Sample Homework/Quiz/Exam Questions

• Sample Homework

• Sample Quiz

• Sample Final Exam

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Economics 101 - Summer Session I (2012) Melati NungsariPrinciples of Economics UNC at Chapel Hill

Student Last Name:Student First Name:PID:Honor Code Signature:

HW #1 Due - 01/23/12 @ the beginning of class

Instructions:

• Students may work together but each must turn in their own assignment.

• You are graded on effort for this homework assignment. The questions are compiled from varioustextbooks and materials and are designed to deepen your understanding on the material.

• Answers to the multiple choice questions do not have to be submitted on a scantron at the duedate/time (just circle your answer on the homework sheet and turn it in).

• Answers to the short answer questions should be written on a separate sheet of paper and stapledto the homework sheet.

1. Economics is the study of

A. production methods.

B. how society manages its scarce resources.

C. how households decide who performs which tasks.

D. the interaction of business and government.

2. After much consideration, you have chosen Cancun over Ft. Lauderdale as your SpringBreak destination this year. However, Spring Break is still months away, and you mayreverse this decision. Which of the following events would prompt you to reverse thisdecision?

A. The marginal benefit of going to Cancun increases.

B. The marginal cost of going to Cancun decreases.

C. The marginal benefit of going to Ft. Lauderdale decreases.

D. The marginal cost of going to Ft. Lauderdale decreases.

3. For which of the following individuals would the opportunity cost of going to college behighest?

A. a promising young mathematician who will command a high salary once she earnsher college degree

B. a student with average grades who has never held a job

C. a famous, highly-paid actor who wants to take time away from show business tofinish college and earn a degree

D. a student who is the best player on his college basketball team, but who lacks theskills necessary to play professional basketball

4. Ed spends an hour studying instead of watching TV with his friends. The opportunity costto him of studying is

A. the improvement in his grades from studying for the hour

B. the improvement in his grades from studying minus the enjoyment of watchingTV

C. the enjoyment he would have received if he had watched TV with his friends

D. zero. Since Ed chose to study rather than to watch TV, the value of studyingmust have been greater than the value of watching TV.

5. The production possibilities frontier illustrates

A. the combinations of output thatan economy should produce

B. the combinations of output that an economy should consume

C. the combinations of output that an economy can produce

D. all of the above is correct

6. Consider two individuals Marquis and Serena each of whom would like to wear sweatersand eat tasty food. The gains from trade between Marquis and Serena are most obvious inwhich of the following cases?

A. Marquis is very good at knitting sweaters and at cooking tasty food, but Serenasskills in both of these activities are very poor.

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B. Marquis and Serena both are very good at cooking tasty food, but neither hasthe necessary skills to knit a sweater.

C. Marquiss cooking and knitting skills are very poor, and Serenas cooking andknitting skills are also very poor.

D. Marquiss skills are such that he can produce only sweaters, and Serenas skills aresuch that she can produce only tasty food.

Table 1: Production of England and Spain for

Cheese Bread Cheese Bread

England 1 4 40 10Spain 4 8 10 5

7. Assume that England and Spain can both produce either cheese or bread. The opportunitycost of 1 unit of cheese for England is

A. 14 unit of bread.

B. 1 hour of labor.

C. 4 units of bread.

D. 4 hours of labor.

8. The opportunity cost of 1 unit of cheese for Spain is

A. 12 unit of bread.

B. 2 hours of labor.

C. 2 units of bread.

D. 4 hours of labor.

9. The opportunity cost of 1 unit of bread for England is

A. 14 unit of cheese.

B. 14 hour of labor.

C. 4 units of cheese.

D. 4 hours of labor.

10. The opportunity cost of 1 unit of bread for Spain is

A. 12 unit of cheese.

B. 12 hour of labor.

C. 2 units of cheese.

D. 8 hours of labor.

11. England has an absolute advantage in the production of

A. cheese and Spain has an absolute advantage in the production of bread.

B. bread and Spain has an absolute advantage in the production of cheese.

C. both goods and Spain has an absolute advantage in the production of neithergood.

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D. neither good and Spain has an absolute advantage in the production of bothgoods.

12. England has a comparative advantage in the production of

A. cheese and Spain has a comparative advantage in the production of bread.

B. bread and Spain has a comparative advantage in the production of cheese.

C. both goods and Spain has a comparative advantage in the production of neithergood.

D. neither good and Spain has a comparative advantage in the production of bothgoods.

13. England should specialize in the production of

A. cheese and Spain should specialize in the production of bread.

B. bread and Spain should specialize in the production of cheese.

C. both goods and Spain should specialize in the production of neither good.

D. neither good and Spain should specialize in the production of both goods.

14. Assume that England and Spain each has 40 labor hours available. Originally, each countrydivided its time equally between the production of cheese and bread. Now, each countryspends all its time producing the good in which it has a comparative advantage. As a result,the total output of cheese increased by

A. 15.

B. 20.

C. 25.

D. 40.

15. If England and Spain each spends all its time producing the good in which it has a com-parative advantage and the countries agree to trade 2 units of bread for 6 units of cheese,then England will consume

A. 34 units of cheese and 2 units of bread and Spain will consume 6 units of cheeseand 3 units of bread.

B. 34 units of cheese and 2 units of bread and Spain will consume 16 units of cheeseand 3 units of bread.

C. 34 units of cheese and 12 units of bread and Spain will consume 6 units of cheeseand 3 units of bread.

D. 34 units of cheese and 12 units of bread and Spain will consume 16 units of cheeseand 3 units of bread.

16. Suppose that without trade, England produced and consumed 32 units of cheese and 2 unitsof bread and Spain produced and consumed 6 units of cheese and 2 units of bread. Then,each country agreed to specialize in the production of the good in which it has a comparativeadvantage and trade 7 units of cheese for 2.5 units of bread. As a result, England gained

A. 0 units of cheese and 0.5 unit of bread and Spain gained 1 unit of cheese and 0.5unit of bread.

B. 1 unit of cheese and 0.5 unit of bread and Spain gained 1 unit of cheese and 0.5unit of bread.

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C. 7 units of cheese and 2.5 units of bread and Spain gained 7 units of cheese and2.5 units of bread.

D. 33 units of cheese and 2.5 units of bread and Spain gained 7 units of cheese and2.5 units of bread.

Table 2: Production of Andia and Zardia for Questions

Minutes Needed to Make 1 Bushel of Wheat Minutes Needed to Make 1 Pound of Beef

Andia 20 12Zardia 15 10

17. Assume that Andia and Zardia each has 360 minutes available. If each person divides histime equally between the production of wheat and beef, then total production is

A. 10.5 bushels of wheat and 16.5 pounds of beef.

B. 21 bushels of wheat and 33 pounds of beef.

C. 35 bushels of wheat and 22 pounds of beef.

D. 42 bushels of wheat and 66 pounds of beef.

18. Which of the following combinations of wheat and beef could Andia produce in one 8-hourday?

A. 6 bushels of wheat and 35 pounds of beef

B. 9 bushels of wheat and 25 pounds of beef

C. 15 bushels of wheat and 20 pounds of beef

D. 24 bushels of wheat and 40 pounds of beef

19. Which of the following combinations of wheat and beef could Zardia not produce in one10-hour day?

A. 10 bushels of wheat and 45 pounds of beef

B. 20 bushels of wheat and 30 pounds of beef

C. 25 bushels of wheat and 25 pounds of beef

D. 30 bushels of wheat and 15 pounds of beef

20. If marijuana were legalized, it is likely that there would be an increase in the supply ofmarijuana. Advocates of marijuana legalization argue that this would significantly reducethe amount of revenue going to the criminal organizations that currently supply marijuana.These advocates believe that the

A. supply for marijuana is elastic.

B. demand for marijuana is elastic.

C. supply for marijuana is inelastic.

D. demand for marijuana is inelastic.

21. When studying how some event or policy affects a market, elasticity provides informationon the

A. equity effects on the market by identifying the winners and losers.

B. magnitude of the effect on the market.

C. speed of adjustment of the market in response to the event or policy.

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D. number of market participants who are directly affected by the event or policy.

22. For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantitydemanded. Which of the following statements is most likely applicable to this good?

A. The relevant time horizon is short.

B. The good is a necessity.

C. The market for the good is broadly defined.

D. There are many close substitutes for this good.

23. Suppose that demand for a product called widgets is given by Q = 125− 5P . If the supplyof widgets is given by Q = 5 + P , find the equilibrium price and quantity of widgets andillustrate the equlibrium graphically.

24. Suppose that the demand for boots is given by Q = 30 − P + I where I is the consumer’sincome. The supply of boots is given by Q = 2P − 4.a) Are boots a normal good? Why?b) Suppose that the consumer’s income is initially at I = 20. What is the demand forboots?c) With I = 20, what the equilibrium price and quantity for boots?d) Suppose income falls to I = 10, what happens to the equilibrium price and quantity ofboots?

25. For each of the following events, describe and show graphically what happens (if anything)to the supply and demand curves, and what happens to the equilibrium price and quantity(increase, decrease, no change, cant tell):a. What happens in the movie market if movies are a normal good and consumers receivemore income?b. What happens in the market for big, gas-guzzling cars if the price of gasoline rises?c. What happens in the wheat market if scientists discover a higher-yielding strain of wheat?d. What happens in the beef market if there is an increase in the price of chicken and anincrease in the price of feed for cattle?

26. When the Shaffers had a monthly income of $4000, they usually ate out 8 times a month.Now that the couple makes $4500 a month, they eat out 10 times a month. Compute thecouple’s income elasticity of demand using the midpoint method. Explain your answer. Isa restaurant meal a normal or inferior good to the couple?

27. Given the following information, draw Aruba and Iceland’s Production Possibilities Fron-tiers assuming 100 labor hours are available to each country. Be sure to label each axisproperly!

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28. Suppose we are analyzing the market for shirts. The demand function is given by P =70 − 1

6Q and supply is given by P = 56Q.

1. What is P and Q in equilibrium? Illustrate these values graphically.2. Compute what consumer surplus and producer surplus is and indicate it on the graph.What is the total surplus?3. Now suppose that the government imposes a 20% tax on sellers of shirts. This causes thesupply curve to shift left since for a given price, suppliers are willing to supply less since afraction of the price they get goes to the government as tax. Assume that this now meansthat the new supply curve is given by P = Q and demand is unchanged. What are the newequilibrium values? Illustrate this graphically.5. What is the consumer surplus now? Producer surplus? How about tax revenues for thegovernment?6. Define deadweight loss.7. Is there a deadweight loss from this taxation? If yes, state its value and indicate it onthe graph.

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Economics 101 - Summer I (2012) Melati NungsariIntroduction to Economics UNC at Chapel Hill

Student Last Name:Student First Name:PID:Honor Code Signature:

Quiz 2

Instructions:

• You have 30 minutes to complete this quiz.

• This quiz contains 10 multiple choice questions (equally weighted) and 1 short answer question (3subquestions).

• You must fill in a Scantron sheet with the answers to your multiple choice questions.

• For the short answer question, you may use the space provided underneath the subquestions.

• Partial credit will be given for those who show their work!

1. Driving a car causes more air pollution than taking the train but individuals face no costfor pollution (i.e., clean air is not priced). What sort of externality is this (if any)?

A. Positive Externality

B. Negative Externality

C. No Externality

D. Not enough information is given

2. From Question 1: What could the government do to insure that there is no externality?

A. Impose a tax on train fares

B. Impose a tax on gasoline

C. Subsidize the prices of cars

D. Do nothing since there is no externality

3. The demand for a lamb gyro at Med Deli is elastic because the percent change in thequantity demanded of gyros in response to a 10% rise in prices is

A. an increase of more than 10 percentt

B. a decrease of less than 10 percent

C. an increase of less than 10 percent

D. a decrease of more than 10 percent

4. Suppose the price of potato chips decreases from $1.45 to $1.25 and, as a result, the quantityof potato chips demanded increases from 2000 to 2200. Using the midpoint method, theprice elasticity of demand for potato chips in the given price range is

A. 2

B. 1.55

C. 1

D. 0.6

5. Which of the following is likely to have the most price inelastic demand?

A. Nike Air running shoes

B. shoes

C. running shoes

D. Nike running shoes

6. Suppose Martha has a weekly budget of $20 and she only wishes to buy 3 goods: pens, movietickets and roast beef sandwiches. Suppose that one sandwich costs $2, a movie ticket costs$6 and a pen costs $1. Here is the total utility attached to each of the following purchases:

Table 1: Total Utility for Each Purchase

Quantity Sandwich Movie Tickets Pens

1 50 240 202 90 330 353 120 390 454 140 420 50

Let x be the number of sanwiches, y be the number of movie tickets and z be the numberof pens. What is Martha’s budget constraint?

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A. 2x + 6y + z = 20

B. 6x + 2y + 2z = 20

C. 6x + y + 2z = 20

D. x + 6y + z = 20

7. Which of the following combinations is affordable given Martha’s budget?

A. 4 sandwiches, 3 movies, 4 pens

B. 2 sandwiches, 4 movies, 2 pens

C. 4 sandwiches, 1 movie, 4 pens

D. 3 sandwiches, 3 movies, 3 pens

8. What is the affordable combination that provides Martha with the greatest utility?

A. 4 sandwiches, 3 movies, 3 pens

B. 3 sandwiches, 2 movies, 2 pens

C. 2 sandwiches, 2 movies, 4 pens

D. None of the above

9. At the optimal and affordable consumption level that maximizes total utility, what is themarginal utility per dollar spent?

A. 20

B. 10

C. 15

D. 5

10. For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantitydemanded. Which of the following statements is most likely applicable to this good?

A. The relevant time horizon is short.

B. The good is a necessity.

C. The market for the good is broadly defined.

D. There are many close substitutes for this good.

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11. Anne is an opera singer and Bill is a writer. Anne and Bill live next door to each other.Bill loves his peace and quiet while Anne loves to practice singing. The following arethe monthly gains to Anne and Bill when Anne’s room is and is not soundproofed:

Table 2: Gains to Anne and Bill

Soundproofed Not Soundproofed

Gains to Anne 100 150Gaines to Bill 120 80

a) What does the Coase Theorem say? (2 points)

b) What is the socially efficient outcome? (i.e. Is it efficient for Anne’s room to be sound-proofed or not soundproofed?) Why? Explain your answer. (2 points)

c) Suppose that Anne has the legal right to make as much noise as she wants. Supposealso that Anne and Bill can negotiate at no cost. Will Anne soundproof her room? Is thischoice socially efficient? Explain your answer. (4 points)

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Economics 101 - Summer I (2012) Melati NungsariIntroduction to Economics UNC at Chapel Hill

Student Last Name:Student First Name:PID:Honor Code Signature:

Final Exam

Instructions:

• You have 3 hours to complete this exam.

• This exam consists of 50 equally weighted multiple-choice questions (worth 50 points) and 3 shortanswer questions (worth 25 points). Answer all multiple choice questions by both marking yourScantron sheet and by circling the correct answer on the examination itself. In the case of conflict,the Scantron answer is the official answer. The answers to the short answer questions should bewritten underneath the questions.

• You are allowed the use of a calculator but you may not use notes, books, cell phones or anyelectronic device. You may not talk with other students or look at the exam papers of other students.

• If you believe there is no right answer or more than one right answer to any question, explainyour reasoning on the “Appeals” page. I will not consider an appeal unless you have recorded yourargument on the exam sheet during the exam period.

• When you have finished the examination, sign the Honor Code Pledge. I will not consider anexamination valid unless you sign the pledge.

Appeals

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1. Peanut butter and grape jelly are complements. What happens in the peanut butter marketwhen the price of grapes rise?

A. the supply curve for peanut butter shifts to the right

B. the demand curve for peanut butter shifts to the right

C. the price of peanut butter falls

D. all of the above

2. All else equal, when the price of a good falls, consumer surplus

A. decreases

B. increases

C. will increase only if the good is inferior

D. none of the above

3. Suppose the banking system currently has $300 billion in reserves; the reserve requirementis 10 percent; and excess reserves amount to $3 billion. What is the level of deposits?

A. $3, 300 billion

B. $2, 970 billion

C. $2, 700 billion

D. $2, 673 billion

4. Suppose Joe starts his own business. In the first year of business, he earns $100, 000 intotal revenue and incurs $75, 000 in explicit costs. If Joe has a standing offer to work forhis brother at a salary of $50, 000, then the economic profit of Joes business is

A. $25, 000

B. $75, 000

C. -$25, 000

D. $100, 000

5. Residents of your city are charged a fixed weekly fee of $9 for garbage collection. Theyare allowed to put out as many trash bags as they wish. The average household disposesof three trash bags of garbage per week under this plan. Suppose that your city changesto a “tag” system. Each trash bag to be collected must have a tag affixed. Tags cost $3each and are not reusable. What effect do you think the introduction of the tag system willhave on the total quantity of garbage collected in your city? The Tag System is likely to

the quantity of garbage collected because .

A. Leave unchanged, because citizens have already shown that they are willing topay $9.00 to dispose of three bags per week.

B. Leave unchanged, because the average cost of garbage service is the same underboth plans.

C. Reduce, because the marginal benefit of discarding garbage is lower under the tagsystem.

D. Reduce, because the marginal cost of discarding garbage is higher un-der the tag system.

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6. Assume that Andia and Zardia can switch between producing wheat and producing beef.The following are the number of minutes needed to make 1 unit of each good.

Table 1: Minutes Needed to Make 1

Bushel of Wheat Pound of Beef

Andia 20 12Zardia 15 10

What is Andia’s opportunity cost of producing one pound of beef?

A. 35

B. 65

C. 43

D. 53

7. Refer to Table 1. What is Zardia’s opportunity cost of producing one bushel of wheat?

A. 23

B. 34

C. 56

D. 32

8. Refer to Table 1. Andia has an absolute advantage in the production of

A. wheat and Zardia has an absolute advantage in the production of beef.

B. beef and Zardia has an absolute advantage in the production of wheat.

C. both goods and Zardia has an absolute advantage in the production of neithergood.

D. neither good and Zardia has an absolute advantage in the productionof both goods.

9. Refer to Table 1. Andia has a comparative advantage in the production of

A. wheat and Zardia has a comparative advantage in the production of beef.

B. beef and Zardia has a comparative advantage in the production ofwheat.

C. both goods and Zardia has a comparative advantage in the production of neithergood.

D. neither good and Zardia has a comparative advantage in the production of bothgoods.

10. Refer to Table 1. Andia should specialize in the production of

A. wheat and Zardia should specialize in the production of beef.

B. beef and Zardia should specialize in the production of wheat.

C. both goods and Zardia should specialize in the production of neither good.

D. neither good and Zardia should specialize in the production of both goods.

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11. Refer to Table 1. Assume that Andia and Zardia each has 60 minutes available. If eachperson spends all his time producing the good in which he has a comparative advantage,then total production is

A. 3 bushels of wheat and 6 pounds of beef.

B. 3.5 bushels of wheat and 5.5 pounds of beef.

C. 4 bushels of wheat and 5 pounds of beef.

D. 7 bushels of wheat and 11 pounds of beef.

12. If a firm has market power, then its marginal revenue

A. is less than its price

B. is negative at quantities where demand is elastic

C. is zero at the quantity the firm chooses to produce

D. remains constant as long as price remains above the marginal cost

13. Suppose a power plant is located on the banks of a river. The plant must decide how muchhot water to discharge into the stream. If the power plant discharges a large amount ofhot water, it is more valuable because it can cool its equipment at low private cost but thefishery is less valuable because the fish grow poorly. If it discharges a small amount of hotwater, it is less valuable and the fishery is more valuable. The table gives the values of thepower plant and the fishery as a function of the plants discharge decision.

Table 2: Value of power plant and fishery

Hot Water Discharge Decision Value of the Power Plant Value of the Fishery

High Discharge $1, 000, 000 $10, 000Low Discharge $990, 000 $30, 000

The socially optimal decision is a discharge rate because .

A. High, Much more value is created by the power plant than by the Fishery

B. High, It is very expensive for the plant to cool its equipment by other means.

C. Low, low discharge triples the value of the fishery.

D. Low, the social value of the power plant and fishery are higher whendischarge is low.

14. Refer to Table 2. Suppose there is no law against the plant discharging hot water into thestream. Provided that bargaining is not very expensive and outcomes are easily verified byall, what will happen when bargaining occurs?

A. The fishery will pay somewhere between $10, 000 and $20, 000 to inducethe power plant to choose a low discharge rate.

B. The plant will pay the fishery something more than $10, 000 to allow it to choosea high discharge rate.

C. The power plant will decide that too much is at stake to bargain with the fishery.

D. A tax on hot water discharge will be necessary to obtain the socially optimaloutcome.

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15. The demand for a Ford Focus (a brand of a compact car) is likely to be elasticthan the demand for a compact automobile because .

A. Less, there are good substitutes for a Focus.

B. Less, an auto accounts for a small part of a consumers budget.

C. More, there are many different compact cars on the market.

D. More, many drivers are loyal to the Ford brand.

16. For years the citizens of Small Land had experienced an annual inflation rate of 3 percentandhad come to think of 3 percent as the normal rate of inflation. Then, in 2006, the rate ofinflation rose to 6 percent. Which of the following statements correctly describes the winnersand losers from inflation in 2006?

A. No one benefited because the rise in inflation created dead weight loss.

B. Small Land borrowers benefited at the expense of Small Land lenders.

C. Small Land savers benefited at the expense of Small Land investors.

D. Small Land workers benefited at the expense of Small Land employers.

17. As price elasticity of demand approaches 0, very small changes in price lead to

A. very large changes in quantity demanded.

B. very small changes in quantity demanded.

C. no change in quantity demanded.

D. None of the above is correct.

18. It is necessary for a Duke student to wait in line to obtain a ticket to a Blue Devil basketballgame but students are not required to purchase their tickets (i.e., they pay 0 to obtain theticket). Which of the following correctly explains why the cost of a ticket is not the samefor all students?

A. Some students care to sit closer to the playing floor than others.

B. Some students enjoy watching basketball more than others.

C. Some students are more loyal fans than others.

D. Some students have more valuable alternative uses of their time thanothers.

19. A checking deposit functions as

A. a medium of exchange and as a store of value.

B. a medium of exchange, but not as a store of value.

C. a store of value, but not as a medium of exchange.

D. neither a medium of exchange nor as a store of value.

20. A closed economy does not

A. trade with other economies.

B. have free markets.

C. allow financial intermediation.

D. All of the above are correct.

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Good Price Elasticity of Demand

A 1.3B 2.1

21. Which of the following is consistent with the elasticities given above?

A. A is a luxury, and B is a necessity.

B. A is a good several years after a price increase, and B is that same good severaldays after the price increase.

C. A is a Kit Kat bar, and B is candy.

D. A has fewer substitutes than B.

22. Ryan says that he would buy one cup of coffee every day regardless of the price. If he istelling the truth, Ryan’s

A. demand for coffee is perfectly inelastic.

B. price elasticity of demand for coffee is 1.

C. income elasticity of demand for coffee is 0.

D. None of the above answers is correct.

23. A local park filled with picnickers is

A. excludable and rival in consumption.

B. excludable and not rival in consumption.

C. not excludable and rival in consumption.

D. not excludable and not rival in consumption.

24. Consider a small economy in which consumers buy only two goods: pretzels and cookies.In order to compute the consumer price index for this economy for two or more consecutiveyears, we assume that

A. the percentage change in the price of pretzels is equal to the percentage changein the price of cookies from year to year.

B. the number of pretzels bought by the typical consumer is equal to the number ofcookies bought by the typical consumer in each year.

C. neither the number of pretzels nor the number of cookies bought bythe typical consumer changes from year to year.

D. neither the price of pretzels nor the price of cookies changes from year to year.

25. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basketconsists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazinecost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in2007 was 125, then how much did a magazine cost in 2007?

A. $0.83

B. $2.25

C. $2.50

D. $3.00

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26. Which of the following is an example of a positive externality?

A. Sue not catching the flu because she got a flu vaccine

B. Mary not catching the flu from Sue because Sue got a flu vaccine

C. Sue catching the flu because she did not get a flu vaccine

D. Mary catching the flu from Sue because Sue did not get a flu vaccine

27. Because resources are scarce, an economist would say

A. The best things in life are free.

B. Wants are unlimited.

C. Every choice has an opportunity cost.

D. Marginal benefit is equal to marginal cost.

28. If a binding price floor is imposed on the video game market, then

A. the demand for video games will decrease.

B. the supply of video games will increase.

C. a surplus of video games will develop.

D. All of the above are correct.

29. Pepper’s Pizza is having a sale on pizza. Today only, a slice of plain cheese pizza is $1.75,rather than the normal price of $2.25. You decide to have three slices of pizza for lunchinstead of your normal purchase of two. Which of the following would be a correct economicexplanation of your decision?

A. The marginal benefit of the third slice was higher than the marginal benefit ofthe second slice.

B. The marginal cost of a slice was lower than the marginal benefit forthe third slice but higher than the marginal benefit for a fourth.

C. The sale implied that the marginal cost of pizza fell below marginal benefit andstayed there.

D. The sale implied that eating more pizza freed up resources for other economicactivities.

30. Imagine an economy in which: (1) pieces of paper called yollars are the only thing thatbuyers give to sellers when they buy goods and services, so it would be common to use,say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so youmight walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3)yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. Inthis economy,

A. the yardstick is a medium of exchange but it cannot serve as a unit of account.

B. the yardstick is a unit of account but it cannot serve as a store of value.

C. the yardstick is a medium of exchange but it cannot serve as a store of value, andthe yollar is a unit of account.

D. the yollar is a unit of account, but it is not a medium of exchange and it is not aliquid asset.

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31. If real GDP doubles and the GDP deflator doubles, then nominal GDP

A. remains constant.

B. doubles.

C. triples.

D. quadruples.

32. Suppose the banking system currently has $400 billion in reserves, the reserve requirementis $10 percent, and excess reserves are $3 billion. What is the level of loans?

A. $3, 603

B. $3, 600

C. $3, 573

D. $3, 570

33. The Fed increases the reserve requirement, but it wants to offset the effects on the moneysupply. Which of the following should it do?

A. sell bonds to increase reserves

B. sell bonds to decrease reserves

C. buy bonds to increase reserves

D. buy bonds to decrease reserves

34. If you adhered to the classical economics paradigm, which of the following statements wouldyou disagree with?

A. Money has no intrinsic value.

B. Government regulation of markets is needed to ensure the harmony ofindividual and national interests.

C. The economy and markets are self-adjusting.

D. Real factors matter more than monetary ones in determining output and employ-ment.

35. The economy’s two most important financial markets are

A. the investment market and the saving market.

B. the bond market and the stock market.

C. banks and the stock market.

D. financial markets and financial institutions.

36. A national chain of grocery stores wants to finance the construction of several new stores.The firm has limited internal funds, so it likely will

A. demand the required funds by buying bonds.

B. demand the required funds by selling bonds.

C. supply the required funds by buying bonds.

D. supply the required funds by selling bonds.

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37. Suppose an increase in government spending on military equipment leads to an increasedgovernment budget deficit. If no other changes occur, there will be a(n) innational saving and a(n) in the real interest rate.

A. Increase, Increase

B. Increase, Decrease

C. Decrease, Decrease

D. Decrease, Increase

38. If the tax revenue of the federal government exceeds spending, then the government neces-sarily

A. runs a budget deficit.

B. runs a budget surplus.

C. runs a national debt.

D. will increase taxes.

39. Kathleen is considering expanding her dress shop. If interest rates rise she is

A. less likely to expand. This illustrates why the supply of loanable funds slopesdownward.

B. more likely to expand. This illustrates why the supply of loanable funds slopesupward.

C. less likely to expand. This illustrates why the demand for loanablefunds slopes downward.

D. more likely to expand. This illustrates why the demand for loanable funds slopesupward.

40. If the demand for loanable funds shifts to the left, then the equilibrium interest rate

A. and quantity of loanable funds rise.

B. and quantity of loanable funds fall.

C. rises and the quantity of loanable funds falls.

D. falls and the quantity of loanable funds rises.

41. If the inflation rate is 2 percent and the real interest rate is 3 percent, then the nominalinterest rate is

A. 5 percent.

B. 1 percent.

C. 1.5 percent

D. 0.67 percent.

42. Crowding out occurs when investment declines because

A. a budget deficit makes interest rates rise.

B. a budget deficit makes interest rates fall.

C. a budget surplus makes interest rates rise.

D. a budget surplus makes interest rates fall.

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43. Gross domestic product measures

A. income and expenditures.

B. income but not expenditures.

C. expenditures but not income.

D. neither income nor expenditures.

44. Bountiful Harvest Bakery buys $4.00 of flour from Grinkers’ Mill and uses the flour to makebread sold to the public for $12.00. Taking these two transactions into account, what is theeffect on GDP?

A. GDP increases by $4.00

B. GDP increases by $8.00

C. GDP increases by $12.00

D. GDP increases by $16.00

45. Sheri, a U.S. citizen, works only in Germany. The value she adds to production in Germanyis included

A. in both German GDP and U.S. GDP.

B. in German GDP, but is not included in U.S. GDP.

C. in U.S. GDP, but is not included in German GDP.

D. in neither German GDP nor U.S. GDP.

46. The CPI was 172 in 2007, and the CPI was 46.5 in 1982. If your parents put aside $1, 000for you in 1982, then how much would you have needed in 2007 in order to buy what youcould have bought with the $1, 000 in 1982?

A. $270.35

B. $1, 255.00

C. $2, 698.92

D. $3, 698.92

47. The BLS counts discouraged workers as

A. employed. Including them as employed makes the unemployment rate lower thanotherwise.

B. unemployed. Including them as unemployed makes the unemployment rate higherthan otherwise.

C. out of the labor force. If they were counted as unemployed the unem-ployment rate would be higher.

D. None of the above is correct.

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48. Raleigh is building a new convention center and financing it with revenues raised by acity hotel tax. Some politicians have said that the convention center is essentially free forRaleigh citizens because out-of-town visitors are paying for it. Someone thinking like aneconomist would disagree because:.

A. The hotel tax may cause a reduction in visits to Raleigh.

B. There are other projects that could be undertaken with the tax funds.

C. The convention center may not pass a benefit-cost test.

D. They believe that Raleigh does not need a new convention center.

49. If all workers and all jobs were the same such that all workers were equally well suited forall jobs, then there would be no

A. cyclical unemployment.

B. frictional unemployment.

C. natural rate of unemployment.

D. structural unemployment.

50. Unemployment data are collected

A. from unemployment insurance claims.

B. through a regular survey of about 60,000 households.

C. through a regular survey of about 200,000 firms.

D. using all of the above.

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51. For each of the following questions, state whether you agree or disagree with the followingbold statements and provide a brief explanation of why. No points will be awarded foranswers without explanations. State any assumptions that you make.

a) Jonathan consumes only steak and salad. At his current consumption bundle, he isspending all of his income. His marginal utility from eating steak is 14 and his marginalutility from eating salad is 6. The price of steak is 7. The price of salad is 2. Jonathanshould consume more salad and less steak. (6 points)

b) A firm suffering losses in the short-run will continue to operate as long as itsrevenue will at least cover its fixed costs. (6 points)

c) In reality, firms usually do not have identical costs. As a result, in a perfectlycompetitive market, different consumers will pay different prices for the sameproduct. (6 points)

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d) Suppose that there are two cities that are alike in every way (entertainment, restaurants,job opportunities, school system, salaries, etc.) except for the weather. In Good-Weather-City (GWC) the temperatures are comfortable all year long. In Bad-Weather-City (BWC),the winter brings snow and freezing rain, and the summer has intense heat and high hu-midity. One would expect that the price of similar homes (same size, number ofbedrooms, etc) to be same in both GWC and BWC. (6 points)

e) Cutting the price of a product never increases the amount of revenue raised.To increase revenue, prices have to be increased. (6 points)

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52. At first patents might seem like a deterrent to growth because in effect they restrict the useof new technology. Yet many economists believe that patents generate economic growth.Explain why. (5 points)

53. The following questions are on macroeconomic schools of thought.a) What is a paradigm? (3 points)

b) Let’s go back to the 16th century when mercantilist thought emerged in Europe. Whatwere the two tenets of mercantilism? (6 points)

c) Classical economic thought emerged as an attack on mercantilism. Can you tell mewhat were the two features of classical economics that were key in this attack? (6 points)

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Sample Writing Assignment

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Freakonomics Paper Guideline

ECON 101: Principles of Economics, Summer Session I

August 5, 2012

• The Freakonomics Paper is due at the beginning of class on the last dayof classes, Friday 6/15.

• It should be about 5 pages long, double-spaced with 12 sized font.

• You should have an introduction paragraph to the book. For example:“The book Freakonomics is about X, Y, and Z. I really hated/liked/feltindifferent about the book. In general, the book is trying to accomplishA. I think the main message it got across was B.” So basically what I wantto see is just a paragraph that would give me a good sense of what thebook is about. A good way to accomplish this is thinking of what youwould write if you had to explain the book in a few minutes to a friendwho has never taken an economics class or read Freakonomics

• Then, you choose your 4 favorite chapters and spend 2-3 paragraphs oneach. The first paragraph can be a summary of the chapter, the secondcan be an explanation of the economic concepts used in the chapter andthe third can be what you thought about it. Example: “The first chapterthat I’ve chosen to write about is the one on how drug dealers still livewith their mothers, etc etc etc. The authors used the economic concept ofincentives to describe this phenomenon. I found this interesting becauseof blahblahblah.”

• After you’re done with that, you would need a concluding paragraph thatwould go something like “Overall, I hated Freakonomics. It portrayedpeople in a manner which I thought was inconsistent with how I view thebehavior of humans. The four chapters that I chose clearly showed methat *insert summary of what you learned to support what you think*”

• Don’t worry too much about citations, just quote the authors in quotationmarks or paraphrase. Obviously, since I’ve read the book (multiple times),I know it very well and I will know if your paper is just a carbon copy of thebook. What I’m looking for is your analysis on which economic conceptsare used, whether you thought it made sense and what you thought aboutthe book in general. This is supposed to be a fun paper on a fun book sojust let the creativity flow.

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