Download Midterm #1

Econ 302
Spring 2010
Midterm #1
Name:____________________
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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.
An Island produces coconuts. The coconuts are either consumed or dried and used as fuel. The
island’s industries report the results below for 2009:
Coconut producer:
Production:
2000 coconuts valued at $1 each
$2000
Fuel used up in production of coconuts
20 units fuel valued at $5 per unit
Wages
Rent
$100
$1400
$300
Profit
$200
Fuel Producer:
Production:
200 units of fuel valued at $5 per unit
Coconuts used up in the production of fuel
500 coconuts valued at $1 per coconut
Wages
Profits
$1000
$500
$400
$100
The fuel producer also had an inventory of coconuts at the end of the year that was 200 coconuts
more than its beginning inventory, and it also purchased during the year an imported oven for
drying coconuts for $150.
The Island’s government purchased 200 coconuts and 50 units of fuel. It collected $500 of taxes
from households and paid $200 in transfer payments.
The Island exported 100 units of fuel and 300 coconuts, and imported 25 pineapples (eaten by
consumers) valued at $10 each, and the oven for drying coconuts mentioned above.
The Island’s citizens also earned $200 in wages by working outside the country.
1. Compute the value of final goods output in each industry, and use these to arrive at GDP.
2. Calculate each category of income received by the country’s citizens to arrive at National
Income.
3. Identify how many units of each good are consumed by households during the year.
4. Compute National Savings
5. State the Uses of National Savings, and compute the value of each use. Do they add up to
National Savings?
Part II
paper.
(60 points possible) Select the best answer and indicate your choice clearly on the
1.
We assume that capital and labor are complements in the aggregate production function.
Therefore an increase in the amount of capital a country has available will:
a.
b.
c.
d.
e.
shift the demand curve for labor to the right.
shift the demand curve for labor to the left.
cause a movement along the demand curve to the right.
cause a shift of the labor supply curve to the right.
none of the above.
2.
Economists evaluate the usefulness of an economic theory or model according to:
(i)
whether the assumptions are reasonable and realistic
(ii)
whether the model or theory includes all the details of the real world and can explain
every economic event accurately
(iii) whether the model or theory provides predictions that can be compared to real world facts
or data
(iv)
whether the predictions of the model or theory are generally consistent with the real world
facts
a.
b.
c.
d.
e.
only (i) and (iii) are true.
only (i) and (iv) are true.
only (iii) and (iv) are true.
only (ii) and (iv) are true.
none of the above (a, b, c, or d) is correct.
3.
Macroeconomics seeks to address all of the following issues EXCEPT:
a.
how does being part of a global economic system affect national economies?
b.
what causes unemployment?
c.
what causes a nation’s economic activity to fluctuate?
d.
why are some industries dominated by a small number of big firms and other industries
have a large number of small firms?
e.
can government policies be used successfully to manage a nation’s economic
performance?
4.
Match the statements below with either the Classical or Kenyesian approach to
macroeconomics:
(i)
Unemployment persists because wages and prices don’t adjust quickly enough to equalize
the number of workers with the number of people firms want to hire.
(ii)
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.
(iii) 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.
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.
Stock variables and flow variables are often related – the flow variable is the rate of
change of a stock. A firm’s ownership of capital goods at a point in time is a _____ variable, its
spending per year to purchase new capital goods (investment) is a _____ variable. Savings is a
_____ variable, weath is a _____.
a.
b.
c.
d.
e.
Stock, Flow, Stock, Flow
Flow, Stock, Stock, Flow
Flow, Stock, Flow Stock,
Stock, Flow, Flow, Stock
none of the above.
6.
Our production is greater than our income only when:
a.
we help produce some other country’s GDP by providing factors of production, more than
they help us.
b.
savings is greater than 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.
7.
The incomes 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.
8.
Gross Domestic Product is not a perfect measure of a society’s overall well-being
because:
(i)
it measures output according to cost of production instead of market value.
(ii)
the boundary between what is counted as “output” (growing vegetables for sale) and not
counted as anything (growing vegetables for one’s own use) is arbitrary.
(iii) it double-counts the value of output that is used in the production of something else (the
value of bread and the value of sandwiches are both counted).
(iv)
it does not attempt to measure the sustainability of any activity on the environment or on
the human or capital resources.
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.
(i), (ii), (iii), and (iv) are all true.
9.
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.
10.
In macroeconomics we combine the efforts of doctors, plumbers, bricklayers,
accountants, and telemarketers and call it all “labor”, and disregard any effect that might come
about because these are not the same kind of labor. We combine the contribution of printing
presses, computers, cement trucks, and hospital equipment and call it all “capital”, and disregard
any effect that might come about because cement trucks and hospital equipment are really
different things. This process is called:
a.
b.
c.
d.
e.
positive economics.
intermediate goods.
aggregation.
the invisible hand.
value-added approach.
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 rises.
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 4 children, 3 members of the military, 8 employed
persons, 6 retired persons, 2 people without jobs and looking for work, and 3 people our
statisticians don’t know about. For those last 3, 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.
19 people
22 people
16 people
10 people
13 people
2/19
5/22
5/16
2/10
5/13
15.
Transfer Payments are not part of ____ but they are part of _____.
a.
b.
c.
d.
e.
National Income
Private Savings
GNP
Net Exports
none of the above.
Personal Disposable Income
Government Savings
GDP
Net Factor Payments
Suppose an economy’s aggregate production function can be described by the equation
F(K,N) = (1/2)K(2/3) + (2/3)N(1/2), where K is the use of capital services and N is the use of
16.
labor. This production function demonstrates:
a.
b.
c.
d.
e.
decreasing returns to scale.
increasing marginal product of labor.
diminishing marginal product of capital.
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
2009 receive income of 20 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 50 dollars in 2009
for this labor. If these are the only net factor payments on both islands, and both islands had GDP
of 100 dollars in 2009, then the two islands’ GNP would be:
a.
b.
c.
d.
e.
island A – 120 dollars; island B – 150 dollars
island A – 150 dollars; island B – 120 dollars
island A – 70 dollars; island B – 130 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.
The _______ approach to measuring economic activity measures for each producer the
difference between the value of production and the value of goods purchased from other firms
that are used up in the production of the output.
a.
b.
c.
d.
e.
value-added
final goods
income
expenditure
none of the above.
20.
A worker who chooses not to participate in the labor market at the prevailing real wage
chooses to participate when the real wage offered to him rises. For this worker, the substitution
effect of the rise in real wages causes him to _____, and the income effect of the rise in real
wages _____ .
a.
b.
c.
d.
e.
increase labor supply
increase labor supply
reduce labor supply
increase labor supply
reduce labor supply
Part III
increase labor supply
reduce labor supply
has no effect
has no effect
increase labor supply
Time-Wasting Extra Credit Problem (1 point possible)
21.
Three traveling businessmen arrive late at night in a small town that has only one
hotel. The hotel manager informs them that he has only one available room, and the room has
only two single beds. The price is $30. Having no other options, the 3 men accept the room,
paying $30. The manager regrets charging them full price since there are not enough beds for
them, so he takes $5 and instructs the bellhop to deliver the refund to the room. The bellhop
thinks, “They cannot divide $5 evenly between them, but I’d better give them something in case
the refund is mentioned when they check out.” So he gives $1 to each of the 3 businessmen and
keeps the remaining $2 for himself.
Each of the three businessmen paid $9 for a total of $27, and the bellhop kept $2 for himself.
Since they originally paid $30, what happened to the other dollar?