AF1605 Introduction to Economics

2022-23 Second Semester

Midterm Test
11th March, 2023

Version A
Instructions:

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the instructions on Lecture Blackboard for the right version for you.
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responses in PDF, then submit the PDF file to the collection point on Lecture Blackboard
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Part I: Multiple Choice Questions (20 marks, 1 mark each)

Choose ONE answer for each question.

Question 1
If your best friends ask you to go for a good dinner on Sunday night, and your best alternative
use of time is to do a part-time job and earn some money, which of the following will decrease
the opportunity cost of going to the dinner with your best friends?
A. The dinner is unexpectedly enjoyable.
B. The dinner becomes more expensive.
C. You need to travel further for the part-time job and pay a higher bus fare, but the wage
is unchanged.
D. You miss the last bus and need to take a taxi to go home after the dinner.

Question 2
Last year, you have purchased 1000 shares of a Company A’s stock at $90 per share. Now, it
can be sold at $100 per share. It is expected one year later, it is worth $110 per share. If the
stock of Company B is expected to increase in price by 15% in the same period, and the
transaction fees for switching to Stock B now is 2% of the total value now, what should be the
right thing to do for a rational investor? (Assume there is no uncertainty about future stock
price.) (Note: switching to Stock B means selling the shares of Company A and buy the stock
of Company B.)
A. Hold Stock A because the current price is above the purchase price.
B. Sell Stock A because the current price is above the purchase price.
C. Hold Stock A because you will have more money than switching to Stock B.
D. Switch to Stock B because you will have more money than holding Stock A.

Question 3
Suppose, at your home, you still have a few sets of Covid-19 antigen test kits, which were
distributed by the government for free in 2022. Recently, a set of kit of the same brand is selling
at $5 and will persist for some time. The opportunity cost of using one old set of test kit of this
brand is now:
A. $0.
B. $2.5.
C. $5.
D. Not enough information to judge.

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Question 4
In which of the following case will you face a lower opportunity cost of studying for a Master
degree, with the best alternative of working in the current career path?
A. You have already paid part of the tuition fees for the Master degree, and the paid fee
is non-refundable.
B. You have an increased current and expected income in the current career path.
C. The work for the Master degree is much harder than expected.
D. You need to take an extra exam, which requires some time for preparation, to get into
the programme.

Question 5
Every day, Peter is willing to pay at most $25 for the first cup of coffee from the café, $15 for
the second cup, $5 for the third cup, and $0 for the fourth cup or more. Peter needs to pay $15
per day to join its membership, but the café only charges $10 per cup to members. What is the
surplus maximizing number of cups of coffee Peter will buy? (One does not join membership
and does not buy coffee from this café if the final surplus is negative.)
A. 0 cup
B. 1 cup
C. 2 cups
D. 3 cups

Question 6
Good A and Good B are complements in consumption, while Good A and Good C are
complements in production output. Good B and C are unrelated. Now a per-unit tax (on sellers)
is imposed on Good B and Good C. How do the tax affect the equilibrium price and quantity
for Good A? (Note: the size of effects are unknown.)
A. Equilibrium price increases. Equilibrium quantity changes in an uncertain direction.
B. Equilibrium price changes in an uncertain direction. Equilibrium quantity decreases.
C. Equilibrium price decreases. Equilibrium quantity changes in an uncertain direction.
D. Equilibrium price changes in an uncertain direction. Equilibrium quantity increases.

Question 7
Which of the following is NOT a consequence of imposing a quota to imports of pork to
Country A, given that pork produced locally (in Country A) is a substitute in consumption of
imported pork?
A. The price of imported pork is higher.
B. The demand for imported pork decreases.
C. The demand for locally produced pork increases.
D. The price of locally produced pork increases.

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Question 8
People now want to reduce carbon emission to avoid severe climate change, while electric
cars are proved to have lower carbon emission than cars running petroleum. Which of the
following demand-side factor has changed for electric cars because of this?
A. An increase in income
B. A stronger preference
C. An increase in price of substitutes in consumption
D. An increase in price of complements in consumption

Question 9
Recently avian flu is prevalent in some countries like Japan. Many chickens are killed. Which
of the following is the key supply-side factor change for eggs because of this?
A. Increase in price of substitutes in production.
B. Improvement in technology.
C. Decrease in expected future price of eggs.
D. Unexpected decrease in input.

Question 10
If there is an increase in demand and an increase in supply for Good A, but we do not know
about the sizes of changes, which of the following can we conclude?
A. Equilibrium price increases, but equilibrium quantity changes in an uncertain
direction.
B. Equilibrium price decreases, but equilibrium quantity changes in an uncertain
direction.
C. Equilibrium price changes in an uncertain direction, while equilibrium quantity
increases.
D. Equilibrium price changes in an uncertain direction, while equilibrium quantity
decreases.

Question 11
If we know that the equilibrium price has increased and the equilibrium quantity has increased,
which of the following cannot explain what we observe?
A. An increase in demand only.
B. An increase in supply only.
C. A large increase in demand and a small increase in supply.
D. A large increase in demand and a small decrease in supply.

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Question 12
If the equilibrium price is $20, which of the following is true?
A. A price ceiling at $25 will lead to an excess demand.
B. A price floor at $15 will lead to an excess supply.
C. A price ceiling at $15 will lead to an excess demand.
D. A price floor at $25 will lead to an excess demand.

Question 13
Which of the following does not give rise to deadweight loss?
A. Increase in supply
B. Imposition of effective price ceiling
C. Imposition of effective price floor
D. Imposition of effective quota

Question 14
If we find that the elasticity of demand for fresh brew coffee is 0.8. In this month, the price of
a cup of fresh brew coffee increases by 3%, which of the following is true?
A. The quantity demanded increases by 2.4%, and total revenue increases.
B. The quantity demanded decreases by 2.4%, and total revenue increases.
C. The quantity demanded decreases by 2.4%, and total revenue decreases.
D. The quantity demanded decreases by 3.8%, and total revenue decreases.

Question 15
Which of the following is NOT generally true about a per-unit tax of t per unit?
A. The price actually paid by buyers increases, but by less than t.
B. The price eventually received by sellers decreases, but by less than t.
C. The proportional share of tax burden to consumers is lower if the price demand
elasticity is higher.
D. After adjusting to the new equilibrium, the price actually paid by buyers is higher if the
tax is imposed to buyers rather than to sellers.

Question 16
Which of the following is not correct for a decrease in quantity of quota, assuming no resources
are spent to secure a quota, and only the quantity transacted is produced?
A. Consumer Surplus decreases.
B. Total revenue increases if demand is inelastic.
C. Total revenue decreases if demand is elastic.
D. Total cost of producing the transacted output increases.

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Question 17
Which of the following curve should not be in U-shape?
A. Marginal cost curve
B. Average variable cost curve
C. Average total cost curve
D. Average fixed cost curve

Question 18
Which of the following is the meaning of economies of scale?
A. Short-run marginal cost is increasing with output level.
B. Long-run marginal cost is decreasing with output level.
C. Long-run average cost is increasing with output level.
D. Long-run average cost is decreasing with output level.

Question 19
If at Q = 5, TC = 50. If at Q = 6, TC = 65. Which of the following is a general relationship
that can be confirmed with the data given?
A. If MC < AC, AC is decreasing.
B. If MC > AC, AC is increasing.
C. If MC < AC, MC is decreasing.
D. If MC > AC, MC is increasing.

Question 20
There are three machines that we can choose to print t-shirts to sell. If we print 500 t-shirts a
day, the average cost of production using the basic model is $10, while the average costs for
standard model and powerful model are $13 and $15 respectively. When we can choose which
machine to use, what is the average cost for printing 500 t-shirts?
A. $8
B. $10
C. $12.5
D. $13

Please turn to next page for Part II.

Version A Page 6
Part II: Short Questions (20 marks in total)

There are altogether THREE questions in this part.

Question 1 (6 marks) (1 mark for each part)

Alice decides to quit her job and operate her own café. Consider the following information
for the coming year if Alice goes ahead to starts her own café.

• To operate this café, Alice has to quit her current full-time job earning $500,000 a
year and work full time in her restaurant.
• She has to spend $450,000 to purchase furniture, appliances and equipment, and their
market values will decrease by 20% in the first year of operation.
• Accounting depreciation for these capital goods allocated to the first year of operation
is $100,000.
• She has to pay $550,000 on wages for employees working in her café in a year.
• She has to spend $300,000 on materials and supplies, utilities, and other relevant costs
in a year.
• To finance the initial investment and operating costs, Alice has to use her saving of
$400,000, from which she could earn an interest of 2 percent in the coming year.
• She also has to borrow $600,000 at 4 percent from a bank in the coming year.
• The total after-tax revenue of her restaurant in the coming year is $1,500,000.

(a) All the explicit costs add up to $_______.

(b) All the (economic) implicit costs add up to $_______.
(c) The accounting cost for the first year of operation is $_______.
(d) The accounting profit for the first year of operation is $________.
(e) The economic cost for the first year of operation is $_______.
(f) The economic profit for the first year of operation is $_________.

Question 2 (6 marks)(1 mark for each part)

Consider the market of apples. The market demand curve for apples is given by 𝑃 = 100 −
5𝑄𝑑 and the market supply curve is given by 𝑃 = 10 + 4𝑄𝑠 , where P is in dollars and Q is in
million apples. (Note: this is a continuous case.)
(a) The market equilibrium price is $_______.
(b) The market equilibrium quantity is ________ million apples.
(c) The consumer surplus is $________million.
(d) The producer surplus is $________million.
Now, suppose the government imposes a quota of 8 million apples allowed to be sold.
(e) The market equilibrium price under quota is $_______.
(f) The deadweight loss is $________ million.

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Question 3 (8 marks)
Consider the following market demand-supply schedule for bottle apple juice. (Take it as a
discrete case.) The government is going to impose a per-unit tax of $3 on sellers.
Price ($/bottle) Quantity Demanded Quantity supplied Quantity supplied
(thousand bottles) before tax after tax
(thousand bottles) (thousand bottles)
7 140 80
8 125 90
9 110 95
10 100 100 (c)
11 90 105 (d)
12 75 115 (e)
13 60 130 (f)
14 40 150

(a) The before-tax market equilibrium price is $______. (1 mark)

(b) The before-tax market equilibrium quantity is _________ thousand bottles. (1 mark)
(c) (d) (e) (f): Fill in the numbers on the quantity supplied schedule after tax. (1 marks)
(g) The after-tax market price paid by buyers is $_______. (1 mark)
(h) The after-tax market price received by sellers (after paying the tax) is $_______ (1
mark)
(i) The after-tax market quantity transacted is _________ thousand bottles. (1 mark)
(j) The consumer tax burden (in dollar amount) is $________ thousand. (1 mark)
(k) The producer tax burden (in dollar amount) is $________thousand. (1 mark)


END OF PAPER

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