Examination 1—100 points + bonus Economics II Payne Part 1. Multiple Choice. 60 questions, @1.6 points, 96 points total. USE PENCIL ONLY. On the Accu-Scan form 100-AS you are given, write --Your name --ECO232 and your section number --Exam 1 --today’s date You do not need to code in your student ID number For each question, mark the letter corresponding to the best answer. USE PENCIL ONLY. DARKEN THE ENTIRE BUBBLE.

All diagrams, except those for questions 4959, are located on the LAST PAGE. 1.

A. B. C.

If diminishing marginal utility applies to applesauce, then the fifth jar of applesauce the Bartleby family consumes in the month of April will give them ? marginal utility than the fourth jar consumed. more the same amount of less

2. A. B. C. D.

The price elasticity of demand measures a buyer's responsiveness to a change in the price of a good. the increase in demand as additional buyers enter the market. how much more of a good consumers will demand when incomes rise. the slope of a demand curve..

3. When quantity demanded responds only slightly to changes in price—that is, %∆Q is smaller than %∆P—demand is said to be A. unit elastic. B. elastic. C. inelastic. D. perfectly inelastic.

6. The price of apples increases from $1 to $1.10. At the same time, the quantity of apples demanded decreases from 100 to 90. The price elasticity of demand for apples is A. –1.0 B. –0.9. C. –1.1. D. –0.02. 7. Say that the price of shipping a 5 lb. parcel 668 miles from Huntsville to Dallas rises from $8.70 to $8.90. The quantity of parcels shipped weekly falls from 627 to 622 as a result. The price elasticity of demand is A. –1.01 B. –0.35 C. 0.35 D. –0.98 8. Refer to Figure 5-2. The elasticity of demand measured moving from point B to point C is A. –0.4 B. –0.75 C. –0.8 D. –1.33 9. Refer to Figure 5-6. Using Marshall’s method, the price elasticity of demand at point X is A. –0.42. B. –0.71. C. –1.40. D. –1.71. 10. If the elasticity of demand for cigarettes by teenagers is -1.5, then to reduce teen smoking by 60 percent, tobacco companies would need to raise their prices by A. 15%. B. 90%. C. 40%. D. 60%. 11. Say that the price of eggplant rises from $1.49 per lb. to $1.69 per lb. In consequence, the quantity demanded of olive oil falls from 56 lbs./wk. to 52 lbs./wk. The cross-price elasticity of olive oil with respect to eggplant is A. –0.53 B. –0.57 C. 0.65 D. –1.88

4. Chocolate chip cookie dough ice cream would tend to have very elastic demand because A. it must be eaten quickly. B. the market is broadly defined. C. there are few substitutes. D. other flavors of ice cream are very close substitutes.

12. A. B. C. D.

5. Which of the following is NOT a determinant of the price elasticity of demand for a product? A. time allowed for consumer adjustment to the price change B. cost of producing the good C. share of total expenditures devoted to the good D. availability of substitutes

13. If a 5 percent increase in price causes a 10 percent decrease in quantity demanded, this good is A. inelastic. B. unit elastic. C. elastic. D. not enough information is given to answer the question.

Income elasticity of demand measures how the quantity demanded changes as consumer income changes. consumer purchasing power is affected by a change in the price of a good. the price of a good is affected when there is a change in consumer income. many units of a good a consumer can buy given a certain income level.

For the next two questions: Say that the average annual income of Hondurans rises from $800 to $900 and consumption of eggs rises from 97 to 106. 14. The income elasticity of demand for eggs is A. –0.23 C. 0.89 E. 1.35 B. 0.74 D. 1.09 15. Given this information, eggs must be a(n) _____ good. A. inferior B. supernormal C. normal 16. A. B. C. D.

Refer to Figure 5-1. The section of the demand curve labeled A represents the elastic section of the demand curve. inelastic section of the demand curve. unit elastic section of the demand curve. perfectly elastic section of the demand curve.

17. Refer to Figure 5-1. If price increases within the A range of the demand curve we can expect total revenue to A. increase. B. decrease. C. stay the same. D. decrease, then increase. 18. Refer to Figure 5-4. As price falls from PA to PB, which demand curve is most elastic? A. D1 B. D2 C. D3 D. Not enough information is given to answer the question. 19. A. B. C. D.

Refer to Figure 5-5. Reducing price from $30 to $20 would increase total revenue by $2,000. decrease total revenue by $2,000. increase total revenue by $1,000. decrease total revenue by $1,000.

20. Moving downward along a linear demand curve, the absolute value of price elasticity becomes A. smaller, then larger. B. larger. C. smaller. D. larger, then smaller. 21. Say that the demand for chocolate chip cookies, a normal good, has fallen in Crumpetville over the past decade. Which explanation is most likely? A. Consumers’ income has risen. B. The price of peanut butter cookies has risen. C. The price of milk has risen. D. A series of hurricanes has severely damaged the cocoa tree groves.

22. Your younger sister wants $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your parents give her the lemonade for free and charge her no rent for the stand, so she has no costs. She currently is charging 25 cents per cup, but wants to adjust her price to earn the money faster. If you know that the demand for lemonade is inelastic, what is your advice to her? A. “Raise your price to increase total revenue.” B. “Reduce your price to increase total revenue.” C. “Leave the price alone and be patient, you little brat.” D. There isn't enough information given to answer this question. 23. Recall the example on bumper crops being bad news for farmers. Why would a bumper crop be harmful to farmers? A. Their crop has an inelastic demand and the resulting drop in price raises their total revenue. B. Their crop has an elastic demand and the resulting drop in price reduces their total revenue. C. Their crop has an elastic demand and the resulting drop in price raises their total revenue. D. Their crop has an inelastic demand and the resulting drop in price reduces their total revenue. 24. A. B. C. D.

Marginal utility is the satisfaction experienced from consuming a good. the change in total utility from consuming one additional unit of a good. government provided goods like electricity. ease of use.

25. The equimarginal principle, or utility maximization rule, states that, in order to maximize total utility, the consumer A. should equate the marginal utility per dollar spent on each good purchased. B. buy more of those goods that cost less. C. buy more of those goods with a high marginal utility. D. should spend the same amount of money on each good purchased. 26. Glenda currently spends all of her weekly income to purchase 50 units of molasses and 20 units of alfalfa sprouts. Currently, MUmolasses/Pmolasses, that is, the marginal utility per dollar of molasses, is 25, and that of alfalfa sprouts is 45. If Glenda decides to maximize her total utility, which of the following consumption bundles will she most likely choose? A. 50 units of molasses and 10 units of alfalfa sprouts, i.e., no change B. 60 units of molasses and 10 units of alfalfa sprouts C. 30 units of molasses and 30 units of alfalfa sprouts D. 20 units of molasses and 10 units of alfalfa sprouts E. no molasses and 70 units of alfalfa sprouts 27. Say that in Haiti, charcoal is a Giffen good. If the price of charcoal rises, then A. the demand for charcoal will rise. B. the demand for charcoal will fall. C. the quantity of charcoal demanded will rise. D. the quantity of charcoal demanded will fall.

28. In order for a good to be a Giffen good, all of the following must be true except A. the good must be strongly inferior. B. consumers must spend a large share of their income on the good. C. there must be few if any close substitutes for the good. D. availability of the good must be strictly limited. 29. Say that the long-term demand for marijuana is inelastic. If legalization leads to a fall in price, then total revenue from marijuana sales will A. rise. B. stay the same. C. fall. 30. If an increase in the price of good X results in a decrease in the quantity of Y demanded, A. good X and good Y are complements. B. good X and good Y are substitutes. C. the cross elasticity of demand for good Y is positive. D. There is not sufficient information to determine the relationship between good X and good Y. 31. If the price elasticity of demand is infinite, the demand curve is A. relatively inelastic. B. upward sloping. C. perfectly elastic. D. relatively elastic. Questions 32 through 38 refer to the Introduction and Chapters 1 through 3 of Capitalism and Freedom. 32. Friedman states that there are two broad principles, embodied in our Constitution, that will allow us to receive the benefits of government but avoid it threatening our freedom. Which of the following is one of these principles? A. Elected representatives must serve no more than two terms in office. B. Government power must be dispersed. C. The scope of government must be unlimited. D. Private property rights must be abolished. 33. Which of the following would Friedman likely consider the best method to bring about greater racial equality in the US? A . Allowing people to sell their services in an impersonal free market B. College admission policies that admit black and hispanic students with lower SAT scores than white and Asian students C. Reparation payments made from taxes, some of which are paid by distant descendents of slaveowners, to distant descendents of slaves D. Racially-based preferential hiring and promotion policies

34. Friedman argues that political and economic freedom A. are essentially separate, and that a country can have one without the other. B. generally go together, but it isn’t necessary that they do. C. while short run deviations can occur, in the long run, a nation must be free in both ways, or in neither. D. it is impossible for a nation to have one kind of freedom but not the other, even in the short run. 35. Friedman refers to "self-denying ordinances" in the Constitution. Which of the following is an example of this? A. the right of eminent domain. B. the 5th Amendment right to refuse to testify against oneself. C. the power to levy excise taxes. D. Congress' power to declare war 36. Friedman argued that the Great Depression was caused by A. the instabilities inherent in the market economic system. B. government mismanagement. C. profiteering actions by greedy corporate executives. D. a conspiracy of the Illuminati, the Trilateral Commission, the Masons, and the Roman Curia. 37. True or False: The Federal Reserve injected massive quantities of new money into bank reserves in 1930 and 1931, but this was not sufficient to prevent another wave of bank failures. A. True B. False 38. The greatest benefit of the adoption of Friedman's monetary rule would be A. the curtailment of the discretionary power of the Fed. B. a decrease in the unemployment rate. C. a reduction in the rate of inflation. D. the return of the gold standard. 39. This past Saturday, my daughter worked at a wedding reception held at our neighbor’s wedding venue. The $100-a-plate dinner, which was preceded by crab cakes, some kind of shrimp goody, various exquisite chocolates, and an open bar, was prepared by someone whose nom de guerre is Chef John, whom I am told is very famous. The whole show was orchestrated by two wedding coordinators in little black dresses, and was recorded for posterity by two photographers, all of whom were in constant communication by Bluetooth. Veblen would observe that the primary purpose of all this was, for the bride’s father, to A. give nourishment and sustenance to the guests. B. provide the necessities of life for the bride and groom. C. acquire, or maintain, social status for himself and his family. 40. Thorstein Veblen made a distinction between consumption of goods for direct acquisition of utility, or the ________ purpose, and conspicuous consumption done to acquire status—the ______ purpose. A. marginal; ceremonial B. instrumental; cathartic C. indifferent; cathartic D. instrumental; ceremonial

41. Consumers are willing to pay a higher price for diamonds than water because the _____ of diamonds is ______ than that of water. A. total utility; greater B. total utility; less C. marginal utility; greater D. marginal utility; less 42. Bob pays his local golf pro $50 for each of 6 half-hour golf lessons each summer. He also voted against a referendum to raise school taxes to fund higher salaries for the teachers at his children’s school, who earn about $25 an hour. Which of the following best explains this behavior? A. Bob derives more total utility from golf than his kids’ education. B. For Bob, the marginal utility of golf exceeds that of his kids’ education. C. For Bob, the marginal utility of his kids’ education exceeds that of golf. 43. As family income rises, the number of children the average family has tends to _____ as parents choose to consume a greater _____ of children at the expense of _____ of children. A. rise; quantity; quality B. rise; quality; quantity C. fall; quantity; quality D. fall; quality; quantity For the next two questions, refer to Figure 1 below, which depicts population pyramids of three different countries.

44. Consider the nation of Lower Slobovia. Situated on a good harbor on the Sea of Mimosa, this prosperous country has a total fertility rate (TFR) of 2.1. The population is growing, but slowly, from its current level. Which of the three pyramids best depicts this situation? A. A B. B C. C 45. Up in the hills, near the headwaters of the River Slob, lies the benighted land of Upper Slobovia. Their TFR is 5.4, and the infant mortality rate is 5 times that of their neighbors downriver. Combined with near-constant tribal warfare with their neighbors over the mountains in Bazakhstan, this makes Upper Slobovia a pretty miserable place in which to live—briefly—and die. Which of the three pyramids best depicts this situation? A. A B. B C. C 46. Adjusted for the age structure of the population, the number of children born per woman, lifetime, is that nation’s _____. A. crude birth rate B. infant mortality rate C. total fertility rate D. population growth rate 47. An indifference curve represents the set of A. all possible combinations of goods that yield the same level of utility to the consumer. B. all possible combinations of two goods that can be purchased, given the consumer's income and the price of the goods. C. all equilibrium points. D. all possible combinations of goods that maximize a consumer's utility. 48. The slope of an indifference curve represents A. the combination of possible goods that yields the same utility. B. the rate at which a consumer is willing to trade one good for the other good. C. the rate at which one good can be traded for the other good in the market. D. the level of utility that the consumer gets from consuming the given bundle of goods. (continued overleaf)

For the questions 49 through 5, refer to Figures 3, 4, 5, 7, 8, and 9. Let B be the budget line and I1, etc., be the indifference curves. putters

6 5 4 3

Figure 4.

Figure 3.

6 5 4 3 B

I3 c

0 0 1

2 3 4

B’ B

d

a b

2 1

d

a b

2 1

5 6 7

I2

I1

gum

49. Refer to Figure 3. Assume first that the budget constraint does not apply. Which indifference curve represents the greatest utility for the consumer? A. I1. B. I2. C. I3. 50. Refer to Figure 3. Given the budget constraint, which point will maximize the consumer's total utility? A. a B. b C. c B. d 51. Refer to Figure 3. Which of the two goods is higher priced, per unit? A. gum B. putters 52. Refer to Figure 3. At point b, |MRSgum/putters| _____ the price ratio of gum to putters. A. > B. = C. < 53. A. B. C. D.

putters

Refer to Figure 3. At point a, the consumer will tend to trade putters for gum. trade gum for putters. be unwilling to trade either one for the other. be indifferent to either trade.

I3 c

0 0 1

2 3 4

5 6 7

I1 I2 gum

54. Refer to Figure 4. Say that the budget line shifts from B to B'. Which is the best explanation for this? A. The consumer's income has increased. B. The consumer's income has decreased. C. The price of putters has decreased. D. The price of gum has decreased. (continued overleaf)

56. Refer to Figure 7. Here, the budget line has shifted from B to B’. Apparently, TV watching is a(n) _______ good, and other forms of entertainment are a(n) ________ good. A. normal; normal B. normal; inferior C. inferior; normal D. inferior; inferior 57. Refer to Figure 8, LOCATED ON THE NEXT PAGE. The utility maximizing bundle the consumer would choose is A. a. B. b. C. c. 58. Refer to Figure 9, LOCATED ON THE NEXT PAGE. Jack the Teetotaller completely abstains from alcoholic beverages. Given the indifference map below, Jack’s optimal consumption bundle is located at point A. a. B. b. C. c. D. d. 55. Refer to Figure 5. Say that the budget line shifts from B to B'. Which is the best explanation for this? A. The consumer's income has increased. B. The consumer's income has decreased. C. The price of putters has decreased. D. The price of gum has decreased.

59. A. B. C. D.

Refer to Figure 9, LOCATED ON THE NEXT PAGE. We call this situation an irrational choice. a principal-agent problem. a corner solution. a parallel shift of the budget line.

60. Which of the following is not a likely explanation for the rapid increase in college textbook prices? A. Financial aid calculations are based in part on textbook prices. B. Textbooks are selected by professors, not students. C. Students’ elasticity of demand for textbooks is very high. D. Most colleges benefit financially from bookstore profits.

End of Part 1

Part 2 overleaf

Part 2—Essay—15 points. Answer ONE of the following FOUR questions on separate lined paper. They refer to Capitalism and Freedom, Introduction and Chapters 1 and 2. You may use extra paper if necessary. CHOOSE ONLY ONE QUESTION. ***This is a 15 point question, so please explain yourself fully. A. How does Friedman define the term "liberal?" How does this differ from the common use of this term today? Give examples of economic policies a liberal might advocate. What is the root of his definition, i.e., its etymological definition? B. For Friedman, what is the basic unit of social organization, or put another way, the ultimate goal in judging social arrangements? How does this differ from the basic unit of socialist systems? What are the consequences for economic liberty of this difference? C. Friedman argues that, in a socialist society, it would be impossible for individuals to advocate capitalism in any meaningful way. Summarize his argument. D. Friedman argues that government has legitimate, and crucial, roles to play in a free society. What are these roles? Why must government fulfill these functions? End of Part 2

Part 3. Reserve reading summaries/reviews. 5 articles @3 points. Be sure to turn these in to the instructor by the assigned time.

End of Part 3

OTHER DIAGRAMS FOLLOW THIS PAGE.

Figure 5-5

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Figure 5-6

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