Study Guide for Final Exam

Transcription

1 San Francisco State University Michael Bar ECON 101 Spring 2014 Instructions Study Guide for Final Exam 1. You must bring your student ID in order to be able to the final exam. 2. This is closed book, closed notes exam. 3. No calculators or electronic devices of any kind are allowed. 4. Show all the calculations. 5. If you need more space, use the back of the page. 6. Use a ruler to draw neat graphs. 7. Fully label all graphs. 8. The last page contains a few formulas. 9. In any case of discrepancy between definitions I gave and the textbook, you are required to follow my definitions. General guidelines 1. The material for the exam is based on lectures in class, and textbook chapters 1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 14, There are 5 types of questions: a. you are asked to write the definition of a concept b. Graphs you are asked to draw a graph or answer a question based on. c. Calculations you are asked to calculate or solve something. In these questions most points are awarded to the correct steps, and NOT to the final answer. d. Multiple choice you are asked to circle the correct answer. Your calculations are not graded. e. True/False, explain questions you are given a statement, asked to circle either True or False, and provide a brief explanation. 1

2 Detailed Guide Introduction (Ch. 1) This chapter explains what economics is. 1. Scarcity 2. Economics 3. Microeconomics 4. Macroeconomics 5. Rational choice 6. Economic model 7. Correlation 8. Normative statement 9. Positive statement 1. Economists assume that all people take any action (circle the correct answer): a. in a random and unpredictable way b. if their perceived cost from taking the action is zero c. if their perceived benefits from taking the action are greater or equal to their perceived cost from taking the action d. in a selfish manner, and are never influenced by feelings and emotions 2. Define Economics. The Economics Problem (Ch. 3) In this chapter we illustrated the concept of scarcity with our first model the Production Possibilities Frontier. We also illustrated how people and countries can gain from trade. 1. Production efficiency 2. Opportunity cost 3. Absolute advantage 4. Comparative advantage 1. (12 points). Two countries produce guns (X) and roses (Y). The time required for an average worker to produce one unit of each good is given in the next table. Time required (in hours) to Country make one unit Opportunity cost of one unit X Y X Y A 4 2 B

3 a. Calculate the opportunity costs of X and Y for each country, and complete the above table. b. Which country has absolute advantage in X? In Y? has absolute advantage in X and has absolute advantage in Y. c. Which country has comparative advantage in X? In Y? has comparative advantage in X and has comparative advantage in Y. d. Both countries can gain from trade if switches resources from X to Y and switches resources from Y to X. 2. (9 points). Monaco can produce two goods: X (beer) and Y (pizzas). Monaco s Production Possibilities Frontier is illustrated in the next figure. A B 3

4 a. An output of 80 pizzas and 60 beer is (circle the correct answer): i. Attainable and inefficient ii. Attainable and efficient iii. Unattainable b. The opportunity cost of 1 pizza on section A-B is (circle the correct answer): i. 40 pizzas ii. 1/2 a beer iii. 2 pizzas iv. 20 beer c. Suppose that Monaco and Vatican have the same PPF as in the above figure. If Monaco produces 80 beers and 60 pizzas, while the Vatican produces 50 beers and 100 pizzas, then (circle the correct answer): i. Monaco has absolute advantage in beer, and Vatican has absolute advantage in pizza. ii. Monaco has comparative advantage in beer, and Vatican has comparative advantage in pizza. iii. Monaco has comparative advantage in pizza, and Vatican has comparative advantage in beer. d. In the above graph, illustrate the effect of a technological improvement in beer production. Label it d e. In the above graph, illustrate the effect of technological improvement in both goods. Label it e. Competitive Markets Demand and Supply (Ch. 4) In this chapter we introduced our second model Demand and Supply diagram. This model was used to illustrate how competitive markets work: how prices of goods and quantity traded are determined, and what causes prices to change. In order to apply this model successfully, we need to distinguish between shifts along a curve vs shift of the curve (supply or demand). 1. Demand curve 2. Supply curve 3. Market equilibrium 4. Substitute goods (in consumption) 5. Complement goods (in consumption) 6. Normal goods 7. Inferior goods 4

5 1. Suppose that demand and supply curves in some market are given below: D : P 100 Q S : P Q Solve for the market equilibrium. 2. Bad weather destroyed many rice plantations in China. Using the supply and demand diagram, illustrate the effect of this event on the market for rice and the market for noodle. Assume that rice and noodle are substitute goods. 3. News announcement: mad cow disease is back. Analyze the effects of the announcement on the market for beef and chicken. 4. New oil reserves were discovered in China. Analyze the effect of this event on the market for oil. 5. In the last 20 years the demand for personal computers increased dramatically. At the same time the prices of computers decreased. Use the supply and demand diagram to reconcile these facts. Elasticities (Ch. 5) In this chapter we analyze the markets quantitatively. For example, in chapter 4 we studied that when price goes up, the quantity demanded drops. In this chapter we ask by how much. We also showed the importance of price elasticity of demand for analyzing the effect of a price increase on firm s revenue. 1. Price elasticity of demand 2. Cross elasticity of demand 3. Income elasticity of demand 4. Price elasticity of supply 1. Suppose the demand curve for some good is given in the next figure: B A Calculate the price elasticity of demand between points A and B. 5

6 Market Efficiency (Ch. 6) In this chapter we briefly discussed different allocation methods, and contrasted them with markets. We also described the conditions under which market allocation is efficient. In order to understand the market efficiency condition, we must understand how the demand curve represents the marginal private benefit to the buyers and the supply curve represents the marginal private cost to sellers. Finally, we quantified the benefits generated by markets. 1. Production efficiency 2. Allocative efficiency 3. Consumer surplus 4. Producer surplus 5. Deadweight loss 1. Consider the market described in the next figure. a. What is the market equilibrium? b. Suppose that supply and demand curves represent the marginal social cost and benefits. What is the efficient quantity? c. Calculate the deadweight loss resulting in this market, if the quantity produced is 150 units. 6

7 Government Intervention in Markets (Ch. 7) In this chapter we illustrated the effects of 3 government policies on markets: (i) price ceiling, (ii) price floor, (iii) price support in agriculture. We showed that if markets are efficient to begin with, any of these interventions results in deadweight loss. I will not ask definitions in this chapter. See class notes, my notes posted on the course webpage, and MyEconLab. I will not ask on price support in agriculture on the final. Taxes in Markets (Ch. 8) This chapter illustrates that when markets are efficient to begin with, taxes result in deadweight loss. We also showed that the tax incidence does not depend on whether the taxes are imposed on buyers or on sellers. Finally, we showed that Elasticities of demand and supply determine how the tax burden is shared between buyers and sellers. I will not ask definitions in this chapter. See class notes, my notes posted on the course webpage, and MyEconLab. International Trade (Ch. 9) In this chapter we illustrated the impact of exports and imports on domestic markets. The main message is that international trade increases the total surplus, although there are some winners and losers. Once again, we showed that when markets are efficient to begin with, government policies that affect the equilibrium outcome (e.g. tariffs, import quotas) lead to deadweight loss. I will not ask definitions in this chapter. See class notes, my notes posted on the course webpage, and MyEconLab. I will not ask about quotas, and will only ask about the effect of tariffs. Externalities (Ch. 10) In this chapter we illustrated that when Marginal Social Cost differs from the Marginal private Cost, or when Marginal Social Benefit differs from Marginal private Cost, the result is that market equilibrium is inefficient. In this case, certain government intervention might improve efficiency. 7

8 1. Externality See class notes, my notes posted on the course webpage, and MyEconLab. Public Goods and Common Resources (Ch. 11) In this chapter we illustrated two other sources of market inefficiency public goods and common resources. Once again, certain government intervention might improve efficiency. 1. Nonrival good 2. Nonexcludable good See class notes, my notes posted on the course webpage, and MyEconLab. Markets with Private Information (Ch. 12) In this chapter we illustrated one more source of market inefficiency asymmetric information. We showed how asymmetric information can lead to adverse selection, and disappearance of an entire market. We explained how asymmetric information can lead to adverse selection and moral hazard in insurance markets. We showed how signaling and screening can improve market efficiency. We discussed how all the above problems, and more, exist in the market for healthcare, and offered solutions (HMOs, government provision). 1. Asymmetric information 2. Adverse selection 3. Moral hazard See class notes, my notes posted on the course webpage, and MyEconLab. Theory of the Firm: Production, Costs and Profit (Ch. 14, 15) In these chapters we discussed the most basic decisions of firms: how much to produce, and whether to stay in business or not. We derived the condition for profit maximization, and the conditions for staying in business in the short run and the long run. These conditions depend on firm s costs. We showed how firm s costs are derived from its production process. 8

9 I will not ask definitions in this chapter. See class notes, my notes posted on the course webpage, and MyEconLab. The focus is on analyzing the cost and profit of competitive firms. 9

10 Formulas (on the last page of the test) 1. Opportunity cost of X: Y Opp.cost of X units of Y X 2. Elasticity: a. Midpoint formula for percent change from X 0 to X 1 : X1 X 0 % X ( X1 X 0) / 2 b. Elasticity of X with respect to Y: % X X, Y % Y 3. Production cost and profit. a. Production Total Product TP( L) Q TP( L) Average product of labor AP( L) L TP( L) Marginal product of labor MP( L) L b. Cost Total Fixed Cost TFC Total Variable Cost TVC ( Total Cost TC( TFC TVC( Average Fixed Cost TFC AFC( Q Average Variable Cost TVC( AVC( Q TC( Average Total Cost ATC( AFC( AVC( Q c. Profit Marginal Cost TC( MC( Q General ( R( TC( Competitive firm ( P Q TC( 10