Download Foundations Exam 2, Winter 2013

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NAME:____________________
Please use the space provided, or additional space on the back, to respond to the following. You may not attach
additional paper to this exam. If something is unclear, please ask for clarification.
Output
TFC
TVC
0
$400
$0
1
$400
150
2
$400
200
3
$400
260
4
$400
340
5
$400
450
6
$400
590
7
$400
770
1a. A perfectly competitive firm has the table of costs above. If the market price is $140, how many units of
output should the firm produce to maximize profit? Calculate the profit or loss. (8 points)
b. Given the profit or loss found in part (a), describe how this competitive market would adjust in the long run.
(12 points)
2a. Suppose a monopoly exists in the bookstore of a small college. Use a clearly labeled graph to show the profit
maximizing level of output the monopolist would produce. Show the price the firm would charge and the area of
profit. (10 points)
b. Would this profit exist in the long run or would it disappear? Explain. (5 points)
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3. On the topic of farm policy, the author says “Economists agree on few things, but one area where there is wide
agreement is on the inadvisability of government intervention in agriculture.”
 In one diagram, show the market for corn. Identify the market equilibrium price and quantity. (3 points)
 Now add a price floor and show the new quantity demanded and new quantity supplied. Finally, show the
deadweight loss caused by the policy. (5 points)
4a. What does OPEC stand for? (1 point, all or nothing)
b. What is a cartel and how has OPEC been an example of cartel behavior? (3 points)
c. Why are some cartels unstable and ineffective? (4 points)
5. What are the reasons discussed in the text for why private sector unions are losing members and why the public
sector is not? (8 points)
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6. A country has the following labor statistics:
Population under 16 years old……………………………………………………………….
Population over 16 years old who are working part time ……………………..
Population over 16 years old who are working full time ……………………...
Those without jobs and who are actively seeking jobs ………………………..
Those without jobs and not actively seeking jobs…………………………………
2.5 million
4 million
14 million
2 million
1.5 million
a. Calculate the size of the civilian work force and the unemployment rate. (7 points)
b. Suppose that 1 million of those who were without jobs but seeking work become “discouraged” and drop out of
the work force. How would this affect the official unemployment rate? Why? Recalculate the unemployment rate
to support your assertion. (8 points)
7. Economists understand that real GDP is not synonymous with the overall welfare of a nation. Thoroughly
explain. (15 points)
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8. Tickets to an economics lecture are sold out 1, but there are many fans who want to attend the lecture but do
not have a ticket. Assume the face value of the ticket is $5 and the market price of the ticket is $50 if scalping
tickets is allowed. First, draw a graph that portrays the market for these scalped tickets. Show both the face value
and the market price of the tickets. Using your graph, and the concepts of consumer and producer surplus, explain
why the economist giving the lecture would be in favor of scalping the ticket as a way to improve efficiency. (6
points)
9. Suppose your Uncle Gates offers to give you $1000 in four years, or give you $900 today. The best annual
interest rate that you can find in the local banks is 2%. Which gift option should you choose? Show your work to
support your decision. (7 points)
10. Suppose that consumers and firms are feeling quite optimistic about the state of the economy and about the
near future. Using a graph of AD/AS, show how this optimism will affect the macroeconomy? Indicate in this graph
how this affects real GDP and the price level. How will the unemployment rate be affected? (15 points)
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Seriously, it could happen! 
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11. It is often said that vaccinations, like flu shots, provide “positive externalities” to the community.
a. What is a positive externality and how do flu shots provide them? (4 points)
b. People also argue that a professional sports team provides a positive externality to residents. How is this used
as an argument for a city to build a stadium, with taxpayer money, to attract an already wealthy owner to locate
his or her team to the city? (4 points)
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