ECONOMICS 108 Fall, 1995 First Midterm There are 60 points on this exam; the number of points appears in parentheses after each question -- for example, (3) means "3 points." Print your name AND sign your name in the spaces provided below. Also write your social security (University ID) number. PRINT NAME SIGN NAME Soc. Sec. #_____________________________________________________ page 2 ________________ page 3 ________________ page 4 ________________ page 5 ________________ page 6 ________________ TOTAL___________________________________ I. Write "true" or "false" after each of the following statements. One point each. 1. The more elastic the supply of a good, the greater the price increase when the demand increases. 28. If Jack can produce 20 placemats or 40 hats in one hour, while Jill can produce 30 placemats or 50 hats in one hour, then Jill has a comparative advantage in hats. 3. If Nintendo game machines and Sega game machines are substitutes, then a subsidy to the production of Nintendo machines would reduce the price of Sega machines. 4. A $5 tax on shoes will raise the equilibrium price of shoes by $5. 5. An increase in the minimum wage rate would be likely to reduce employment of teenagers. 6. Comment: "An effective way to keep the price of computers down would be to put price controls on parts that go into computers; this would reduce the costs of making computers and reduce their prices." 7. If marginal cost is below average cost, then average cost rises with output. 8. Speculators reduce economic efficiency because they buy products to resell rather than to use. II. Other short questions. Points allocated as shown. 9. (1 point each) Define: (a) marginal revenue (b) post-hoc fallacy 10. Give an example of sample selection bias. (1) 11. Define and give an example of a sunk cost. (2) 12. State the general rule for making a rational choice (to maximize net benefit or profit). (1) 13. What are the formulas for (a) the discounted present value of $1000 paid two years from now? (b) the discounted present value of $1000 paid every year forever? (2) 14. What does the slope of a budget line show? How does your budget line change if your income rises? (2) 15. Explain why stock prices follow a random walk. (3) III. Longer questions. Points allocated as shown. 16. Draw diagrams to show the effects of a decrease in current production of a storable good on (a) today's price of the good, (b) today's quantity produced, (c) today's quantity consumed, (d) the amount of the good produced next year, (e) the amount consumed next year, and (f) the price next year. (6) 17. Draw a diagram to show the effects of a tax on sales of gasoline. Suppose the government requires gas stations to send the tax money to the government. Show the effects of the tax on (a) the quantity of gasoline sold, (b) the prices paid by buyers and received by sellers, (c) consumer surplus, (d) producer surplus, and (e) government revenue from the tax. (f) How would your answer change if the government required buyers (rather than sellers) to pay the tax to the government? Why? (6) 18. The United States imports cars. Draw graphs to show the effect of a U.S. law making it illegal to import cars. Use your graph to answer the following questions: (a) How would this law affect the prices and quantities produced in the U.S. and in other countries? {4} (b) Who gains and who loses from this law? How much? (Show on your graph.) {4} (c) How would the law affect economic efficiency? {2} 19. Suppose the demand curve for a product is Qd = 500 - 3p where Qd is the quantity demanded and p is the price. Suppose the supply curve for the product, with Qs representing the quantity supplied, is Qs = 100 + 2p. (a) Find the equilibrium price and quantity. (2) (b) Suppose a per-unit tax of $10 is placed on the product. Find the new equilibrium quantity, price to buyer, and price to seller. (3) (c) Suppose a per-unit subsidy of $10 is placed on the product. Find the new equilibrium quantity, price to buyer, and price to seller. (3) 20. (a) Use a graph to show the effects of a 5-cent per unit tax on newspapers if the demand is perfectly inelastic. (b) Use a graph to show the effects of a $100 per acre tax on land if the supply were perfectly inelastic. (2 points each). 21. The following table shows a firm's total cost of producing a good and the demand curve that the firm faces. Fill in at least 4 numbers in each of the blank columns (TR, MR, MC, and Profit), and circle the quantity that maximizes the firm's profit. (5) Total Marginal Total Marginal Quantity Price Revenue Revenue Cost Cost Q P TR MR TC MC PROFIT 1 12 12 2 11 16 3 10 20 4 9 24 5 8 28 6 7 32 7 6 36 8 5 40 9 4 44 10 3 48 3