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Barnard College ̶ Columbia University Department of Economics Econ BC1003 (02) Introduction to Economic Reasoning Spring 2023 Test I 2/22/23 _____________________________________ __________________________ PRINT NAME UNI ID Notes 1. This exam is a closed book/ closed notes exam. You are only allowed to use a calculator. 2. The exam has two parts: 30 Multiple choice questions (75 points) and one problem (25 points). 3. Multiple choice questions have ONLY one correct answer. 4. If you think a question is incorrect or contains a typo, mark it on the question and respond to it to the best of your knowledge. If there is a problem with a question, I will fix it after the exam, and you will get the allocated points for the question. 5. Make sure you answer all the questions. You DO NOT get penalized for incorrect answers. GOOD LUCK!

1. 2. 3. 4. 5. 6. In economics, all the items that people would consume if they had unlimited income are known as A. aggregates. B. wants. C. outputs. D. needs. Macroeconomics is the study of A. aggregate economic variables. B. output in particular industries. C. how individuals make important decisions. D. all of the above. Sara looks into her closet and discovers a pair of like-new shoes she no longer wears because they give her blisters. From the economist's perspective, was Sara behaving rationally when she bought those shoes? A. No. If any of a person's decisions have poor results, that person is irrational. B. Yes, Sara didn't buy those shoes when they were out of fashion. C. It's not clear because psychology, not economics, deals with the rationality assumption. D. No. The rationality assumption states that rational people never make mistakes. Which of the following statements is TRUE? A. Economic models always make accurate predictions about behaviors. B. No economic model captures every detail that affects a problem. C. Economic models must fully reflect reality. D. Economic models use economists' opinions with no use of data. What would lead an economist to conclude that Theory A is superior to Theory B? A. The assumptions underlying Theory A are more realistic than are the assumptions underlying Theory B. B. Theory A explains how people think, whereas Theory B only explains what they do. C. Theory A is based on the assumption that an individual typically cannot determine what is in his or her own best interest, whereas Theory B assumes that each person knows what is in his or her own best interest and acts accordingly. D. Theory A predicts real-world events better than does Theory B. Which of the following is a normative statement? A. An economy with high unemployment can be worse off than an economy with high inflation. B. An increase in the income tax will cause a greater reduction in savings than an increase in the sales tax. C. An increase in consumer income will lead to increased sales of beef. D. A decrease in the rate of unemployment will lead to upward pressure on consumer prices.

7. 8. 9. Scarcity A. cannot be avoided in the world. B. does not exist in the United States. C. applies only to developing countries. D. can be reduced with more efficient production methods. In the above figure, what is the opportunity cost of one bushel of soybeans? A. 0.5 bushels of corn B. 1 bushel of corn C. 2 bushels of corn D. unable to determine A B C D E Pizza (Pies) 0 30 60 90 120 Bread (Loaves) 300 240 180 120 60 The above table shows the daily production possibilities for a bakery. Currently the bakery bakes 60 pizzas and 180 loaves of bread, that is it is at alternative C. − Using the above table, moving from alternative C to alternative B, what is the opportunity cost of one loaf of bread? A. 2 pizza pies B. 0.5 pizza pie C. 1 pizza pie D. 30 pizza pies

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10. 11. 12. 13. 14. The table shows the daily production possibilities for a nation. A B C D E Televisions 100 90 75 55 0 Cars 0 25 50 75 100 According to the above table, the opportunity cost of each additional car in terms of televisions A. increases as more cars are produced. B. falls as more cars are produced. C. is meaningless because the cost of cars cannot be expressed in terms of televisions. D. remains constant. A bowed outward production possibilities curve occurs when A. opportunity costs are constant. B. additional units of output of one good necessitate greater reductions in the other good. C. resources are not scarce. D. there are surpluses in the goods being produced. Which of the following is NOT an assumption used in deriving a production possibilities curve? A. Technology is constant. B. Resources are fully employed. C. The labor force is growing at a constant rate. D. The quantity of resources is constant. Production is efficient when A. it generates a point beyond the production possibility curve. B. the maximum amounts of the most important good are produced. C. technological change occurs. D. the economy cannot produce more of one good without giving up the production of another good. Refer to the figure at right. Which of the following would allow society to move to point d? A. Increasing the quantity of labor B. Using the best land to produce wheat and the lower quality land to produce beans. C. Concentrating production in wheat D. Producing efficiently Bushels of Wheat Bushels of Beans a e 775 300 g d 700 400 f

15. 16. 17. 18. 19. 20. Economic growth appears on a production possibilities curve as A. the curve shifting in toward the origin. B. a change in the slope of the curve. C. the points outside the production possibilities curve. D. the curve shifting out away from the origin. The trade-off between current consumption and the production of capital goods is also a trade-off between A. having fewer needs and more wants in the future. B. satisfying the needs of the poor and the wants of the wealthy. C. current consumption and future consumption. D. the future cost for capital goods and future cost of consumption goods. With specialization, A. there is more emphasis on self-reliance. B. there are greater gains in material well being. C. opportunity costs tend to be constant. D. society is more productive while individuals are less productive. Justin and Maria work at a restaurant. Justin can make either 10 pancakes or 4 waffles; Maria can make either 8 pancakes or 2 waffles. According to this scenario A. Justin has the comparative advantage in making pancakes. B. Maria has the comparative advantage in making waffles. C. Maria has the absolute advantage in making waffles. D. Justin has the absolute advantage in making waffles. In economic utility analysis, consumer tastes and preferences are assumed A. given but rapidly changeable. B. to be determined by income. C. given and stable for an individual. D. to be influenced by the prices of goods. A well-known athlete loves cupcakes. He receives 200 utils for the first cupcake, an additional 160 for the second, an additional 120 for the third, another 80 for the fourth, and another 40 for the fifth. The marginal utility of the fourth cupcake is ________ and the total utility of consuming four cupcakes is ________. A. 40; 80 B. 80; 600 C. 40; 40 D. 80; 560

21. 22. 23. 24. 25. Using the table at right, what is the total utility of consuming 2 bottles of soda? A. 120 B. 240 C. 115 D. 140 Number of Bottles of Soda Total Utility Marginal Utility 1 100 2 20 3 15 4 140 Suppose Jeremy's marginal utility from attending his 10th San Antonio Spurs game was 50 and the marginal utility from attending his 1st Rihanna concert was 70. Assume that the price of a Spurs ticket is $30 and the price of a Rihanna ticket is $100. Which of the following would be TRUE? A. Jeremy would not alter his behavior. B. Jeremy would attend more Rihanna concerts and less Spurs games. C. Jeremy would attend more Spurs games and less Rihanna concerts. D. Jeremy would attend less of both Spurs games and Rihanna concerts. The price of good X is $5 and the price of good Y is $15. If the marginal utility of good X is 20 then the marginal utility of good Y must be ________ to have an optimum combination of goods purchased. A. 4 B. 60 C. 80 D. 20 Refer to the table. Assume the consumer spends his entire income. If the consumer's optimum at the current price of a movie is at 4 hotdogs and 4 movies, and the price of a hotdog is $1, what is the consumer's income? A. $16 B. $40 C. $20 D. $28 Quantity of Hotdogs/Day Total Utility Quantity of Movies/Day Total Utility 0 0 0 0 1 25 1 200 2 45 2 260 3 55 3 300 4 60 4 320 5 61 5 325 The price of a piece of pizza is $1, and the price of a movie is $6. The consumer has purchased 2 pieces of pizza and 2 movies, and her marginal utility from the second piece of pizza is 20 and from the second movie is 120. The consumer has an income of $21. This combination of goods A. maximizes utility because the marginal utility of the last dollar spent on each good is the same, but it is not an equilibrium because marginal utility is not zero. B. maximizes utility and is an optimum because the marginal utility of the last dollar spent on each good is the same. C. is not an optimum because the consumer has not spent all of her money. D. is not an optimum because the marginal utility of the last dollar spent on each good is not the same.

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26. 27. 28. 29. The substitution effect argues that a consumer A. will purchase less of both goods if his or her real income increases. B. will purchase more of a good that has become relatively cheaper, and less of a good that has become relatively more expensive. C. will not purchase more of a good when its price falls. D. will always use the additional purchasing power from a price decrease to purchase more of both goods. Refer to the table at right. The price of a hamburger is $2, the price of a movie is $10, and the consumer has $44. What is the change in quantity demanded of hamburgers if the price of a hamburger decreases to $1? A. Quantity demanded increases by 1 hamburger. B. Quantity demanded increases by 2 hamburgers. C. Quantity demanded increases by 4 hamburgers. D. Quantity demanded increases by 3 hamburgers. Quantity of Hamburgers per Week Total Utility Quantity of Movies per Week Total Utility 1 40 1 400 2 60 2 700 3 76 3 850 4 86 4 950 5 91 5 1,000 6 93 6 1,025 An indifference curve shows A. the combinations of goods that a consumer does not like very much. B. the set of consumption alternatives that yield the same amount of marginal utility. C. the combinations of goods that generate the same ratio of marginal utilities. D. the set of consumption alternatives that yield the same amount of total utility. Refer to the figure. Which point(s) represents the lowest level of utility? A. Points A & C B. Point B C. Point C only D. Point D

30. In the figure at right, point C is A. preferred to points A and B. B. less preferred than point G. C. preferred to points G, A, and B. D. less preferred than point H. Quantity of Coffee Quantity of Bagels E F B A C H G D

Part 2: Problem (25 points, 5 points each part) The table below describes the Japan's production possibilities curve (PPC). Combination Computers Cotton A 0 500 B 5 495 C 10 485 D 15 465 E 20 425 F 25 345 G 30 185 H 35 0 a) Draw (approximately) Japan’s PPC representing computers on the horizontal axis and cotton on the vertical axis. b) Compute the per-unit opportunity cost of producing computers when the economy moves from combination A to combination B, from B to C, and from C to D. What do you observe about the opportunity cost and why it happens? Explain briefly. c) Evaluate the following combinations J = (20 computers and 300 cotton), and K = (30 computers and 300 cotton). Briefly explain what these combinations mean and how they could happen. d) Suppose the economy experiences a technological improvement in the production of computers. Represent this change in the graph you drew for part A). Does this mean the economy will produce the same quantity of cotton? Why or why not? e) Forget about part (d) and suppose Japan's PPC is the one described in part (a). Additionally, assume Korea's PPC is identical to Japan's PPC. However, countries differ in their preferred consumption. Without trade, Japan produces at point B and Korea at point G. Can both countries be better off by producing away from B and G and trading? If not, explain. If yes, give an example (i.e., find production points for Japan and Korea and explain how they can trade and improve.)

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1. B. wants. 2. A. aggregate economic variables. 3. B. Yes, Sara didn't buy those shoes when they were out of fashion. 4. B. No economic model captures every detail that affects a problem. 5. D. Theory A predicts real-world events better than does Theory B. 6. A. An economy with high unemployment can be worse off than an economy with high inflation. 7. A. cannot be avoided in the world. 8. A. 0.5 bushels of corn 9. B. 0.5 pizza pie 10. A. increases as more cars are produced. 11. B. additional units of output of one good necessitate greater reductions in the other good. 12. C. The labor force is growing at a constant rate. 13. D. the economy cannot produce more of one good without giving up the production of another good. 14. A. Increasing the quantity of labor 15. D. the curve shifting out away from the origin. 16. C. current consumption and future consumption. 17. B. there are greater gains in material well being. 18. D. Justin has the absolute advantage in making waffles. 19. C. given and stable for an individual. 20. D. 80; 560

21. A. 120 22. C. Jeremy would attend more Spurs games and less Rihanna concerts. 23. B. 60 24. C. $20 25. C. is not an optimum because the consumer has not spent all of her money. 26. B. will purchase more of a good that has become relatively cheaper, and less of a good that has become relatively more expensive. 27. B. Quantity demanded increases by 2 hamburgers. 28. D. the set of consumption alternatives that yield the same amount of total utility. 29. A. Points A & C 30. A. preferred to points A and B.

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