Midterm Exam
ECON 205 (Principles of Economics), Fall 2019-2020
3 Mechanical Engineering/Bioengineering
All questions are worth 5 points.
1. Absolute advantage for the production of a
good refers to
(a) The ability to produce more with fewer
inputs.
(b) The ability to produce at lower opportu-
nity cost.
(c) The ability to sell the good at higher price
than all other producers.
(d) The ability to control the demand for the
product.
(e) All of the above
2. Two goods are called complements, if
(a) a rise in the price of one good leads to a
fall in the demand of the other.
(b) a rise in the price of one good leads to a
rise in the demand of the other.
(c) a rise in the demand of one good leads to
a fall in the demand of the other.
(d) a rise in the supply of one good leads to
a rise in the demand of the other.
(e) none of the above.
3. A normal good is a good for which
(a) demand falls as income increases.
(b) demand increases as income increases.
(c) many substitutes are available.
(d) many complements are available.
(e) none of the above.
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4. A fall in the supply of a good could be caused
by
(a) a fall in the prices of the good’s comple-
ments.
(b) an increase in the prices of inputs impor-
tant to this commodity.
(c) a new production technology.
(d) an increase in consumer income.
(e) none of the above.
5. What is the price elasticity of demand for the
demand curve ln (Q) = 1 0:6 ln (P ) at the
price P = 1?
(a) 1 (b) 0.8 (c) 0.6 (d) 0.5 (e) 0.3
6. The …rst fundamental theorem of welfare eco-
nomics states that the market outcome is e¢ -
cient,
(a) if prices are low enough.
(b) if there are no externalities.
(c) if the market is perfectly competitive.
(d) if either one of (b) or (c) are true.
(e) if both (b) or (c) are true.
7. If demand rises and and supply falls,
(a) price falls while quantity may or may not
change.
(b) price increases while quantity may or may
not change.
(c) quantity falls while price may or may not
change.
(d) quantity increases while price may or may
not change.
(e) none of the above.
 8. A fall in supply will reduce total revenues in
an industry, if
(a) industry is producing a normal good.
(b) supply is inelastic.
(c) supply is elastic.
(d) demand is elastic.
(e) demand is inelastic.
9. In the market for housing, demand rises, but
market output (Q) does not change. This
could be because
(a) It is followed by an increase in supply.
(b) Supply is perfectly elastic.
(c) Supply is perfectly inelastic.
12. An increase in supply will reduce the price
(d) Demand is perfectly inelastic.
(e) Demand is very elastic.
10. Refer to the following …gure that depicts sup-
ply and demand curves in a given market. The
consumer surplus at the market equilibrium
equals
13. Consider the market given in the previous
(a) 4 (b) 12 (c) 18 (d) 24 (e) 36
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11. A friend of yours (who has not taken any eco-
nomics classes) observes that house prices in
I·stanbul have been falling, and house sales are
falling at the same time. He is confused since
he thinks that falling prices should lead to an
increase in demand, and argues that this mar-
ket outcome is inconsistent with economic the-
ory. You should explain to him that
(a) this is a natural outcome of an increase in
supply.
(b) this is a natural outcome of a decrease in
supply.
(c) this is a natural outcome of an increase in
demand.
(d) this is a natural outcome of a decrease in
demand.
(e) he is right.
level. An expception to this would occur, if
(a) supply is perfectly inelastic.
(b) both demand and supply are highly in-
elastic.
(c) it is followed by a reduction in quantity
demanded.
(d) demand is perfectly inelastic.
(e) demand is perfectly elastic.
question. If both demand and supply fall so
that they still intersect at a positive quantity,
(a) Both consumer surplus and producer sur-
plus will fall.
(b) Both consumer surplus and producer sur-
plus will rise.
(c) Consumer surplus will fall and producer
surplus will rise.
(d) Consumer surplus will rise and producer
surplus will fall.
(e) There will be no change in either con-
sumer surplus or producer surplus.
14. The following …gure depicts the labor market
in a given …eld. The supply curve represents
the supply of labor hours (L) by workers, and
the demand curve represents the demand for
labor hours by employers (…rms). The price of
labor is the hourly wage, which is denoted by
w: Suppose the government introduces a min-
imum wage in order to give a minimum living
standard for workers, which is shown by wm in
the plot.
16. In the same question, the surplus of employ-
ers with the minimum wage is given by the
area: (Note: since workers are represented by
the supply curve, worker surplus is what you
knew as producer surplus in the usual supply-
demand analysis.)
(a) C + E (b) A (c) A + B
(d) B + C (e) B + D

17. Consider the following …gure for the market

for avacadoes. The …gure depicts the e¤ect of
a $1.00 unit tax on this market. The part of
this unit tax that is paid by producers (supply
side) is

The additional number of unemployed hours

created by the minimum wage is given by

(a) L2 L1
(b) L1
(c) L2 L
(d) L (a) $.90 (b) $.60 (c) $.50 (d) $.40 (e) $.30
(e) The minimum wage does not create any
unemployment.

18. Consider the CES utility function over quanti-

ties of two goods,
2
u (Q1 ; Q2 ) = Q10:5 + Q0:5
2

15. In the previous question, the surplus of workers where 2 (0; 1) is a constant that represents
with the minimum wage is given by the area: the similarity of goods 1 and 2. The Marginal
Rate of Substitution of good 1 for 2, M RS12 is
(a) C + E (b) A (c) A + B 0:5
Q2 1 Q2
(a) 0:5 (b) (c)
(d) B + C (e) B + D Q1 2 Q1
0:5
1 Q1 Q1
(d) (e)
2 Q2 Q2

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19. Let p1 and p2 be the market prices of goods class.
1 and 2. For a consumer with the CES pref-
erences given above, solve for the consumer’s
optimum bundle to …nd her demand curve for
good 1. Let I stand for the consumer’s income
level.

p1 p1
(a) Q1 = I p +p2 1
1 (b) Q1 = I p +p2 2
2
1 1

p1 2 p1 1
(c) Q1 = I p 1
+p2 1
(d) Q1 = I p 2
+p2 2
1 1

p1 2 21. In the previous question, consider a lottery

(e) Q1 = I p 2
+p2 2
1 (kura) that pays m or 0 with 50% chance each.
The risk premium associated with this lottery
for the consumer is given by

m u (m) m
(a) (b) (c) s
2 2 2
20. The following …gure depicts a concave utility
function for money, u (M ) ; as we discussed in (d) s (e) u