PART II.
SHORT ESSAY QUESTIONS:
Each question is worth 2 points
1-Please briefly discuss the following questions:
a) Does a trade surplus help to guarantee strong economic growth?
b) What is more important, a country’s current account balance or the growth of GDP?
2-This question involves MVM (i.e. the commuter rail service providing transportation between Chicago and the suburbs). Indicate whether the following events would most likely cause demand or quantity demanded for Metra to “increase” or “decrease”. In other words, what is your expectation as to the overall effect on demand or quantity demanded? Provide a brief explanation to support your answer. Consider each event independently; that is, assume each event is the only change taking place. (Hint: Change in demand vs. Change in Quantity demanded)
a. MVM decreases the price of its tickets by 20%
b. The price of gasoline for automobiles increases by 25%
3-If the equilibrium price for a two-liter bottle of Coca-Cola is $1.50 today, just like it was ten years ago, can we safely say that all supply and demand conditions in the market for Coke have remained very stable all these years? Or other factors have been in place?
4- What are the essential characteristics of public goods? Why might it be difficult for private sector to supply public goods? Please briefly discuss.
5- How does an overvalued dollar affect U.S. exports and imports? Please briefly discuss.
6- What are the arguments for and against globalism. Please briefly discuss.
7- In what ways do company investments in research and development create positive externalities?
Companies create positive externalities because they tend to have spill over’s into social benefits. This means that when a company invests in better technology, society tends to benefit from that new technology as well.
PART III.
PROBLEMS:
60 points (Each question is worth the same points)
1-The accompanying table gives part of the supply schedule for personal computers in the United States.
Price of computer Quantity of computers supplied
$1,100 12,000
$900 8000
a. Calculate the price elasticity of supply when the price increases from $900 to $1,100 using the midpoint method.
b. Suppose firms produce 1,000 more computers at any given price due to improved technology. As price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was in part a?
2-Predict the direction of change for either supply or demand in the following situations:
Several new companies enter the cell phone industry.
Consumers suddenly decide SUV’s are unfashionable.
The U.S. surgeon general issues a report stating that tomatoes prevent colds.
Frost threatens to damage the coffee crop, and consumer expect the price rise sharply in the future.
The price of tea falls. What is the effect on the coffee market.
The price of sugar rises. What is the effect on the coffee market.
Tobacco lobbyists convince Congress to remove the tax paid by sellers on each carton cigarette sold.
A new type of robot is invented that will pick up peaches.
3-Consider the following table for the neighboring nations of North East and West Coast. The table lists maximum feasible hourly rates of production of pastries if no sandwiches are produced and maximum feasible hourly rates of production of sandwiches if no pastries are produced. Assume that the opportunity costs of producing these goods are constant in both nations.
Product North East West Coast
Pastries (per hour) 50,000 100,000
Sandwiches (per hour) 25,000 200,000
a. What is the opportunity cost of producing pastries in North East? Of producing sandwiches in North East?
b. What is the opportunity cost of producing pastries in West Coast? Of producing sandwiches in West Coast?
c. Which nation has a comparative advantage in producing pastries? Which nation has a comparative advantage in producing sandwiches?
4-The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good.
Good Cross-price elasticities of demand
Air-conditioning units and kilowatts of electricity – 0.34
Coke and Pepsi +0. 63
High-fuel-consuming sport-utility vehicles (SUVs) and gasoline – 0.28
McDonald’s burgers and Burger King burgers +0.82
Butter and margarine +1.54
a. Explain the sign of each of the cross-price elasticities. What does it imply about the relationship between the two goods in question?
b. Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonald’s burgers and Burger King burgers less than the cross-price elasticity of butter and margarine?
c. Use the information in the table to calculate how a 5% increase in the price of Pepsi affects the quantity of Coke demanded.
d. Use the information in the table to calculate how a 10% decrease in the price of gasoline affects the quantity of SUVs demanded.
6-
a. Above is the cost curves of a firm that produces t-shirts. Total Cost for this firm if it produces 20 units of output is:
b. If the firm whose costs curves are shown above graph produces 50 units of output its Total Variable Cost will be:
c. If the firm whose costs curves are shown above graph produces 50 units of output its Total Fixed Cost will be:
d. If the firm whose costs curves are shown above graph produces 20 units of output its Total Fixed Cost will be:
7-
Number of Workers
Total Output
1
10
2
22
3
31
4
40
5
47
6
52
7
56
8
58
9
60
10
61
a. Consider Jamie’s production data given in the table above. Suppose Jamie has to pay her workers $20 per hour, and further suppose there are no other production costs at all. What is the marginal product of the 5th worker?
b. Remember that Jamie has to pay her workers $20 per hour, and there are no other production costs. Using the data above we know that Jamie’s Average Total Cost when 40 units are produced is:
c. Remember that Jamie has to pay her workers $20 per hour, and there are no other production costs. Using the data above we know that the approximate marginal cost of the 52nd unit of output is:
8-Katie quit her job which paid her $30,000 a year in order to start a pizza restaurant.
In her first year, she used $100,000 she had in her retirement account and bought a
pizza oven, tables, and chairs for her restaurant. If she did not buy the oven, tables,
and chairs she would have left the money in her retirement account and earned a
return of 10%. She also spent $50,000 on pizza ingredients and $30,000 on wages
for a worker she hired. Her total revenue for the year is $110,000. What is Katie’s
economic profit for this year?
9-Fred is considering opening a ski shop in Colorado. Assume Fred will incur the following
Costs: building rent = $100,000/year, inventory = $250,000/year, energy = $50,000/year, and
labor (one clerk) = $10,000/year. In addition, Fred’s current income as a computer programmer is
$60,000 per year. Assuming Fred would earn $460,000 in revenues, what is his economic and accounting profit?
10- Please answer following questions based on exhibit below.
a. At a rental rate of $1,000 per month, is there an excess quantity supplied, or is there an excess quantity demanded? What is the amount of the excess quantity supplied or demanded?
b. If the present rental rate of one-bedroom apartments is $1,000 per month, through what mechanism will the rental rate adjust to the equilibrium rental rate of $800?
c. At a rental rate of $600 per month, is there an excess quantity supplied, or is there an excess quantity demanded? What is the amount of the excess quantity supplied or demanded?
d. If the present rental rate of one-bedroom apartments is $600 per month, through what mechanism will the rental rate adjust to the equilibrium rental rate of $800?
11- For each of the following situations, indicate the direction of the shift in the supply curve or the demand curve for dollars, the factor causing the change and the resulting movement of the equilibrium exchange rate for the dollar in terms of foreign currency.
American- made cars become more popular overseas
The United States experiences recession, while other nations enjoy economic growth.
Inflation rate accelerates in the United States, while inflation rates remain constant in the other nations.
Real interest rates in the United States rise, while real interest rates abroad remain constant.
The Japanese put quotas and high tariffs on all imports from the United States.
12-
Total Utility
from Multiplex Tickets
Total Utility
from Video Rentals
Total Utility
from Popcorn
1 movie (30 utils)
1 video (14 utils)
1 bag (8 utils)
2 movies (54 utils)
2 videos (24 utils)
2 bags (13 utils)
3 movies (72 utils)
3 videos (30 utils)
3 bags (15 utils)
4 movies (84 utils)
4 videos (32 utils)
4 bags (16 utils)
a. In Exhibit above assume the Multiplex tickets cost $6 each, video rentals cost $2 each, bags of popcorn cost $1 each. What is the marginal utility of renting a third video?
b. In Exhibit above, assume the Multiplex tickets cost $6 each, video rentals cost $2 each, and bags of popcorn cost $1 each. Suppose the consumer has $12 per week to spend on multiplex tickets, video rentals, and popcorn. What combination of goods will give the consumer the most utility?
13- Costs schedules for producing pizza
Pizzas
Fixed
Cost
Variable
Cost
Total
Cost
Marginal
Cost
0
$
$
$
$
1
5
2
13
3
10
4
100
140
5
20
6
85
7
215
a. By filling in the blanks in exhibit above, the total fixed cost of producing 6 pizzas is equal to:
b. By filling in the blanks in exhibit above, the total cost of producing zero pizzas is shown to be equal to:
c. By filling in the blanks in exhibit above, the variable cost of producing 3 pizzas is shown to be equal to:
d. By filling in the blanks in exhibit above, average variable cost of producing 7 pizzas is shown to be equal to:
e. By filling in the blanks in exhibit above, the average total cost of producing 5 pizzas is shown to be equal to:
f. By filling in the blanks in exhibit above, the marginal cost of the fourth pizza is shown to be equal to:
g. By filling in the blanks in exhibit above, the marginal cost of the sixth pizza is shown to be equal to:
14- Consider the diagram below, which depicts the labor market in a city that has adopted a “living wage law” requiring employers to pay a minimum wage rate of $11 per hour. Answer the questions that follow.
a. What condition exists in this city’s labor market at the present minimum wage of $11 per hour? How many people are unemployed at this wage?
b. A city councilwoman has proposed amending the living wage law. She suggests reducing the minimum wage to $9 per hour. Assuming that the labor demand and supply curves were to remain in their present positions, how many people would be unemployed at a new $9 minimum wage?
c. A councilman has offered a counterproposal. In his view, the current minimum wage is too low and should be increased to $12 per hour. Assuming that the labor demand and supply curves remain in their present positions, how many people would be unemployed at a new $12 minimum wage?
15-Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount.
Group A Group B
(sales per week) (sales per week)
Volume of sales before the 10% discount 1.55 million 1.50 million
Volume of sales after the 10% discount 1.65 million 1.70 million
a. Using the midpoint method, calculate the price elasticities of demand for group A and group B.
b. Briefly explain how the discount will affect total revenue from each group.
c. Suppose Amazon.com knows which group each customer belongs to when he logs on and can choose whether or not to offer the 10% discount. If Amazon.com wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?
16-
Merchandise exports
500
Service exports
75
Net change in domestic liabilities abroad (financial outflows)
−215
Net change in foreign assets at home (financial inflows)
300
Merchandise imports
600
Service imports
50
Based on information in the table above, what is this nation’s :
a) balance of trade:
b) current account balance:
c) capital account balance:
17- Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 6 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $5,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $6,000, pays $1,300 for fuel and maintenance, and hires one worker for $30,000. Sam’s total revenue from pilot training classes equaled $90,400. Sam’s implicit costs for this year are equal to:
18- Please answer following questions based on exhibit below.
A- As shown in Exhibit above, assume the government places a $1 per pack sales tax on cigarettes. The percentage of the burden of taxation paid by consumers of a pack of cigarettes is:
a.
zero.
b.
25 percent.
c.
50 percent.
d.
100 percent.
B- As shown in Exhibit above, assume the government places a $1 per pack sales tax on cigarettes. The percentage of the burden of taxation paid by tobacco sellers is:
a.
zero.
b.
50 percent.
c.
75 percent.
d.
100 percent.
C- As shown in Exhibit above, the $1 per pack tax on cigarettes raises tax revenue per day totaling to:
a.
$5 million.
b.
$6 million.
c.
$10 million.
d.
$15 million.
19- Please answer following questions based on exhibit below.
Refer to the Figure above.
a) What does the bowed outward shape of the production possibilities curve indicates?
b) Which point(s) on the graph is (are) efficient production possibilities?
c) Which point(s) on the graph show unemployment of resources?
d) Which point(s) on the graph is(are) unattainable given current resources and technology?
e) What is the opportunity cost of moving from point U to point V?
20- Please answer following questions based on exhibit below.
A) In Exhibit above, which firm’s long-run average cost curve experiences constant returns to scale?
B) Which firm in Exhibit above displays a long-run average cost curve with diseconomies beginning at 2,000 units of output per week?
C) Which firm in Exhibit above displays a long-run average cost curve with economies of scale throughout the range of output shown?
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