Principles of Macroeconomics by dALWC4gq

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									 Principles of Macroeconomics                           Signature:
 (Econ 001)
                                                     Printed name:
 Drake University, Fall 1996
 William M. Boal                                       ID number:

                   MIDTERM EXAMINATION #1: VERSION A
                            September 18, 1996
INSTRUCTIONS: This exam is closed-book, closed-notes, but calculators are 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. [3 pts each, 24 pts total]
(1) Questions (1) through (4) refer to the
following graph.                                              (5) By definition, a normal good is one whose
                                                              quantity demanded
Capital                        C                              a. decreases as the good's price rises.
goods                                                         b. increases as the price of a substitute rises.
                    A                                         c. increases as the price of a complement rises.
                                                              d. increases as the consumer's income rises.

                  D              B                            (6) All of the following will cause a shift in the
                                                              supply curve for a good except:
                                                              a. technical innovations that lower the cost of
                    Consumption goods                              production.
                                                              b. changes in the prices of inputs.
(1) This production possibility curve is                      c. a change in the price of the good being
characterized by:                                                  produced.
a. increasing opportunity costs                               d. changes in government regulation relating to
b. decreasing opportunity costs                                    production of the good.
c. constant opportunity costs
d. cannot be determined from graph.                           (7) If for some reason the price in a market is
                                                              below the equilibrium price
(2) An example of an inefficient point is given by            a. a shortage (or excess demand) exists.
a. point A.                                                   b. a surplus (or excess supply) exists.
b. point B.                                                   c. the price will tend to fall.
c. point C.                                                   d. the demand and supply curves will tend to
d. point D.                                                        shift.

(3) An example of an infeasible point is given by             (8) The sum of producer and consumer surplus is
a. point A.                                                   maximized when the quantity traded
b. point B.                                                   a. equals the number of buyers.
c. point C.                                                   b. equals the number of sellers.
d. point D.                                                   c. equals the price of the good.
                                                              d. is at the intersection of demand and supply
(4) The efficient point that will lead to the most                 curves.
rapid economic growth is
a. point A.
b. point B.
c. point C.
d. point D.
Principles of Macroeconomics (Econ 001)
Midterm Examination #1: Version A, September 18, 1996                                        Page 2 of 4

II. Short answer: Insert your answer to each question in the box provided. Feel free to use the
margins for scratch workonly the answers in the boxes will be graded.


(1) [Production functions: 14 pts] John Gruesome writes novels, with the following annual production
function:
                                 Months worked            Novels written
                                        0                         0
                                        3                         9
                                        6                        15
                                        9                        18

        a. Compute Gruesome's average product when he works 3, 6, or 9 months of the year.
                  Average product when Gruesome works 3 months
                  of the year:
                  Average product when Gruesome works 6 months
                  of the year:
                  Average product when Gruesome works 9 months
                  of the year:

        b. Compute Gruesome's marginal product when he increases his labor input from zero to 3 months,
        from 3 months to 6 months, and from 6 months to 9 months of the year.
                  Marginal product from zero to 3 months:

                       Marginal product from 3 months to 6 months:

                       Marginal product from 6 months to 9 months:


       c. Is Gruesome's production function characterized by
       diminishing returns to labor input? Answer "yes" or "no".


(2) [Production possibility curves, opportunity cost, gains from trade: 14 pts] Farmers O. MacDonald and
F.I.T. Dell each have resources to produce two possible goods: corn and soybeans. Their production
possibility curves are shown below. Units are tons.


                      10
                       9
                       8
                       7
                       6
                                                                                MacDonald
               Corn




                       5
                                                                                Dell
                       4
                       3
                       2
                       1
                       0
                           0   1   2   3   4   5   6   7   8   9 10
                                           Soybeans
Principles of Macroeconomics (Econ 001)
Midterm Examination #1: Version A, September 18, 1996   Page 3 of 4
Principles of Macroeconomics (Econ 001)
Midterm Examination #1: Version A, September 18, 1996                                           Page 4 of 4


        a. MacDonald's opportunity cost of a ton of soybeans is how
        many tons of corn?
        b. Dell's opportunity cost of a ton of soybeans is how many tons
        of corn?
        c. Which farmer has a comparative advantage in soybeans?

        d. Which farmer has a comparative advantage in corn?


         e. Fill in the blanks: Both farmers can have combinations of crops outside their individual

         production possibility curves if ____________________ gives one ton of soybeans to

         ____________________ , who gives ____________________ ton(s) of corn in return.


(3) [Pit market, equilibrium price and quantity: 12 pts] Assume that a market (similar to the pit market
experiment we did in class) consists of six buyers and six sellers. Each person buys or sells at most one unit
of the good, but might decide not to trade at all. The buyers have values $20, $18, $16, $14, $12, and $10.
The sellers have costs of $2, $4, $6, $8, $10, and $12. Earnings for each buyer equal the buyer's value of
the good minus the price paid. Earnings for each seller equal the price received minus the seller's cost of
the good. Earnings of buyers or sellers who do not trade are zero.
         a. What is likely to be the going price?

        b. How many units are likely to be traded?

        c. What are the total gains from tradethat is, the total
        earnings of buyers and sellers?


(4) [Demand, supply, and market equilibrium: 12 pts] Analyze each of the following markets in italics
according to the accompanying scenario. Indicate whether and how the demand and supply curves shift.
Also indicate how the equilibrium price (P*) and quantity (Q*) move. [Hint: You may find it helpful to
sketch a graph of each scenario.]

                                           Demand:          Supply: shifts   P*: increases,    Q*: increases,
                                           shifts left,       left, shifts   decreases, or     decreases, or
                                         shifts right, or    right, or no      cannot be         cannot be
                                          no change?           change?        determined?       determined?
   a. Typewriters: The price of
   personal computers and word-
   processing software falls.
   b. Lumber: New government
   regulations put some national
   forests off-limits to lumber
   companies.
   c. Home insulation: The price
   of energy falls. Simultaneously,
   new technologies lower the cost
   of producing insulation.
Principles of Macroeconomics (Econ 001)
Midterm Examination #1: Version A, September 18, 1996                                       Page 5 of 4

(5) [Consumer and producer surplus: 24 pts] Consider the competitive market, illustrated in the figure
below.

                        $9
                        $8
                        $7
                        $6
                        $5                                                        Demand
                Price


                        $4                                                        Supply
                        $3
                        $2
                        $1
                        $0
                             0   10   20   30     40   50   60   70   80
                                            Quantity



This market is defined by the following equations:
        Demand: QD = 140 - 20 P                         Supply: QS = 10 P - 10

First, find the unregulated market equilibrium.
          a. Compute the equilibrium price.

        b. Compute the equilibrium quantity.

        c. Compute total revenue to suppliers.

        d. Compute consumer surplus.

        e. Compute producer surplus.

        f. Compute total gains from tradethat is, the sum of consumer
        and producer surplus.

Now suppose the government enforces a price ceiling of $3. No output may be sold at any higher price, but
suppliers are not compelled to sell more units than they choose.
        g. Compute the quantity demanded at this price.

        h. Compute the quantity supplied at this price.

        i. Compute excess demand (or shortage) at this price.

        j. Compute consumer surplus.

        k. Compute producer surplus.

        l. Compute the loss in total consumer and producer surplus (that
        is, the deadweight loss) from the price ceiling.

[end of exam]

								
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