PART I. Write "true" or "false" after each of the following statements.  Note: No explanation is required. A correct answer is worth one point, no answer at all is zero points, and an incorrect answer is MINUS one point.  Therefore, you should guess only if you are reasonably confident in your answer; otherwise, it is better not to answer.

1. If Jack can produce 20 pairs of slippers or 40 hats in one hour, while Jill can produce 30 pairs of slippers or 50 hats in one hour, then Jill has a comparative advantage in hats.

2. Once you have paid your tuition to the university, the cost to you of going to class is zero.

3. A firm in a perfectly competitive industry chooses a quantity to produce so that marginal cost equals the price.

4. If the shoe industry is perfectly competitive and the marginal cost of producing shoes rises by one dollar per pair, then the price of a pair of shoes will rise by one dollar per pair.

5. Maximum legal prices on computer parts could reduce the costs of computers.

6. One plus the real interest rate is the relative price of future goods in terms of current goods.

7. Creditors lose and debtors gain from unexpected inflation.

8. The more inelastic the supply of labor, the greater is the rise in the wage when the demand for labor increases.

9. Sellers of products would increase their profits if they would make their products fall apart or go out of style sooner (that is, if they have greater "planned obsolescence").

10. 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.

11. Speculators reduce economic efficiency because they buy things to resell rather than to use.

12. A $5 tax on shoes will raise the equilibrium price of shoes by $5.

13. A minimum wage rate (above the equilibrium wage) reduces employment.

14. The perfect competition model says that in equilibrium, profits are zero.  But in real life, corporate profits are usually positive.  This indicates that we do not have perfect competition in real life.

15. City streets are examples of common resources, and are overused relative to the social optimum.

16. A monopoly maximizes profits by choosing to produce a quantity such that the marginal revenue minus the marginal cost is as large as possible.

17. If the rate of inflation rises, and people learn to expect this higher inflation, then the real interest rate will fall and the nominal interest rate will remain constant.

18. Automation reduces total employment in the economy.

19. A reduction in taxes on income from investment is likely to increase investment and therefore increase economic growth.

20. What is (3 points each)

1. selection bias?

2. the marginal benefit of doing something?

3. a public good?

4. adverse selection?

5. moral hazard?

(f) the velocity of money?

21. A dishonest university president plans to grant one pizza vendor the right to sell pizzas in the new student activity building. Many pizza vendors have offered bribes to the president in return for that right. What will determine the equilibrium size of the winning bribe? (3)

22. What are the formulas for (a) the discounted present value of $1000 paid one year from now?

(b) the discounted present value of $1000 paid two years from now? (2)

23. Explain the argument that the social security system reduces savings in the U.S. (4)

24. Suppose the government raises taxes to eliminate its budget deficit. What are the effects

(a) according to the majority view? (b) according to the minority view? (4)

25. Explain how each of the following things affect inflation: (5 points each):

(a) an increase in business greed for profits

(b) an increase in the price of necessities, such as food and housing

26. Explain: "Stock prices follow a random walk." (3)

27. Draw a graph to show the effects of an income tax on (5)

1. wages paid by employers (firms) including taxes;
2. wages received by employees (workers) net of taxes;
3. employment;
4. government revenue from the tax;
5. the deadweight social loss from the tax.

28. Suppose the demand curve for a product is x^d = 500 - 3p where x^d is the quantity demanded and p is the price.  Suppose the supply curve for the product, with x^s representing the quantity supplied, is x^s = 100 + 2p.

1. 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, the price the buyer pays including, and the price the seller receives net of tax. (3)

29. Draw a graph to show why an increase in the tax rate can reduce government tax revenue. Explain in words why this can happen. (3)

30. Explain why the effects of government spending on the economy depend partly on what goods or services the government buys. (5)

31. Use the sticky-price theory to explain what happens, in the short run and the long run, when aggregate demand falls. (5)

32. (a) Fill in the rest of the table below. (TC = total cost, MC = marginal cost, p = price, q = quantity produced and sold, TR = total revenue, MR = marginal revenue. The numbers in the table for q and p represent points on the demand curve.) (5 points)

1 20 5

2 18 11

3 16 18

4 14 26

5 12 35

6 10 45

7 8 56

8 6 68

2. Given the information in the table, how much should a monopolist facing this demand curve and cost conditions produce? What price maximizes the monopolist’s profit? (2 points)

3. What quantity would a perfectly competitive industry produce? What price would it charge? (2)

33. Draw the basic supply-demand diagram with a negative externality. Show: (10 points)

(a) the marginal private and social costs of the good,

(b) the marginal private and social benefits of the good,

(c) the marginal cost to others from the good,

(d) the economically efficient amount of output of the good,

(e) the perfect-competition equilibrium amount of output,

(f) the deadweight social loss from the externality.

(g) Explain in words what this graph has to do with the problem of pollution.

34. Define a "rise in consumer confidence" as an increased desire of consumers to spend money on consumption and decreased willingness to save. Discuss the effects of a rise in consumer confidence on the real interest rate, savings, investment, and consumption. (5)

35. Explain (a) the activist view in favor of discretionary government policies and (b) the laissez-faire view in favor of rules for government policies. Include in your discussion an explanation of why rules can produce better results than case-by-case discretionary policy-making. (10)

A California artist once proposed a new law to help poor struggling artists: whenever anyone bought a work of art and later resold it (to someone else), that seller would pay the artist a royalty equal to 10% of the resale price.  How would a law like this affect (a) the price at which art is resold? (b) the number of times a work of art is resold? (c) the price at which new artwork is originally sold by the artist to its first owner? (d) the wealth of artists? (6)