1. (1 point each) Define:

(a) marginal revenue

(b) Pareto improvement

(c) marginal tax rate

2. Give an example of sample selection bias. (1)

3. Caps cost $3.00 each, and T-shirts cost $9.00 each. What is the relative price of T-shirts in terms of caps? (1)

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

5. (1 point each) If the interest rate is 10 percent per year, approximately what is

(a) the discounted present value of $3000 paid one year from now?

(b) the discounted present value of $3000 paid 2 years from now?

(b) the discounted present value of $3000 paid every year forever?

7. Define consumer surplus and producer surplus and show them on a graph. (2)

8. What is a sunk cost? How do they affect rational decisions? (2)

9. Discuss the following statement: "An decrease in the supply of a good raises its price, which raises total consumer spending on the good." (2)

10. If Japan can produce 10 televisions or 15 VCRs with a given amount of inputs, and Korea can produce 8 televisions or 13 VCRs with the same amount of inputs, which country has a comparative advantage in televisions? Which country has a comparative advantage in VCRs? (2)

11. Suppose people’s tastes change -- they want to switch from stressful jobs to peaceful jobs. Use graphs to show how this affects wages at each type of job. (3)

12. (a) Use a graph to show the effects of a 5-cent per unit tax on newspapers if the demand for newspapers were perfectly inelastic. (2)

(b) Use a graph to show the effects of a $100 per acre tax on land if the supply of land were perfectly inelastic. (2)

13. Suppose the demand curve for VCRs is Q^d = 1700 - 2P

and the supply curve is Q^s = 500 + 4P_.

where Q^d is the quantity demanded, Q^s is the quantity supplied, and P is the price.

(a) Find the equilibrium price and quantity.

(b) Suppose the government taxes VCR purchases at $12 each. Find the equilibrium price that buyers pay (including tax) and the equilibrium price that sellers receive (net of tax), the equilibrium quantity, and total tax payments to the government. (6)

14. 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)

15. A drought in North America reduces output of oats in the United States. Use graphs to help explain why this raises that quantity of oats that the U.S. imports from Argentina. (8)

16. 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)

17. Sunville and Dismaland are two cities in different parts of the United States. Sunville has good weather and opportunities for outdoor activities. Dismaland has terrible weather and little to offer in recreational activities.  Comment on the differences in (a) prices of food, books, clothing, and other goods in the two cities, (b) wages in the two cities, and (c) prices of land in the two cities.  In your comments, discuss whether there are any economic forces that tend to make prices of food, books, clothing, and other goods equal in the two cities; do the same for wages and for land prices. (8)