Download Sample Midterm 1 - Berkeley Economics

Economics 2
Spring 2017
Professor Christina Romer
Professor David Romer
SAMPLE FIRST MIDTERM EXAMINATION
PART I: SHORT ANSWER
[36 POINTS TOTAL]
Answer all questions. Be sure to explain your answers and to draw diagrams where they are appropriate.
1.
What is the rational spending rule is? Explain in words what the rule is saying and why a household that wants
to maximize its utility should follow this rule. [9 points]
2. Explain what is wrong with the following statement: Because one gets frequent flyer miles for free, there is no
cost to using them. [9 points]
3. If the government imposes a per unit tax on a good produced in a competitive market, does it matter whether
the tax is imposed on the sellers or the buyers? [9 points]
4. We have discussed that a binding price ceiling is likely to cause a misallocation of consumption among
consumers but not a misallocation of production among producers. Would you expect the opposite effects
from a binding price floor—that is, would you expect it to lead to misallocation of production among producers
but not to misallocation of consumption among consumers? [9 points]
PART II: PROBLEMS
[40 POINTS TOTAL]
Answer both parts of each question. Be sure to explain your answers and to draw diagrams where they are
appropriate.
5. In 2015 Oakland raised the minimum wage from $9 (the California level) to $12.25 per hour. Fast food
restaurants, which is a highly competitive industry, typically employ many minimum wage workers. (After the
midterm we will discuss the effects of minimum wages in much greater detail, including the empirical
evidence. For the purposes of this problem, you should focus on its effect in our standard model of a
competitive industry.)
a. What would you expect this development to do to the price of fast food and the output of a typical Oakland fast
food restaurant in the short run? [10 points]
b. Assume that the market for fast food started in long-run equilibrium. What would you expect to happen in the
long run to the number of fast food restaurants in Oakland as a result of the rise in the minimum wage? [10
points]
6. Suppose a company has a patent on a life-saving drug and therefore they are the only producer of the drug.
a. How much of the drug will the single producer choose to produce and what price will it charge? Is this
outcome allocatively efficient? [10 points]
b. In addition to supposing that the drug firm has a monopoly on the production of the drug, suppose that there
are external benefits associated with the drug. (For example, perhaps it is a drug for treating hepatitis C that
not only cures the people taking the drug, but also makes it less likely that the consumers will infect others.)
Show the deadweight loss in this case. (Hint: To make things simpler for you, it is not necessary to separate the
total private surplus into consumer surplus and producer surplus.) [10 points]
PART III: MULTIPLE CHOICE
[24 POINTS TOTAL]
Circle the best answer to each question. Each question is worth 2 points.
7.
The fact that the PPC slopes down reflects:
a. utility maximization.
b. profit maximization.
c. comparative advantage.
d. scarcity.
8. If the demand curve for a good shifts to the right and the supply curve shifts to the left, the equilibrium
quantity of the good will:
a. rise.
b. fall.
c. not change.
d. it is not possible to tell from the information provided.
9. If the demand for a good is completely price inelastic, a downward shift of the marginal cost curve of the
typical firm in the industry will cause:
a. no change in the price of the good.
b. a fall in the price of the good.
c. a rightward shift of the demand curve for the good.
d. some firms to exit the industry.
e. none of the above.
10. The research paper by Esther Duflo that you read examined not only the weight, given their height, of the
grandchildren of pension recipients, but also:
a. their height, given their age.
b. their performance on an IQ test.
c. their weight compared with that of children in Sudan and Turkey.
d. the amount of time they spent watching television.
S1, PMC1, SMC1
11. Suppose there is a positive externality associated with a
P
good. In the supply and demand diagram for this market
f
shown to the right, the deadweight loss associated with
g
producing at the market equilibrium is:
e
a. g.
h
b. g+h.
c. h.
d. e.
SMB1
e. none of the above.
D1, PMB1
12. A consumer’s budget constraint shows:
a. the marginal utility of the goods they consume.
Q1 Q*
Q
b. the total utility from the goods they consume.
c. the combinations of goods they can just afford given their income.
d. the consumer’s comparative advantage.
13. When there is a negative externality associated with a good, the deadweight loss at the free market equilibrium
will be larger:
a. the less price elastic demand is.
b. the more price elastic demand is.
c. the larger the externality is.
d. the smaller the externality is.
e. a and c.
f. a and d.
g. b and c.
h. b and d.
14. If demand for a good is elastic, a decrease in the price (caused by an increase in supply) will:
a. increase the total amount that consumers spend on the good.
b. decrease the total amount consumers spend on the good.
c. either increase or decrease the total amount that consumers spend on the good depending on the level of
marginal utility associated with the good.
15. A firm that is earning zero economic profits:
a. will eventually want to leave the industry.
b. has total revenue less than total costs.
c. will want to shut down in the short run.
d. is covering the opportunity cost of all its inputs.
16. The PPC for a typical economy is bowed out because:
a. as people consume more of a good, their marginal utility falls.
b. total surplus in a market is maximized at the level of production where supply equals demand.
c. in order to produce more and more of a good, we have to use workers whose opportunity cost is higher and
higher.
d. people usually prefer having a moderate amount of each good to consuming a large amount of only one good.
17. A perfectly competitive firm maximizes profits by producing where:
a. total revenue equals total cost.
b. marginal revenue exceeds marginal cost.
c. price equals marginal cost.
d. marginal benefit exceeds marginal cost.
18. In the long-run equilibrium of a competitive industry, all of the following are equal to one another for a typical
firm except:
a. the price of the good.
b. marginal revenue.
c. marginal cost.
d. average total cost.
e. average revenue (that is, total revenue divided by quantity for a typical firm).
f. average profit (that is, total profit divided by quantity for a typical firm).