Sealand can produce 120 bananas or 60 fish. In that same month, Westfall can produce 60 bananas or 120 fish. Without trade, the citizens of Westfall produce and consume twice as many fish as they do bananas, while the citizens of Sealand produce and consume twice as many bananas as they do fish. When trade is allowed and both countries fully specialize, how many additional fish and bananas are consumed by the two countries combined?
1. 20 fish and 20 bananas
2. 25 fish and 25 bananas
3. 30 fish and 30 bananas
4. 60 fish and 60 bananas
5. 15 fish and 15 bananas

1. In a given period of time using the same number of resources, we have the following production possibilities for the U.S. and Italy.

 U.S. Italy Good A Good B Good A Good B 200 0 120 0 150 10 90 5 100 20 60 10 50 30 30 15 0 40 0 20

Suppose that before trading with each other, the U.S. and Italy are producing and consuming at the middle entries of the table. Then both nations specialize completely, according to comparative advantage, and trade at a rate of 5.5A for 1B. If in doing so the U.S. consumes just as much B as before, how much more A than before is the U.S. consuming? a. 10 units

1. 20 units
2. 55 units
3. 110 units
4. 120 units

1. On a PPF diagram we move production from inefficient point G to efficient point H. What must be true about point H relative to point G?
1. More of both goods are produced
2. More of one good and the same amount of other good is produced
3. More of one good and less of the other good is produced
4. The move from point G to point H is the result of an outward shift in the PPF
5. None of the above need necessarily be true

1. Suppose we observe that a firm’s average total cost is falling over a given range of output. If it is in the short-run, then it must be true that____________. If it is in the long-run, then it must be true that_________________.
1. Average variable cost is falling; the firm is experiencing increasing returns to scale
2. Average variable cost is falling; the firm is experiencing decreasing returns to scale
3. The firm is not experiencing diminishing marginal returns to its variable input; the firm is experiencing increasing returns to scale
4. The firm is experiencing diminishing marginal returns to its variable input; the firm is experiencing increasing returns to scale.
5. None of the above combinations need be happening to the firm over this rang

For the following 2 questions, use the graph below (Note: Assume quantity is in single units, not dozens).

1. According to the graph, the amount of deadweight loss caused by the tariff equals a. \$100
1. \$200
2. \$400
3. \$500
4. \$600

1. Suppose that, instead of the tariff on the graph, the government instituted a \$6 tariff on carnations. In this case the total consumer surplus for domestic consumers of carnations would be:
1. \$0
2. \$100
3. \$400
4. \$900
5. \$1600

1. 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
2. Suppose the government plans on generating tax revenue of \$10 million by imposing a perunit tax on good A. The government fully knows the supply curve for good A, but the demand curve is unknown. As a result, the government hires an economist to estimate the demand for good A. Based on these estimates, in order to raise the \$10 million in revenue, the government will impose a \$1 per-unit tax, which is expected to make the price consumers pay after the tax equal to \$10 per unit and the price suppliers receive after the tax equal to \$9 per unit. However, when the tax is actually implemented, the price consumers ended up paying was \$9.90 per unit. Relative to what the government originally expected, which of the following must be true?
1. The deadweight loss from the tax will be higher, the tax revenue from the tax will be higher, the quantity transacted of the good will be higher.
2. The deadweight loss from the tax will be lower, the tax revenue from the tax will be higher, and the quantity transacted of the good will be higher.
3. The deadweight loss from the tax will be higher, the tax revenue from the tax will be lower, and the quantity transacted of the good will be higher.
4. The deadweight loss from the tax will be lower, the tax revenue from the tax will be lower, and the quantity transacted of the good will be lower.
5. The deadweight loss from the tax will be higher, the tax revenue from the tax will be lower, and the quantity transacted of the good will be lower.

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### Option 2

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