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ANALYSIS OF MARKETS:
COMM 220

MIDTERM 1 MOCK
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1. Suppose a market is in competitive equilibrium. If the supply becomes more elastic,

but the same equilibrium price and quantity is kept, what would happen to consumer and
producer surplus?

a) CS increases and PS remains the same

b) PS decreases and CS remains the same
c) both CS and PS decrease
d) PS decreases and consumer surplus increases

2. Suppose the absolute value of the price elasticity of demand of pineapples is 0.5 while
the price elasticity of supply is 1.45. If there is a $3 tax is levied on pineapples, what
would be the tax incidence (burden) on producers?

a) $0.77
b) $0.44
c) $0.26
d) $0.74

3. Norman Love Confections in Ft. Myers Florida, is the only producer of the Golden
Santa Christmas collection in the world. Norman recently expanded his production from
1000 to 2000 boxes of chocolate candy per Christmas season. If the price elasticity of
demand for Golden Santa boxes of chocolates is 3.33, by how much will the company
have to reduce the price to sell the additional 1000 units (using the midpoint method).

a) 2.5%
b) 125%
c) 25%
d) 20%

4. A manufacturer currently employs labor and capital. At the current output the marginal
product of capital is 80 and labor’s marginal product is 100. The price of capital is $30
and the price of labor is $60. In the long run, the firm should

a) hire more labor and more capital

b) hire more capital and less labor
c) hire less capital and less labor
d) hire less labor and more capital

5. If two inputs are substitutes in production and there is a decrease in the price of one
input that shifts the demand curve for the other input to the right then
a. the scale effect is less than the substitution effect and the two are gross complements.
b. the scale effect dominates the substitution effect and the two are gross substitutes.
c. the scale effect dominates the substitution effect and the two are gross complements.
d. the scale effect is less than the substitution effect and the two are gross substitutes.

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6. If skilled workers are gross substitutes with low-skilled workers, then, when there is an
increase in low-skilled workers:

a. skilled workers wages will go down but their employment will go up.
b. skilled workers wages will go down and their employment will go down.
c. skilled workers wages will go up and their employment will go down.
d. skilled workers wages will go up and their employment will go up.

7. If your non-labor income rises this is likely to:

a) lower your reservation wage

b) increase your economic rent
c) raise your reservation wage
d) none of the above

8. Suppose that at the market clearing price of engines, the price elasticity of demand is
-1.4 and the price elasticity of supply is 0.8. What will result from a binding price ceiling
that is 10% below the market clearing price?

a. a surplus of 22 % of the market clearing quantity

b. a surplus of 2.2 % of the market clearing quantity
c. a shortage of 22% of the market clearing quantity
d. a shortage of 2.2% of the market clearing quantity

9. If the demand function is given by Qd = 500 – 20P and the supply function is Qs=40
then the imposition of a per unit tax will cause:

a) consumers to bear a higher tax burden

b) producers to bear all of the tax burden
c) producers to bear some, but not all of the tax burden
d) consumers and producers to equally share the tax burden
e) the tax burden to be determined by the amount of the tax

10. If the domestic demand is given by Qd= 500 -20P and the domestic supply is given
by Qs = 100 + 10P and the international supply (world price) is given by P=10. What
would be the consumer surplus with free trade?

a) $2250
b) $3300
c) $3000
d) $2000

11. Continuing from the previous question, if there was a $2 tariff imposed, what would
be the tariff revenue and deadweight loss?
a) $80; $60
b) $100; $160
c) $120; $140
d) $140; $60

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12. Continuing from the previous question, if an import quota of 50 is imposed, what
would be the world price?

a) $11.67
b) $3.55
c) $14.2
d) $5.80

13. A manager of a Tim Horton’s is trying to decide how many employees to have
working at the same time during peek hours. Each coffee sells $2.50, and each
employee is paid $37.50 per hour. Given the table below, help her decide how many
employees to schedule

Number of employees Coffees Per Day MRP (Marginal Revenue Product)

0 0
1 20
2 60
3 90
4 105
5 110

a) 1 employee
b) 2 employees
c) 3 employees
d) 4 employees
e) 5 employees

14. The income elasticity of demand for ice cream is -1.4. What is the expected change
in the quantity consumed when income increases by 20%?

a. +28%
b. -28%
c. +0.7%
d. -0.7%

15. In the market for travel mugs, the supply and demand are given by P= 0.33Q and P
= 50-0.5Q respectively. If a $1 per unit tax is imposed, the price of travel mugs will
increase by:

a) $1.50
b) $0.40
c) $1.00
d) $0.60

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16. The battery packs used in electric and hybrid automobiles are one of the largest
components for manufacturing these cars. As the price of these batteries decline, we
expect that the:

a) demand curve for electric and hybrid autos will shift rightward
b) supply curve for electric and hybrid autos will shift rightward
c) supply curve for electric and hybrid autos will shift leftward
d) demand curve for electric and hybrid autos will shift leftward

17. What will happen in the market for cars if the price of steel increases and the price of
gasoline decreases?

a) equilibrium price will increase and equilibrium quantity is indeterminate

b) equilibrium price will decrease and equilibrium quantity is indeterminate
c) equilibrium quantity will decrease and equilibrium price is indeterminate
d) equilibrium quantity will increase and equilibrium price is indeterminate

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