Download Midterm #1

ECO 102c
Fall 2013 Semester
Midterm #1
Name: _________________________
Student ID#: ____________________
Part I: Instructions: Provide answers to the following questions. Show your work as
much as possible.
1.
1 ECO major and 1 JMC major live on two nearby islands. The two activities
that they do in order to survive are catching fish and growing wheat. The ECO major
can work 8 hours per day, and can either catch 12 fish per day (1.5 fish per hour) or
grow wheat on the good land on his island and produce 2 units of wheat per hour (up
to 4 hours per day) and if necessary spend up to 4 more hours per day growing wheat
on the poor land and produce 1 unit of wheat per hour there. (Spending more than 4
hours per day on either land does not produce more output. A day can also be divided
between the two activities, with proportional changes in output.)
The JMC major can either fish or grow wheat. The JMC major can either produce 6
fish per day or 6 units of wheat per day, or divide his time between the activities and
obtain proportional results. Draw below each person’s Production Possibilities
Frontier (PPF) (you will need 2 graphs).
2a.
For the ECO major, what is the opportunity cost of producing the 9th unit of
wheat?
2b.
For the JMC major, what is the opportunity cost of producing the second fish?
3.
If the two islands unite to form a single country, what would be the combined
PPF (including the output of (both the ECO major and the JMC major.) Warning!
Draw the PPF as carefully as possible, so I can read numbers off the axis and
can tell whether you intend to show a straight line or curved line. Use the back of
the page.
4.
Explain why the PPF of the combined country is -- or is not -- a straight line
(whichever you claim it to be).
5.
TRICK QUESTION ALERT!
Suppose that in the combined country, the decision is made to increase wheat
production from 8 units to 9 units. If production is efficient, the 9th unit of wheat will
be produced by the ____ major, because the ____ major has a comparative advantage
in producing the 9th unit of wheat.
Suppose that in the combined country, the decision is made to increase fish production
from 6 fish to 7 fish. If production is efficient, the 7th fish will be produced by the
____ major, because the ____ major has a comparative advantage in producing the 7th
fish.
Part II: Instructions: Select the one best response and record it directly on the paper.
You must clearly indicate which response you pick as your final answer. (If you
change your mind, erase or obliterate completely your old choice, and draw special
attention to your new choice by underlining, circling, drawing arrows, etc.)
1.
Consider the following situations:
(i)
(ii)
(iii)
(iv)
More awareness of the importance of exercise and good nutrition
causes a reduction in illnesses and a reduction in spending on the
treatment of illnesses.
Pollution of the water supply causes people to produce and purchase
bottled drinking water instead of drinking tap water.
Improvements in the quality of products make them last longer and
cost less.
Increased fear of crime leads to more production and purchases of
locks, alarms, and home security systems.
Statements _____ above describe situations where GDP would rise, but overall wellbeing would decline. Statements ____ describe situations where GDP would fall, but
overall well-being would rise.
a.
b.
c.
d.
e.
(i) and (ii);
(ii) and (iv);
(i) and (iv);
(iii) and (iv);
(ii) and (iii);
2.
Which of the following add up to GDP?
(i)
(ii)
(iii)
(iv)
a.
b.
c.
d.
e.
(iii) and (iv)
(i) and (iii)
(ii) and (iii)
(i) and (ii)
(i) and (iv)
Consumption, Investment, Government Expenditure, Net Exports
Wages, Rents, Interest, Profits
The value of final goods output in each industry.
Land, Labor, and Capital
only (i) is true.
only (ii) is true.
only (iii) is true.
(i), (ii), (iii), and (iv) are all true.
none of the options (a) through (d) is correct.
3.
There are times when we sell our factors of production (like labor) to help
produce output in some other country. The income we earn in these situations is
included in:
a.
b.
c.
d.
e.
rents
royalties
net factor payments.
profits.
GDP.
4.
Which of the following is Investment?
(i)
buying land in order to build a future home
(ii)
buying a new machine to increase our ability to produce goods
(iii) increasing our inventory of goods to prepare for higher future sales or
production.
a.
b.
c.
d.
e.
only (i) is true.
only (ii) is true.
only (iii) is true.
only (ii) and (iii) are true.
(i), (ii), and (iii) are all true.
5.
_____ is a flow variable, and _____ is a stock variable.
a.
b.
c.
d.
e.
investment
wealth
imports
consumption
none of the above.
capital
savings
exports
investment
Beer
Pretzels
6.
Bob can produce 2 units of Beer per day, or 1 Pretzel per day. Pete can
produce 1 Beer per day or 2 Pretzels per day. Their combined Production Possibility
Frontier is shown above. If Bob and Pete each divide their days so that half of the day
they make Beer, and the other half of the day they make Pretzels, then output is shown
as point X. This is _____ because _____.
a.
b.
c.
d.
e.
inefficient
efficient
efficient
inefficient
inefficient
both consumers want more of both products.
all resources are being used to produce a point on the PPF.
output is not outside the PPF.
not all the available labor is used.
more output of both goods is possible with existing resources.
7.
The difference between real and nominal GDP is:
a.
real GDP measures output of products, nominal includes value of services.
b.
real GDP uses market values of output, nominal GDP uses producers’ costs.
c.
nominal GDP uses current market prices, real GDP attempts to adjust for
changes in the price level.
d.
nominal GDP includes imported goods, real GDP does not.
e.
none of the above.
8.
What would allow a country to push its Production Possibilities Frontier
outwards?
(i)
(ii)
(iii)
(iv)
eliminating the obvious waste of resources
more labor available to use
more capital
discovery of more natural resources (like oil)
a.
b.
c.
d.
e.
only (i) and (ii) are true.
(i), (ii), and (iii) are true.
only (ii) and (iii) are true.
only (ii) and (iv) are true.
only (ii), (iii), and (iv) are true.
The following text applies to the next three questions:
Our economy produces the following goods each day:
20 units of milk worth $1 per unit
5 units of cheese worth $3 per unit
10 units of bread worth $0.50 per unit
3 cheese sandwiches worth $5 per sandwich
Each unit of cheese uses up 2 units of milk. Each sandwich uses up 2 units of bread
and 1 unit of cheese, taken from the bread and cheese output described above.
9.
The value of final goods production per day in our economy is:
a.
b.
c.
d.
e.
$30
$55
$38
$33
none of the above.
10.
The value of intermediate goods produced per day in our economy is:
a.
b.
c.
d.
e.
$10
$9
$22
$15
none of the above.
11.
The value-added of the cheese industry per day is:
a.
b.
c.
d.
e.
$3
$6
$12
$15
none of the above.
12.
The real interest rate plus the expected inflation rate equals:
a.
b.
c.
d.
e
the exchange rate
the nominal interest rate.
GDP deflator
CPI
the inflation rate
13.
The “standard of living” in a country is best approximated by:
a.
b.
c.
d.
e.
investment per person.
real GDP.
nominal GDP per person.
real GDP per person.
investment.
14.
The economy’s ability to produce output would be higher if there were more
capital. Acquiring more capital requires:
a.
b.
c.
d.
e.
more labor.
more natural resources.
more investment.
more exports.
more technology.
15.
Intermediate goods are:
a.
b.
c.
d.
e.
the products that are not used in the current year.
products that are used up in the production of something else.
additions or subtractions to the inventories of unsold goods.
products that are neither the best quality or the lowest quality.
the goods that are purchased by the government.
16.
A stock variable:
a.
b.
c.
d.
e.
is measured at a single point in time.
is less important than a flow variable.
is a combination of two or more flow variables.
cannot be measured as accurately as a flow variable.
is measured as a rate per unit time.
17.
When developing countries increase their GDP at rapid rates (greater than the
growth rates in the developed countries), most of this increase is caused by:
a.
new discoveries of natural resources.
b.
rapid increases in the education levels of the population.
c.
effective control of population growth rates so that there aren’t so many
children.
d.
making better use of previously unused (or uncounted) resources like labor.
e.
intensive research into the discovery of new technology.
18.
Country A reports a higher unemployment rate than Country B, but a higher
percentage of the adult population in Country A is employed than in Country B. This
can happen because in Country A:
a.
b.
c.
d.
e.
the retirement age is lower than in Country B.
the labor force participation rate is higher than in Country B.
the size of the military is higher than in Country B.
the student population is higher than in Country B.
the unemployment compensation is less generous than in Country B.
19.
Firms want to be careful about who they hire, in order to be sure they have the
right person for the job. They take their time reviewing applications, interviewing
candidates, checking references, etc. Therefore there are always some people who
have finished one job but haven’t yet started a new job. This is called _____
unemployment.
a.
b.
c.
d.
e.
frictional
cyclical
seasonal
structural
natural
20.
Suppose our country’s population consists of 6 babies, 7 retired people, 20
people working for private firms, 10 people serving in the military, 8 people working
for the government (non-military), 5 people out of work and looking for a job, 4
people in prison, and 11 people who are not employed, but we don’t know whether or
not they are looking for a job. The unemployment rate that would be reported would
be:
a.
b.
c.
d.
e.
5/20
5/25
5/35
5/33
16/44
Part III Extra Credit (1 point if correct) – Do not waste your time on this until you
are FINISHED wasting your time on the other sections.
Below are 4 photos – one is Ben Bernanke, who is the Fed chairman and one of the
authors of your textbook. Another is former professional wrestler Randy “Macho
Man” Savage. Another is former Minnesota Governor Jesse Ventura. Another is my
dog.
Which photo shows Ben Bernanke?