Econ 1: Midterm Exam

There are three parts and they carry different weights, so budget your time carefully. Good luck.

Part I (30 percent). Define each of the following as clearly as you can.

1. Income elasticity.

2. Scarcity.

3. Consumer surplus.

4. Positive economics.

5. Excess supply.

6. Opportunity cost.

Part II (30 percent). Short answer:

1. If you heard that last year the price of good X increased, but the quantity consumed also increased, what would you conclude?

2. What causes an increase in productivity, measured as output per worker?

3. Suppose that the price of good X increases by 20 percent and the quantity demanded decreases by 10 percent; what is the elasticity of demand?

4. Evaluate the following statement: "A Giffen good must be an inferior good, but an inferior good does not have to be a Giffen good."

5. What did Adam Smith mean by 'the invisible hand'?

Part III (40 percent). Long Answer:

1. Discuss the effects of a minimum wage law.

2. Discuss how the assumptions of perfect competition and increasing marginal cost imply that the Law of Supply will hold.