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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?