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ECON 103

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Economics 103 Fall 2018 Dr. Martin Santamaria Student Name :_____________________________________ Student ID :________________________________________ Economics 103 Midterm Examination Fall 2018 Instructions: a. You have 1 hour and 50 minutes to finish your exam. Write your name and ID number on the upper left corner of this page. b. Confirm that your test has 15 pages. The last two pages can be used as scratch paper. You may detach any of the two last pages. c. Use a pen to write your answers. You give up your right to a regrade if you choose to use a pencil. With you, you should only have a pen, and a calculator. d. Show ALL your work. e. The table below indicates how points will be allocated on the exam. You can answer the questions in any order you like. Use your time carefully and efficiently. Question Points Your Score MC 60 SA 1 10 SA 2 16 SA 3 14 Exam Total 100 f. You are not allowed to use your cell phone during the exam. Please, turn off your cell phone and put it away. If you are found using a cell phone during the examination, you will be considered in violation of academic integrity, and you will be reported to the Academic Integrity Office. g. Once you started the exam you are not allowed to leave the room until you turn in your exam. h. KEEP YOUR EYES ON YOUR OWN PAPER, AND KEEP YOUR PAPER OUT OF VIEW OF YOUR NEIGHBORS.

Economics 103 Fall 2018 Dr. Martin Santamaria Part I. Multiple Choice Questions (60 points total, 4 points each) Please, write your answers on the space provided below: 1.______ 2. ______ 3.______ 4._______ 5._______ 6.________ 7.______ 8.______ 9._______ 10.______ 11.______ 12._______ 13._____ 14.______ 15._______ 1) Sally has to decide whether to study for her economics test or her accounting test. If she chooses to study for accounting, her opportunity cost of studying accounting is A) studying economics. B) less than the value of studying economics. C) not comparable to the value of studying economics. D) the future lost wages that will occur if she fails her accounting exam. 2) Complete the following sentence. Marginal cost is A) the total cost of an activity. B) the total cost of a decrease in an activity. C) the opportunity cost of an increase in an activity. D) the opportunity cost of a decrease in an activity. 3) Monika will choose to eat a seventh pizza slice if A) the marginal benefit from the seventh slice is greater than its marginal cost. B) the marginal benefit from the seventh slice is less than its marginal cost. C) the total benefit from all seven slices is greater than their total cost. D) the total benefit from all seven slices is less than their total cost. E) she has enough money to pay for it. 4) "The rich countries of the world should forgive the debt of poor countries." This is an example of A) a normative statement. B) a positive statement. C) a negative statement. D) economic reasoning.

Economics 103 Fall 2018 Dr. Martin Santamaria 5) A point inside a production possibilities frontier A) indicates some wasted or misallocated resources. B) is unattainable. C) is preferred to a point on the production possibilities frontier. D) indicates a point of production efficiency. 6) A tradeoff exists when A) we move from a point inside the PPF to a point on the PPF . B) we move from a point on the PPF to a point within the PPF . C) the PPF shifts outward. D) we move along the PPF . 7) The bowed-out (concave) shape of a production possibilities frontier illustrates A) the equal usefulness of resources in all activities. B) technological change. C) increasing opportunity cost. D) decreasing opportunity cost. Figure 1: Use the figure below to answer questions 8 and 9.

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Economics 103 Fall 2018 Dr. Martin Santamaria 8) Refer to the production possibilities frontier in Figure above. If 40 pounds of flowers are produced, then A) 60 pounds of Tomatoes cannot be produced unless production of flowers is decreased. B) 60 pounds of Tomatoes cannot be produced unless production of flowers is increased. C) The maximum amount of tomatoes that can be produced is 100 pounds. D) The graph does not provide enough information to answer the question. 9) Refer to the production possibilities frontier in Figure above. If moving from point A to point B on the production possibilities frontier the opportunity cost of producing one more pound of flowers is A) 40 pounds of tomatos per pound of flowers B) ½ a pounds of tomatos per pound of flowers C) 2 pounds of tomatos per pound of flowers D) None of the above. 10) Which one of the following events shifts the demand curve for grape jelly to the right? A) an increase in income if grape jelly is a normal good B) a decrease in the price of strawberry preserves, a substitute for grape jelly C) a decrease in the price of grape jelly D) an increase in the price of peanut butter, a complement of grape jelly 11) A turnip is an inferior good if A) an increase in the price of a turnip decreases the quantity of turnips that consumers want to buy. B) an increase in income decreases the demand for turnips. C) an increase in income increases the demand for turnips. D) turnips violate the law of demand. 12) The supply curve of a good slopes upward to the right because of A) technological improvements over time. B) increasing marginal cost as production increases. C) the law of demand. D) the fact that prices tend to rise over time.

Economics 103 Fall 2018 Dr. Martin Santamaria Figure 2: Use the figure below to answer questions 13, 14 and 15. Question 13) Point A in Figure 2 indicates that A) $20 is the least that the marginal consumer is willing to pay for the 200th unit. B) consumers will not be in equilibrium if the price is $20. C) all consumers are willing to pay at most $20 for an extra unit. D) if the price is $20, consumers will plan to buy 200 apples. Question 14) The price elasticity of demand in figure 2 when going from point A to point B is given by A) -1/2 B) -2 C) 1 D) -1

Economics 103 Fall 2018 Dr. Martin Santamaria Question 15) At point B the demand curve is A) Inelastic B) Elastic C) Unit elastic D) Not enough information in the graph to answer.

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Economics 103 Fall 2018 Dr. Martin Santamaria Short Answer Questions (40 points) Question 1 (10 points) You manage a tutoring business. All tutors teach equally well. Each tutor serves 2 students, and each student brings your business $12. However, it is not easy to find tutors, so while the first ones you find are relatively cheap to employ, the later ones demand more money. This table shows the cost of hiring each additional tutor Cost of hiring that additional tutor 1 st tutor $10 2 nd tutor $15 3 rd tutor $20 4 th tutor $25 5 th tutor $30 a. (5 points) How many tutors should you hire?

Economics 103 Fall 2018 Dr. Martin Santamaria b) (2 points) What will your surplus be with the optimal number of tutors? (Hint: Surplus is total benefit minus total cost) c) (3 point) Suppose that in order to operate your tutoring business you must pay a 10$ fee. How does your answer to a and b change? Explain

Economics 103 Fall 2018 Dr. Martin Santamaria Question 2 (16 points) Suppose Gordon and Bobby both work at a bakery making pies and cupcakes. In an hour, Gordon can either make 10 pies or 40 cupcakes, while Bobby can either make 20 pies or 60 cupcakes. Both Gordon and Bobby work 8 hours a day. a. (2 points) Draw Gordon’s daily PPC, placing pies on x-axis and cupcakes on the y-axis. Label the x-intercept, the y-intercept and the slope of the PPC. Be sure to also label your axes. b. (2 points) Draw Bobby’s daily PPC, placing pies on x-axis and cupcakes on the y-axis. Label the x- intercept, the y-intercept and the slope of the PPC. Be sure to also label your axes.

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Economics 103 Fall 2018 Dr. Martin Santamaria c. (2 points) What is the opportunity cost to each of one cupcake? d. (2 points) Who has the comparative advantage in cupcakes? Briefly explain. e. (2 points) Who has the absolute advantage in cupcakes? Briefly explain. f. (2 points) Suppose you are the owner of the bakery. If Gordon and Bobby are currently both spending all of their time making pies, then which of them should you ask to start making cupcakes? Briefly explain.

Economics 103 Fall 2018 Dr. Martin Santamaria g. (4 points) Draw the daily joint PPC for Gordon and Bobby, placing pies on the x-axis and cupcakes on the y-axis. Be sure to label the x-intercept, the y-intercept, the slope along each segment of the PPC and the point at which each is specializing in the activity at which he has a comparative advantage. Be sure to also label your axes.

Economics 103 Fall 2018 Dr. Martin Santamaria Question 2 (14 points) Consider the market for oranges. a. (4 points) Using a simple supply and demand graph, label the equilibrium price (P*) and quantity (Q*) of oranges. Clearly label the supply curve, the demand curve and the axes. b. (5 points) Suppose that a study comes out that show that drinking freshly made orange juice everyday significantly reduces the chances of catching a common cold, making it more valuable to consumers to consume orange juice. Make a new graph for the market of oranges and show how the new study will affect the equilibrium price and quantity of oranges. Clearly label the supply curve, the demand curve, any movements in the curves, the old and new equilibrium, and the axes.

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Economics 103 Fall 2018 Dr. Martin Santamaria c. (5 points) For most consumers, oranges and apples are substitutes. Make a new graph for the market of apples and show how the new study and the new equilibrium in the market for oranges will affect the equilibrium price and quantity of apples. Clearly label the supply curve, the demand curve, any movements in the curves, the old and new equilibrium, and the axes.

Economics 103 Fall 2018 Dr. Martin Santamaria SCRATCH PAPER

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