Econ 101 Section 3– Principles of Microeconomics
Instructor: C. Burkart
Questions 1 to 5 are worth 2 points each. Clearly circle the one best answer to each question. You will not receive credit if your answer choice is unclear or ambiguous.
1. Suppose that in Ecuador, it takes 2 hours of labor to harvest 10 bushels of apples and 4 hours of labor to harvest 10 bushels of tomatoes. Further, suppose that a worker in New Zealand can harvest 10 bushels of apples in 4 hours or 10 bushels of tomatoes in 5 hours. Which of the following statements is true?
(a) New Zealand has an absolute advantage in producing both goods.
(b) Of these two countries, New Zealand has a comparative advantage in producing tomatoes.
(c) In trade between these two countries, Ecuador would gain and New Zealand would lose.
(d) Of these two countries, New Zealand has a comparative advantage in producing apples.
2. Which of the following changes would cause a decrease in the demand for DVD rentals?
(a) An increase in the supply of DVD players.
(b) Improved technology in the manufacture of DVD players.
(c) A decrease in the price of movie admissions.
(d) A decrease in the price of DVD players.
3. If housekeeping services are a normal good, then an increase in income will
(a) increase the demand for housekeeping services.
(b) decrease the supply of housekeeping services.
(c) decrease the demand for housekeeping services.
(d) increase the supply of housekeeping services.
4. Which of the following is a normative statement?
(a) A camera makes a good wedding gift.
(b) An increase in the price of cameras will decrease the number of cameras sold.
(c) A decrease in the price of digital cameras will decrease the demand for camera film.
(d) The United States imports most of its cameras from Asia.
5. Economists typically depict the production possibilities frontier as a bowed curve rather than as a straight line in order to show that
(a) the opportunity cost of producing a good declines as more is produced.
(b) opportunity cost is always present.
(c) resources used in production of one good cannot be used in production of another.
(d) the opportunity cost of producing a good rises as more is produced.
Question 6 [10 pts.] State whether each of the following statements is a “shift” in or a “movement along” the demand curve:
(a) A store owner finds that customers are willing to pay more for umbrellas on rainy days.
Shift or movement along? Shift
(b) When pay-as-you-go cell phone providers lower per-minute costs on evenings and weekends, call volumes during those times increased.
Shift or movement along? Movement along
(c) More chocolates are purchased the week before Valentine’s Day even though prices are higher than other times of the year.
Shift or movement along? Shift
(d) The recent rise in gasoline prices has resulted in many people to walk, bike, ride the bus, and join carpools.
Shift or movement along? Movement along
(e) A beer company introduces a new brew that tastes great and is also less filling. Sales of other brews fall.
Shift or movement along? Shift
Question 7 [10 pts.] Give examples of two goods that are substitutes, examples of two goods that are complements, an example of a normal good, and an example of an inferior good. In the case of the normal and inferior goods, use the definition of normal and inferior goods to explain why your examples are normal or inferior.
Substitutes: Coffee and Tea
Complements: Bratwurst and Mustard
Normal good: Restaurant meals Why? If your income goes up you will consume more of them.
Inferior good: Ramen noodles Why? If your income goes up you will consume less of it.
Question 8 [10 pts.] In South Korea an automobile can be produced by 10 workers in one day and a helicopter by 25 workers in one day. In Canada an automobile can be produced by 12 workers in one day and a helicopter by 18 workers in one day.
Which country has a comparative advantage in the production of automobiles? South Korea
Explain how you know this:
The opportunity cost of one automobile is .4 helicopters for S. Korea, but .67 helicopters for Canada (S. Korea has a lower opportunity cost of producing automobiles).
Which country has a comparative advantage in the production of helicopters? Canada
Explain how you know this:
The opportunity cost of one helicopter is 2.5 automobiles for S. Korea, but 1.5 automobiles for Canada (Canada has a lower opportunity cost of producing helicopters).
To maximize gains from trade, what pattern of specialization should the two countries adopt?
South Korea should specialize in automobile production and Canada should specialize in helicopter production.