Auburn University
Spring 1994
U-102: Political Economy
Dr. Johnson

Midterm Exam #1 Version #1

Instructions: This is a closed-book, in class examination. You will have the entire class period in which to work. Pick the one best answer to each of the following questions and record your answers by blackening in the appropriate dots on your large blue Scan Sheet with a number 2 pencil. Be sure to fill in your name in the appropriate field on your Scan Sheet and blacken the corresponding dots in the columns below. Please write your signature on the space for that purpose on the scan sheet. If you consent to have your exam score publicly posted by your student I.D. number, please write in your student identification number and blacken in the corresponding dots in the "Identification" field just below the signature bloc on your scan sheet. If you do not want your score posted, you should still write your I.D. number in the boxes, but do not blacken the corresponding dots. Important: for your exam to be correctly graded, you must enter the correct Version number of your exam (above) in the V/J box of your scan sheet (right after the boxes for your I.D. number) and blacken the dot corresponding to this number.

1. Which of the following was not identified in this course as one of the three basic economic problems faced by all societies that constitute the central subjects of study of the discipline of economics?

2. A resource or good or service would be defined by an economist as "scarce" in a particular economy if: 3. The XYZ Corporation can turn out 100 thousand widgets per month at a total cost of $1,000,000 per month. It can turn out 101 thousand widgets per month at a total cost of $1,005,000 per month. The "marginal cost" for the additional thousand widget batch is: 4. If a firm can sell as much of its product as it wishes at the going competitive market price, and it wants to earn as much profit as possible, it should: 5. Use statements 1 and 2 to determine the best answer below:
  1. Other things being equal, the quantity of a good or service demanded within a given time period tends to decrease as its price increases.
  2. Other things being equal, the quantity of a good or service that firms and industries will offer for sale in a given time period tends to increase as its price increases.
6. Compared to a traditional hunter-gatherer economy, a market economy 7. Use statements 1 and 2 to determine the best answer below:
  1. Roughly two-thirds of the tangible property in the U.S. consists of items owned by households and reserved for direct consumption by the members of the household, while the other one-third or so represents productive resources in the ownership of business, government or non-profit organizations.
  2. Roughly 30% of the value of productive resources in the U.S. consist of property owned by Federal, state or local government agencies.
8. The predominant legal form of ownership of private businesses in the present day U.S. (as measured by the percentage of total productive assets owned in that way) is: 9. In the average month, Grok can either dig 24 baskets of edible roots or kill 8 deer. If Grok chooses to divide his time between the two activities, he can normally kill one deer in the same amount of time it takes him to dig three baskets of roots. In the average month, his fellow tribesman Og can either dig 8 baskets of roots or kill 4 deer. If Og chooses to divide his time between the two activities, he can normally kill one deer in the same amount of time it takes him to dig two baskets of roots. At present, without trade, Grok is dividing his time so as to produce (and consume) 12 baskets of roots and 4 deer per month, while Og is producing (and consuming) 4 baskets of roots and 2 deer per month. Both would like to have more for their families to eat. Which of the following is correct? 10. Making another person aware that the people around him will think more highly of him if he performs a particular action (and will despise him as a traitor to the group if he doesn't) is an example of using a(n): 11. Which of the following pairs is the best example of complementary goods? 12. Use statements 1 and 2 to determine the best answer below:
  1. Other things being equal, an increase in consumer incomes will shift the demand curve for any given good (or service) that is not an inferior substitute to the right -- that is, more of the good will be demanded at any given price than would have been the case at lower incomes.
  2. Other things being equal, an increase in the size of the population within a market area will normally shift the demand curve for any given good or service in that area to the left -- that is, less of the good will be demanded at any given price than would have been the case with the lower population.
13. Use statements 1 and 2 to determine the best answer below:
  1. Other things being equal, an increase in the price of one of the raw materials used to produce a good or service will normally shift the supply curve for that good or service to the left -- that is, less of the final good or service will be offered for sale at any given price than would be the case if the raw material were still available only at the previous price.
  2. Other things being equal, imposing a 15% payroll tax on wages paid out by firms producing a particular good would normally shift the supply curve for that good to the left -- that is, less of the good will be offered for sale at any given price than would have been the case without the tax.
14. Other things remaining equal, we would expect an increase in the price of frankfurters 15. The equilibrium price of a good on a free competitive market will be a price at which 16. If the production of a good involves a positive externality, then from society's point of view free competitive markets will tend to produce 17. Use statements 1 and 2 to choose the correct answer:
  1. The consumption of a "pure public good" by one individual does not reduce the availability of that good to other individuals.
  2. Many kinds of "public goods" are provided only by the government or by non-profit organizations rather than by profit-seeking private business because the benefits derived from a public good cannot practically be limited to only those consumers that paid for them.
18. Before passage of the Civil Rights Act of 1964, it was not illegal for the "apartment for rent" ads in U.S. newspapers to contain racially exclusionary language such as "no colored people need apply" (and in fact significant numbers of ads used to contain words to that effect). A history graduate student hoping to document changes in the amount of racial discrimination in American life went through all the old newspapers for 1923 through 1963 for two large American cities and calculated the percentage of rental ads that contained racial restrictions for each city in each year from 1943 through 1963. City A had strict and effectively enforced rent control laws in effect only from 1943 through 1946, while City B had similar rent controls in effect for the entire period from 1943 through 1963. The economic theory of price ceilings would be most consistent with which of the following possible findings of the study? 19. Which of the following is the best example of a pair of goods that are "close substitutes" for each other? 20. According to Miller, Benjamin and North in The Economics of Public Issues, the greatest financial benefits from the US government's agricultural price support and acreage restriction programs have gone to 21. Which of the following is the best example of a "public good"? 22. The net benefits (total benefits minus total costs) of consuming an economic good are at a maximum when amounts of the good consumed reach the total number of units where 23. A substantial portion of the cost incurred by producing a good that does not get charged to the producers or purchasers of that good but rather is born by one or more "third parties" indicates we are dealing with 24. There has been a shift in the market demand schedule for a commodity if 25. According to Professor Johnson's lecture, which of the following would not be among the groups that are most likely to benefit from legislation substantially raising the minimum wage? 26. A "natural monopoly" in the technical economic sense occurs when 27. Adam Smith's concept of the "invisible hand" (in your selection from The Wealth of Nations) could best be described as referring to 28. Use statements 1 and 2 to choose the best answer below:
  1. According to Pool and LaRoe's The Instant Economist, if the government wishes to increase the level of economic activity, it can do so either by increasing government expenditures or by increasing taxes.
  2. According to Pool and LaRoe's The Instant Economist, if the government wants to increase the amount of investment (and thus increase the level of economic activity), it can do so by expanding the money stock so as to lower interest rates.
29. If the demand for a product is "highly elastic," 30. In a market economy, when the available amount of a raw material (or other resource with many valuable uses) is for some reason no longer sufficient to supply all of the producers that have been regular purchasers of that material in the past, economic theory would predict that typically 31. According to Miller, Benjamin and North in The Economics of Public Issues, which of the phenomena below do not represent typical patterns of market adjustment to a sudden large jump in a region's population that greatly increases the demand for rental housing and leads to rapid rent increases? 32. The part of government economic policy that is concerned with deciding the amount of revenues to be raised through taxation and with deciding on the total amount of money the government will spend on its various programs is 33. Which of the following best explains why the invention of money was a productivity enhancing social institution? 34. Use statements 1 and 2 below to choose the best answer below:
  1. According to Miller, Benjamin and North in The Economics of Public Issues, restrictions on importing foreign goods into the U.S. adversely affect the interests of American consumers by pushing up the prices of foreign goods while enabling U.S. producers of similar goods to hike their own prices.
  2. According to Miller, Benjamin and North in The Economics of Public Issues, the costs of import restrictions to American consumers are typically more than counterbalanced by their savings as taxpayers, since import restrictions save American jobs and thus avoid the need to pay welfare and unemployment benefits to the workers who would otherwise be displaced.
35. Examine the supply and demand diagram below. Which of the following would be the likely consequence of a shift in the industry's demand curve from D1 to D2, other things remaining equal?

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36. Consider the following supply and demand diagram for dilithium crystals (used for many civilian commercial purposes but also essential for operation of the warp drive systems in Federation starships). Which of the following would be a reasonable explanation for the shift in the industry's supply curve from S1 to S2?

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