Bunker Hill Community College ECO 202; EC 202-Principles of Microeconomics- Midterm Exam-Summer 2025 (Sec 01R) | Answered Correctly A+.

EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 1 NAME(Please Print):_____________________________________ Instructions: Please answer ALL of the Questions from 1 to 35 (Exam covers material from Chapters 1,2,4,5,7,8,21,13,14,15, HW # A-E) Below. You may use your text or lecture notes, but you must not work with another econ student, past or present. The Midterm is due at 6pm on Tuesday, 8/12. Send e-mail to me if you have any questions. Good Luck! 1. Economics is the study of society manages its scarce resources. government's role in society. c. how a market system functions. d. how to increase production. 2. A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between a. guns and butter. b. efficiency and equity. c. inflation and unemployment. d. work and leisure. 3. One tradeoff society faces is between efficiency and equity. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy. (2 points) - Efficiency means the economy is getting the most it can from its scarce resources, producing goods and services in a way that maximizes total output. - Equity means the benefits of those resources are distributed fairly among society’s members. - If the U.S. government redistributes income from the wealthy to the poor (through taxes and welfare programs), this promotes greater equality. However, it may reduce efficiency because it lowers the incentive for people to work hard or produce more. As a result, the total size of the economic “pie” may shrink.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 2 4. If an economy is producing efficiently, then a. there is no way to produce more of one good without producing less of another good. b. it is possible to produce more of both goods without increasing the quantities of inputs that are being used. c. it is possible to produce more of one good without producing less of the other. d. it is not possible to produce more of any good at any cost. 5. Production possibilities frontiers are usually bowed outward. This is because a. the more resources a society uses to produce one good, the fewer resources it has available to produce another good. b. it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced. c. of the effects of technological change. d. resources are specialized, that is, some are better at producing particular goods rather than other goods. 6. Identify each of the following topics as being part of microeconomics or macroeconomics: (4 Points) a. the impact of a change in consumer income on the purchase of luxury automobiles - Microeconomics b. the effect of a change in the price of Coke on the purchase of Pepsi -Microeconomics c. the impact of a war in the Middle East on the rate of inflation in the United States -Macroeconomics d. factors influencing the rate of economic growth -Macroeconomics 7. Which of the following statements are positive, and which are normative? (4 Points) a.The minimum wage creates unemployment among young and unskilled workers. -Positive b. If the price of a product in a market decreases, other things equal, quantity demanded will increase. -Positive c. If welfare benefits were reduced, the country would be better off. -Normative d. The minimum wage ought to be abolished. - NormativeEC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 3 8. A surplus exists in a market if a. there is an excess demand for the good. b. the situation is such that the law of supply and demand would predict an increase in the price of the good from its current level. c. the current price is above its equilibrium price. d. None of the above is correct. 9. In general, elasticity is a measure of a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive. c. how fast the price of a good responds to a shift of the supply curve or demand curve. d. how much buyers and sellers respond to changes in market conditions. 10. Income elasticity of demand measures how a. the quantity demanded changes as consumer income changes. b. consumer purchasing power is affected by a change in the price of a good. c. the price of a good is affected when there is a change in consumer income. d. many units of a good a consumer can buy given a certain income level. 11. Using the midpoint method, compute the elasticity of demand between points A and B(from the graph below). Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic? (5 points) Between A and B: Elasticity = 2.5, Elastic demand Interpretation: A 1% decrease in price results in a 2.5% increase in quantity demanded. Demand is elastic, meaning consumers are sensitive to price changes in this range. Between B and C: Elasticity = 0.75, Inelastic demand Interpretation: A 1% decrease in price results in only a 0.75% increase in quantity demanded. Demand is inelastic, meaning consumers are less responsive to price changes in this range.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 4 Graph for Question #14 12. Welfare economics is the study of a. how the allocation of resources affects economic well-being. b. how technology is best put to use in the production of goods and services. c. government welfare programs for needy people. d. taxes and subsidies. 13. Which of the Ten Principles of Economics does welfare economics explain more fully? a. The cost of something is what you give up to get it. b. Markets are usually a good way to organize economic activity. c. Trade can make everyone better off. d. A country’s standard of living depends on its ability to produce goods and services. 14. Shannon buys a new CD player for her car for $135. She receives consumer surplus of $25 on her purchase if her willingness to pay is a. $25. b. $110. c. $135. d. $160. Table 1 BUYER WILLINGNESS TO PAY MEE SOOK $50.00 PAOLO $30.00 JONATHAN $20.00 SABINE $10.00 For Questions 15 and 16EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 5 15. In Table 1 above, if the table represents the willingness to pay of four buyers and the price of the product is $18, then their total consumer surplus is - Mee Sook: $50 - $18 = $32 - Paolo: $30 - $18 = $12 - Jonathan: $20 - $18 = $2 - Sabine: $10 $18 =Does not buy Total Consumer Surplus = $32 + $12 + $2 = $46 16. From Table 1 Above, if the table represents the willingness to pay of four buyers and the price of the product is $15, then who would be willing to purchase the product? - Mee Sook ($50) = buys - Paolo ($30) = buys - Jonathan ($20) = buys - Sabine ($10) = does not buy (willingness to pay price) Answer: Mee Sook, Paolo, and Jonathan 17. To measure the gains and losses from a tax on a good, economists use the tools of a. macroeconomics. b. welfare economics. c. international-trade theory. d. circular-flow analysis.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 6 18. Use the following graph shown to fill in the table that follows. (12 Points) WITHOUT TAX WITH TAX CHANGE Consumer surplus A+B+C A Decreases Producer surplus D+E+F F Decreases Tax revenue 0 B+D Increases Total surplus A+B+C+D+E A+B+D+F Deadweight loss 19. John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement? (2 Points) Answer: The maximum tax is $10.00 (That’s the total surplus that can be absorbed before one or both parties drop out.) 20. A budget constraint a. shows the prices that a consumer chooses to pay for products he consumes. b. shows the purchases made by consumers. c. shows the consumption bundles that a consumer can afford. d. represents the consumption bundles that give a consumer equal satisfaction. 21. An increase in income will cause a consumer's budget constraint toEC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 7 a. shift outward, parallel to its initial position. b. shift inward, parallel to its initial position. c. pivot around the "Y" axis. d. pivot around the "X" axis. Figure for Problem #22 22. From the indifference curves in the figure above, which of the following statements is correct? a. Point A is preferred equally to point E. b. Point A is preferred equally to point C. c. The bundle associated with point B contains more Ho-Ho's than that associated with point C. d. The bundles along indifference curve I1 are preferred to those along indifference curve I2. 23. Suppose at $5 the quantity demanded for the download of Yo-Yo Ma’s music from his “Piazzolla: Soul of the Tango” Album is 3 songs. If the substitution effect of the price decrease from $5 to $3 is 1 song, and the income effect is 3 songs, what impact will the price change have on the number of tracks consumers purchase from the Piazzolla’s album? (2 points) Answer: The price change from $5 to $3 will increase the number of tracks consumers purchase from 3 to 7 songs.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 8 24. Suppose the table below represents the Marginal Utility a consumer derives during a month from attending swing and salsa social dance events. Swing events costs $10 each and salsa costs $12 each. How many of each dance option per month would the consumer meet his or her consumer equilibrium (optimal choice) (1 point) 5 swing events and 6 salsa events per month is the optimal choice. Quantity of Swing per Month Quantity of Salsa per Month Marginal Utility of Swing Marginal Utility of Salsa 1 2 14 18 2 3 27 26 3 5 60 75 EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 9 25. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run, a. output is not variable. b. the number of workers used to produce the firm's product is fixed. c. the size of the factory is fixed. d. there are no fixed costs. 26. The production function depicts a relationship between which two variables? Draw a production function that exhibits diminishing marginal product. (3 points) 27. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? (2 Points) - If the average total cost (ATC) curve is falling, then the marginal cost (MC) must be below the ATC. - If the average total cost (ATC) curve is rising, then the marginal cost (MC) must be above the ATC.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 10 28. A profit-maximizing firm will shut down in the short run when a. price is less than average variable cost. b. price is less than average total cost. c. average revenue is greater marginal cost. d. average revenue is greater than average fixed cost. 29. In the long run, all of a firm's costs are variable. In this case the exit criterion for a profitmaximizing firm is to a. shutdown if price is less than average total cost. b. shutdown if price is greater than average total cost. c. shutdown if average revenue is greater than average fixed cost. d. shutdown if average revenue is greater than marginal cost. 30. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market? (2 Points) - A perfectly competitive firm sets price = market price to maximize profit. - Pricing below market price would reduce the firm’s own profit without impacting the market.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 11 31. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production? (3 Points) Ans: - A firm in a competitive market identifies the profit-maximizing level of production where marginal cost (MC) equals marginal revenue (MR). Since the firm is a price taker in a perfectly competitive market, MR equals the market price (P). Therefore, the firm maximizes profit by producing the quantity where MC = MR = P. Raise Production: If MR MC, the firm should increase production because producing more adds more to revenue than to cost, increasing profit. Lower Production: If MR MC, the firm should decrease production because the cost of producing an extra unit exceeds the revenue it brings, reducing profit. 32. A fundamental source of monopoly market power arises from a. perfectly elastic demand. b. perfectly inelastic demand. c. barriers to entry. d. availability of "free" natural resources, such as water or air. 33. In the figure above, the marginal cost curve for a monopoly firm is depicted by curve a. A. b. B. c. C. d. D.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 12 34. In the figure above, total cost curve for a monopoly firm is depicted by curve a. A. b. B. c. C. d. D. 35. The price of a Major League Baseball ticket 5 rows behind the visitor’s dugout at Turner Field in Atlanta, GA is much lower than the price of a similar ticket for the same location at Fenway Park, Boston. Explain the factors in Supply and Demand that accounts for the price difference. (2 points) The price difference between similar seats at Turner Field and Fenway Park can be explained by basic supply and demand principles: Fenway Park in Boston has higher demand due to its historic significance, strong fan base, and frequent sell-out games. This increased demand shifts the demand curve to the right, raising the equilibrium price. On the other hand, Turner Field in Atlanta generally has lower demand, possibly due to a smaller or less passionate fan base and less frequent sell-outs which keeps ticket prices lower. Additionally, supply is fixed (limited number of seats), so in cities with higher demand and limited supply, like Boston, prices naturally rise. Therefore, the higher price at Fenway reflects greater consumer willingness to pay and a more inelastic demand curve, while lower demand in Atlanta results in a lower equilibrium price. CONGRATULATIONS! YOU ARE FINISHED. THE REST IS OPTIONAL PART B. EXTRA CREDIT. You are not obligated to do this section. To obtain full extra credit, you must show all of your work for problems requiring calculations. (13 POINTS) EC 1. There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Using your understanding of monopolies, discuss the likely effect of deregulation on prices in these two industries (hint-what happens if it leads to increase competition, if it doesn’t? How would you define the success of deregulation?). (3 Points) Deregulating electricity and natural gas delivery aims to introduce competition into markets that have traditionally been natural monopolies due to high infrastructure costs.EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 13 If deregulation increases competition, prices may decrease as firms compete for customers, improving efficiency and service. However, if competition doesn't develop, private monopolies may replace public ones, leading to higher prices and reduced accountability. Deregulation is successful if it lowers prices, improves service, boosts innovation, and ensures fair competition. If these outcomes aren't met, the policy fails to benefit consumers. EC 2. Suppose that instead of a supply-demand diagram, you are given the following information: Qs = 100 + 3P Qd = 400 - 2P a. From this information compute equilibrium price and quantity. (2 points) Equilibrium Price = 60 Equilibrium Quantity = 280 b. Now suppose that a tax is placed on buyers so that Qd = 400 - (2P + T). If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers. What does this show you? (4 points) New Seller Price = 57 New Buyer Price = 72 New Quantity = 271EC 202-Principles of Microeconomics Due Tuesday, 8/12/25 Midterm Exam-Summer 2025 (Sec 01R) Prof. C. Chow 14 EC 3. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation? (4 points) In a monopoly, the firm restricts output to the quantity where marginal revenue = marginal cost and charges a price above marginal cost. This results in consumer surplus shrinking and some mutually beneficial trades not occurring. The deadweight loss (DWL) is represented on the graph as the triangular area between the demand curve and the (S1) curve over the range of quantities between the monopoly quantity (Q1) and the socially efficient quantity (Qe) Similarity to taxation: The deadweight loss from a monopoly is similar to that from a tax because both reduce the quantity traded below the socially optimal level, removing mutually beneficial exchanges. In both cases, there’s a triangular loss of total surplus that is not transferred to anyone, it’s pure economic inefficiency. In taxation, the price wedge is caused by the tax; in monopoly, the wedge is caused by the price mark-up above marginal cost.