ECON121: Midterm 1 Exam Review (Solutions to selected questions)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1) Economics is best defined as the study of:
A) the financial concerns of businesses and individuals.
B) how people make choices in the face of scarcity and the implications of those choices for society as a whole.
C) inflation, interest rates and the stock market.
D) supply and demand.

2) All economic questions arise because we

A) have an abundance of resources.
B) want more than we can get.
C) have limited wants that need to be satisfied.
D) want more than we need.

3) Studying the determination of prices in individual markets is primarily a concern of

A) microeconomics. B) macroeconomics.
C) positive economics. D) negative economics.

4) Which of the following questions is NOT a microeconomic question?

A) Can the Federal Reserve keep income growing by cutting interest rates?
B) What is Britney's opportunity cost of having another baby?
C) Does the United States have a comparative advantage in information technology services?
D) How would a tax on e-commerce affect eBay?

5) In broad terms the difference between microeconomics and macroeconomics is that

A) they use different sets of tools and ideas.
B) macroeconomics studies the effects of government regulation and taxes on the price of individual goods and
services whereas microeconomics does not.
C) microeconomics studies the effects of government taxes on the national unemployment rate.
D) microeconomics studies decisions of individual people and firms and macroeconomics studies the entire national
economy.

6) During the summer you have made the decision to attend summer school, which prevents you from working at
your usual summer job in which you normally earn $6,000 for the summer. Your tuition cost is $3,000 and books
and supplies cost $1,300. In terms of dollars, the opportunity cost of attending summer school is

A) $3,300. B) $4,300. C) $6,000. D) $10,300.

Opportunity cost = Explicit costs + Implicit costs
EC = tuition and school supplies = 3,000+1,300=4,300
IC=forgone salary of $6,000
OC=EC+IC=$10,300

7) During the summer you have made the decision to attend summer school, which prevents you from working at
your usual summer job in which you normally earn $6,000 for the summer. Your tuition cost is $3,000 and books
and supplies cost $1,300. The explicit cost of attending summer school is

A) $10,300. B) $4,300. C) $6,000. D) $3,000.

EC = tuition and school supplies = 3,000+1,300=4,300
8) The accompanying table below shows the relationship between the number of times you get your car washed
each month and your total monthly benefit from car washes. Each car wash costs $15.
Number of Car Washes Per Month Total Monthly Benefit from Car Washes
0 $0
1 $20
2 $36
3 $48
4 $56
5 $60

What is the marginal cost of the 5th car wash each month?

A) $15 B) $12 C) $14 D) $4

Since each car wash costs $15 → marginal (additional) cost of 5th car wash is $15

9) The accompanying table below shows the relationship between the number of times you get your car washed
each month and your total monthly benefit from car washes. Each car wash costs $15.

Number of Car Washes Per Month Total Monthly Benefit from Car Washes
0 $0
1 $20
2 $36
3 $48
4 $56
5 $60

What is the marginal benefit of the 3rd car wash each month?

A) $16 B) $4 C) $48 D) $12

Marginal benefit of 3rd unit = additional benefit resulting from increasing number of car washes from 2 to 3 units
(change in the total benefit when we increase quantities from 2 to 3 units).
MB = 48-36=$12

10) During the summer you have made the decision to attend summer school, which prevents you from working at
your usual summer job in which you normally earn $6,000 for the summer. Your tuition cost is $3,000 and books
and supplies cost $1,300. The implicit cost of attending summer school is

A) $6,000. B) $10,300. C) $4,300. D) $3,000.

IC=forgone salary of $6,000
11) The accompanying figure shows Becky's daily production possibilities curve for dresses and skirts.

The maximum number of dresses that Becky can make in a day is represented by point:

A) W B) V C) T D) U
Maximum quantity of dresses equals to 4. This is the case when the firm only produces dresses and zero units of
skirts (point W on PPF curve).

12) The accompanying figure shows Becky's daily production possibilities curve for dresses and skirts.

Of the labeled points, only ________ are efficient.

A) W, X, Y, Z, and V B) W, X, Y, Z, V, and T
C) T and U D) X, Y, and Z
The ones on PPF: W, X, Y, Z, V
Efficient bundles are those that lie on PPF. Those are efficient because all the factors of production are used efficiently (case where there
the economy faces full employment).
13) In the figure above, if the quantity of yogurt produced increases from 2 gallons an hour to 3 gallons an hour, the
opportunity cost of a gallon of yogurt in terms of ice cream is

A) 4 gallons. B) half a gallon. C) 3 gallons. D) 1 gallon.

To increase the production of milk from 2 gallons to 3 gallons, firm should decrease production of ice cream from
4 to 3 gallons. So, opportunity cost of additional gallon of milk is 1 gallon of ice cream.

14) Refer to the accompanying table. According to the table, Corey has the absolute advantage in:
Pizzas Made Per Hour Pizzas Delivered Per Hour
Corey 12 6
Pat 10 15

A) neither making nor delivering pizza. B) making and delivering pizza.

C) delivering pizza. D) making pizza.
Corey has absolute advantage in making pizzas. He can make 2 more pizzas per hour than Pat.

15) Refer to the accompanying table. Corey's opportunity cost of making of a pizza is delivering:

Pizzas Made Per Hour Pizzas Delivered Per Hour

Corey 12 6
Pat 10 15

A) 2/3 of a pizza. B) 2 pizzas. C) 3/2 of a pizza. D) 1/2 of a pizza.

Corey: 12 Pizzas = 6 Deliveries → 1 Pizza = 6/12 = ½ delivery

16) Refer to the accompanying table. Pat's opportunity cost of delivering a pizza is making:

Pizzas Made Per Hour Pizzas Delivered Per Hour

Corey 12 6
Pat 10 15

A) 12 pizzas. B) 10 pizzas. C) 2/3 of a pizza. D) 3/2 of a pizza.

Pat: 15 Deliveries = 10 Pizzas → 1 Delivery = 10/15=2/3 Pizza
In general:
Corey
12 Pizzas = 6 Deliveries → Opportunity cost of 1 Pizza = ½ Delivery
6 Deliveries = 12 Pizzas → Opportunity cost of 1 Delivery = 2 Pizzas

Pat
10 Pizzas = 15 Deliveries → Opportunity cost of 1 Pizza =15/10 = 3/2 Delivery
15 Deliveries = 10 Pizzas → Opportunity cost of 1 Delivery = 10/15=2/3 Pizza
17) Refer to the accompanying figure. At a price of $9, there will be:

A) an excess supply of 5 units. B) an excess demand of 1 unit.

C) an excess demand of 5 units. D) an excess supply of 6 units.
When the price is $9 → quantity demanded equals to 1and quantity supplied equals to 6. Quantity supplied is more
than quantity demanded → market will face surplus of goods (5).

18) In a free market, if the price of a good is below the equilibrium price, then;
A) buyers, hoping to ensure they acquire the good, will bid the price higher.
B) the government will set a higher price to reestablish the market equilibrium.
C) sellers, dissatisfied with growing inventories, will lower their prices.
D) sellers, dissatisfied with growing inventories, will raise their prices.

19) Refer to the accompanying figure. Suppose the solid line represents the current supply of Star Wars action
figures. If the price of the plastic used to make action figures rises, current supply will:

A) shift to S(A).
B) not change; only the quantity supplied will change.
C) shift to S(B).
D) not change because a change in the price of plastic will not affect the demand for action figures.
Increase in the cost of production shifts the supply curve to the left.

20) Refer to the accompanying figure. Suppose the solid line shows the current demand for coffee. In response to a
news story explaining that coffee causes heart disease, you should expect:

A) neither a change in quantity demanded nor a shift in demand.

B) the demand curve to shift to D(B) in anticipation of higher future prices.
C) the demand curve to shift to D(A) because some people will stop drinking coffee.
D) the quantity of coffee demanded to decrease, but no shift in the demand curve.
Consumer preference is negatively affected. Demand curve will shift to the left (indicating that there is a decline in
demand).
21) Refer to the given table.
Price Per Unit Demand Units Per Year Supply Units Per Year
$40 110 40
$45 95 50
$50 80 60
$55 65 70
$60 50 80
Suppose the columns in this table reflect demand and supply. If the current market price is $50, then you would
expect:
A) the market price to fall.
B) supply to decrease.
C) the market price to rise.
D) demand to decrease and supply to decrease.
When P=$50 then quantity demanded is 80 and the quantity supplied is 60. Market is facing shortage. There will be
upward push on prices, and they will rise eventually.

22) Refer to the given table. Suppose the columns in this table reflect demand and supply. At a price of $30:
Price Per Unit Demand Units Per Year Supply Units Per Year
$20 100 40
$30 95 50
$40 80 60
$50 65 70
$60 50 80
A) the market will be in equilibrium.
B) there will be an excess supply of 45 units.
C) there will be an excess demand of 95 units.
D) there will be an excess demand of 45 units.
When P=$30 then quantity demanded is 95 and the quantity supplied is 50. Market is facing shortage (excess
demand) of 95-50=45 units.

23) What happens to the demand for Xbox games if the price of an Xbox falls?
A) The demand for Xboxes increases because the price of a complement falls.
B) The demand for Xboxes remains unchanged.
C) The demand for Xboxes decreases because the price of a substitute falls.
D) The demand for Xboxes decreases because the price of a complement falls.
Xbox console and Xbox games are complements. When the price of complement decreases, then the demand for
original product increases.

24) Which of the following would NOT shift the demand curve for turkey?
A) an increase in income
B) a change in people's preferences for turkey
C) a change in the price of a turkey
D) a decrease in the price of ham
Demand will not shift if there are changes in the own price (ie price of turkey).

25) Oatmeal is a normal good and cold cereal is a substitute for oatmeal. Raisins are a complement for oatmeal.
Which of the following increases the demand for oatmeal?
A) a decrease in population B) an increase in the price of cold cereal
C) a decrease in income D) an increase in the price of raisins
Increase in the price of a substitute (cold cereal), increases the demand for the original product (oatmeal). Since,
people who were consuming cereal now switch to oatmeal.
Increase in the price of raisins (complement of oatmeal) will actually decrease the demand for oatmeal.
A decrease in population, decreases the demand for oatmeal.
A decrease in income, decreases demand for oatmeal (since oatmeal is a normal good according to the definition).

26) Over the past decade technological improvements that have lowered the cost of producing an automobile have
increased

A) both the supply and the demand for automobiles.

B) neither the supply nor the demand for automobiles.
C) the demand but not the supply of automobiles.
D) the supply but not the demand for automobiles.
Tech improvement is supply curve shifter.

27) Good A and good B are substitutes in production. The demand for good A decreases, which lowers the price of
good A. The decrease in the price of good A

A) increases the supply of good B. B) increases the demand for good B.

C) decreases the demand for good B. D) decreases the supply of good B.

28) Suppose the market demand curve is given by Qd = 80 - 10P, and the market supply curve is given by Qs = 10 +
15P. What is the equilibrium price and quantity?

A) P* = $3.00 and Q* = 55 B) P* = $2.60 and Q* = 54

C) P* = $2.80 and Q* = 52 D) P* = $2.80 and Q* = 54
In the equilibrium Qd=Qs → 80-10P=10+15P→ 25P=70 → P=70/25 = $2.80
Then use this equilibrium price with either Qd or Qs to calculate the equilibrium quantity.
Q=80-10*2.8=52

29) In the above figure, if D2 is the original demand curve and the population falls, which price and quantity might
result?

A) point a, with price P2 and quantity Q2 B) point b, with price P1 and quantity Q1
C) point c, with price P3 and quantity Q3 D) point d, with price P1 and quantity Q3
Decrease in population shifts the demand curve to the left (Demand will shift from D2 to D1). Supply curve and
demand curve (D1) will intersect at b (where Price = P1 and Quantity = Q1)
30) Which of the following is NOT a final good?
A) a new car sold to Avis for use in their fleet of rental cars
B) a new computer sold to an NYU student
C) a purse sold to a foreign visitor
D) a hot dog sold to a spectator at a Chicago Bears football game
Avis will be using it to provide a service and the price of the car will already be reflected in the price of the rent.

Millions of
Item
dollars
Personal consumption
80
expenditure
Government expenditure on
30
goods and services
Net taxes 35
Gross private domestic
20
investment
Imports of goods and services 10
Exports of goods and services 20

31) Using the information in the table above, calculate the value of GDP.
A) $140 million B) $195 millionC) $185 millionD) $145 million
GDP = C + I + G + NX
C = 80, I = 20, G = 30, NX = X-IM = 20-10
GDP = 80+20+30+20-10= 140

32) An economy produces only 1,000,000 computers valued at $2,000 each. Of these, 200,000 are sold to
consumers, 300,000 are sold to businesses, 300,000 are sold to the government, and 100,000 are sold abroad. No
computers are imported. At the end of the year, the computer manufacturers hold the unsold computers in
inventory. What is the value of GDP?

A) $1.0 billion B) $1.8 billion C) $2.0 billion D) $0.9 billion

Since all of the computers are sold domestically or held in inventory, and because no computers are imported, the
value of GDP is the number of computers times their market value.
That is 1,000,000 × $2,000= $2,000,000,000, or $2 billion.

33) In the base year, real GDP ________ nominal GDP.

A) is equal to B) is greater than
C) could be greater than or less than D) is less than
In the base year, current prices are the prices of the base year.

34) An economy produces only 500,000 tables valued at $100 each. Of these, 100,000 are sold to consumers,
200,000 are sold to businesses, 100,000 are sold to the government, and 50,000 are sold abroad. No tables are
imported. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is the value of
the investment component of GDP?

A) $25 million B) $10 million C) $50 million D) $2 billion

Investment is the value of tables sold to business and the net change in inventory. In this case, 200,000 tables are
sold to business and 50,000 tables are unsold and added to inventory, so 250,000 × $100 = $25 million goes into
investment.
35) Assume an economy produces only hamburgers and hot dogs and the base year is 2016.
Quantities Produced Prices
2016 2017 2016 2017
Hamburgers 2,000 3,000 $2 $3.00
Hot dogs 3,000 4,000 $1 $1.50
Given the data in the table above, what is the value of nominal GDP in 2017?

A) $15,000 B) $ 5,000 C) $ 7,000 D) $10,500

Nominal GDP in 2017 is: (3,000 hamburger × $3) + (4,000 hot dogs × $1.50) = $9,000 + $6,000 = $15,000.

36) Assume an economy produces only footballs and baseballs and the base year is 2016.
Quantities Produced Prices
2016 2017 2016 2017
Hamburgers 200 300 $20 $3.00
Hot dogs 500 600 $10 $1.50
Given the data in the table above, what is the value of real GDP in 2017?

A) $12,500 B) $9,000 C) $12,000 D) $10,000

Real GDP in 2017 is: the quantities in 2017 × prices in the base = (300 footballs × $20) + (600 baseballs × $10) =
$6,000 + 6,000 = $12,000.

37) Which of the expenditure components of GDP can be negative?

A) Consumption spending on services
B) Net exports are negative when imports exceed exports
C) Net exports
D) Consumption spending on durables
Net exports and inventory investments are the only components of GDP that can be negative. Net exports are
negative when imports exceed exports.

38) The CPI is a measure of the:

A) average level of prices relative to prices in the base year.
B) rate of inflation.
C) price of a specific good or service.
D) real wage.
The consumer price index compares the cost of a standard basket of goods and services in any period relative to the
cost of the same basket of goods and services in the base year.

39) Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of
purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2017 equals:

A) 100 B) 83 C) 125 D) 120

CPI is calculated by taking the current price of the basket and dividing it by the historical price of the basket. In this
case, $3,000/$2,500 * 100= 120.

40) If the total expenditures of a typical family equaled $35,000 per year in 2015 and the exact same basket of goods
and services cost $40,000 in the year 2017, the family's cost of living:

A) increased by 14 percent. B) decreased by 14 percent.

C) decreased by 12.5 percent. D) increased by 12.5 percent.
The percentage change in the cost of living is computed by: ($40,000-35,000)/$35,000 *100= 14.3
or taking the current price of the basket divided by the historic price of the basket and then subtracting 1. In this
case, ($40,000/$35,000) – 1 = 0.143, or a 14 percent increase.
41) The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2015, the base
year, the typical consumer purchased 10 books for $25 each and 25 hamburgers for $2 each. In 2017, the typical
consumer purchased 15 books for $30 each and 30 hamburgers for $3 each. The consumer price index for 2017 on
Planet Econ equals:

A) 100 B) 115 C) 125 D) 145

First, note that in the computation of the CPI, the basket of goods and services is fixed - so the quantities remain
the same as in the base year. The market basket cost in 2015 was (10 × $25) + (25 × $2) = $300. The same market
basket's cost in 2017 was (10 × $30) + (25 × $3) = $375, so the consumer price index is 375/300*100=125.

42) A consumer expenditure survey reports the following information on entertainment spending:

2015 2016
Price Quantity Price Quantity
Movies $7 5 $8 7
Concerts $30 2 $35 2
Music $16 7 $15 10

Using 2015 as the base year, by how much does a "cost of entertainment" index increase between 2015 and 2016?

A) 13.4 percentB) 8.6 percent C) 3.9 percent D) 29.4 percent

The entertainment cost in 2015 was (5 × $7) + (2 × $30) + (7 × $16) = $207. Entertainment cost in 2016 was (5 ×
$8) + (2 × $35) + (7 × $15) = $215, so the entertainment price index in 2016 is 215/207*100 = 103.9, or an
increase of 3.9 percent (in the base year the index will be 100, so compared to the base year prices are 3.9% higher
in 2016).

43) The CPI in year one equaled 145. The CPI in year two equaled 151. The rate of inflation between years one and
two was ________ percent.

A) 6.0 B) 4.1 C) 4.0 D) 4.5

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥 – 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝐶𝑃𝐼 151 – 145
The percentage change in CPI is calculated as: ∗ 100. In this case: ∗ 100 =
𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝐶𝑃𝐼 145
4.1, or 4.1 percent.
Answer Key to Midterm 1 Exam Review Questions

1) B
2) B
3) A
4) A
5) D
6) D
7) B
8) A
9) D
10) A
11) A
12) A
13) D
14) D
15) D
16) C
17) A
18) A
19) A
20) C
21) C
22) D
23) A
24) C
25) B
26) D
27) A
28) C
29) B
30) A
31) A
32) C
33) A
34) A
35) A
36) C
37) C
38) A
39) D
40) A
41) C
42) C
43) B