Download Midterm Exam #1

Name
Score
Honor Code
Macro Principles
M. Finkler
Spring 2004
Midterm Exam #1
This exam consists of three parts. The first part requires you to provide a definition as
well as an application for each concept. The second part involves solution of simple
economic problems. The third part provides opportunities for students to employ
economic analysis to address more complicated circumstances. You have 90 minutes to
complete the exam. No books or notes are permitted. The LU Honor Code is in effect.
“Tariff, A scale of taxes on imports, designed to protect the domestic producer against the
greed of his consumer.” - A. Bierce, The Devil’s Dictionary
Part I. Define four of the five concepts below and indicate how it is used for economic
analysis. (6 points each).
1.
Comparative Advantage
2.
Cross-Price Elasticity of Demand
3.
Marginal Product of Labor
4.
Inferior Good
5.
Deadweight Loss
Part II Answer 3 of the following 4 questions. Be sure to show all work including
relevant graphics with appropriate labels. (12 points each)
1.
a.
Changes in factors external to a specific market place. Assume a competitive
market.
What happens to the equilibrium price and quantity of milk when the cost of
feeding cattle increases?
b.
What happens to the equilibrium price and quantity of theater tickets when
household income rises?
2.
Some politicians have suggested a tax on gasoline consumption as one way to
reduce U.S. dependence on oil. What would be the effect on the equilibrium price
and quantity? Who would bear the burden of the tax? Indicate any needed
assumptions.
3.
Tickets to the Tonight Show are free. Capacity, of course, is limited. Use a
supply and demand diagram to determine the equilibrium quantity and price.
How does the notion of opportunity cost enable one to explain how the tickets are
allocated? Suggest one reason why the Tonight Show does not charge for tickets.
4. Sunland’s production possibilities are described by the following table.
Food – pounds per month
Sunscreen – gallons per month
300
0
200
50
100
100
0
150
a.
Graph the production possibilities frontier.
b.
What are Sunland’s opportunity costs of producing food and sunscreen at each
output?
c.
If Busyland has an opportunity cost of producing 100 pounds of food at 75
gallons of sunscreen, should Sunland trade with Busyland? If so, what should
they specialize in? If not, why not?
Part III. Answer question 1 and 1 of the remaining 2 questions. Each question is
worth 20 points. Be sure to show all your work including relevant graphics with
appropriate labels.
1.
Use the information on the apple market in the table below to answer a-d.
The Apple Market Price per bushel
Quantity
Quantity
Points
Demanded
Supplied
1
$1
250
70
2
$3
150
90
3
$5
50
110
a.
Assuming that the demand curve is a line, determine the equation for demand.
b.
Assuming that the supply curve is a line, determine the equation for supply.
c.
Assuming a competitive market, determine the equilibrium price and quantity.
d.
What is the price elasticity of demand for consumers at point 2?
2.
The New Medicare Law provides insurance that covers a portion of the cost of
prescription drugs for Medicare enrollees. Assume that the policy covers 50% of the
price of a drug all Americans (it does not) and is funded by income taxes (it is). What
would be the impact on the price and quantity of prescription drugs purchases? What
would happen to consumer and producer surpluses? Economic welfare?
3.
Presumptive Democratic candidate for President John Kerry has suggested that
firms that “outsource” production (and thus jobs) be taxed. Treat the “outsourced”
production as imports to the U.S. Address the economic welfare implications of such a
tax on producers. To what degree does comparative advantage matter in determining the
effects?