Spring 2024 Principles of Macro Exam 1 Practice Problems

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Feb 20, 2024

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P RINCIPLES OF M ACROECONOMICS E XAM 1 P RACTICE P ROBLEMS (A NSWERS BELOW ) 1. Use the graph above to answer the following questions. a) Why is the curve showing the MB of eating pizza downward sloping? b) How many slices of pizza should be eaten? Why? c) If I’m currently eating 2 slices of pizza, should I eat more or less pizza to be better off? 2. What are the four categories of resources? 3. Is each of the following a microeconomic or macroeconomic topic? a) The U.S. unemployment rate is 4.0%. b) Starbucks decides to add a new kind of coffee to their menu. 4. Is each of the following a positive or normative statement? a) State governments should increase funding for higher education. b) Students enroll in more credit hours when tuition decreases. 5. Suppose you choose to go to a movie with your friends instead of studying for your economics exam. What is your opportunity cost of going to the movie? 6. The graph above shows the PPF for a restaurant that produces pizzas and burritos. Use the PPF above to answer the following questions. a) Which point(s) are efficient? Inefficient? Unattainable? b) What is the opportunity cost of producing 125 more burritos when moving from A to B? c) What is the opportunity cost of producing 25 more burritos when moving from C to D? d) What is the opportunity cost of producing 50 more pizzas when moving from B to A?

e) Does this restaurant experience constant or increasing opportunity costs? What does this tell us about the resources the restaurant has available to produce pizzas and burritos? f) Is it possible for the economy to produce at point E? g) Is it possible for the restaurant to produce 150 pizzas and 175 burritos? h) What will happen to the restaurant’s PPF if they purchase/hire more resources that are used to produce both pizzas and burritos (e.g. hire more workers, expand kitchen size)? Possible Output Combination Cakes Produced Pies Produced A 0 15 B 4 10 C 8 5 D 12 0 7. The table above shows possible combinations of cakes and pies that a bakery can produce. Assume each possible output combination given in the table is efficient—uses all available resources. Use the table to answer the following questions. a) What is the opportunity cost for the bakery to produce 4 more cakes when moving production from B to C? b) What is the opportunity cost for the bakery to produce 5 more pies when moving production from D to C? c) Is it possible for the bakery to produce 4 cakes and 15 pies? d) Is it possible for the bakery to produce 8 cakes and 2 pies? 8. Explain the difference between an increase in quantity demanded and an increase in demand. 9. If the price of pizza decreases, there will be ___________ in the market for pizza. a. an increase in quantity demanded b. an increase in demand c. a decrease in quantity demanded d. a decrease in demand 10. Suppose your income increases, and as a result, you buy more Chiefs football tickets. What type of good do you consider Chiefs tickets? 11. Suppose cereal and milk are complements. If the price of cereal decreases, there will be ___________ in the market for milk. a. an increase in quantity demanded b. an increase in demand c. a decrease in quantity demanded d. a decrease in demand 12. If there is an increase in the number of buyers in the market for pizza, there will be a a. rightward shift of the entire demand curve for pizza. b. leftward shift of the entire demand curve for pizza. c. movement upward and left along the same demand curve for pizza. d. movement downward and right along the same demand curve for pizza. 13. Explain the difference between an increase in quantity supplied and an increase in supply. 14. Suppose the price of wheat, an input for producing bread, increases sharply. This will cause ______________ in the market for bread. a. an increase in quantity supplied b. an increase in supply c. a decrease in quantity supplied d. a decrease in supply

15. If the price of coffee increases, there will be _____________ in the market for coffee. a. an increase in quantity supplied b. an increase in supply c. a decrease in quantity supplied d. a decrease in supply 16. The table below gives changes that occur in the market for pizza . Fill in the table below indicating whether the given change shifts the demand curve or supply curve and if that curve will shift to the right or to the left. Demand or Supply? Right or Left? Consumer income decreases (pizza is a normal good) The cost of cheese (an input for producing pizza) increases More restaurants start producing and selling pizza The price of fast food (a substitute for pizza) increases 17. a) Refer to the graph above. The equilibrium price of bagels is ____________, and the equilibrium quantity is ______________ bagels. b) Refer to the graph above. Would a price of $1 cause a shortage or a surplus? How much would the shortage/surplus be? A NSWERS : 1. a) The marginal (additional) benefit of each additional slice of pizza decreases as we eat more pizza. b) 3; MB = MC at 3 slices of pizza--the net benefits are maximized. If fewer than 3 slices are eaten, benefits are not maximized (we could be better off). If more than 3 slices are eaten, the cost is greater than the benefit. c) Since 2 slices is less than the efficient amount, I should eat more pizza to be better off. 2. natural resources, labor, physical capital, entrepreneurship 3. a) Macro b) Micro 4. a) Normative b) Positive

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5. Studying for your economics exam 6. a) A, B, C, and D are efficient; E is inefficient; F is unattainable b) 50 pizzas c) 100 pizzas d) 125 burritos e) Increasing opportunity costs; specialized resources f) Yes, point E is possible because it lies inside the PPF—there are enough resources to produce at this level, but it is inefficient (less than maximum possible output produced). g) No, this level of production is not possible because it lies beyond the PPF (not enough resources). h) There would be a parallel shift outward of the PPF. 7. a) 5 pies b) 4 cakes c) No, the bakery does not have enough resources to produce this output combination. Combination B uses all available resources to produce 4 cakes and 10 pies, so there are not enough resources to produce 4 cakes and 15 pies (would like outside the PPF). d) Yes, the bakery can produce this combination—it is possible, but inefficient. The bakery is able to produce 8 cakes and 5 pies (Combination C), so we know it is possible to produce 8 cakes and 2 pies. 8. An increase in quantity demanded is a movement downward and to the right along the demand curve caused by a change in the price of the good. An increase in demand is a shift to the right of the demand curve caused by a change in something other than the price of the good. 9. a. an increase in quantity demanded 10. Normal good 11. b. an increase in demand 12. a. rightward shift of the entire demand curve for pizza 13. An increase in quantity supplied is a movement upward and to the right along the supply curve caused by a change in the price of the good. An increase in supply is a shift to the right of the supply curve caused by a change in something other than the price of the good. 14. d. a decrease in supply 15. a. an increase in quantity supplied 16. Demand or Supply? Right or Left? Consumer income decreases (pizza is a normal good) Demand Left The cost of cheese (an input for producing pizza) increases Supply Left More restaurants start producing and selling pizza Supply Right The price of fast food (a substitute for pizza) Demand Right

increases 17. a) $2; 200 b) shortage; 200

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