Download Mid-term

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CDAE 061 Review questions for Mid-term. Many of these questions are taken from previous exams. The actual exam will
be somewhat shorter, and will rely more heavily on multiple choice.
Please read the following questions carefully, then provide short answers.
1) If economics is the allocation of scarce resources among alternative desirable ends, what is the first task of the
economist (you can answer this question based on logic, but it is also covered in Daly and Farley and in the
lectures)?
2) The figure on the left depicts an ‘empty world’ economy
and a ‘full world’ economy. The empty world
corresponds to the situation over 200 years ago when
the theories of market economics were being
developed. Base your answers to the following
questions on the figure.
a.
(4) What has happened to the relative scarcity of
natural and humanmade capital over the past 200
years?
b.
(4) What is opportunity cost of increasing manmade
capital?
c.
(4) What is the desirable end towards which both
natural capital and manmade capital are being
allocated?
3. (5) In one or two sentences, explain why the supply curve for timber slopes upwards.
4. (5) In one or two sentences, explain why the demand curve for oil slopes downwards.
5. The following graphs show the demand curves for all food and for hostess twinkies in the short run.
a. (5) Based on your knowledge of economics, label these accordingly, and explain briefly why you labeled them as you did.
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Explanation:
b. (4) Based on the demand curve above, if the price of twinkies decreases, what will happen to total consumer expenditures
on twinkies?
c. (4)Based on the demand curve above (and considerable empirical evidence), what would happen to farmers’ incomes in a
perfectly competitive market setting when the total output of food increases, due for example to exceptionally good weather?
6. In a day’s work, Mary can make 12 gallons of butter or 3 assault rifles. Jon make 1 gallon of butter or two assault rifles.
a. (6)Explain how specialization and trade under the laws of comparative advantage could allow them both to consume more
butter and assault rifles.
b. (4) Use the laws of thermodynamics to explain why they could end up worse off after increasing output and consumption.
7
In a speech before the American Society of Newspaper Editors (April 16, 1953), President Eisenhower
stated: “Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft
from those who hunger and are not fed, those who are cold and not clothed. This world in arms is not spending
money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children…This is
not a way of life at all in any sense. Under the cloud of threatening war, it is humanity hanging from a cross of
iron.” (Question courtesy of Dr. Schramm)
a)
From the quotation above, what are the final goods and services that society desires?
b) What factors of production did President Eisenhower point to, in the quotation above, as the resources that
limit our production possibilities?
c) What is the opportunity cost of food and clothing indicated in the quote above?
d) Suppose we presented this information as a production-possibilities curve with military goods on one axis and
non-military goods on the other. What was President Eisenhower implicitly recommending? Show this on a
graph.
e) If we increase expenditure on the military, what will happen to the supply curve for food and clothing? Draw a graph,
and show what happens to the price and quantity supplied (you will also need to draw in a demand curve).
8. (6) Fill in the following table, and very briefly explain each answer. If the resource is non-rival but congestible, say so.
Under the stock-flow or fund-service column, give at least 2 reasons. You are considering the benefits provided by each
resource.
Resource
Trees used for timber
A forested watershed that
protects against floods and
drought
Downloadable music
Ski trails at Stowe (not the real
estate itself, but the skiing)
Rival
(yes/no)?
Excludable
(yes/no)?
Is the resource a stock-flow or fund-service?
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The ozone layer
9. Give an example of a pure public good. Carefully explain why it will not be provided by markets, and why it should not be
provided by markets.
10. Do you think the demand for cars is more or less elastic than the demand for recreational boats? Why? What are the
determinants of elasticity of demand?
11. Do you think the supply of oil is more or less elastic than the supply of clothing? Why? What are the determinants of
elasticity of supply?
12. Explain why the substitution effect will lead people to watch fewer movies when movie theaters raise prices.
13. Explain how the income effect will lead people to watch fewer movies when theaters raise prices.
14. Explain how an increase in the price of movie theater tickets could lead to an increase in the price of video rentals.
All homework assignments are fair game.
Additional concepts you should understand:
 What is the preanalytic vision of ecological economics, and how does it differ from that of neoclassical economics?
 . What are the goals of ecological economics, and how do they differ from those of neoclassical economics?
 Understand the difference between a movement along the supply curve and a shift in the supply curve, and the same for
demand.
 Comparative advantage and absolute advantage
 The laws of thermodynamics.
 The difference between complements and substitutes.
 Comparative advantage and absolute advantage
