# Economics 1102 Lecture 013

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```					Economics 1102 Lecture 032
Fall Semester 2007

Midterm 1 - Practice

Name:

(1pt)

For full credit, graphs must be completely LABELED and math work shown. Be sure to justify your answers clearly and precisely for full credit, even if question does not explicitly ask for justification. Each page may have has its own directions. Follow the directions carefully. The value of the problems sum to 110 points, but a maximum score for this assignment is 100 points. Nothing over 100 points will be counted. Rambling or incoherent responses shall be penalized even if correct. Points are rewarded for answers consistent with those your instructor would give to the same question. This exam is 7 pages (including this front page), numbered 0-6. If questions ask for parts, only the first x parts will be graded. For grading only: score received on the following PAGE 0 Total 1 2 3 4 5 6 .

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(12 pts, 1 pts each) Below are some terms and definitions. Match them (one definition per term). a) Absolute Advantage

b) Real Gross Domestic Product c) Recession

d) Scientific Method e) f) National Income GDP Deflator

g) Marginal Cost h) Positive marginal product production function i) j) Scarcity Production Possibilities Frontier

k) Growth Policy l) GDP per capita

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II. (20 pts, 5 pts each)
Suppose the inflation rate from 2006 to 2007 is 35% and suppose 2006 is the base year for the CPI. Pam is going to work for 2 years before she enters graduate school. Her job pays her \$30,000 in 2006 and \$40,000 in 2007 Just like in real-life, salaries in this problem are given nominally.

a) What is the percentage increase in nominal salary from 2006 to 2007?

b) What is the CPI in 2006? What is the CPI in 2007?

c) What is Pam’s real salary in 2006? What is her real salary in 2007?

d) What is the % change in real salary from 2006 to 2007?

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III.(20 pts, 4 pts each)
Consider the following data on Middle Dakota for the years 2001 and 2002. Billions of 2001 US \$ Billions of 2002 US\$ National Income 6,000 7,000 Taxes 2,000 2,000 Transfer Payments 500 500 Consumption 4,000 4,500 Investment 400 600 Government Spending 1,800 2,100 Imports 600 600 2001 2002 CPI 150 175 Population 199,990,000 200,000,000 Solve for the following values, showing all your work. a.) Disposable Income in 2002

b.) 2001 Gross Domestic Product

c.) 2002 GDP per capita

d.) What are two reasons why RGDP per capita is not a good measure of welfare?

e.) You want to compare a the above country’s wealth in each year. Do you use GDP, Real GDP, or Real GDP per capita. Why?

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IV.(20 pts, 5 pts each)
a) Calculate opportunity costs from the following table. Ketchup 20/day Mustard 4/day

b) Draw output per capita using the following production functions and indicate which (or both or neither) has diminishing marginal product in capital (hint: use the fact that for high enough levels of capital, diminishing marginal product is equivalent to GDP per capita less than doubling whenever capital doubles).

1) Y = K.25*L
2) Y = K*L

c)

What is the change to GDP from the following events? Marcel grows enough food for his family (\$100 worth) in his garden. His income (\$400) is from selling prescription pain killers illegally. On his way home, he picks up some peach flavored tea at the Co-op for \$1.49.

d) Suppose there are 100 bushels of raspberries and 50 identical people. What is an equal but inefficient allocation of the bushels? What is and unequal but efficient allocation of the bushels?

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V. (15 pts, 5 pts each)
V.I A household lives for two years. It has zero initial wealth and a marginal propensity to consume of 0.70. a. Draw the household’s consumption function for year one, given that disposable income in year two will be \$10 and assuming that the household can borrow with zero interest. Why is consumption positive for all levels of year one disposable income?

b.

Suppose that the interest rate increases to 10%. Draw the effect of this change on the consumption function in year one. Explain

V.II A firm has three possible projects in which it could invest. They each cost \$1 million dollars to undertake. The expected revenues are \$1.2 million for project one, 1.1 million for project two, and \$800,000 for project three. c. What are the highest interest rates the firm is willing to pay in order to undertake each project. Draw the firm’s demand for loans using these interest rates.

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(12pts, 4 pts each) Suppose the country of Toonslyvania can produce two different goods using a single resource, labor. The goods are hockey pucks and tons of food. Give one days worth of time, the labor in Toonslyvania can produced, at most the following: Spinach Sardines 20/day 4/day

b) Draw

the PPF for Toonslyvania. Indicate a possible combination of tons of spinach and sardines that Toonslyvania could be producing for it to be efficient. Also indicate a possible combination of spinach and sardines it would be producing if the economy were in a recession.

c)

Draw the PPF for Toonslyvania. Now suppose an increase in technology allows the labor in Toonslyvania to produce 7 tons of sardines in a day but still only 20 tons of spinach in a day. On the same axes as before, draw the new PPF.

d) Draw the PPF for Toonslyvania.

Now suppose that resources are not fully employed. Indicate a combination of spinach and sardines to represent this scenario. Indicate a DIFFERENT combination of spinach and sardines representing a scenario in which the best farmers were making sardines, and the best fishermen were growing spinach.

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Bonus Page (5 points each) 1. Draw a utility function with diminishing, but positive, marginal utility in consumption. Explain why you would not expect someone to have positive marginal utility for Doughnuts. How many doughnuts does it take for you personally to reach negative marginal utility? For me it is approximately two (three apple cider doughnuts).

2.

Consider again the country of ____ Spinach 20/day

Sardines 4/day

Suppose that technology changes so that the country can produce 30 bunches of spinach a day but only 2 cans of sardines. Draw the effects using a PPF. Suppose that the country is populated by only Popeye the sailor men (or person), who love spinach. Why is this a good technology change? What if it was populated entirely by Catwoman’s (persons), who loved sardines?

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