IS and Econ 13 - First Midterm Examination

Answers (correct answer starred *)

S. Skaperdas January 28, 2015
Version A
Fill in your scantron, INCLUDING YOUR
VERSION (A).
There are 35 questions in the exam. Questions
1-25 are worth 1 point each. Questions 26-35
are worth 2 points each.
1. Suppose that, at a particular price, quantity
demanded is 300 and quantity supplied is 500.
Then, we should expect the price in this market
to
a. Go up because there is excess demand.
b. Go down because there is excess
supply.*
c. Go up because there is excess supply.
d. Stay the same.
e. Go up or down, depending on whether
there is excess supply or excess
demand.
2. Which of the following factors cause a
movement along the demand curve?
a. change in the price of related goods.
b. change in the population.
c. change in income.
d. change in the price of the good.*
e. a and d.
3. In 2013, which one of the following
countries had the highest GNI per capita (at
PPP)?
a. Bangladesh.
b. Nigeria.
c. Indonesia.
d. India.
e. Qatar.*
4. In 19th century U.S. the largest industry was
a. Automobiles
b. Electricity generation
c. Railroads*
d. Computer electronics
e. The internet.
5. Which one of the following is NOT a
characteristic of the SECOND industrial
revolution:
a.
The spread of serfdom.*
b.
Growth of joint-stock companies or
corporations.
c.
High level of division of labor.
d.
Vertical integration of economic
activity.

e.

Growth of bureaucracies.

6. A point outside a production possibilities

frontier
a. indicates that some resources are
unemployed.
b. is worse than points on the production
possibilities frontier.
c. implies that too much capital and not
enough labor are used.
d. is unattainable for production
purposes.*
e. None of the above.
7. A decrease in incomes
a. shifts the demand curve to the right.
b. shifts the demand curve to the left.*
c. causes a movement along the demand
curve.
d. implies no change in the demand curve.
e.causes a movement along the Supply
curve.
8. Positive economics refers to
a. analyses that try to understand how the
economy actually works.*
b. the positive reinforcement that the media
can employ to pump up the economy.
c. the positive feelings that firms can
induce for the good of the economy.
d. a and b.
e. b and c.
9. Modern economic growth is correlated
a. with the gradual reduction of the public
sector as a share of GDP.
b. with an increase in the size of the public
sector.*
c. with a reduction in regulation and other
government interference in business.
d. a and c.
e. All of the above.
10. According to Jared Diamond in Guns,
Germs, and Steel, the most dominant
civilizations emerged in Eurasia because
a. the people were on average smarter
there.
b. there were fewer animals and plants that
were available for domestication there.
c. the propagation of agriculture along an
East-West axis was easier.*
d. Eurasians were better hunters and
gatherers.
e. c and d.

Consider two countries, Gaia and Virtualia, and

suppose that each can produce just two goods,
corn and virtual reality machines (VRMs). Their
production possibilities are described below:
Gaia
Virtualia
Corn
VRMs
Corn
VRMs
300
0
150
0
200
50
100
100
100
100
50
200
0
150
0
300
Use this information to answer questions 11-17.
.
11. The opportunity cost of one unit of corn in
Gaia is
a. 100 VRMs.
b. 200 VRMs
c. 2 VRMs.
d. 1 VRM.
e. VRM.*
12. The opportunity cost of one unit of corn in
Virtualia is
a. 2 VRMs.*
b. VRMs
c. 100 VRMs.
d. 200 VRMs.
e. 600 VRMs.
13. The opportunity cost of one VRM in Gaia is
a. 100 units of corn.
b. 2 units of corn.*
c. 1 unit of corn.
d. units of corn.
e. 200 units of corn.
14. The following statement is true:
a. Virtualia has an absolute advantage
(AA) in the production of VRMs.
b. Virtualia has and AA in corn
production.
c. Gaia has an AA in VRM production.
d. b and c.
e. Absolute advantage cannot be
determined from the information
provided.*
15. The following statement is true:
a. Gaia has a comparative advantage
(CA) in VRM production.
b. Gaia has CA in corn production.*
c. Virtualia has CA in both VRM and
corn.
d. Virtualia has a CA in corn production.
e. Comparative advantage cannot be
determined from the information
provided.

Now suppose that VRMs can be used for

electronic warfare and for each country to defend
itself against the other (either under autarky or
under trade), it needs to produce 50 VRMs and
solely dedicate them to defense. Questions 16
and 17 apply to this new situation but with the
same production possibilities in the previous
table.
16. The maximum amount of corn that Gaia can
produce for consumption or trade is
a. 200*
b. 150
c. 100
d. 50
e.
0
17. The maximum amount of VRMs that
Virtualia can produce for consumption or trade
is
a. 300
b. 250*
c. 200
d. 150
e. 100
18. An increase in the cost of producing a good
a. shifts the demand curve to the right.
b. shifts the demand curve to the left.
c. causes a movement along the demand
curve.
d. implies no change in the demand
curve.*
e. causes a movement along the supply
curve.
19. During the Great Recession sales of new
cars went down by almost 40% while their prices
slightly decreased. This fact can best be
explained by
a. a reduction in the demand for new cars.*
b. an increase in the demand for new cars.
c. a reduction in the supply of new cars.
d. an increase in the supply of new cars.
e. b and c.
20. Suppose the demand for Ipads is downward
sloping and supply is upward sloping. If Ipads
become cheaper to produce
a. the demand for Ipads shifts to the left.
b. the demand and supply of Ipads both shift
c. the demand for Ipads shifts to the right.
d. the supply of Ipads shifts.*
e. none of the above

Suppose that each of Xena and Robinson

face the choice between, on the one hand,
Not Arming and Specializing in Production
(with the intention to Trade) and, on the
other hand, Arming with the intention of
remaining autarkic. Denote the first
strategy by N and the second by A. The
matrix of possible outcomes is then as
follows:
Xena
N
A
Robinson N (No
Robinson
Robinson
arming)
obtains:
obtains:
(5coconuts, (0coconuts,
10 fish);
0 fish);
Xena
Xena
obtains (10 obtains (15
coconuts, 5 coconuts,
fish)
20 fish)
A
Robinson
Robinson
(Arming) obtains:
obtains: (2
(20
coconuts, 6
coconuts,
fish); Xena
10 fish);
obtains (7
Xena
coconuts, 4
obtains (0
fish)
coconuts, 0
fish)
21. If Robinson were to pursue his self-interest,
he would choose:
a. N
b. A*
c. Sometimes N and sometimes A.
d. Can never be determined from the
information provided.
22. If Xena were to pursue her self-interest, she
would choose:
a. N
b. A*
c. Sometimes N and sometimes A.
d. Can never be determined from the
information provided.
23. If Robinson and Xena were each to pursue
their own self-interest, the outcome that will
occur is
a. N for Robinson and N for Xena
b. N for Robinson and A for Xena
c. A for Robinson and N for Xena
d. A for Robinson and A for Xena*
e. Can never be determined from the
information provided.

24. The collectively rational outcome is for

a. N for Robinson and N for Xena*
b. N for Robinson and A for Xena
c. A for Robinson and N for Xena
d. A for Robinson and A for Xena
e. Can never be determined from the
information provided.
25. The Industrial Revolution began in
a. The United States.
b. France.
c. Japan.
d. Scandinavia
e. Great Britain.*
(Note that questions 26-35 are worth 2 points
each.)
26. Economic growth can be represented by
a. a movement along the Production
Possibilities Frontier (PPF).
b. an inward (down and left) shift of the
PPF.
c. a downward shift in the demand curve.
d. an outward expansion of the PPF.*
e. c and d.
27. The province of Shanghai in China has
about the same life expectancy and per capita
income as
a. Bangladesh.
b. India.
c. Ghana.
d. the rest of China.
e. Italy.*
28. Suppose that to produce 10 pounds of rice in
Japan requires 2 hours of labor, whereas in the
U.S. it requires 1 hour of labor. As a result, we
can conclude that
a. Japan has a comparative advantage
(CA) in producing rice.
b. The U.S. has the absolute advantage in
producing rice.*
c. Japan has the absolute advantage in
producing rice.
d. The U.S. has a CA in producing rice.
e. None of the above

29. David Ricardo, a British political economist

of the 19th century, used the production of
wine and cloth in Britain and Portugal to
illustrate the idea of comparative advantage. In
his classic example, the unit labor costs of
production (i.e., how much labor it takes to
production one unit of output) of these two
goods in these two countries are
Cloth Wine
Britain
100
110
Portugal
90
80
According to these numbers, which of the
following statements is correct?
a. Britain has comparative advantage in
producing wine.
b. Britain has absolute advantage in
producing wine.
c. Portugal has absolute advantage in
producing wine.*
d. Portugal has comparative advantage in
producing cloth.
e. Neither comparative advantage nor
absolute advantage can be determined by the
information provided.
30. Corporations
a. were the main form of firm organization
since the beginning of the industrial revolution.
b. became the dominant form of firm
organization in the US in the late 19th century.*
c. have always been the most efficient form
of firm organization.
d. arose in the late Middle ages and have
been dominant since then.
e. a and c.
31. There are more people on earth
a. living on less than $1 a day than those living
on less than $2 a day.
b. living on less $2 a day than those living in
high-income countries (as defined by the World
Bank).*
c. living in high-income than those living in
middle-income.
d. living in high-income countries than those
living on less than $2 a day.
e. living in high-income countries than those
living in middle and low-income countries.

32. Consider the market for the Samsung

Galaxy Note II. Samsung has started an effective
advertising campaign for its product and more
segments of the population consider it a cool
product. At the same time, improvements in
production techniques imply that the Note II is
not becoming more expensive to produce. Which
of the following MUST be true?
a. The equilibrium quantity will rise.*
b. The equilibrium quantity will fall.
c. The equilibrium price will fall.
d. The equilibrium price will rise.
e. Neither the equilibrium price nor
quantity will be affected.
33. Adam Smith
a. argued in favor of corporations as the
most efficient form of firm organization.
b. considered the corporate form of firm
organization critical for the success of the
industrial revolution.
c. considered the corporate form of firm
organization too immature for the
nineteenth century economy.
d. argued against corporations because of
the intractable problems inherent in the
separation of ownership from
management.*
e. a and b.
34. When the price of oil decreases, the price of
jet fuel decreases and we can expect
a. a shift to the left in the supply curve of
air travel and higher airfares.
b. a shift to the right in the demand curve
for air travel and lower airfares.
c. a shift to the left in the demand curve for
air travel and higher airfares.
d. a shift to the right in the demand curve
for air travel and higher airfares.
e. a shift to the right in the supply curve of
air travel and lower airfares.*
35. The military superiority of European states
over the rest of the world since the 15th century
could ultimately be attributed to
a. the philosophers of ancient Greece and
Rome.
b. their economies being more advanced
than China in the 15th century.
c. solely to the industrial revolution.
d. advances in military technology induced
by the considerable internal political
fragmentation of Europe.*
e. b and c.