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Econ 302 Spring 2010 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. 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?