Economics 1

First Hour Examination – Makeup

February 23, 2000

H.S. Levine

Instructions:

1. Answer all sections of this test. This is a 60 minute exam; 50 minutes have been

assigned to questions. You have 10 minutes for review and prayer.

2. Write all answers in the blue books provided. Show all work. Use diagrams where

appropriate and label all diagrams carefully.

  1. Write your name and your Recitation Instructor’s name in every blue book that

you use.

4. This exam is given under the rules of Penn’s Honor System

5. All blue books, blank or filled, must be handed in at the end of this exam. No

blue books may be taken from the room.

PART I. (40 minutes)

For each question, choose the alternative that best completes the statement or answers the

question, and briefly explain WHY that alternative is best.

  1. If unemployment decreases,
  1. the PPF will move outward.
  2. the PPF will move inward.
  3. the production point will move outward toward the PPF.
  4. the production point will not move.

2. If goods A and B are complementary goods (in consumption) and the cost of a resource used in the production of A decreases, then

  1. the price of B will fall and the price of A will rise.
  2. the price of B will rise and the price of A will fall.
  3. the prices of both A and B will rise.
  4. the prices of both A and B will fall.

3. Revenues from the sale of a good will increase if

  1. income increases and the good is inferior.
  2. the price rises and demand is elastic.
  3. the price rises and demand is inelastic.
  4. income falls and the good is normal.
  1. Assuming that there are no external costs or benefits, and the good is not a public good,

then efficiency is
  1. achieved when output is more than the amount produced in a competitive market.
  2. achieved when output is the amount produced in a competitive market.
  3. achieved when output is less than the amount produced in a competitive market.
  4. unrelated to the amount produced in a competitive market.
  1. In the long run, market adjustment to a shock that lowers supply occurs because
  1. government intervention encourages suppliers to enter the market.
  2. consumer boycotts force suppliers to lower their prices and increase supply.
  3. low profits encourage suppliers to become more efficient.
  4. high profits encourage market entry.
  1. Lynn finds that the marginal utility from a compact disc is 30 and the marginal utility

from a cassette is 10. The price of a compact disc is $15 and the price of a cassette is

$10. In order to increase her utility, Lynn should
  1. increase her consumption of compact discs.
  2. increase her consumption of cassettes.
  3. not change her consumption of cassettes and compact discs.
  4. decrease the price of cassettes.
  1. The substitution effect reflects a movement along a given
  1. horizontal line.
  2. vertical line.
  3. indifference curve.
  4. budget line.
  1. In the article, "Sex, Booze, and Drugs," which of the statements below would NOT result

from decreasing the flow of drugs into the US
  1. shift of the supply curve of drugs to the left.
  2. rise in prices of drugs.
  3. decrease in quantity of drugs consumed.
  4. decrease in drug addicts’ resort to crime.

PART II (10 minutes)

  1. (6 min.) Using a diagram, show the effect of a $5 per pack of cigarettes tax on the

    2. equilibrium price and quantity of cigarettes.

    Explain your answer.

  2. (2 min.) In your diagram, how is the burden of the tax divided between consumers

    3. and producers?

  3. (2 min.) What would be the effect on the burden of the tax, if the supply curve were

perfectly inelastic? Use a diagram.

 

 

 

 

 

 

ANSWERS

 

PART I

1. C A decrease in unemployment does not change the size of the labor force available. It only means that the labor force is being used more efficiently. Thus, the production point moves outward closer to the PPF.

2. B The supply curve for A moves to the right with the decrease in its resource cost and thus the price of A falls and its quantity increases. The demand for B rises since it is a complement to A and thus the price of B rises.

3. C If when the price rises, the revenue rises, this must mean that the % rise in price is greater than the % fall in quantity since TR = P*Q. Thus the elasticity [E = (% fall in Q) / (% rise in P) in absolute terms] must be less than 1 (inelastic).

4. B For full credit, student should show, with a diagram, that in the competitive market equilibrium, consumer surplus plus producer surplus is a maximum, which means the output is efficient.

5. D The higher prices caused by the leftward shift of the short run supply curve for rental apartments will, in a free competitive market, lead to higher profits for the owners of apartment houses. This will lead to the entry of new builders of apartment houses, which in turn will lead to the rightward shift of the short run supply curve for rental apartments, eventually leading to a return to the pre-shock state of the market.

6. A 30/15 > 10/10 and therefore the increased purchase of compact discs will lead to an increase in Total Utility (the gain in utility from the purchase of more compact discs will be greater than the loss in utility from the decreased purchase of cassettes).

7. C This is true because if there is no movement to a higher or lower IC, then there is no income effect (no change in "real" income) since there is no change in Total Utility. There is only a substitution of more of one product in place of less of the other product.

8. D Given that there would be an increase in the price of drugs in the US if the flow of drugs into the US were decreased, many drug addicts would have to resort to criminal activity to acquire the funds to buy drugs.

 

PART II

See pp. 135-138 in the Text for a discussion of the issues in questions A-C.