First Midterm Exam-
Binary Choice Questions:
1.) Suppose a small, closed economy supplies bananas to their domestic consumers at a constant price of $.50 a pound and that domestic suppliers are willing to supply bananas at this price over the entire relevant range of consumption. Suppose the country moves from a closed economy to an open economy and that the world price of bananas is $.40 a pound. Then
a.) the domestic demand for bananas will be satisfied through a combination of domestic production and imports.
b.) the country will import bananas, and the domestic production of bananas will fall to zero units of the good.
Use the information below to answer the next two questions.
Suppose there are two countries A and B, and they both produce basketballs and tennis racquets. Labor is the only input these countries use in the production of these two goods. The table below presents the units of labor required to produce a single unit of output.
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Basketballs
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Tennis Racquets
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A
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2 units of labor
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4 units of labor
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B
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9 units of labor
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3 units of labor
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2.) Which of the following statements is true?
a.) Country A has a comparative advantage in producing basketballs, and country B has a comparative advantage in producing tennis racquets.
b.) Country A has a comparative advantage in producing tennis racquets, and country B has a comparative advantage in producing basketballs.
3.) Which of the following statements is true?
a.) For international trade to be possible, the relative price of basketballs with respect to tennis racquets must be between ½ unit of tennis racquets and 3 units of tennis racquets.
b.) For international trade to be possible, the relative price of basketballs with respect to tennis racquets must be between 1/3 unit of tennis racquets and 2 units of tennis racquets.
4.) Which of the following statements is false for a country that is open to trade? Assume the country is currently importing baseball caps.
a.) If the government imposes a tariff on a baseball caps, the consumer surplus will not change.
b.) If the government imposes a tariff on a baseball caps, the producer surplus will change.
5.) Is the following statement true or false? "Measures of GDP tend to underestimate the total amount of economic production because they add up the value of only the final goods that are produced, not the intermediate goods and raw materials that are used in production. "
a.) True
b.) False
6.) Suppose the government of a country wants to encourage home ownership, so the government offers a cash subsidy to all those who purchase a house. Holding everything else constant, this policy will
a.) shift the demand for houses to the right.
b.) decrease the price received by sellers of houses.
7.) Which of the following statements is true?
a.) There is a deadweight loss associated with international trade and the size of the deadweight loss depends on the shapes of the demand and supply curves in each market.
b.) There is a deadweight loss associated with tariffs and import quotas. The size of the deadweight loss depends on the shapes of the demand and supply curves in each market.
8.) Which of the following statements is true?
a.) Transactions of securities (that is, the value of purchases and sales of stocks and not the brokerage fees) in the stock market are not counted in the GDP of a country.
b.) Transactions of securities (that is, the value of purchases and sales of stocks and not the brokerage fees) in the stock market are counted in the GDP of a country.
9.) The demand curve for cigarettes is represented by the equation Q = 6 - P. Suppose that cigarette smokers in this market grow more concerned about their health and they decide to consume fewer cigarettes. Which of the following equations could represent this change in the preferences of cigarette consumers?
a.) Q = 5 - P
b.) Q = 12 - 2P
10.) A country reports that its environment has gotten dirtier over the past year. Will this country's GDP figure for the year overstate or understate the degree of change in the broad standard of living?
a.) It will overstate the degree of change in the broad standard of living.
b.) It will understate the degree of change in the broad standard of living.
Multiple Choice questions:
11.) Suppose there is a small country that is initially closed to international trade. Opening its markets to international trade will
a.) Increase producer surplus provided that the world price is less than the equilibrium price in the closed economy.
b.) Increase producer surplus provided that the world price is greater than the equilibrium price in the closed economy.
c.) Reduce the value of both consumer and producer surplus if the world price is less than the equilibrium price in the closed economy since the country will be consuming and producing fewer units domestically.
d.) Reduce the value of both consumer and producer surplus if the world price is greater than the equilibrium price in the closed economy since the country will be consuming and producing fewer units domestically.
12.) In January, buyers of gold expect that the price of gold will rise by February. What happens in the gold market in January, holding everything else constant?
a.) The supply curve shifts to the right.
b.) The demand curve shifts to the left.
c.) The demand curve shifts to the right.
d.) The supply of gold increases.
13.) There are five consumers are in the market for computers: Steven, Mary, Sam, Henry and John. Each of these consumers' willingness to pay for a laptop computer is presented in the following table. If the market price of a laptop computer is $40, what is the consumer surplus of the laptop computer market in this country?
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Willingness to pay
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Steven
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$100
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Mary
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$34
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Sam
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$50
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Henry
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$70
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John
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$20
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a.) $60
b.) $10
c.) $30
d.) $100
Use the following information to answer the next question.
Consider a situation where there are 2 countries, A and B. They both can produce either shirts or food. Their respective PPFs are shown in the graphs below.
14.) Both countries are allowed to trade and each one produces only that good in which they have a comparative advantage. Regardless of the price at which both countries exchange goods, which of the following combinations of the two goods cannot be the final consumption of country A?
a.) 8 units of Food and 2 units of Shirts
b.) 11 units of Food and 1 unit of Shirts
c.) 4 units of Food and 4 units of Shirts
d.) 6 units of Food and 3 units of Shirts
Use the information below to answer the next two questions.
The table below shows the maximum amounts of rice and soda that Japan and Hong Kong can produce. Both countries have constant opportunity costs of production.
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Units of Rice
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Units of Soda
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Japan
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50
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20
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Hong Kong
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10
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10
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15.) The opportunity cost of producing 1 unit of soda for Japan is:
a.) 5/2 units of rice
b.) 2/5 units of rice
c.) 5 units of rice
d.) 1/5 units of rice
16.) Which of the following statements is true?
a.) If Japan and Hong Kong trade with each other, Japan will specialize in producing soda and Hong Kong will specialize in producing rice.
b.) If Japan and Hong Kong trade with each other, Japan will specialize in producing rice and the relative price of rice must between 1 unit of soda and 5/2 units of soda .
c.) If Japan and Hong Kong trade with each other, Japan will specialize in producing rice, and the relative price of rice must between 2/5 unit of soda and 1 unit of soda.
d.) If Japan and Hong Kong have the same amount of resources, Japan has the absolute advantage in producing both goods and therefore Japan would receive no gains from trade with Hong Kong.
17.) Holding everything else constant, suppose the price of cotton falls. In the market for clothing, the equilibrium price will ________ and the consumer surplus in the clothing market will ________.
a.) decrease, decrease
b.) increase, increase
c.) decrease, increase
d.) increase, decrease
18.) The figure above shows the domestic supply and domestic demand curves for cigarettes in a small country. The country opens the cigarette market to international trade and the world price for cigarettes is $6. Suppose the government decides to impose a quota in the market for cigarettes that restricts the level of imports to 4 units of cigarettes. The decrease in the domestic consumer surplus due to the import quota is equal to areas:
a.) D + E + F + G + H + I
b.) D + G
c.) H + I
d.) C + D + E + F + G
19.) Suppose the domestic demand and the domestic supply for DVD-ROMs of a small country is represented by the following equations:
Demand: Q = 10 - P
Supply: Q = 0.5P - 4
The country has opened the DVD-ROM market to international trade, and the world price of DVD-ROM is $4. Which of the following statements is correct?
a.) At a world price of $4 there will not be any domestic production of DVD-ROMs.
b.) At a world price of $4, the quantity demanded domestically of DVD-ROMs is 5 units. The country will import DVD-ROMs.
c.) At a world price of $4, the country will export 6 units of DVD-ROMs.
d.) Opening the economy to trade will lead to an increase in the domestic producer surplus.
20.) The above diagram shows the domestic demand and the domestic supply for cars in a small country. The country was initially closed to international trade. Suppose now the country opens this market to trade. Which of the following statements is true?
a.) Since the domestic supply is perfectly inelastic (that is, the domestic supply curve is vertical), there is no change in domestic producer surplus after opening the market to international trade.
b.) The country will export cars, and the domestic producer surplus will increase.
c.) The country will export cars, and the domestic producer surplus will not change.
d.) Since the supply is perfectly inelastic (that is, the domestic supply curve is vertical), there is no international trade of cars in this economy even if it opens to trade.
21.) Which of the following statements is false?
a.) A country may have an absolute advantage in everything it produces but not a comparative advantage in everything it produces.
b.) Trade based on the principle of comparative advantage enables a country to produce outside its production possibilities frontier.
c.) Trade based on the principle of comparative advantage enables a country to consume outside its production possibilities frontier.
d.) Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.
22.) The diagram above shows the domestic demand and the domestic supply of textiles in China. Assume the world price for this good is $70. Which of the following statements is true?
a.) A tariff of $20 and an import quota of 200 units of textiles will lead to the same market outcome in this market.
b.) A tariff of $20 and an import quota of 200 units of textiles will lead to different deadweight losses. The deadweight loss associated with the tariff is equal to areas D + G, and the deadweight loss associated with the import quota is equal to areas D + E + F + G.
c.) A tariff of $10 and an import quota of 100 units of textiles will lead to the same market outcome in this market.
d.) A tariff of $20 and an import quota of 200 units of textiles will lead to different levels for the value of domestic producer surplus.
23.) Suppose there is a small country that does not trade with other countries. The country's domestic demand and domestic supply of pineapples are given by the following equations:
Demand: P = 10 - 2Q
Supply: P = 2 + 2Q
If the world price of one pineapple is $4, how would the economic surplus change if this small country opened to international trade?
a.) The total surplus in the pineapple market will decrease by $2.
b.) The total surplus in the pineapple market will decrease by $6.
c.) The total surplus in the pineapple market will increase by $2.
d.) The total surplus in the pineapple market will increase by $4.
The table below presents the statistics of Korea in 2007. Use the information in the table to answer next two questions.
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Consumption Expenditure
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$250 million
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Market value
of stock issued
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$80 million
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Expenditure on plant and equipment
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$120 million
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Market value
of bonds issued
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$50 million
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Decrease in inventories
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$?? million
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Purchases of
foreign bonds
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$40 million
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Government expenditure
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$80 million
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Wages
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$200 million
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Government tax revenue
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$30 million
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Profit
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$180 million
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Government transfers
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$20 million
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Interest
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$100 million
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Exports
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$170 million
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Rent
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$40 million
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Imports
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$50 million
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24.) What is the value of Korean GDP in 2007?
a.) $570 million
b.) $520 million
c.) $640 million
d.) $510 million
25.) The data on the decrease in inventories is lost. According to the information in the table, the decrease in inventories should equal
a.) $60 million
b.) $120 million
c.) $50 million
d.) $100 million
26.) Which of the following would not shift a nation's production possibilities frontier?
a.) a liberal immigration policy that welcomes foreign labor.
b.) an increase in a nation's capital stock.
c.) the discovery of oil, a vital input in the production process.
d.) an increase in the general price level.
27.) The demand curve in the market for good Y is given by Q= 24 - 4P. At an equilibrium price of $1, the consumer surplus in this market is
a) $100
b) $30
c) $50
d) $48
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Wages
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$350
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Interest payments
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$200
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Rent
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$180
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Profit
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$20
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28.) The accounting information for a food company in 2007 is provided in the above table. All the information about factor incomes are provided, but the information about the total revenue and the cost of intermediate goods are not available. We have three approaches to calculate the GDP of a country. The first approach is to sum all the expenditures in the economy during a time period on final goods and services; the second approach is to sum all the factor incomes in the economy during the time period; and the third approach is to sum all the value added by the producers at each stage of production. According to the information provided in the above table,
a.) we cannot determined the value added of this food producer.
b.) the value added of this producer is $750.
c.) the value added of this producer is $730.
d.) the value added of this producer can be determined only if the cost of the intermediate goods used in production by this producer are provided.
29.) The market for used cars is described by the following equations:
Supply: Q = 2P
Demand: Q = 15050 - 3P
At a price of $3,000 for a used car, there is a
a) surplus of 50 cars.
b) shortage of 50 cars.
c) surplus of 100 cars.
d) shortage of 100 cars.
30.) Holding everything else constant, suppose there is an increase in income so that the demand curve in a given market shifts to the right. Which of the following statements is true?
a) Producer surplus will not decrease.
b) Total surplus has decreased.
c) The consumer surplus will not change.
d) The change in total surplus is ambiguous.