Student Name: __________________________________________
Class: Microeconomics
Exam 2      October 27-8, 2004

Read these Instructions carefully! You must follow them exactly!
I)   On your Scantron card you must print three things:
1) Your full name clearly;
2) The day and time your class meets (for example MW 1:25);
3) The number I have written in ink on the upper right corner of
   your copy of this test. (This number tells me which version of the
   test you have. Without it your test cannot be graded properly and
   you get no credit for your answers.)      
II)   Answer on your Scantron card, using a #2 pencil.
III) Warning: SOME QUESTIONS MUST BE ANSWERED SEVERAL
      TIMES! Such questions will begin with a phrase such as this:
(Repeat answer on Scantron lines 37, 38 and 39)
                 Remember to do it!
IV) You must turn in this printed exam along with your Scantron card. Otherwise
     your score on this exam is "F".

Questions:


1.
(Repeat answer on Scantron line 26.) Immediately following World War II, the U.S.:
A.
ran trade deficits and was an international lender.
B.
ran trade deficits and was an international borrower.
C.
ran trade surpluses and was an international lender.
D.
ran trade surpluses and was an international borrower.


2.
(Repeat answer on Scantron lines 27 and 28.) Consider each of the following statements about international economics.
1) Based on lecture, it is very common for a nation to run a balance of payments surplus or deficit.
2) If a country has a current account surplus, then it also must have a "capital account deficit" (imports of claims larger than exports of claims).
3) When claims are being exported by a country, this is called a capital inflow.

Then choose which of the following is most accurate:
A.
Statements 1, 2 and 3 are all true.
B.
Only statements 1 and 2 are true.
C.
Only statements 1 and 3 are true.
D.
Only statements 2 and 3 are true.
E.
None of statements 1, 2 and 3 are true.


3.
(Repeat your answer on Scantron line 29.) Suppose the data shows that if the price of a product rises 10% then supply rises 10% and demand falls 20%. Choose the most complete answer.
A.
Then the own price elasticity of supply is 1.
B.
Then the own price elasticity of demand is 2 (technically-2).
C.
Then the own price elasticity of demand is -1/2.
D.
Then A) and B) are correct.
E.
Then A and C) are correct.


4.
(Repeat your answer on Scantron lines 30 and 31.) As you slide down a straight line demand curve:
A.
The own price elasticity of demand definitely rises.
B.
Both A) and E) are correct.
C.
The elasticity of supply definitely rises.
D.
No other answer is correct.
E.
The income elasticity of demand definitely falls.


5.
(Repeat your answer on Scantron lines 32 and 33.) If the incomes of potential customers rise and demand for the good declines:
A.
this is impossible.
B.
economists would call the good a "normal good".
C.
Both D) and E) are correct.
D.
the good is of low quality.
E.
economists would call the good an "inferior good".


6.
(Repeat your answer on Scantron line 34.) As a result of advances in productivity, farmers can now produce their goods at a far lower cost, but the demand for agricultural goods is very inelastic. Therefore the effect of these changes has been to __________ for farmers as a group.
A.
increase total costs and total revenue
B.
reduce total revenue and increase total costs
C.
increase total revenue and total costs
D.
none of the other answers are correct
E.
reduce costs and also reduce total revenue


7.
(Repeat your answer on Scantron line 35.) A firm produces and sells a particular good. The firm discovers the own price elasticity of demand for its good is -.25. Decide which of the following statements are correct and then choose the best answer from A) through E) below:
1) Revenue will rise as price falls.
2) This situation will not last very long, because the firm can make more profit by raising its price, which it will keep doing again and again until demand becomes elastic. (I sometimes call this "Andron's Law".)
3) Revenue will fall as price falls.
4) Revenue will fall as price rises.
5) Revenue will rise as price rises.
A.
Statements 1, 4 and 5 are true.
B.
Only Statements 2, 3 and 5 are true.
C.
Only Statements 3 and 5 are true.
D.
Only Statements 1 and 4 are true.
E.
Only Statement 2 is true.


8.
(Repeat your answer on Scantron line 36.) The government is considering imposing a tax on the market for Squidges and asks you whether the buyers or the sellers are going to pay a larger share of the burden of this new tax. Here is the only data you have: if the price of Squidges rises 10%, the quantity supplied rises 10% and quantity demanded falls 20%. Choose the most complete answer.
A.
Then sellers will bear more of the burden than buyers.
B.
Then buyers will bear more of the burden than sellers.
C.
Then buyers and sellers will share the burden equally.
D.
Since we have not been told who will be "paying" the tax, we cannot say who will bear the burden.
E.
There will be no burden of this tax, since neither supply nor demand are "elastic".    


  Current prices in two countries, Rahrah and Goofonia                    
   (The money of Goofonia is called the goofus, and the money of Rahrah is called the rah. Prices in each country are expressed in its local currency.)                    
                                                           Good 1     Good 2   Good 3   Good 4
        Rahrah prices (in rahs)                   40         20            4            2
        Goofonia prices (in goofuses)         40         20            4            6
Reference: Intl Trade Table

9.
(Repeat your answer on Scantron lines 37 and 38.) The numbers in the table represent current prices of four goods in two different nations, Rahrah and Goofonia. Each price is expressed in the local currency of that country, which is the "rah" in Rahrah and the "goofus" in Goofonia. These two countries have never traded with each other, but now they begin to trade. There will be no barriers to trade, no transport costs and no tariffs. Here are several statements which may or may not be true. Decide about each statement and then select the best answer below.
1) Good 4 definitely will be exported from Rahrah to Goofonia.
2) Goods 1, 2 and 3 will all begin to be traded from Goofonia to Rahrah.
3) After trade has built up to its eventual equilibrium level, the equilibrium trade-currency ratio (measured in units of rahs per goofus) will definitely be less than 1.
4) After trade has built up to its eventual equilibrium level, the equilibrium trade-currency ratio (measured in units of rahs per goofus) will definitely be greater than 1/2.
5) If a foreign exchange market comes into existence, the equilibrium exchange rate (measured in units of rahs per goofus) will definitely be at least as large as 1, and no larger than 3, but we cannot be more accurate without more data.
   
A.
Only statement 1 is correct.
B.
Only statements 1, 2 and 3 are correct.
C.
Only statement 3 is correct.
D.
Only statement 4 is correct.
E.
Only statement 5 is correct.


10.
(Repeat your answer on Scantron line 39.) Evaluate each of the following statements having to do with international flows of capital and international flows of goods, then select the best answer from among A though D below.
1) As a practical matter, financial claims cannot move between nations as quickly as goods. That is why the foreign exchange markets are linked more tightly to the trade currency exchange rates of internationally traded goods than internationally traded claims.
2) Since a country can have an imbalance between the import and export of claims (in other words, can run a capital account surplus or deficit) therefore a country can run a surplus or deficit in its balance of payments.
A.
Only statement 1 is true.
B.
Only statement 2 is true.
C.
Both statements 1 and 2 are true.
D.
Neither statement 1 nor 2 is true.


11.
(Repeat your answer on Scantron line 40.) Evaluate each of the following statements having to do with the international foreign exchange markets, then select the best answer from the lettered choices below.
1) Without the foreign exchange markets (by which citizens all over the world acquire the foreign money they need for purchases of the goods of foreign nations) international trade would not be possible.
2) The exchange rates in the international foreign exchange markets track the trade currency ratios of internationally traded claims more closely than the trade currency ratios of internationally traded goods.
A.
Only statement 1 is true.
B.
Only statement 2 is true.
C.
Both statements 1 and 2 are true.
D.
Neither statement 1 nor 2 is true.


12.
(Repeat your answer on Scantron line 41.) Evaluate each of the following statements having to do with international trade, then select the best from the lettered choices below.
1) There are no "pareto gains" from international trade of goods between nations, because the process of international trade always creates losers, as well as gainers, in both countries.
2) Suppose a small country began international trade of goods with a large, economically advanced country such as the United States, and suppose further that neither country was permitted to impose protective tarriffs. Then most of the pareto gains from international trade would be captured by the larger, more advanced country and in fact, the smaller country might not benefit at all.
A.
Only statement 1 is true.
B.
Only statement 2 is true.
C.
Both statements 1 and 2 are true.
D.
Neither statement 1 nor 2 is true.


13.
(Repeat your answer on Scantron line 42.) Assume that the income elasticity of demand for a good is greater than one. Then evaluate each of the following statements and choose the best answer from among the lettered choices below.
1) The good is a luxury good.
2) The good is a necessity.
3) The good is a normal good.
4) The good is an inferior good.
A.
Only Statements 1 and 3 are correct.
B.
Only Statement 1 is correct.
C.
Only Statement 3 is correct.
D.
Only Statement 2 is correct.
E.
Only Statement 4 is correct.


14.
An effective price ceiling:
A.
is a government-set price above market equilibrium price.
B.
the equivalent of an implicit tax on producers and an implicit subsidy to consumers.
C.
will create a surplus.
D.
causes an increase in consumer and producer surplus.


15.
If the Smith family would be willing to sell their house for $185,000, but they in fact sell it for $225,000, they will receive:
A.
producer surplus in the amount of $225,000.
B.
producer surplus in the amount of $40,000.
C.
consumer surplus in the amount of $225,000.
D.
consumer surplus in the amount of $40,000.


16.
(Repeat answer on Scantron lines 43 and 44.) The burden of a tax is:
A.
most heavily borne by those with the more inelastic demand or supply.
B.
most heavily borne by those with the more elastic demand or supply.
C.
usually equally split between buyers and sellers.
D.
usually passed entirely on to consumers in the form of a higher price.


17.
Dead weight loss refers to the loss of _______________ caused by a tax.
A.
consumer surplus
B.
producer surplus
C.
both consumer and producer surplus
D.
revenue to the government



Reference: Figure 7-6

18.
Hard Question. Refer to the graph above. Assume the market is initially in equilibrium at point j in the graph. If government imposes a per-unit tax equal to the distance between point k and point j in the graph, and buyers collect and send in the money from the tax, equilibrium price will:
A.
rise from d to b.
B.
rise from d to c.
C.
rise from c to b.
D.
rise from e to c.
E.
fall



Reference: Figure 7-17

19.
Refer to the graph above. After the imposition of an effective price floor at Pf, producer surplus is shown by areas:
A.
C + D + E.
B.
D + E + F.
C.
C + D + E + F.
D.
B + C + D.


20.
(Repeat answer on Scantron line 45.) Public choice economists argue that rent-seeking activities:
A.
never succeed in transferring surplus from one group to another.
B.
benefit the middle class at the expense of the upper class.
C.
are significant and result in a net loss to society.
D.
are productive expenditures from society's perspective.


21.
(Repeat answer on Scantron line 46.) Social security taxes are:
A.
levied by government more heavily on employees than employers, even though the burden of the tax is most heavily borne by employers.
B.
most heavily borne by employers because the demand for labor tends to be more inelastic than supply.
C.
most heavily borne by workers because the demand for labor tends to be more inelastic than the supply of labor.
D.
most heavily borne by workers because the supply of labor tends to be more inelastic than the demand for labor.


22.
(Repeat answer on Scantron line 47.) The U.S. economy is currently financing its trade deficit by:
A.
selling domestic assets like stocks, bonds, and real estate to foreign investors.
B.
buying foreign assets like stocks, bonds, and real estate.
C.
retiring stocks and bonds held by foreigners.
D.
relying on foreign aid.


23.
(Repeat answer on Scantron line 48.) Trade adjustment assistance:
A.
is difficult to implement because the adjustment costs of international trade are generally greater than the gains from trade.
B.
is designed to assist workers displaced by increased foreign competition following reductions in trade restrictions.
C.
is easy implement because the adjustment costs of international trade are typically less than the gains from trade.
D.
is easy to implement because it is easy to identify the few industries genuinely injured by international trade.


24.
(Repeat answer on Scantron line 49.) Countries restrict international trade for all of the following reasons except:
A.
international trade will probably lead to the displacement of at least some workers.
B.
countries that specialize according to their comparative advantage are more efficient.
C.
it is sometimes difficult to decide where a country's comparative advantage lies when "learning by doing" effects are important.
D.
economies of scale can mean that a country is able to develop a comparative advantage by protecting infant industries.


25.
(Repeat answer on Scantron line 50.) The term most-favored nation (MFN) refers to a country that will:
A.
be charged no tariffs on its exports.
B.
be charged as low a tariff on its exports as any other country.
C.
voluntarily agree to limit its exports without the use of a tariff.
D.
be charged the same tariff on its exports as it charges on its imports.


Answer Key

1. C
2. D
3. D
4. D
5. E
6. E
7. B
8. B
9. B
10. D
11. B
12. D
13. A
14. B
15. B
16. A
17. C
18. E
19. A
20. C
21. D
22. A
23. B
24. B
25. B