There are 60 points on this exam; the number of points appears in parentheses after each question.

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. # Recitation Day/Time

1. What is the real interest rate? How is it connected to the nominal interest rate? What relative price equals one plus the real interest rate? (3)

2. Roughly how large is GDP in the United States? Roughly how large is world GDP? (2)

3. Roughly how large were the rates of U.S. and world economic growth in the 20^th century? (1)

 4. Explain why a country cannot keep growing at the same rate indefinitely simply by adding indefinitely to its input of physical capital. (3)

5. Explain why the demand for any one firm's output in a perfectly competitive industry is more elastic than the market demand for the product. (3)

6. Explain why firms earn zero economic profit in long-run equilibrium with perfect competition. Why do firms with zero economic profit stay in business? (3)

7. Why do members of a cartel have an incentive to cheat? (2)

8. Draw a graph to show (a) monopoly output, (b) the monopoly price, (c) the monopoly's profit (if it has no fixed costs), and (d) the deadweight social loss from a monopoly. (4)

9. Explain Malthus's belief about population growth. Then criticize it. (3)

10. A firm’s marginal cost of production is $4 per unit; its average cost is also $4 per unit. The firm faces the demand schedule below. (Assume the firm cannot price discriminate.) (a) How much should the firm produce and what price should it charge to maximize profit? (b) How big is its profit? (c) How much consumer surplus do its customers get? (d) How big is the deadweight social loss from this monopoly? (e) Repeat parts (a)-(d) assuming that the firm can perfectly price discriminate. (8)

quantity

price demanded

$12 1

$11 2

$10 3

$9 4

$8 5

$7 6

$6 7

$5 8

$4 9

$3 10

$2 11

11. A firm’s factory pollutes the air. Draw a diagram to show (a) the marginal private cost of the good that the firm produces, (b) the marginal social cost of the good, (c) the marginal private and social benefit of the good, (d) the economically efficient quantity of the good, (e) the equilibrium quantity, (f) the equilibrium price, and (g) the deadweight social loss from allowing pollution. (h) What is the economically efficient level of pollution? (8)

 12. Explain moral hazard and present an example, describing who is the principal and who is the agent. (4)

13. Suppose the government increased taxes to eliminate the budget deficit. Explain the likely effects, according to the majority and minority views of deficits, on consumption, investment, and the real interest rate. (6)

14. A lake is a common resource with many fish that can be sold for $1 each. If only one person fishes on the lake, that person can catch 800 fish on an average day. If two people fish on the lake, they each catch 700 fish on an average day. The table below shows how the number of fish caught per person depends on the number of people fishing. The opportunity cost of each person's time is $400 per day, and alternative jobs are exactly as much fun as fishing.

number of fish caught

people fishing per person

1 800

2 700

3 600

4 500

5 400

6 300

7 200

8 100

(a) How many people fish in equilibrium, when the lake is a common resource? 5 (1)

2. What is the economically efficient number of people fishing on the lake? 3 (or 2) (1)
1. If the lake were private property and the lake’s owner maximized profit from the lake, what price would the owner charge each person to fish? How many people would fish on the lake? $200, 3 (or $300, 2) (4)

15. (a) Explain why some people believe that fixed and exhaustible natural resources will cause the rate of economic growth to fall in the future. (2)

(b) Explain why economic growth may not fall in the future despite the finite physical quantities of fixed and exhaustible natural resources. (2)