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Grade /100 Midterm Exam Spring 2016 Supervisor

Date: Wednesday, March 16th 2016. signature
Course Title: Introduction to Microeconomics (BCOR 140)
Time: 9:00AM– 11:00AM
Professors: Pr. Selma Chaker
Pr. Fatma Mabrouk
Pr. Richard Shields
Groups: G1-G2-G3-G4-G5-G6-G7-G8
Number of pages: 4

INSTRUCTIONS
1. Books and notes are not permitted.
2. Calculators are not allowed.
3. Cell phones are not allowed.

Understanding questions (30 points)

Question 1 (10 points)
Choose the right answer; 1 point for each right answer, -0.5 point for each wrong answer and 0 for not answering.

1. The price elasticity of demand is defined as:

a. The percentage change in quantity supplied given the percentage change in price.
b. The percentage change in quantity demanded given the percentage change in price.
c. The percentage change in quantity demanded given the percentage change in income.

2. The demand is inelastic if:

a. The price elasticity of demand > 1.
b. The price elasticity of demand = 1.
c. The price elasticity of demand < 1.
d. The price elasticity of demand in absolute terms < 1.

3. If the price of one good leads to an increase in the demand for another good, then the two goods are
a. Substitutes.
b. Normal goods.
c. Complements.

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4. Positive statements are
a. macroeconomic.
b. microeconomic.
c. statements of description that can be tested.
d. statements of prescription that involve value judgments.

5. The following table shows the units of output a worker can produce per month in Sweden and Tunisia
Table 1
Food Paper
Sweden 20 5
Tunisia 8 4
Which of the following statements about absolute advantage is true?
a. Tunisia has an absolute advantage in the production of food while Sweden has an absolute advantage
in the production of paper.
b. Sweden has an absolute advantage in the production of both food and paper.
c. Tunisia has an absolute advantage in the production of paper while Sweden has an absolute advantage
in the production of food.

6. Refer to Table 1. Which of the following statements about comparative advantage is true?
a. Sweden has a comparative advantage in the production of food while Tunisia has a comparative
advantage in the production of paper.
b. Tunisia has a comparative advantage in the production of food while Sweden has a comparative
advantage in the production of paper.

7. Which principle of economics better applies to the following situation: A plane that is half-empty can
take on more passengers with very little extra cost. Instead of letting the plane fly half-emty, the airline
decides to reduce by 40% the price of the flight ticket to attract more passengers.
a. People face trade-offs.
b. Rational people think at the margin.
c. People respond to incentives.

8. Assume the consumers are buying at the equilibrium price. When the government imposes a price
ceiling below the equilibrium price, the consumer surplus after the price ceiling policy is implemented is
a. higher than the initial consumer surplus
b. lower than the initial consumer surplus
c. the same as the initial consumer surplus.

9. Suppose the equation for demand can be expressed as P = 20 – Q. The equation for supply can be
expressed as P = Q. The equilibrium price P* and quantity Q* are given by
a. (P*, Q*) = (10,10).
b. (P*, Q*) = (20,10).
c. (P*, Q*) = (10,20).

10. Assume the labor market is initially at equilibrium. The government decides to impose a minimum
wage which is higher than the original equilibrium wage.
a. The minimum wage policy is binding and causes unemployment.
b. The minimum wage policy is non-binding and causes unemployment.
c. The minimum wage policy is binding and creates jobs.

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Question 2 (10 points)
For each of the following questions, use a graph to illustrate your answer.
2.1 Suppose that there is an announcement that chocolate causes obesity. What would happen to
equilibrium price and equilibrium quantity in the market for Maestro chocolate? (4 points)
2.2 Suppose that the price of Said chocolate increases. What would happen to equilibrium price and
equilibrium quantity in the market for Maestro chocolate? (4 points)
2.3 Suppose that the price of sugar increases. What would happen to equilibrium price and equilibrium
quantity in the market for Maestro chocolate? (2 points)

Question 3 (10 points)

Use the midpoint method to calculate your price elasticity of demand as the price of chocolate packet
increases from 8 TND to 10 TND if (a) your income is 1000 TND (4 points), and if (b) your income is 2000
TND (4 points). Interpret both results. (2 points)

Price Quantity demanded Quantity demanded

(Income = 1000 TND) (Income = 2000 TND)
8 40 50
10 32 45

Problem I (20 points)

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons
of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. Assume that each country
has 100 million workers.
I.1 Graph the linear production possibilities frontier of the American and Japanese economies. (4 points)
I.2 For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity
cost of a car? Of grain? (4 points)
I.3 Which country has an absolute advantage in producing cars? In producing grain? (2 points)
I.4 Which country has a comparative advantage in producing cars? In producing grain? (4 points)
I.5 Without trade, half of each country’s workers produce cars and half produce grain. What quantities of
cars and grain does each country produce? (3 points)
I.6 Starting from a situation without trade, give an example in which trade makes each country better off.
(3 points)

Problem II (30 points)

For questions II.1, II.2 and II.3:
Show in a graph the effect of each of the following events on the demand curve, the supply curve, the
equilibrium price and the equilibrium quantity in the market for ‘Tropico’ juice (3 points for each answer).
Explain by identifying the demand and/or supply shifter and determining the effects on the equilibrium
price and the equilibrium quantity (3 points for each answer).
II.1 Suppose that there is an announcement that the price of ‘Minute Maid’ juice decreases. (6 points)
II.2 Suppose that ‘Tropico’ juice workers organize themselves into a union and obtain higher wages. (6
points)
II.3 Suppose both events in II.1 and II.2 happening simultaneously. (6 points)

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For questions II.4 and II.5:
Show in a graph the producer surplus change in the market for ‘Tropico’ juice (3 points for each answer).
Interpret the change is surplus by decomposing it into different relevant areas (3 points for each answer).
II.4 Suppose that the price of ‘Tropico’ juice rises from P1 to P2. (6 points)
II.5 The price of ‘Tropico’ juice is fixed at the level P. Suppose that the prices of oranges and apples (2
major components of ‘Tropico’ juice) decrease. (6 points)

Problem III (20 points)

We are interested in the equilibrium outcome for the market of energy-efficient windows and the
consequences of a public policy of subsidizing this sector.

III.1 In order to encourage energy saving, the government has decided to offer s TND (with s>0) of subsidy
to the consumer for each energy-efficient window that she buys.
Plot a graph showing the effect of the subsidy on the demand curve, the price that the buyer pays (P B),
the price that the seller receives (PS) and the new equilibrium quantity (Q’). (4 points)

III.2 In the extreme case of infinitely elastic supply, which side of the market will enjoy the entire subsidy?
(1 points)

Now, we turn to the equilibrium outcome for the market of natural gas heating and the consequences of
a public policy of taxing this sector.

III.3 In order to limit energy use and to encourage energy saving, the government has decided to levy t
TND (with t>0) of tax on the supplier of each natural gas unit that she sells.
Plot a graph showing the effect of the tax on the supply curve, the price that the buyer pays (P’B), the price
that the seller receives (P’S) and the new equilibrium quantity (Q’’). (9 points)

III.4 Plot a graph showing the consumer and producer surpluses before and after the tax; as well as the
deadweight loss resulting from the taxation policy. Interpret the change in surpluses. (4 points)

As a policy maker you are asked to compare the policy of taxing natural gas with the policy of subsidizing
energy-efficient windows.

III.5 Which policy would be more effective in saving energy? Explain. (2 points)

END
Good Luck