Eng

Instructions: Please answer ALL of the Questions from 1 to 35 (Exam covers material from Chapters 1,2,4,5,7,8,21,13,14,15, HW # A-E) Below.  You may use your text or lecture notes, but you must not work with another econ student, past or present.  The Midterm is due at 6pm on Wednesday, 3/22.  Send e-mail to me if you have any questions.  Good Luck!

1. Economics is the study of
2. how society manages its scarce resources.
3. the government’s role in society.
4. how a market system functions.
5. how to increase production.

2. A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between
3. guns and butter.
4. efficiency and equity.
5. inflation and unemployment.
6. work and leisure.

3. One tradeoff society faces is between efficiency and equity. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy. (2 points)

4. If an economy is producing efficiently, then
5. there is no way to produce more of one good without producing less of another good.
6. it is possible to produce more of both goods without increasing the quantities of inputs that are being used.
7. it is possible to produce more of one good without producing less of the other.
8. it is not possible to produce more of any good at any cost.

5. Production possibilities frontiers are usually bowed outward. This is because
6. the more resources a society uses to produce one good, the fewer resources it has available to produce another good.
7. it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced.
8. of the effects of technological change.
9. resources are specialized, that is, some are better at producing particular goods rather than other goods.

6. Identify each of the following topics as being part of microeconomics or macroeconomics: (4 Points)
7. the impact of a change in consumer income on the purchase of luxury automobiles

1. the effect of a change in the price of Coke on the purchase of Pepsi

1. the impact of a war in the Middle East on the rate of inflation in the United States

1. factors influencing the rate of economic growth

7. Which of the following statements are positive, and which are normative? (4 Points)
8. The minimum wage creates unemployment among young and unskilled workers.

1. If the price of a product in a market decreases, other things equal, quantity demanded will increase.

1. If welfare benefits were reduced, the country would be better off.

1. The minimum wage ought to be abolished.

8. A surplus exists in a market if
9. there is an excess demand for the good.
10. the situation is such that the law of supply and demand would predict an increase in the price of the good from its current level.
11. the current price is above its equilibrium price.
12. None of the above is correct.

9. In general, elasticity is a measure of
10. the extent to which advances in technology are adopted by producers.
11. the extent to which a market is competitive.
12. how fast the price of a good responds to a shift of the supply curve or demand curve.
13. how much buyers and sellers respond to changes in market conditions.

10. Income elasticity of demand measures how
11. the quantity demanded changes as consumer income changes.
12. consumer purchasing power is affected by a change in the price of a good.
13. the price of a good is affected when there is a change in consumer income.
14. many units of a good a consumer can buy given a certain income level.

11. Using the midpoint method, compute the elasticity of demand between points A and B(from the graph below). Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic? (5 points)

Graph for Question #14

12. Welfare economics is the study of
13. how the allocation of resources affects economic well-being.
14. how technology is best put to use in the production of goods and services.
15. government welfare programs for needy people.
16. taxes and subsidies.

13. Which of the Ten Principles of Economics does welfare economics explain more fully?
14. The cost of something is what you give up to get it.
15. Markets are usually a good way to organize economic activity.
16. Trade can make everyone better off.
17. A country’s standard of living depends on its ability to produce goods and services.

14. Shannon buys a new CD player for her car for $135. She receives consumer surplus of $25 on her purchase if her willingness to pay is
15. $25.
16. $110.
17. $135.
18. $160.

Table 1

For Questions 15 and 16

15. In Table 1 above, if the table represents the willingness to pay of four buyers and the price of the product is $18, then their total consumer surplus is

16. From Table 1 Above, if the table represents the willingness to pay of four buyers and the price of the product is $15, then who would be willing to purchase the product?

17. To measure the gains and losses from a tax on a good, economists use the tools of
18. macroeconomics.
19. welfare economics.
20. international-trade theory.
21. circular-flow analysis.

18. Use the following graph shown to fill in the table that follows. (12 Points)

19. John has been in the habit of mowing Willa’s lawn each week for $20. John’s opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement? (2 Points)

20. A budget constraint
21. shows the prices that a consumer chooses to pay for products he consumes.
22. shows the purchases made by consumers.
23. shows the consumption bundles that a consumer can afford.
24. represents the consumption bundles that give a consumer equal satisfaction.

21. An increase in income will cause a consumer’s budget constraint to
22. shift outward, parallel to its initial position.
23. shift inward, parallel to its initial position.
24. pivot around the “Y” axis.
25. pivot around the “X” axis.

Figure for Problem #22

22. From the indifference curves in the figure above, which of the following statements is correct?
23. Point A is preferred equally to point E.
24. Point A is preferred equally to point C.
25. The bundle associated with point B contains more Ho-Ho’s than that associated with point C.
26. The bundles along indifference curve I₁ are preferred to those along indifference curve I₂.

23. Suppose at $5 the quantity demanded for the download of Yo-Yo Ma’s music from his “Piazzolla: Soul of the Tango” Album is 3 songs. If the substitution effect of the price decrease from $5 to $3 is 1 song, and the income effect is 3 songs, what impact will the price change have on the number of tracks consumers purchase from the Piazzolla’s album? (2 points)

24. Suppose the table below represents the Marginal Utility a consumer derives during a month from attending swing and salsa social dance events. Swing events costs $10 each and salsa costs $12 each. How many of each dance option per month would the consumer meet his or her consumer equilibrium (optimal choice) (1 point)

25. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,
26. output is not variable.
27. the number of workers used to produce the firm’s product is fixed.
28. the size of the factory is fixed.
29. there are no fixed costs.

26. The production function depicts a relationship between which two variables? Draw a production function that exhibits diminishing marginal product. (3 points)

27. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? (2 Points)

28. A profit-maximizing firm will shut down in the short run when
29. price is less than average variable cost.
30. price is less than average total cost.
31. average revenue is greater marginal cost.
32. average revenue is greater than average fixed cost.

29. In the long run, all of a firm’s costs are variable. In this case the exit criterion for a profit-maximizing firm is to
30. shutdown if price is less than average total cost.
31. shutdown if price is greater than average total cost.
32. shutdown if average revenue is greater than average fixed cost.
33. shutdown if average revenue is greater than marginal cost.

30. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market? (2 Points)

31. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production? (3 Points)

32. A fundamental source of monopoly market power arises from
33. perfectly elastic demand.
34. perfectly inelastic demand.
35. barriers to entry.
36. availability of “free” natural resources, such as water or air.

33. In the figure above, the marginal cost curve for a monopoly firm is depicted by curve
34. A.
35. B.
36. C.
37. D.

34. In the figure above, total cost curve for a monopoly firm is depicted by curve
35. A.
36. B.
37. C.
38. D.

35. The price of a Major League Baseball ticket 5 rows behind the visitor’s dugout at Turner Field in Atlanta, GA is much lower than the price of a similar ticket for the same location at Fenway Park, Boston. Explain the factors in Supply and Demand that accounts for the price difference. (2 points)

CONGRATULATIONS!  YOU ARE FINISHED.  THE REST IS OPTIONAL
 PART B. EXTRA CREDIT.  You are not obligated to do this section. To obtain full extra credit, you must show all of your work for problems requiring calculations. (13 POINTS)

EC 1.  There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Using your understanding of monopolies, discuss the likely effect of deregulation on prices in these two industries (hint-what happens if it leads to increase competition, if it doesn’t? How would you define the success of deregulation?). (3 Points)

EC 2. Suppose that instead of a supply-demand diagram, you are given the following information:

Q_s = 100 + 3P

Q_d = 400 – 2P

1. From this information compute equilibrium price and quantity. (2 points)

1. Now suppose that a tax is placed on buyers so that

Q_d = 400 – (2P + T).

If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers. What does this show you? (4 points)

EC 3. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation? (4 points)