ECON 201: Introduction to Macroeconomics Professor Robert Gordon Midterm Exam 1: October 21, 2013

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1 ECON 201: Introduction to Macroeconomics Professor Robert Gordon Midterm Exam 1: October 21, 2013 NAME Circle your TA's name: Arjada Samir Circle your section time: 11:00 am 4:00 pm Directions: This test is in two parts, a multiple choice question part and a short-answer part. Use this answer packet to complete the exam. Calculators are permitted. Books, notes, reference materials, etc. are prohibited. Good luck! Part 1: Referring to the questions in the Multiple Choice Questions Packet, choose the one alternative that best completes the statement or answers the question. Each question is worth one point. There is no penalty to guessing, so be sure to answer all of them. Write your answers in the following table using capital letters

2 1. The opportunity cost of something is: D (A) greater during periods of rising prices. (B) equal to the money cost. (C) less during periods of falling prices. (D) what is given up to acquire it. 2. While buying refreshments for an upcoming party, you notice that a six-pack of Americana Beer costs $2 and a six-pack of Bavarian Beer costs $4. You buy the six-pack of Bavarian Beer, although you wonder if maybe two six-packs of Americana Beer would have been a better choice. The opportunity cost of the Bavarian Beer is: C (A) $6. (B) a six-pack of Americana Beer. (C) two six-packs of Americana Beer. (D) the $4 and the six-pack of Americana Beer. 3. The lecture s analysis of the taxicab market in New York City concluded (A) Lifting the quota would raise taxi fares (B) Copy what London has done (C) Lifting the quota would benefit owners of taxi medallions (D) Copy what Chicago has done (E) (B) and (C) (F) (A) and (D) 4. Which of the following would shift the demand curve for new textbooks to the right? C (A) a decrease in the price of paper (B) a fall in the price of used textbooks (C) an increase in college enrollment (D) a fall in the price of new textbooks 5. Raclette is a popular wintertime dish in Switzerland. It is essentially melted raclette cheese over boiled new potatoes. If the price of Raclette cheese decreased, we would expect to see: B (A) a shift in the demand curve for Raclette cheese. (B) a shift in the demand curve for new potatoes. (C) no effect on the demand for either of the Raclette ingredients, since this is a traditional dish and its consumption does not depend on the prices of the ingredients. (D) a shift in the demand curve for Raclette cheese and for new potatoes Refer to the following table for questions If the economy produces 2 units of consumer goods per period, it also can produce at most units of capital goods per period. C (A) 30 (B) 28 (C) 24

3 (D) The opportunity cost of producing the fourth unit of consumer goods is units of capital goods. D (A) 2 (B) 4 (C) 6 (D) 8 8. If an economy has to sacrifice only one unit of good X for each unit of good Y produced throughout the relevant range, then its production possibility frontier has: B (A) a zero slope. (B) a constant, negative slope. (C) an increasing, negative slope. (D) a decreasing, negative slope. 9. The lecture read from articles that characterized these aspects of the USSR-type command economy. (A) rapid economic growth (B) shortages (C) surpluses (D) inefficiency (E) (A) and (B) (F) (B) and (D) 10. Technological improvements will: C (A) leave the production possibility frontier unchanged. (B) shift the production possibility frontier inward. (C) shift the production possibility frontier outward. (D) necessarily lead to increased unemployment. 11. Rapidly increasing health costs have been a major political concern since at least Suppose the government sets the maximum price for a normal doctor's visit at $20 to control rising health costs but the current market price is $40. What will happen? A (A) More people will try to visit the doctor, but there will be fewer doctors willing to see patients at that price. (B) The same number of people will try to visit the doctor, and the same number of doctors is willing to see patients at that price. (C) More people will be able to see the doctor, since the price is lower. (D) Fewer people will try to see the doctor, and fewer doctors are willing to see patients at that price. 12. A price ceiling is not effective if: A (A) it is set above the equilibrium price. (B) the equilibrium price is above the price ceiling. (C) it is set below the equilibrium price. (D) it creates a shortage.

4 13. The readings in the course packet and the lecture treatment of subsidies conclude that subsidies: (A) Redistribute income from the rich to the poor (B) Redistribute income from the poor to the rich (C) Improve the efficiency of the farm sector (D) Create a dead-weight loss (E) (A) and (D) (F) (B) and (D) Refer to the following supply and demand graph to answer questions 14-17: 14. In the market shown in the figure, a price ceiling of P1 causes: D (A) a shortage equal to the distance AB. (B) a surplus equal to the distance AB. (C) a shortage equal to the distance DE. (D) no change to the market. 15. In the market shown in the figure, a price ceiling of P3 causes: C (A) a shortage equal to the distance AB. (B) a surplus equal to the distance AB. (C) a shortage equal to the distance DE. (D) no change to the market. 16. In the market shown in the figure, a price ceiling of P3 would create a deadweight loss graphically representable by the area of: B (A) triangle ABC (B) triangle ACD (C) triangle CDE (D) rectangle ABED

5 17. In the market shown in the figure, a binding price ceiling is represented by: C (A) the price P1. (B) the price P2. (C) the price P3. (D) point C. 18. An inferior good is one for which in buyers' income causes. C (A) an increase; an upward shift in demand (B) an increase; an increase in quantity demanded (C) an increase; a downward shift in demand (D) a decrease; a downward shift in demand 19. Which of the following best describes the law of demand? C (A) As income taxes rise, fewer new cars are purchased. (B) As the price of corn rises, more acres of corn are planted. (C) As the price of a DVD rental rises, fewer DVDs are rented. (D) As the population rises, more electricity is consumed. 20. The lecture discussed a course packet reading about a drought in Russia in summer The lecture analysis concluded that the curve for wheat in the U. S. shifted to the while the curve for soybeans shifted to the.. (A) supply; right; demand; right (B) supply; left; supply; right (C) demand; right; supply; left (E) demand; right; demand; left Refer to the following graph for questions In the figure, if Tealand is producing 10 million scones and 10 million cups of tea (point A), we know that the economy: B (A) is using its resources efficiently. (B) is using its resources inefficiently. (C) is fully employing its resources.

6 (D) has found new resources. 22. In the figure, Tealand is producing at point C on its production possibility frontier. What is the opportunity cost in Tealand of increasing the production of tea from 20 million cups to 30 million cups? B (A) 10 million cups of tea (B) 5 million scones (C) 10 million scones (D) The answer is impossible to determine from the information given. 23. The demand and supply equations for hot dogs are given by Q d = P, Q s = P, where Q d (Q s) is the quantity demanded (supplied) and P is the price in dollars. Which of the following statements is true? D (A) At the equilibrium, the price = $0.50 and the quantity = 4500 hot dogs. (B) At a price of $1, there is a shortage of 4000 hot dogs. (C) At a price of $1, there is a surplus of 4000 hot dogs. (D) Both answers A and C are correct. (E) Both answers A and B are correct. Refer to the following graph to answer question Look at the graph above. In the graph, one effective price ceiling would be the price indicated at point and a would exist equal to the difference between points. C (A) b; surplus; f and e (B) b; shortage; f and e (C) d; shortage; i and h (D) d; surplus; e and h 25. Joe s demand for spring water can be represented as P = 10 Q (where P is measured in $/gallon and Q is measured in gallons). He recently discovered a spring where water can be obtained free of charge. His consumer surplus from this water is: B (A) $0.

7 (B) $50. (C) $100. (D) unknown based upon the information provided. Refer to the following graph to answer question The figure above shows the market demand curve for telecommunication while driving one s car (time spent on the car phone). The current price is $0.35 per minute. What is the difference in between the consumer surplus enjoyed by consumers if the price is $0.35 per minute (as shown in the graph) and the consumer surplus enjoyed at an alternative higher price of $0.45 per minute? B (A) $820. (B) $84. (C) $58. (D) $369 Refer to the following graph to answer questions The graph above shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, the loss in social welfare equals: D (A) b + c. (B) f. (C) a.

8 (D) f + g 28. If the city government passes a law that establishes $350 per month as the legal maximum rent, producer surplus decreases by: C (A) d. (B) b + f. (C) c + g. (D) i. 29. If the city government passes a law that establishes $350 per month as the legal maximum rent, the consumer s net gain in surplus equals: A (A) c f. (B) b f. (C) d f. (D) Answer cannot be determined from the information given. 30. The lecture added to the economy-wide interactions of the text s chapter 1 by providing additional examples of the New Deal policies to improve employment. What was unique about the WPA (and the CCC or Civilian Conservation Corps) compared to today s attempts at fiscal stimuls? (A) They built roads. (B) Workers were directly employed by local governments. (C) Workers were directly employed by the federal government. (D) Workers wages were subsidized so that private firms would hire them.

9 Part 2: Solve the following problems in the provided space. Show all your work clearly. Problem 1 (8 points) Bakers A and B are rival bakers in a small town. Assume that both of their PPFs are linear. Baker A can produce either 15 biscuits or 5 cupcakes in 1 hour; Baker B can produce either 4 biscuits or 4 cupcakes in 1 hour. (1.5 pts) Suppose that both bakers work a typical 8-hour workday. In the space below, draw their respective (daily) PPFs, so that the VERTICAL axis is CUPCAKES and the HORIZONTAL axis is BISCUITS. Make sure to identify the axis intercepts clearly. (3 pts) (Intercepts will be (Baker A intercepts: (120,0) and (0,40); Baker B intercepts: (32,0) and (0,32)) Baker A Baker B (1pts) The opportunity cost of producing biscuits for Baker A is, while for Baker B is. (Don t forget units!) (2 pts) (1/3 cupcakes/biscuit, 1 cupcake/biscuit) (1.5 pts) Baker A has a comparative advantage in baking, while Baker B has a comparative advantage in baking. Baker has an absolute advantage in baking cupcakes. (3 pts) (biscuits / cupcakes / A) Baker B recruits a volunteer (a cupcake enthusiast!) that is very skillful in baking cupcakes; hence, the production of cupcakes for Baker B goes up by % 150. Baker A purchases a new oven, which increases her maximum production of both biscuits and cupcakes by 3/4. (4 pts) The opportunity cost of baking cupcakes for Baker A is, while for Baker B is. If they were to each specialize in baking only one type of good, Baker A should specialize in baking while Baker B should specialize in baking. (4 pts) (3 / 0.4 / biscuits / cupcakes)

10 Problem 2. (11 pts) Consider the following demand and supply equations in a market for peanut butter: Q s = 1/3 P P= 100-7Q d 1. (2 pts) What is the equilibrium quantity and price in this market? (Q=10, P=30) 2. (2 pts) At a price of 20, the quantity of peanut butter exchanged in the market will be. There is a shortage/surplus in the market. (20/3; shortage) 3. (2 pts) Suppose now that due to an external shock in the market for peanut butter, the new equilibrium shifts to P = 15, Q = 5. What is the new demand equation assuming that demand rotates about its P-intercept? (P = Q d) 4. (3 pts) Suppose that a binding quota of 8 units is imposed by the government in the original market (with the original demand equation P= 100-7Q d). At Q=8, consumers' willingness to pay is

11 , while producers' willingness to accept is. The price charged under this quota will be. The quantity exchanged under this quota is. (44; 24; 44; 8) 5. (1 pts) What is consumer surplus equal to under this quota? (224) 6. (1pts) Show that there is a decrease in consumer surplus due to this quota. (old CS: 350, new CS: 224)

12 Problem 3. (11 pts) Suppose that in a market, the demand for good X is given by the equation: P=120-2Qd, while the supply for good X is given by the equation P=20+3Qs, where Qd indicates quantity demanded and Qs indicates quantity supplied. The demand and supply curves are drawn in the graph below: P S 20 D 60 Q 1. (1pts) Solve for the equilibrium price and quantity in the market for good X. (Q= 20, P=80) 2. (2pts) The government imposes a sales tax of $30 per unit of good X. What is the new quantity of good X exchanged in the market? The new price that the consumers pay is and the new price that the producers receive is. (Q=14, Pd=92, Ps=62) 3. (3pts) Under this sales tax, consumer surplus is equal to, producer surplus is equal to, and the deadweight loss caused by the tax is equal to. (196, 294, 90)

13 4. (2pts) Suppose that instead of a sales tax of $30, the government imposes a subsidy of $30 per unit paid to the producer. The quantity that will be exchanged in the market now is. The price paid by the consumer is, and the price received by the producer is. (26, 68, 98) 5. (3pts) Under this new subsidy, consumer surplus is equal to, producer surplus is equal to, and the deadweight loss created by this subsidy is equal to. (676, 1014, 90)

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