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Study Guide for Economics 100 fall 2004 1st midterm

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					Study Guide for Economics 100:13 first mid-term, Fall 2004-10-12

1. 18 points
Using a production possibility diagram, explain why a society has to choose between
consuming more capital or more consumer goods. Explain why future growth may
require less current consumption and show the impact of economic growth on the
diagram.



1. 20 points: 10 minutes

Assume that a society has decided to go to war. Use a production
possibilities frontier diagram to explain the impact of increasing
production of military goods on the ability to provide education to the
population, ceteris paribus. Discuss the long-run impact of the decision
to go to war on economic growth, remembering that education creates
human capital.




   2. 10 points

       Your room mate and another political science student are quarrelling late
       at night in your dorm room. One says that we can produce only a limited
       quantity of goods, so that the only way to eliminate scarcity is to restrict
       the consumption of the rich and give the goods they would have
       consumed to the poor. The other says that the only way to eliminate
       scarcity is to have as much growth as possible so output will rise until
       everyone's needs are met. How do you (an economics student) settle the
       dispute so you can get some sleep?



3. 18 points: 9 minutes

Answer TWO of the following THREE questions, a. b. and c.

a. You plan to go skiing at Aspen during Christmas break. If you go
   skiing, you must pay $1200 for air fare, hotels and meals. You could
   have gone home to Ottawa and worked at your part-time job
   delivering pizza and earned $500. If you go home instead of skiing,
   your travel costs will be $200. Your parents will provide free room
   and board. What is the cost to you of your ski trip?
2. 18 points: 9 minutes (Answer TWO of questions a. b. and c. .)

b. Over the past centuries, our capacity to produce has increased
   tremendously. Using the economist’s definition of the term, discuss
   whether this change has reduced scarcity.




c. List the four factors of production and the type of income earned by
   each. Briefly discuss the factors which determine how much non-
   human capital an individual owns.




c. Briefly describe the differences between the three types of firms.
a. Draw a diagram showing the industry supply and demand curves for the
   lumber industry. On this diagram, show the equilibrium price and quantity,
   the consumer’s surplus and the producer’s surplus. Assume that there
   are no external costs or benefits to producing lumber.
b. If the price is at equilibrium is the sum of consumers’ surplus and
   producers’ surplus maximised? Explain.
c. If the price is artificially set above equilibrium, what will happen to the
   consumers’ surplus? What will happen to the producers’ surplus? What
   will happen to the sum of consumers’ surplus and producers’ surplus.
d. If the price is artificially set below equilibrium, what will happen to the
   consumers’ surplus? What will happen to the producers’ surplus? What
   will happen to the sum of consumers’ surplus and producers’ surplus.
e. If there are external costs or benefits to the production of lumber, will the
   equilibrium price and quantity result in the maximum surplus for society as
   a whole? Explain.
a. 32 points: 16 minutes

Trinidad and St. Kits are able to produce the following output from a
given set of inputs.

                     TRINIDAD               ST. KITS
               SUGAR      TOBACCO     SUGAR TOBACCO
                (lbs.)      (lbs.)     (lbs.)      (lbs.)
                   0         770          0         700
                 100         660         75         600
                 200         550        150         500
                 300         440        225         400
                 400         330        300         300
                 500         220        375         200
                 600         110        450         100
                 700           0        525           0


a. The opportunity cost of sugar in Trinidad is _________.
b. The opportunity cost of sugar in St. Kits is _________.
c. Explain which nation has an absolute advantage in sugar
   production, which has an absolute advantage in tobacco
   production.

d. Explain which nation has a comparative advantage in sugar
   production, which has a comparative advantage in tobacco
   production.


4.
5. 32 points: 16 minutes

Russia and the Ukraine are able to produce the following output from
a given set of inputs.

                     RUSSIA               UKRAINE
                  Wheat    Beef        Wheat    Beef
                (bushels)  (lbs.)    (bushels)  (lbs.)
                       0       375          0       400
                     125       300        100       320
                     250       225        200       240
                     375       150        300       160
                     500        75        400        80
                     625         0        500         0
  a. Which nation will export wheat?
  b. Which nation will export beef?
  c. Explain why both nation’s can benefit from trade.



  6. In each of the following questions, draw diagram showing a
     demand curve and show the impact of the change in the market on
     that curve. Public transit is a substitute for automobiles. Car
     insurance is a complement of automobiles.

a.
Market      Change
Automobiles The price of public transit
            rises



b.
Market      Change
Automobiles The price of car insurance rises



a.
Market     Change
Eggs       The price of bacon
           rises.

b.
Market     Change
Eggs       Incomes increase.


  a. Market              Change

     Ketchup      Price of French fries rises



  b. Market              Change

     Onion rings Price of French fries rises
  7. In each of the following questions, draw diagram showing a supply
     curve and show the impact of the change in the market on that
     curve. Steel is a raw material used in the production of cars.

  b.
  Market      Change
  Automobiles The price of steel falls



  b.
  Market      Change
  Automobiles The wages of auto
              workers rise.
d.
Market    Change
Eggs      The wages of farm workers rise.

  c. Market           Change

    lumber            price of sawdust doubles




  d. Market           Change

    lumber            wages of saw mill workers falls