Economics Midterm 1 (100 points) – September 23, 2011
- A professional basketball team has a new assistant coach. The assistant notices that one player (aka “the star player”) scores on a higher percentage of her shots than the other players. Based on this information, the assistant suggests to the head coach that this star player should take all the shots. That way, the assistant reasons, the team will score more points and win more games. On hearing this suggestion, the head coach fires his assistant for incompetence. What was wrong with the assistant’s idea? (15 pts.)
- How will a reduction in the number of hours worked each day affect an economy’s production possibilities curve (all other variables being held constant)? (7 pts.)
- Susan can pick 4 pounds of coffee in an hour or 2 pounds of nuts. Tom can pick 2 pounds of coffee in an hour or 4 pounds of nuts. Each works 6 hours per day. (35 pts.)
- What is the maximum number of pounds of coffee the two can pick in a day?
- What is the maximum number of pounds of nuts the two can pick in a day?
- If Susan and Tom were picking the maximum number of pounds of coffee when they decided that they would like to begin picking 4 pounds of nuts per day, who would pick the nuts, and how many pounds of coffee would they still be able to pick?
- Now suppose Susan and Tom were picking the maximum number of pounds of nuts when they decided that they would like to begin picking 8 pounds of coffee per day. Who would pick the coffee, and how many pounds of nuts would they still be able to pick?
- Would it be possible for Susan and Tom to pick a total of 26 pounds of nuts and 20 pounds of coffee each day? If so, how much of each good should each person pick?
- Is the point (30 pound of coffee per day, 12 pounds of nuts per day) an attainable point? Is it an efficient point? What about the point (24 pounds of coffee per day, 24 pounds of nuts per day?)
- On a graph with pounds of coffee per day on the vertical axis and pounds of nuts per day on the horizontal axis, show all the points you identified in question 3 parts a-f. Connect these points with straight lines. Is the result the PPC for the economy consisting of Susan and Tom?
- Distinguish between the meaning of the expressions ‘change in demand’ and ‘change in the quantity demanded.’ Draw graphs to illustrate your point. (15 pts.)
- Last year a government official proposed that to protect the poor from rising gasoline prices, a price cap of $3.00 per gallon. The average price of gasoline in the
- If this proposal had been enacted by Congress and the President, would the $3.00 mark be a price ceiling or a price floor?
- What would the relationship be between the supply and demand of the price of gasoline?
- What social behaviors would be observed in terms of gasoline purchasing? Why?
- Draw a supply and demand graph showing the current equilibrium point ($3.556) and the proposed price cap of $3.00. The
Economics Midterm 2 (100 points) – October 19, 2011
- Mr. Brown and nine friends are having dinner at the Moonstone Grill north of McKinleyville. To simplify the task of paying for their meal, they have agreed in advance to split the cost of their meal equally, with each paying one-tenth of the total check. Having cleared the entrée dishes, the waiter arrives with the dessert menu, on which Mr. Brown’s favorite items are pumpkin pudding ($10) and chocolate mousse ($6). Mr. Brown’s reservation prices for these items are $4 and $3, respectively. (27 pts)
- If Mr. Brown is the only person who is interested in dessert, will he order dessert, and, if so, which one? What are his economic surpluses from the two items? (12 pts)
- Would he order dessert if he were dining by himself? (7 pts)
- Would Mr. Brown order dessert if there were only 5 people splitting the check instead of 10? (8 pts)
- In the country Breakfastland, which has a competitive market economy, citizens eat only bagels and cereal for every meal. Suppose the demand for bagels rises dramatically while the demand for breakfast cereal falls. Briefly explain how Breakfastland’s competitive market economy will make the needed adjustments to reestablish an efficient allocation of society’s scarce resources. (8 pts)
- Suppose that a
Now suppose that the U.S. U.S.
- What do foreign workers earn annually, in dollars, within these two industries? (4 pts.)
- When it opens to trade, which good will the
- Find the real income of
- How might your conclusion in part “c” be modified in the short term, if it is costly for workers to change industries? What policy or government response might help with this problem? (7 pts.)
- In studying for his economics final, Sam is concerned about only having two things: his grade and the amount of time he spends studying. A good grade will give him a benefit of 20; an average grade, a benefit of 5; and a poor grade, a benefit of 0. By studying a lot, Sam will incur a cost of 10; by studying a little, a cost of 6. Moreover, if Sam studies a lot and all other students study a little, he will get a good grade and they will get poor ones. But if they study a lot and he studies a little, they will get good grades and he will get a poor one. Finally, if he and all other students study the same amount of time, everyone will get average grades. Other students share Sam’s preferences regarding grades and study time. (30 pts.)
- Model this situation as a two-person prisoner’s dilemma in which the strategies are to study a little and to study a lot, and the players are Sam and all other students. Include the payoffs in the matrix. (20 pts)
Economics Midterm 3 (100 points) – November 18, 2011
- Here are some data for an economy. All figures are in millions of dollars (20 pts)
Consumption expenditures $600
Exports $75
Government purchases of goods and services $200
Construction of new homes and apartments $100
Sales of existing homes and apartments $200
Imports $50
Beginning-of-year inventory stocks $100
End-of-year inventory stocks $125
Consumption of fixed capital $25
Business fixed investment $100
Government payments to retirees $100
Household purchases of durable goods $150
- Find GDP and explain your calculation (8 pts)
- Find NDP and explain your calculation (8 pts)
- If this economy has 18,000 people, what is its GDP per capita? (4 pts)
- The outputs and prices of goods and services in Country X are shown in the table below. Assume that 2009 is the base year. (30 pts)
| | 2009 Quantity | 2009 Price (base year) | 2010 Quantity | 2010 Price |
| Food | 6 | $2.50 | 8 | $2.50 |
| Clothes | 5 | $6 | 10 | $10 |
| Entertainment | 2 | $4 | 5 | $5: |
i.
a. Calculate the following:
i. The nominal gross domestic product in 2010 (5 pts)
ii. The real GDP in 2010 (10 pts)
- If in one year the price index is 50 and in the next year the price index is 55, what is the rate of inflation from one year to the next? (5 pts)
- Assume that 2011’s wage rate will be 3% higher than 2010 because of inflationary expectations. The actual inflation rate is 4%. At the beginning of 2011, will the real wage be higher, lower, or the same as 2010? (5 pts)
- Assume that Mr. Brown gets a fixed-rate loan for 3.25% from a bank when the expected inflation rate is 3%. If the actual inflation rate turns out to be 4%, who benefits fro the unexpected inflation? Mr. Brown, the bank, neither, or both? Explain. (5 pts)
- Using Okun’s law, fill in the four pieces of missing data in the table below. The data are hypothetical. (20 pts)
| Year | Real GDP | Potential GDP | Natural unemployment rate (%) | Actual unemployment rate (%) |
| 2001 | 7840 | 8000 | (a) | 6 |
| 2002 | 8100 | (b) | 5 | 5 |
| 2003 | (c) | 8200 | 4.5 | 4 |
| 2004 | 8415 | 8250 | 5 | (d) |
- Natural unemployment rate for 2001 (5 pts)
- Potential GDP for 2002 (5 pts)
- Real GDP for 2003 (5 pts)
- Actual unemployment rate for 2004 (5 pts)
- Data on a before-tax income, taxes, paid, and consumption spending for the Simpson family in various years is given below. (30 pts)
| Before-tax income ($) | Taxes paid ($) | Consumption spending ($) |
| 25,000 | 3,000 | 20,000 |
| 27,000 | 3,500 | 21,350 |
| 28,000 | 3,700 | 22,070 |
| 30,000 | 4,000 | 23,600 |
- Graph the Simpsons’ consumption function (C vs. DI) (5 pts)
- Find their households marginal propensity to consume. (10 pts)
- Find their households marginal propensity to save. (5 pts)
- Homer Simpson wins a lottery prize. As a result, the Simpson family increases its consumption by $1000 at each level of after-tax income. (“Income does not include the prize money) (10 pts).
i. How does this change affect the graph of their consumption function? (5 pts)
ii. How does it affect their marginal propensity to consume? (5 pts)
- What is the equilibrium outcome in this game? From the students’ perspective, is it the best outcome? (10 pts)
BONUS Question
- Explain in four to six sentences why a military arms race is an example of a prisoner’s dilemma. (5 pts)
Economics Midterm 4 (100 points) – December 16, 2011
- For each of the following, use an AD-AS diagram to show and explain the short-term effects on GDP and the price level. (42 pts, or 7 pts each)
- An increase in consumer confidence that leads to higher consumption spending.
- A reduction in taxes
- A decline in planned investment spending by businesses.
- A sharp drop in oil prices.
- A war that raises government purchases.
- A sharp decrease in net exports.
- Aggregate Expenditures Model (32 pts)
- What are the four components of the Aggregate Expenditures Model which add up to equal real GDP? (8 pts)
- Suppose that a certain country with a private, closed economy has an MPC of 0.99 and a real GDP of $100 Billion. If its investment spending decreases by $1 billion, what will be its new level of real GDP? (8 pts)
- What is a recessionary gap? What is the impact on unemployment of a recessionary gap, and of GDP growth? Does it produce a negative or positive GDP gap? (8 pts)
- How is a recessionary gap different from an inflationary gap? Does an inflationary gap produce a negative or positive GDP gap? What is the impact of an inflationary gap on unemployment and price level? (8 pts)
- Discuss your research project, and give a brief overview of your January presentation proposal. (26 pts)
- What country have you chosen to study? Why? (6 pts)
- What makes your country’s economy different from your classmates? (10 pts)
- Overall, what are the strengths and weaknesses of your country’s growth potential? (10 pts)
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