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.
We are stuck on an island, which has 50 full-grown coconut trees. Each tree takes 20 years to
reach full size, and only full-size trees produce fruit. We can gather the fruit from the trees to eat,
or we can cut down the trees for their wood. Cutting down one tree produces 1 unit of wood. The
wood can be burned to keep us warm, or it can be used to build shelters. Each shelter lasts
several years, so the purchase of a shelter counts as investment. Each shelter requires 5 units of
wood. Therefore, we produce coconuts, wood, and shelters.
2010 production:
400 coconuts valued at $1 each
10 units of wood at $6 each
1 shelter at $50 each
2011 production:
320 coconuts valued at $1.50 each
30 units of wood at $10 each
4 shelters at $70 each
In 2010:
The shelter producer also had an inventory of wood at the end of the year 2010 that was 2 units
of wood more than its beginning inventory, and it also purchased during the year imported
equipment for $200.
The Island’s government purchased 80 coconuts, and 2 units of wood in 2010. It collected $200
of taxes from households and paid $80 in transfer payments.
The Island exported 100 coconuts, and imported 25 pineapples (eaten by consumers) valued at $4
each, and the equipment mentioned above.
The Island’s citizens also earned $200 in wages by working outside the country.
All goods not accounted for elsewhere were consumed.
In 2011:
The shelter producer also had an inventory of wood at the end of the year 2011 that was 2 units
of wood less than its beginning inventory.
The Island’s government purchased 60 coconuts, and 4 units of wood in 2011. It collected $220
of taxes from households and paid $100 in transfer payments.
The Island exported 150 coconuts, and imported 30 pineapples (eaten by consumers) valued at $6
each.
The Island’s citizens also earned $300 in wages by working outside the country.
1. Compute the 2010 value of final goods output in each industry, and use these to arrive at 2010
GDP.
2. Calculate 2011 value-added in each industry, and use these to compute 2011 GDP.
3. Compute the quantities of each good that were consumed in 2010, and give the value of total
consumption.
4. Compute I, G, and NX for 2010.
5.
We would like to know how much better off we were in 2011 compared to 2010.
Compute what the value of 2011 GDP would have been if prices in 2011 had been the same as in
2010. What was the percentage increase in real GDP?
6. Discuss why we should be careful to use the number you computed in question 5 to answer the
question “how much better off are we in 2011?” What reasons are there for this number to be a
poor indicator of our over-all well-being?
Part II
paper.
(60 points possible) Select the best answer and indicate your choice clearly on the
1.
See the graph above. 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 the production function is the same as W/P.
the short-run production function intersects the (W/P)•N
2.
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 includes all the details of the real world and can explain
every economic event precisely
(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.
3.
Macroeconomics seeks to address the following issues:
(i)
what causes unemployment?
(ii)
what causes a nation’s economic activity to fluctuate?
(iii) why are some industries more heavily regulated than others?
(iv)
why do individuals who are members of particular ethnic or religious minorities earn less
income on average than other people?
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.
4.
Match the statements below with either the Classical or Keynesian approach to
macroeconomics:
(i)
Through the skillful use of macroeconomic policies, the government can promote
economic growth while avoiding inflation or recession.
(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.
5.
The variables used to measure economic activities are either stock or flow variables.
Income – and the various types of income (wages, rents, profits) are ____ variables. Expenditure
– and the various types of expenditure (consumption, investment, government expenditure, net
exports) are ____ variables. Production (and production of intermediate goods) is a ____ variable
a.
b.
c.
d.
e.
stock flow flow
flow stock flow
flow flow stock
stock flow stock
none of the above.
6.
If we are on our island producing both fish and coconuts, our production possibilities
frontier will be outward-bending (not a straight line) if:
(i)
some of our workers are relatively better at fishing than gathering coconuts (compared to
other workers)
(ii)
some of our workers work twice as efficiently as other workers – and can produce twice
as much of either good in the same amount of time.
(iii) some of our equipment (tools, nets) can be used for either fishing or coconuts, but is
better-suited for fishing.
a.
b.
c.
d.
e.
only (i) and (ii) are true.
only (i) and (iii) are true.
only (ii) and (iii) are true.
(i), (ii), and (iii) are all true.
none of the above (a through d) are true.
7.
Our income is greater 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 cheat somebody out of the value of what they produce.
e.
our production occurs by using foreign land, foreign labor, or foreign-owned capital.
8.
Official Gross Domestic Product computations will include:
(i)
estimates of the amount of activity in the underground economy such as gambling, drug
dealing, etc.
(ii)
goods and services provided by the government such as roads and schools, valued at cost.
(iii) the value of assets (like houses) that were produced in some earlier year, but sold from
one owner to another in the most recent year.
(iv)
the value of output added to a firm’s inventory of unsold goods.
a.
b.
c.
d.
e.
only (ii) and (iv) are true.
only (i) and (iv) are true.
only (ii) and (iii) are true.
only (i) and (iii) are true.
only (iii) and (iv) are true.
9.
The value-added 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.
10.
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.
human resources.
11.
When a worker is offered a higher real wage, he feels 2 effects. The ____ effect causes
the worker to wish to supply a smaller amount of labor, and the _____ effect causes him to wish
to supply a larger amount of labor.
a.
b.
c.
d.
e.
real wage
consumption
income
income
none of the above.
leisure
investment
leisure
substitution
12.
Okun’s Law may seem surprising, because the constant returns-to-scale aggregate
production function suggests that – if capital is held constant – the amount of extra GDP we
should get if we increase the use of labor by 1% (and reduce the unemployment rate by about
1%) should be:
a.
b.
c.
d.
e.
1%
between 2% and 3%.
between 1% and 2%
less than 1%
zero.
13.
Diminishing marginal product of labor implies that we must use more than 1% more
labor to increase output by 1%, while Okun’s Law suggests we need to increase output by more
than 1% to get the unemployment rate to drop by 1%. Which of the following helps explain the
apparent contradiction?
(i)
as GDP rises, some of the extra labor comes from more hours worked by those already
employed.
(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.
a.
b.
c.
d.
e.
only (i) is true.
only (ii) is true.
only (iii) is true.
both (i) and (ii) are true.
both (ii) and (iii) are true.
14.
An island’s population consists of 6 children, 3 members of the military, 15 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.
20 people
30 people
23 people
33 people
26 people
25 percent (5 out of 20)
17 percent (5 out of 30)
22 percent (5 out of 22)
15 percent (5 out of 33)
25 percent (5 out of 20)
15.
According to the Ricardian Doctrine, if a consumer’s current taxes fall (raising current
disposable income) but government expenditure stays the same, then future taxes rise by the
amount of the tax cut plus interest. Therefore the consumer’s:
a.
b.
c.
d.
e.
current spending rises and current savings falls.
current spending falls and current savings rises.
current spending is unchanged, and current savings rises.
current spending rises, and current savings is unchanged.
current spending rises, and future spending falls.
Suppose an economy’s aggregate production function can be described by the equation
F(K,N) = (1/2)K(2/3) • N(1/2), where K is the use of capital services and N is the use of labor.
16.
This production function demonstrates:
a.
b.
c.
d.
e.
decreasing returns to scale.
increasing marginal product of labor.
increasing returns to scale.
constant returns to scale.
none of the above.
17.
Suppose residents of island A own all of the capital equipment used on island B, and in
2011 receive income of 10 dollars from renting the equipment to island B. Residents of island B
provide the labor used to produce output on island A, and receive income of 60 dollars in 2011
for this labor. If these are the only net factor payments on both islands, and each island had GDP
of 100 dollars in 2011, then the 2011GNP of each island would be:
a.
b.
c.
d.
e.
island A – 110 dollars; island B – 160 dollars
island A – 160 dollars; island B – 110 dollars
island A – 40 dollars; island B – 160 dollars
island A – 100 dollars; island B – 100 dollars
none of the above.
18.
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.
diminishing marginal product of capital.
diminishing marginal product of labor.
diminishing returns to scale.
decreasing returns to scale.
none of the above.
19.
A boat-builder purchases wood used to make boats from another firm. The boat builder
produces boats worth $1000 in 2011, and spends $600 purchasing wood. The firm had $100
worth of wood as inventory on January 1, 2011 and $300 worth of wood in inventory on
December 31. The boat-builder’s value-added in 2011 was _____; and his investment was
_____.
a.
b.
c.
d.
e.
$400
$600
$600
$400
$600
$200
$300
$300
none of the above.
20.
The picture above shows how a saver responds to a rise in the real interest rate. The
saver’s original best choice of present and future spending 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
Part III
X to D
D to M
M to D
A to M
M to D
Time-Wasting Extra Credit Problem (1 point possible)
The shape below can be divided into 2 identical size and shape smaller parts with a single cut
along the dashed line. Show how the second shape can be divided into 2 identical parts.