Download Midterm 1

Econ 302
Spring 2012
Midterm #1
Name:____________________
Student ID#:_______________
Do not begin the exam until you are given instructions to do so!
Part I
(30 points possible) Solve the following problem on the second page. You may
use the back of the page if necessary. Show your work where possible.
A group of people inhabiting an island produce 3 goods – fresh water (distilled from salt water), corn, and corn
flakes. Some of the water is used up to grow the corn. Some of the corn and some of the water are used up in
the production of corn flakes.
The unit of currency is the peso.
Below is the information describing activity that took place in 2013:
Product
Water
Corn
Corn Flakes
Production
100 units
10 units
5 units
Price per unit
1 peso
8 pesos
20 pesos
60 units of water were used up to make corn
10 units of water were used up to make corn flakes
6 units of corn were used up to make corn flakes
Exports:
2 units of corn
2 units of corn flakes
Imports:
Corn flake machinery costing 100 pesos
Government expenditures:
1 unit of corn
1 unit of corn flakes
The government also makes 20 pesos of transfer payments, and collects 40 pesos of taxes.
One unit of corn was added to the inventory of corn (to be used at some later date).
All products not otherwise accounted for were consumed.
1.
Calculate the value-added of each industry to find the island’s GDP.
Water industry value-added:
_____________
Corn industry value-added:
_____________
Corn flake industry value-added:
_____________
GDP:
_____________
2.
Calculate the final goods output of each industry to find the island’s GDP.
Water industry final goods output:
_____________
Corn industry final goods output:
_____________
Corn flake industry final goods output:
_____________
GDP:
_____________
3.
How much of each good goes into consumption?
Water consumed:
________ units of water worth _________ pesos.
Corn consumed:
________ units of corn worth _________ pesos.
Corn flakes consumed:
________ units of corn flakes worth _________ pesos.
Total value of consumption:
4.
Calculate the amount of national savings.
__________ pesos
5.
Specify the uses of national savings.
National savings are used to finance __________________________________________
For each use of national savings identified above, specify how much in terms of units of product that this
represents, and how much this costs in pesos. (For instance, if you believe that national savings are used to
finance government expenditure, then say, “government expenditure which consists of 1 unit of corn and 1 unit
of corn flakes which costs…..”)
Part II
the paper.
(60 points possible) Select the best answer and indicate your choice clearly on
Output
Use of labor (N)
In the graph above, where initially the short-run production function is curve (A), and the cost
of labor is shown as line (1).
1.
Firms attempt to maximize profits. In the short-run, capital is fixed. Therefore in the
short-run, firms will try to set output at the level where:
a.
b.
c.
d.
e.
the value of output is maximized.
the value of output minus the depreciation of capital is maximized.
the short-run production function has the highest slope.
the slope of curve (A) is the same as the slope of line (1).
curve (A) intersects line (1).
2.
In the graph above, an improvement in technology would be shown as _____. As a
result, the firm would _____.
a.
b.
c.
d.
e.
a shift from line (1) to line (2);
a shift from line (1) to line (3);
a shift from curve (A) to curve (B);
a shift from curve (A) to curve (C);
a shift from curve (A) to curve (B);
demand more labor
demand more labor
demand more labor
demand less labor
demand less labor
3.
The production function shown above shows _____ marginal product and _____
returns to scale.
a.
b.
c.
d.
e.
decreasing
decreasing
impossible to tell
constant
decreasing
constant
decreasing
impossible to tell
decreasing
impossible to tell
4.
Macroeconomics seeks to address the following issues:
(i)
(ii)
(iii)
(iv)
what causes a nation’s economic activity to fluctuate?
why are some industries more heavily regulated than others?
why do large firms in an industry pay more than small firms?
what causes unemployment?
a.
b.
c.
d.
e.
both (i) and (ii) are true.
both (i) and (iii) are true.
both (i) and (iv) are true.
both (ii) and (iii) are true.
both (ii) and (iv) are true.
5.
Our income is less than our production only when:
a.
we help produce some other country’s GDP by providing our land, labor, or capital to
help produce products in their country.
b.
our savings is greater than our investment.
c.
never – income is always equal to production.
d.
we export stuff we need and import stuff we don’t need, so the foreigners have outsmarted us.
e.
we pay more for the use of foreign land, foreign labor, or foreign-owned capital in our
production than foreigners pay us for our land, labor, and capital used in their production.
6.
If the aggregate production function is constant returns to scale, then in order to
increase output by 2% in the short run (when capital is fixed), we should need to increase the
amount of labor used by _____. According to Okun’s Law, the change in the unemployment
rate that would be generated by the 2% increase in output would be about _____.
a.
b.
c.
d.
e.
1%
4%
more than 2%
more than 2%
less than 2%
2%
2%
4%
1%
4%
7.
Okun’s Law seems to suggest that the relationship between percent changes in output
and percent changes in unemployment rates do not behave the way the short-run production
graph says it should. Which of the following helps explain the apparent contradiction?
(i)
as GDP rises, management of firms pulls workers away from useful (but not urgent)
tasks and uses them to increase current production
(ii)
as GDP rises, some newly-hired workers were not those officially counted as
“unemployed”, so the official number of unemployed persons doesn’t drop.
(iii)
as GDP rises, the marginal product of labor stays the same.
(iv)
as GDP rises, some of the extra labor comes from more hours worked by those already
employed.
a.
b.
c.
d.
e.
both (i) and (ii) are true.
both (ii) and (iii) are true.
both (iii) and (iv) are true.
(i), (ii), and (iv) are true.
(ii), (iii), and (iv) are true.
8.
An island’s population consists of 6 children, 10 employed persons, 6 retired persons, 5
people without jobs and looking for work, and 10 people our statisticians don’t know about.
For those last 10, they do not hold official jobs, but it is not known whether they are actively
looking for work. The island’s civilian labor force is ____ and the unemployment rate is _____.
a.
b.
c.
d.
e.
25 people
15 people
27 people
37 people
31 people
60 percent (15 out of 25)
33 percent (5 out of 15)
19 percent (5 out of 27)
14 percent (5 out of 37)
16 percent (5 out of 31)
9.
Consider the 3 production functions below:
(i)
(ii)
(iii)
Y = 3▪K + 2▪N +1
Y =3▪K + 2▪N – 1
Y =3▪K + 2▪N
The returns-to-scale of the 3 functions are:
a.
b.
c.
d.
e.
(i) decreasing; (ii) constant; (iii) increasing
(i) constant; (ii) constant; (iii) constant
(i) decreasing; (ii) increasing; (iii) constant
(i) increasing; (ii) decreasing; (iii) constant
(i) increasing; (ii) increasing; (iii) constant
10.
Suppose residents of island A provide all of the labor used on island B, and in 2013
receive income of 20 dollars from supplying this labor to island B. Residents of island B own the
capital used to produce output on island A, and receive income of 30 dollars in 2013 for the
use of this capital. If these are the only net factor payments on both islands, and each island
had GDP of 100 dollars in 2013, then the 2013 national income of each island would be:
a.
b.
c.
d.
e.
island A – 90 dollars; island B – 110 dollars
island A – 110 dollars; island B – 90 dollars
island A – 150 dollars; island B – 50 dollars
island A – 50 dollars; island B – 150 dollars
none of the above.
11.
The picture above shows how a worker responds to a rise in the real wage rate. The
worker’s original best choice of leisure and consumption goods is shown as point A. The
substitution effect of the change in the interest rate would be shown as the movement from
point _____; and the income effect would be shown as the movement from point _____
a.
b.
c.
d.
e.
A to X
A to D
A to M
X to A
X to M
X to D
D to M
M to D
A to M
M to D
12.
If 2 different indifference curves cross each other, this means that:
a.
b.
c.
d.
e.
the income effect is greater than the substitution effect.
one of the goods is an inferior good.
the consumer should select the point where the two indifference curves cross.
the indifference curves are drawn incorrectly.
none of the above.
13.
Suppose a person chooses not to supply any labor at the current real wage rate. When
the real wage offered to her rises, she chooses to enter the labor market and supply some
labor. The reason her labor supply increases is:
a.
b.
c.
d.
e.
entirely substitution effect with no income effect.
the substitution effect turned out to be stronger than the income effect.
the income effect turned out to be stronger than the substitution effect.
entirely income effect with no substitution effect.
both substitution and income effects worked to increase labor supply.
14.
Economists evaluate the usefulness of an economic model or theory according to:
(i)
whether the predictions of the model or theory are generally consistent with the real
world facts.
(ii)
whether the model or theory provides an explanation for movement of key variables
that seems approximately correct.
(iii)
whether the model or theory provides predictions that can be compared to real world
facts or data.
a.
b.
c.
d.
e.
only (i) and (iii) are true.
only (i) and (ii) are true.
only (ii) and (iii) are true.
only (ii) is true
none of the above (a, b, c, or d) is correct.
15.
Match the statements below with either the Classical or Keynesian approach to
macroeconomics:
(i)
When prices adjust to set quantity demanded equal to quantity supplied, the allocation
of goods between buyers and sellers is efficient.
(ii)
Because prices and wages can take a long time to adjust to the “correct” levels and
markets can fail, there is a role for government to improve macroeconomic performance.
(iii)
Given a country’s resources, and its initial distribution of wealth, the use of free
markets will make people as economically well-off as possible.
a.
b.
c.
d.
e.
(i) Keynesian; (ii) Keynesian; (iii) Classical
(i) Classical; (ii) Keynesian; (iii) Classical
(i) Classical; (ii) Keynesian; (iii) Keynesian
(i) Keynesian; (ii) Classical; (iii) Keynesian
none of the options (a) through (d) is correct.
16.
The variables used to measure economic activities are either stock or flow variables.
Savings is a _____ variable. Wealth is a _____ variable. Income is a _____ variable.
a.
b.
c.
d.
e.
stock flow flow
flow stock flow
flow flow stock
stock flow stock
none of the above.
17.
The income approach to measuring economic activity computes GDP by measuring:
a.
b.
c.
d.
e.
the value of output minus the cost of intermediate goods used up in production.
wages, rents, interest, and profit.
consumption, investment, government expenditure, and net exports.
land, labor, and capital.
none of the above.
18.
The factors of production that limit how much output can be produced in a given time
with a given technology are:
a.
b.
c.
d.
e.
land, labor, and capital.
wages, rents, interest, and profits.
consumption, investment, government expenditure, and net exports.
savings and investment.
tuition, activity fee, residence hall fee, and meal plan deposit.
19.
The night before an exam, ECO 302 students spend several hours studying
macroeconomics. Assume that studying macroeconomics is more like “work” than “leisure”.
(This is a crazy assumption, of course.) The increase in hours spent studying the night before
the exam can probably be explained by the _____ effect.
a.
b.
c.
d.
e.
income
substitution
panic
scholarship
love of macroeconomics
20.
When the amount of output a firm can produce is graphed with output on the Y axis
and amount of labor on the X axis (capital is fixed and cannot be changed in the short term),
output rises as labor rises, but the slope of the line becomes smaller (the line becomes less
steep) as the use of labor rises. This shows:
a.
b.
c.
d.
e.
Part III
diminishing marginal product of capital.
diminishing marginal product of labor.
diminishing returns to scale.
decreasing returns to scale.
none of the above.
Time-Wasting Extra Credit Question (1 point possible)
The photos below show the Chair of the Federal Reserve Board, the Chair of the European
Central Bank, the Chair of the Bank of England, and my dog. Which is which?
a.
b.
c.
d.
e.
A = Federal Reserve; B = my dog; C = European Central Bank; D = Bank of England
A = my dog; B = European Central Bank; C = Bank of England D = Federal Reserve
A = European Central Bank; B = Bank of England; C = my dog D = Federal Reserve;
A = European Central Bank; B = Federal Reserve; C = my dog; D = Bank of England
A = Federal Reserve; B = Bank of England, C = European Central Bank; D = my dog;