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Econ 1120-INTRODUCTORY MACROECONOMICS
PRELIM #1-Wissink-Spring 2017 – March 7
Clearly Print Your LAST(family) Name: ______________________________________________________
Clearly Print Your First Name: ___________________________________________________
Your Cornell NetId: ___________________
Your Student Number: __________________________
There are two sections in this exam. Answer all questions.
Part I: 14 multiple choice questions @ 3 points each
Part II: 3 problems @ 14, 22 and 22 points each
TOTAL POINTS = 100, TOTAL TIME = 90 minutes.
NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you
need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have,
raise your hand and wait for the proctor to come to you. Only one person can be out of the examination
room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.
NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.
NO GRAPHING CALCULATORS.
NO BOOKS. NO NOTES. NO HELP SHEETS.
NO TALKING TO EACH OTHER.
Circle the SECTION you regularly attend (that is to say, check where you will pick up your
prelim)
One more time, please…
Clearly Print Your LAST(family) Name: _______________________________________________________
Clearly Print Your First Name: ___________________________________________________
Your Cornell NetId: ___________________
Your Student Number: __________________________
GRADING
MC (out 42 points)=___________________
Q1 (out of 14 points)=_________________
Q2 (out of 22 points)=_________________
Q3 (out of 22 points)=_________________
TOTAL SCORE: _____________________
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Part I: Multiple Choice. Do them ALL.
CIRCLE the letter for your answer.
_____________________________________________
1. Drinking tea is a popular activity in Paris. Which one of the
following will decrease demand for tea in Paris, assuming that tea
is a normal good?
A. A rise in the price of teacakes, a popular complement with tea.
B. A rise in the price of coffee, a popular substitute for tea.
C. An increase in billboards showing a popular local artist
drinking tea.
D. A natural disaster that destroys half of the tea crop.
E. An increase in income of the average Parisian.
2. A careless research assistant has presented his professor with
the following unlabeled equation representing the market for
sunglasses: Q = 50 - 17A + 1/2B + 45C. The professor then
spends numerous hours trying to figure out what the equation
represents. Which one of the following is a plausible best guess?
A. It is a supply function where A represents the price of sun tan
lotion – a complement in consumption to sun glasses.
B. It is a demand function where A represents the number of
consumers in the market.
C. It is a supply function where C represents the cost of the
sunglasses components to the sunglasses manufacturer.
D. It is a demand function where A represents the price of largebrimmed sun hats – a substitute in consumption for sun glasses.
E. It is a supply function where C represents the price of
sunglasses.
3. Which one of the following is an example of an intermediate
good?
A. The sugar you bought to put in your pantry.
B. The chocolate bar you bought for energy to stay awake in class.
C. The lumber you bought for your company to make doll houses
to sell each weekend at the Ithaca Farmers Market.
D. The lumber you bought to build a dog house for your own dog.
E. The circular saw you bought for your company to cut the
lumber to make doll houses to sell each weekend at the Ithaca
Farmers Market.
4. Cornell Island has 30,000 square feet of land available to be
rented on an annual basis. The annual demand for land rentals on
the island is given as QD = 40,000 – 5P.
What is the equilibrium price in this market?
A.
B.
C.
D.
E.
P* = $30,000
P* = $4,000
P* = $2,000
P* = $4,250
P* = $3,700
5. The table shows the daily demand and supply
information for the pizza market at Florida’s
Disney World. A new study shows that pizza and
rollercoasters do not mix well. The local
government therefore imposes a quota on the
number of slices of pizza allowed to be sold in the
theme park per day. The quota is set at 1,000
slices. What is the new equilibrium price?
A.
B.
C.
D.
E.
P* = $1.50
P* = $1.25
P* = $2.00
P* = $0.50
P* = $2.75
6. The figure with wine and cars shows the
production possibility frontier for an economy that
produces only those two goods. Which one of the
following statements is true?
A. As we go from point A to point E, the
marginal opportunity cost of wine increases.
B. This production possibility frontier exhibits
constant marginal opportunity costs.
C. If resources were being used efficiently, we
could attain point C.
D. As we go from point A to point E, the
marginal opportunity cost of cars increases.
E. An output mix between point A and point E
would be best since it is a balance of wine and
cars.
Price
($/slice)
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
$3.25
Quantity
Demanded
(pizza slices)
4000
3500
3000
2500
2000
1500
1000
500
0
Quantity
Supplied
(pizza slices)
250
500
750
1000
1250
1500
1750
2000
2250
7. Two friends, Tyrion and Jorah, decide to open up a blacksmith
store. They both work eight hours per day. It takes Tyrion 30
minutes to make a sword, and 6 minutes to make a goblet. It takes
Jorah 10 minutes to make a sword, and 12 minutes to make a
goblet. Which one of the following statements is true?
A. Tyrion has a comparative advantage in the production of
swords.
B. Tyrion has an absolute advantage in the production of both
goods.
C. Jorah has a comparative advantage in the production of swords.
D. Jorah has an absolute advantage in the production of goblets.
E. Tyrion and Jorah would be unable to mutually benefit based on
the theory of comparative advantage.
8. Mary retired from the fire department. She started working an
hour or two a day at a paid job in the local hospital. According to
the U.S. government, Mary is
A.
B.
C.
D.
E.
a discouraged worker.
employed.
unemployed.
not in the labor force.
part of structural unemployment.
9. Which one of the following is an example of an activity whose
value will not be represented in this year’s U.S. GDP? (All
transactions took place this year, unless otherwise noted.)
A. Car sun-visors made in Oulu, Finland and purchased by Ford
Motor Company to install in this year’s car models being made
in Detroit, Michigan.
B. Flour made in Locke, NY and purchased by Ithaca Bakery as
an ingredient for making wedding cakes in Ithaca, NY.
C. Sunglasses that Mexican workers make in a factory in Texas
and that you bought in July at the Ithaca Farmers Market.
D. The new 12th edition of your textbook (published and printed
this year in the U.S.) which you bought to take this course, but
will sell at the end of the semester.
E. The Corning glassware made in Corning, NY this year that was
added to the inventory of a department store in Japan in
anticipation of rising sales in Japan next year.
10. The value of nominal (also known as current) GDP in the
United States in 2016 was roughly
A.
B.
C.
D.
E.
$18.6 billion.
$16.7 billion.
$18.6 trillion.
$16.7 trillion.
$18.6 million.
11. If no foreign citizens work in BadLand, but many of
BadLand’s citizens work abroad, then
A.
B.
C.
D.
E.
BadLand's GNP and GDP will tend to be equal.
BadLand's GDP will tend to exceed its GNP.
BadLand's GNP will tend to exceed its GDP
BadLand's GDP will tend to be equal to its national saving.
BadLand's exports will be zero.
YEAR
GDP (nominal)
in billions of current
dollars
7414,720.3
8114,417.9
814,958.3
9315,533.8
7116,244.6
2716,803.0
http://www.economagic.com
2008
2009
2010
2011
2012
2013
GDP (real)
in billions of chained
2009 dollars
1714,833.6
9314,417.9
8914,779.4
4315,052.4
9015,470.7
1515,767.1
12. Janice Yelling has two grandchildren, Mutt and Jeff. Mutt
graduated from college in 2009 and Janice gave him a graduation
present of $1,000. Jeff is younger than Mutt and graduated from
college in 2013. Based on the GDP table, how much should Janice
give Jeff if she wants to make sure that in “real” terms, she is
giving Jeff the same present she gave Mutt?
A.
B.
C.
D.
E.
$1,000
$1,066
$1,660
$7,600
$1,006
13. Wayne started looking for another job immediately after he
lost his current job. As a result the
A.
B.
C.
D.
E.
size of the labor force decreases.
size of the labor force increases.
unemployment rate increases.
unemployment rate remains constant.
labor force participation rate changes.
14. Refer to the table. The unemployment rate is
A.
B.
C.
D.
E.
2.8%.
7.2%.
5.3%.
5%.
none of the above.
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Part II: Make sure you read and do ALL parts of each question. Show as much work as
possible. TRY to get started on every question. Show us something. Write legibly and
remember to label all graphs and axes in diagrams.
1. The market for "Ithaca is Gorges" t-shirts is perfectly competitive. The demand function for these
t-shirts is best characterized by the equation: PD = 46 - 2Q, while the supply function is characterized
by the equation: PS = 4 + Q.
a. Carefully graph and label the supply and demand curves as done in class. Indicate numerical
values where demand and supply intersect the horizontal and vertical axes.
b. Calculate the equilibrium values for quantity (Q*) and price (P*) and indicate them on your
graph.
c. Suppose the mayor of Ithaca wants to impose a binding price floor on this market. Give one
reasonable justification for why the mayor might do this. The mayor hires you to be his
consultant. Propose a reasonable dollar value for the mayor’s price floor. What happens as a
consequence of this policy? Indicate on your graph and be as complete in your answer as you can
be.
Answer Space
Answer Space
2. Consider the simple closed economy of WonderLand with only four goods: computers, bread,
apples and apple juice. There is no government, and no international sector and no investment by
firms. Note the following very important information:
i) Computers, bread and apple juice are final goods only.
ii) Apples are consumed by households as a final good AND used as an intermediate good
by firms in the production of apple juice.
iii) It takes 2 pounds of apples to make each gallon of apple juice. This is the case in both
years.
iv) The apple juice industry buys all the apples it needs from the domestic apple industry.
The table below provides ALL the information you need to know on prices and total
output/production in two consecutive years.
Items
Computers
Loaves of Bread
Pounds of Apples
Gallons of Apple
Juice
a.
b.
c.
d.
Year 2016
Price per unit
Quantity
$800
100
$2.50
1000
$1.50
1000
$4.00
200
Year 2017
Price per unit
Quantity
$900
80
$2.00
1500
$2.00
1200
$5.00
300
Calculate nominal GDP in year 2016.
Calculate nominal GDP in year 2017.
Calculate real GDP in 2017 assuming 2016 is the base year.
How much did the economy grow or shrink in real terms between 2016 and 2017? Briefly
discuss what concepts and numbers you used to arrive at your conclusion.
e. What is the value for the implicit GDP deflator index in 2017 assuming 2016 is the base year?
f. Calculate how much inflation there was between 2016 and 2017 according to the implicit GDP
deflator index.
g. Identify and briefly discuss two reasons why the way in which we calculate GDP for this
economy (or any economy, for that matter) might lead us to conclude that GDP is not really an
accurate indicator of social welfare.
Answer Space
Answer Space
3. Ross and Demelza Poldark live at Nampara and need to do two tasks. Mine buckets of tin and
pick baskets of flowers. The two graphs below illustrate their individual PPF’s for a week’s time.
a. Suppose both Poldarks are currently only mining tin. At this production point, who has the
comparative advantage in picking baskets of flowers? Defend your position.
b. Suppose Ross and Demelza want to determine the family’s efficient joint production possibilities
frontier. Putting tin on the vertical axis and flowers on the horizontal, carefully sketch out the
efficient joint production possibilities frontier. Label the endpoints of this PPF. For full credit, if
there are any kink points in your graph, label the number of units of each task at any/all kink
points. In addition, label the marginal opportunity cost or costs as the Poldarks move along their
joint PPF.
c. If the Poldarks are efficiently mining 16 buckets of tin, exactly how many baskets of flowers are
being picked? What exactly is Ross doing? What exactly is Demelza doing?
Answer Space
Answer Space
Answer Space
WISSINK ANSWERS ECON 1120 S2017 PRELIM 1
1. A
If the price of teacakes increases, then the demand for tea falls since now there is a smaller quantity demanded of its
complement. B, C and E are not correct because these all lead to an increase in demand. D is not correct because a natural
disaster would decrease supply, not demand.
2 E
A is not correct because the price of a complement in consumption does not enter into the supply function – it’s in the
demand function. B is not correct because the number of consumers in the market is positively related to quantity
demanded. C is not correct because the cost of factors of production is negatively related to quantity supplied. D is not
correct because the price of a substitute is positively related to quantity demanded. E is correct because own-good price is
positively related to quantity supplied.
3. C
It is clear that B is incorrect because the chocolate bar you bought for energy to stay awake in class is a final good. A, D,
and E are less obvious. Then think about the definition: intermediate goods are goods that are produced by one firm for
use in further processing by another firm. A and D are not correct because you are not “firms” to process those goods and
to make a profit from them. In alternative E, you use saw to process goods but you are not processing the saw. C is
correct because you process the lumber and add value to the lumber. (In this sense, you are a for-profit firm!).
4 C
30,000=40,000-5P which can be solved to yield P=$2,000.
5. E
There is now a vertical supply curve at a quantity of 1,000. In order to equate quantity demanded to quantity supplied, the
price must rise to $2.75.
6 D
B is incorrect because the PPF is not a straight line. C is an unattainable point. E is a normative statement: we do not
know enough about this economy to know what output mix would be best. This leaves either A or D as options. As we go
from point A to E, the production of cars is going up while the PPF is growing steeper. In other words, as the economy
produces each additional unit of cars, the amount of wine that must be given up as a result is increasing. This means that
the marginal opportunity cost of cars is increasing, and D is the correct answer.
7. C
Based on the information given, Tyrion has to give up 5 goblets to make a sword. Jorah gives up 5 goblets to make six
swords. Since 5/6 is less than 5, Jorah’s opportunity cost of making a sword is lower. Jorah has the comparative
advantage in making swords while Tyrion has the comparative advantage in making goblets. Furthermore, Tyrion has the
absolute advantage in goblets, and Jorah the absolute advantage in swords.
8 B
The employment rate includes part-time work, so Mary would still be considered employed. She is not a discouraged
worker (A) because she did not stop searching for work upon not being able to find a job post-retirement. She is not
unemployed (C) because she is currently has a job. As someone who is employed, Mary is definition in the labor force
(D). Mary is not part of structural unemployment (E) because she did not lose her job on account of, for instance, broader
changes in technology that rendered her current position obsolete.
9 A
The visors were imported, so they are not part of our GDP.
10 C
See slides from lecture #7.
11. C
GDP measures the total market value of all final goods and services produced within a given period by factors of
production located within a country, whereas GNP is the market value of all final goods and services produced during a
given period by factors of production owned by a country’s citizens. Because there are no foreign citizens producing in
BadLand, but many of the BadLand’s citizens produce abroad, BadLand’s GNP should be greater than its GDP.
12. B
GDPDI 2013 = (nominal GDP 2013) / (real GDP 2013) * 100 = 16,803 / 15,767.1 * 100 = 106.6, so the inflation between
2009 and 2013 is (106.6 – 100)/100 = 6.6%. This implies that the value of $1,000 gift in 2008 dollars is equivalent in real
terms to $1,000*1.066 = $1,066 in 2013 dollars.
13. C
Wayne lost his job, but he is actively looking for another job, so he is now classified as the unemployed. As a result,
unemployment rate increases, implying that D is not correct. He is still in the labor force, now as the unemployed, so the
size of labor force is unchanged as well as labor force participation rate. Thus, A, B and E are incorrect.
14. D
The unemployment rate is (Unemployed) / (In the Labor Force) *100 = 5,000 / (5,000 + 95,000) *100 = 5%.