ECONOMICS  108	Spring, 1994		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." 

Define: (1 point each)
(a) value of a firm
 (b) marginal cost
 (c) Pareto improvement
 (d) potential Pareto improvement

2. Frisbees cost $3.00 each.  Tacos cost $1.50 each.  What is the relative price of 
frisbees in terms of tacos? (1)

3. What happens to the demand for a good if the price of a complement good rises? (1)

4.What is the general formula for the discounted present value of X1 dollars paid one year 
from now and X2 dollars paid 2 years from now?   (2)	

5.  Explain why firms earn zero economic profit in long-run equilibrium with perfect 
competition. (2)

6.  What is economic profit and why does it differ from accounting profit? (2)

7. Make up an example of gains from trade.  Show who has the comparative advantage 
in which activity, and explain how your example illustrates the following proposition.  (4)
		It is economically efficient for people to produce the goods in which they 
have a comparative advantage, and then trade goods with each other.  

8.  People can reach the Island Restaurant only by boat.  The round-trip used to take one 
hour, but now takes only 30 minutes.  Draw a graph to show how this affects the demand 
for meals at the Island Restaurant if all potential diners value their time at $20 per hour.  
(3)

9.  Draw diagrams to show the effects of an increase in the expected future demand for a 
product (next year) on  (a) today's price of the good, (b) today's quantity produced, and 
(c) today's quantity consumed.  Also show the amount of the good (d) produced next 
year, (e) consumed next year, and (f) the price next year.  (6) 

10.  Suppose the demand curve for rental cars is	 	Qd = 1048 - 4PB
and the supply curve is					Qs = 724 + 2PS, 
where Qd is the quantity demanded (in cars per day), Qs is the quantity supplied, PB is the 
price per day paid (in dollars) by renters including taxes, and PS is the price per day (in 
dollars) received by sellers excluding taxes.  Suppose the government taxes car rentals 
at $6 per day.  Find the equilibrium prices to buyers (including tax) and to sellers 
(excluding tax), the equilibrium quantity, and total tax payments to the government.  (6)

11.  Comment: "An effective way to keep the price of clothing down would be to put price 
controls on fabric; this would reduce the costs of making clothing and reduce clothing 
prices." (4) 

12.  Draw a graph to show consumer and producer surplus
	(a) without international trade,
and 	(b) with international trade.
	(c)  How large are the gains or losses from international trade to:
		(i)   consumers in the exporting country?
		(ii)  producers in the exporting country?
		(iii) consumers in the importing country?
		(iv)  producers in the importing country?
(10 points)

13.  Draw a diagram to illustrate the effects of a  tax on  the production of ice cream.  Show 
the effects on (a) output of  ice cream, (b) the prices paid by buyers and received by sellers, 
(c) consumer surplus, and (d) producer surplus.  Also show (e) government revenue from 
the tax and (f) the gain or loss in economic efficiency from the tax.  (6 points)

14.  Draw a diagram to illustrate the effects of a subsidy to the production of peanuts.  
Show the effects on (a) output of peanuts, (b) the prices paid by buyers and received by 
sellers, (c) consumer surplus, and (d) producer surplus.  Also show (e) the cost of the 
subsidy to the government and (f) the social gain or loss from the subsidy.  (6 points)

15.  What does the slope of a budget line show?  How does your budget line change if  
(a) your income rises?	  (b) a price changes?	(3)