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Principles of Macroeconomics (Econ 001) Signature: Drake University, Fall 2006 William M. Boal Printed name:
MIDTERM EXAMINATION #1 VERSION C
"Introduction to Economics"
September 20, 2006
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100. I. Multiple choice: Circle the one best answer to each question. [1 pt each, 20 pts total] (1) In economics, to be rational means to a. maximize one's income. b. make all decisions using math. c. do the best one can with what one has. d. live for the future. (2) “A tax cut would stimulate growth” is an example of a. a positive statement. b. a normative statement. c. both of the above. d. none of the above. (3) “Congress ought to cut taxes now” is an example of a. a positive statement. b. a normative statement. c. both of the above. d. none of the above. (4) In the graph below, variables X and Y have a. a positive relationship. b. a negative relationship. c. no relationship. d. a positive relationship or a negative relationship, depending on the value of X.
Y
X
Principles of Macroeconomics (Econ 001) Drake University, Fall 2006 Midterm Examination #1 Version C
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(5) "Economic capital" or "physical capital" includes a. shares of stock in private corporations. b. savings in bank accounts. c. buildings, computers, and trucks. d. corporate and government bonds. (6) Consider the production function shown below. As more labor is used, the marginal product of labor a. decreases. b. increases. c. first increases, then decreases. d. remains constant. (7) Consider the production possibility curve shown below. As more of either good is produced, its opportunity cost a. decreases. b. increases. c. first increases, then decreases. d. remains constant. (8) Farmer A can produce 20 bushels of corn or 10 bushels of soybeans. Farmer B can produce 60 bushels of corn or 20 bushels of soybeans. Farmer A has a comparative advantage in a. corn. b. soybeans. c. Both crops. d. Neither crop. (9) The United States and Mexico can both produce manufactures and agricultural goods. If the Mexico has a comparative advantage in manufactures, then logically it a. produces more manufactures than the U.S. does. b. may also have a comparative advantage in agricultural goods. c. does not have a comparative advantage in agricultural goods. d. Cannot be determined from the information given. (10) Transactions using money are more common than bartering, because bartering a. requires a double coincidence of wants. b. is out of fashion. c. is illegal in some states. d. is taxed more heavily. (11) In an efficient well-functioning market, a. the law of one price will hold. b. total gains from trade (or earnings) by buyers will equal total gains by sellers.
Bushes pruned
Hours worked
Low-tech
goods
High-tech goods
II. Problems: Insert your answer to each question in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section. (1) [Percent change of product: 4 pts] The amount of money that a consumer spends on a good equals the price of the good times the quantity purchased. Suppose the price of gasoline falls by 5 percent and the quantity purchased increases by 6 percent. a. Does the amount of money spent on gasoline increase or decrease?
b. By about how much (to the nearest percentage point)? %
(2) [Percent change of ratio: 4 pts] Real output equals nominal output divided by the price level. Suppose nominal output increases by 5 percent and the price level increases by 2 percent a. Does real output increase or decrease?
b. By about how much (to the nearest percentage point)? %
(3) [Production functions: 14 pts] A work crew fills potholes, with the production function shown in the first two columns below. Complete the table by computing the work crew's average product and marginal product and placing your answers in the unshaded cells of the third and fourth columns below. Then answer the question
below.
Number of workers Number of potholes filled Average Product Marginal Product 0 workers 0 potholes potholes per worker 2 workers 10 potholes potholes per worker potholes per worker 4 workers 16 potholes potholes per worker potholes per worker 6 workers 18 potholes potholes per worker Is the work crew's production function characterized by diminishing returns to their labor input? Answer “yes” or “no.” (4) [Production possibility curves, opportunity costs, comparative advantage: 18 pts] Country X and Country Y each produce agricultural and manufactured goods. They each face a tradeoff between these two kinds of outputs because their workforces are limited. Their production possibility curves are shown below.
Agricultural goods
Manufactured goods
Country X
Country Y
a. [2 pts] What is Country X's opportunity cost of producing a unit of manufactured goods? units of agricultural goods b. [2 pts] What is Country Y’s opportunity cost of producing a unit of manufactured goods? units of agricultural goods c. [2 pts] What is Country X's opportunity cost of producing a unit of agricultural goods? units of manufactured goods d. [2 pts] What is Country Y’s opportunity cost of producing a unit of agricultural goods? units of manufactured goods e. [2 pts] Which country has a comparative advantage in producing manufactured goods? f. [2 pts] Which country has a comparative advantage in producing agricultural goods? g. [6 pts] Fill in the blanks: Both countries can consume combinations of agricultural goods and manufactured goods outside their individual production possibility curves if ___________________________ produces and exports one unit of agricultural goods to ___________________________, which produces and exports ______________ unit(s) of manufactured goods in return.
(6) [Shifts in demand and supply: 12 pts] Analyze each of the following markets in italics according to the
accompanying imaginary scenario. Indicate whether and how demand and supply curves shift.
Also indicate how the equilibrium price (P) and quantity (Q) move. [Hint: Sketch a graph of
each scenario before writing your answers.]
Demand: shifts left , shifts right , or no change? Supply: shifts left , shifts right , or no change?
P*:
increases, decreases , or cannot be determined?
Q*:
increases, decreases , or cannot be determined? a. Grapefruit juice: The price of orange juice rises. b. New houses: A construction workers’ union wins a big wage increase. c. Automobiles: New technologies lower the cost of making autos. Simultaneously, a boom raises consumers’ incomes. (7) [Market equilibrium, price controls: 12 pts] The following graph shows the market for gasoline. $0.
Millions of gallons Price per gallon Demand Supply First, find the unregulated market equilibrium.
a. Find the equilibrium price. $
b. Find the equilibrium quantity. million gallons
Second, suppose the government imposes a maximum price (or price ceiling) of $2.00. No gasoline may be
bought or sold any higher price.
c. Compute the quantity demanded at this price. million gallons
d. Compute the quantity supplied at this price. million gallons
e. Will there be excess supply or excess demand with this price ceiling?
f. How much? million gallons
P
Q
III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [4 pts] (1) Consider the following statement. "The United States produces more cars and more corn than Mexico. Therefore, the United States cannot benefit from trade with Mexico in these goods." Assume the first sentence is correct. Do you agree or disagree with the second sentence? Justify your answer. (2) Suppose the government imposed a price ceiling on college tuition, limiting it to $2,000 per year at all colleges and universities. Would this help students? Explain your answer using a graph of supply and demand. Which question are you answering, (1) or (2)? _________. Please write your answer below: [end of exam]
