Final Exam. Coconuts. Figure 1. a) fish, coconuts. b) coconuts, fish. c) fish, fish. d) coconuts, coconuts. e) fish, neither good.

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1 ECONOMICS Dr. John Stewart May 9, 2000 Final Exam Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet. Please note that some questions have four choices, others have five choices. On the answer sheet make sure that you have written your name and coded in your student ID number and the number of the recitation section you attend (A list of recitations shown on the screen will help you identify your section number). All questions are weighted equally. Information for Questions 1-4. Sam and Dave are stranded on a desert island. The only two goods they can produce with their time are fish and coconuts. Figure 1 shows the amounts of the two goods each could produce if they spent a day working to produce food Sam and Dave's PPFs unit of each good per day 1. If Sam and Dave combine their efforts they could a) produce a total of 7 fish if they produce no coconuts. b) produce a total of 10 coconuts if they produce no fish. c) produce 8 coconuts and two fish. d) produce 3 coconuts and 6 fish. e) all the above except for d). Coconuts Figure 1 2. Dave has an absolute advantage in producing and a comparative advantage in producing Fish Sam's PPF Dave's PPF a) fish, coconuts. b) coconuts, fish. c) fish, fish. d) coconuts, coconuts. e) fish, neither good. 3. If they are combining their efforts to produce 6 coconuts and 4 fish, then the opportunity cost of one more fish is. a) 1 coconut b) 2 coconuts c).5 coconuts d).25 coconuts e) none of the above. 4. Sam and Dave have divided there time so as to efficiently produce (and consume) 6 fish and 2 coconuts per day. A native shows up in a canoe full of coconuts wanting to trade some of them for some of our boys fish. Which of the following statements is most true? a) Sam & Dave cannot make themselves better off by trading with the native. b) Sam & Dave can increase their welfare but only if they can strike a deal where they pay no more than one fish per coconut purchased. c) Sam & Dave can increase their welfare but only if they can strike a deal where they pay less than one half fish per coconut purchased. d) Sam & Dave can increase their welfare but only if they can strike a deal where they pay one fish per four coconut purchased. e) We can draw no conclusion of what would be a reasonable price for Sam and Dave to pay. Econ 10-7 Spring Final Exam Page 1 of 12

2 Information for Questions 5-7. The table below show the marginal utility (measured in dollars per 10 minutes talked) that Alice receives from talking on the phone. Number of Minutes talked per day Marginal Utility of talking (measure in dollars per 10 minutes talked) $0.0 $.60 $.70 $.45 $.30 $.15 -$ Alice can buy calling time from Southern Belle in 10 minute chunks at $.40 per ten minutes. How many minutes will Alice choose to talk. a) 0 b) 20 c) 30 d) 40 e) How much consumer surplus will Alice receive? a) $0.0 b) $.05 c) $.30 d) $.55 e) $ Southern Belle offers its consumers a choice between its original $.40 per 10 minutes plan and a new rate plan where you can pay $1.00 per day but then buy all the time you want at $.10 per 10 minutes. What will Alice choose to do? a) She will choose the new rate plan and talk 40 minutes a day. b) She will choose the new rate plan and talk 50 minutes a day. c) She will stick with the old rate plan and talk 30 minutes a day. d) She will stick with the old rate plan and talk 40 minutes a day. e) Not enough information to tell what she will do, Information for Questions Assume that there are only two types of houses that can be built: small affordable houses and large luxury houses. Both housing markets are assumed to be competitive. Figure 2 shows the supply and demand curves for new affordable housing in Chapel Hill. 8. In market equilibrium, there will be new affordable houses built each year and they will sell at a price of. a) 100, $160,000 b) 100, $100,000 c) 120, $120,000 d) 140, $140,000 e) 160, $160,000 House price Thousands Supply and Demand of Affordable Housing $320 $280 $240 $200 $160 $120 $80 $40 Demand Supply $ If the Chapel Hill city council passes an Affordable Houses built per year ordinance that the maximum price that can Figure 2 be charged for an affordable house is $120,000 then a) 140 new affordable homes will be built each year selling for $120,000 each. b) 120 new affordable homes will be built each year but there will be an excess demand of 20. c) 120 new affordable homes will be built each year but there will be an excess demand of 60. d) 180 new affordable homes will be built each year but there will be an excess supply of 60. e) the ordinance will have no effect on the price or quantity of new affordable home. Econ 10-7 Spring Final Exam Page 2 of 12

3 10. If the affordable home and luxury homes are substitutes and the price for luxury homes increases, we expect the equilibrium price for affordable homes to and the quantity to a) raise, raise b) raise, fall c) fall, raise d) fall, fall 11. If we consider a price change form $160,000 per house to $140,000 per house, the arc price elasticity for the demand curve shown in Figure 2 is a).002 b) 2.0 c) 2.5 d) 3.2 e) If the demand for German chocolate increases as the price for gummy bears falls, we can conclude that a) German chocolate is a normal good. b) gummy bears are an inferior good. c) German chocolate and gummy bears are substitutes. d) German chocolate and gummy bears are complements. 13. Given that the cross price elasticity of the demand for roller skates with respect to price of bicycles is found to be 1.5, we can conclude that a) roller skates and bicycles are substitute goods b) roller skates and bicycles are complementary goods c) roller skates are inferior goods d) bicycles are inferior goods. Information for Questions Figure 3 shows the short run marginal, average total, average variable, and average fixed cost curve for a firm that produces little red wagons. Quantity is measured in wagons per week. The market for little red wagons is perfectly competitive and the firm is assumed to maximize profits. 14. The firm in Figure 3 has total fixed cost equal to a) $0 b) $10 c) $20 d) $50 e) $65 $ per unit Figure 3 Short run Cost Curves Output Quantity AFC AVC ATC SRMC 15. If the current market price is $40 per wagon, how many wagons will the firm will choose to produce? a) 5 b) 9 c) 10 d) 13 e) At a market price of $40 per wagon the firm shown in Figure 3 will be making profit of about per week. a) $0 b) $150 c) $250 d) $300 e) $400 Econ 10-7 Spring Final Exam Page 3 of 12

4 17. Given your answers to 14 and 15, in the long run we can expect a) the price of little red wagons to fall below $40 because new firms will enter the market. b) the price of little red wagons to rise above $40 because firms will exit the market. c) the price of little red wagons to stay at $40 because the market is in equilibrium. d) the firm depicted in Figure 3 to expand its output of wagons. 18. The firm depicted in Figure 3 will choose to produce zero unit of output if the market price falls below a) $40 b) $30 c) $25 d) $20 e) $ If labor is the only variable input used by the little red wagon firm, the market wage rate for labor is $80 per week, and the market price of wagons was $40; can we conclude a) that the marginal product of the last employee hired by the firm was 13 wagons per week b) that the marginal product of the last employee hired by the firm was 1 wagon per week c) that the marginal product of the last employee hired by the firm was 2 wagons per week d) that the marginal product of the last employee hired by the firm was 4 wagons per week e) nothing about the marginal product of the last employee. 20. Again if labor is the only variable input used by the little red wagon firm and the market wage rate for labor is $80 per week, then if the firm is producing 14 wagons per week the average physical product of labor must be wagons per week of labor. a) 14 b) 5.7 c) 10 d) 4 e) not enough information to tell. 21. A chicken farmer is currently producing 20 tons of chicken a month using 30 tons of feed per month and 500 man hours of labor. The marginal physical feed is 1 ton of chicken per ton of feed and the marginal physical product of labor is.05 tons of chicken per man hour. Feed costs the farmer $100 per ton and labor costs the farmer $5 per man hour. In order for the farmer to minimize the cost of producing 20 tons of chicken he should: a) decrease the amount of labor and increase the amount of feed. b) increase the amount of labor and decrease the amount of feed. c) do nothing, he is already minimizing his cost. d) not enough information to determine the correct course of action. 22. You are the manager of a perfectly competitive firm and are faced with the following situation. The market price for your product is $10 and you are currently selling 1,000 units. Your total fixed costs are $1,000 while your total variable costs are $11,000. Your short run marginal cost is $ 10 per unit. Given this information, to maximize profit in the short run you should decide to: a) immediately stop all production b) continue to produce 1,000 units c) expand output to cover fixed costs d) decrease output so that you can cut down on variable costs 23. Bill s Sandwich shop is currently charging a price of $3.00 per sandwich. At this price Bill is selling 100 sandwiches a day. The marginal cost of producing another sandwich is $2.00. An economist estimates that the price elasticity of the demand curve for Bill s sandwiches at his current output is 2.0. Bill comes to you with this information and asks for your advice. You should tell Bill a) to keep charging $3.00 per sandwich. b) that he can increase profits if he lowers his price a little. c) that he can increase profits if he raises his price a little. d) that he hasn t given you enough information for you to make a recommendation. Econ 10-7 Spring Final Exam Page 4 of 12

5 24. A monopolist charging $10 per unit is able to sell 100 units of output. The price elasticity of demand at this point on the monopolists demand curve is 4.0 and the firm's marginal cost is $5 per unit. The price the firm is charging is a) too high to maximize profits b) too low to maximize profits c) exactly the correct price to maximize profits d) might be too large, to small, or just right. There is not enough information in the problem to know. 25. If a consumer's demand curve for a product X is price inelastic (i.e. price elasticity is less than 1) then which of the following statements is true? a) An increases in the price of X will increase the consumer's total expenditure on the good X. b) An increase in the price of X will decrease the consumer's total expenditure on the good X. c) An increase in the price of X will leave the consumer's total expenditure on good X unchanged. d) The problem does not provide enough information to determine whether a price increase will change total expenditure on good X. 26. In April of this year Microsoft was found in violation the Sherman Antitrust Act for. a) criminal, illegal price fixing of Internet services. b) criminal, illegal monopolization. c) civil; illegal monopolization. d) civil; illegal price fixing of Internet services. 27. The demand curve faced by an individual firm operating in a perfectly competitive market: a) is downward-sloping just like the market's demand curve for that product b) is upward-sloping c) is horizontal and equal to the average cost curve d) is horizontal and equal to the firm's marginal revenue curve and the current market price e) can have various sloped in different circumstances 28. Which of the following do profit maximizing perfectly competitive firms and monopolies have in common at the output quantity they choose? a) The firm s MC = the firm s MR for both monopolies and perfectly competitive firms b) MC = P for both monopolies and perfectly competitive firms c) P = ATC for both monopolies and perfectly competitive firms in the short run d) P = ATC for both monopolies and perfectly competitive firms in the long run e) zero economic profits for both monopolies and perfectly competitive firms in the long run 29. Consider a market for a good in which the production of the good results in an external cost (i.e. pollution). Which of the following is a true statement concerning the efficiency of a market equilibrium for the good? a) If the market is competitively structured, the market process will result in an output level such that marginal utility (measured in $) will exceed marginal social cost. b) If the market is competitively structured, the market process will result in an output level such that marginal social cost will exceed marginal utility (measured in $). c) If the market is structured as a monopoly, the market process will result in an output that is necessarily worse than the competitive outcome. d) If the market is structured as a monopoly, the market process will result in an output that is necessarily better than the competitive outcome. e) If the market is competitively structured, the market process will produce the correct amount of the good to maximize social welfare. Econ 10-7 Spring Final Exam Page 5 of 12

6 30. If "Richard and Jerry's Mexican Restaurant" is a monopolistically competitive firm making positive economic profits in the short run, then in the long run, Richard and Jerry should expect economic profits because of. a) zero; decreasing returns to scale b) positive; advertising c) positive; product differentiation d) zero; easy of entry and exit from the industry e) negative; government regulations 31. If the consumer price index was 125 in 1998 and 130 in 1999, the inflation rate between 1998 and 1999 was a) we need more information to be able to answer this. b) 4% c) 5% d) 30% 32. If the inflation rate was 6% between 1998 and 1999 and the nominal income of professors at UNC increased from $ to $ during that same time period, a) the professors were worse off in 1999 than in 1998 b) the professors were better off in 1999 than in 1998 c) their real income has not changed from 1998 to 1999 d) we need more information to answer this. Information for Questions The table below shows the quantity of beer and wine consumed in 1998 and the prices for the two goods in 1998 and Beer and wine are assumed to be the only two goods consumed in the economy. Quantity 1998 Price ($) 1998 Price ($) 1999 Beer Wine If we consider 1998 to be the base year (CPI = 100), what is the consumer price index in 1999? a) 110 b) c) 115 d) 120 e) The inflation rate in this economy between 1998 and 1999 was a) 1.375% b) 1.5% c) 13.75% d) 15% 35. In 1999, Volker s nominal income increased by 15% from 1998 and Ted s income increased by only 6%. Volker only drinks wine and Ted only drinks beer. Given the information in the table above, Volker is off in 1999 than he was in 1998 and Ted is off in 1999 than he was in a) better; better b) better; worse c) worse; better d) worse; worse 36. In the national income accounts, which expenditure(s) made by individual consumers are counted in GDP as investment expenditures (I) rather than consumption expenditure (C)? a) The purchase of consumer durables such as automobiles, washing machines, etc. b) The purchase of stocks and bonds by consumers. c) The purchase of new constructed houses. d) only a) and c) e) All the above. Econ 10-7 Spring Final Exam Page 6 of 12

7 Information for Questions The graph in Figure 4 show the total expenditure function for a simple economy with no imports or exports and autonomous lump sum taxes. It also shows the aggregate supply and demand curves for the economy. For questions 37, 38 and 39 you can ignore any price level effects. 37. If the economy is in equilibrium at Y* and the Government increases its spending by 100 and the Investment falls by 120, what is the overall impact on the equilibrium GDP? a) It increases. b) It decreases. c) It stays the same. d) We don't know, because the multipliers on government expenditure and Investment are different. 38. If the economy is in equilibrium at Y* and the government increases its spending by 100 and also increases the head (autonomous) tax by 100 to keep the budget deficit low. What will be the effect on the equilibrium GDP? a) It increases. b) It decreases. c) It stays the same. d) We don't know, because the multipliers on government expenditure and head tax are different. Total Expenditure Price Level P* Figure 4 AD 450 Line TE = C + I + G Y* GDP AS GDP 39. If the economy is in equilibrium at Y* and the government decides to replace the head tax with a proportional income tax but sets the income tax rate so that at Y* the income tax generates exactly the same total tax revenue as the old head tax, then a) GDP will not change but the multiplier on government expenditure will increase. b) GDP will not change but the multiplier on government expenditure will decrease. c) GDP will decrease and the multiplier on government expenditure will decrease. d) GDP will increase and the multiplier on government expenditure will increase. 40. For this question the prices are flexible - therefore also use an aggregate demand and aggregate supply graph for your analysis. If the business climate improves and businesses increase their investment, in the short run a) GDP will rise and prices will fall b) GDP will fall and prices will fall c) GDP will fall and prices will rise d) GDP will rise and prices will rise 41. In the longer run we can expect the investment increase in question 38 to a) cause the supply curve to shift out increasing GDP and lowering prices. b) cause the supply curve to shift in decreasing GDP and raising prices. c) cause the supply curve to shift out increasing GDP and raising prices. d) cause the supply curce to shift in decreasing GDP and lowering prices. Econ 10-7 Spring Final Exam Page 7 of 12

8 Figure 5 is used for questions It shows the graphic representation of the Macro model that was discussed in class. Variable names follow the conventions used in class and in the book C= consumption expenditure I= investment expenditure G= government expenditure 1750 Real Expenditures $ per year TE=C+I+G O 45 TE=GDP C For questions assume that there is no foreign trade and no taxes From Figure 5, we can see that the Marginal Propensity to Consume is a).5 b).6 c).75 d).8 e) Real GDP $ = DI Figure 5 Questions In Figure 5 above, the government expenditure multiplier at work in this economy is a) 2 b) 2.5 c) 4 d) 5 e) The model in Figure 5 assumes that this economy has no international trade so that total expenditures are comprised of consumption (C ), investment (I) and government spending (G). Using the diagram we can see that the sum of government and investment spending does not depend on income and is always a) 200 b) 300 c) 500 d)1250 e) If the total expenditure curve is as shown in Figure 5, then we can determine that the equilibrium level of GDP for this macroeconomy is a) 500 b) 750 c) 1000 d)1250 e) The government in Figure 5 decides that equilibrium GDP is too low. In order to raise equilibrium GDP, the government decides to increase government spending by 100. This action should correspondingly raise equilibrium GDP by. a) 100 b) 100 c) 250 d) 350 e) In a macro model such as Figure 5, if production exceeds total expenditures a) inventories will begin to fall. When businesses notice this, they will increase production to ensure that they are able to meet current and future demand. b) inventories will begin to pile up. When businesses notice this, they will decrease production to ensure that inventories don't continue to accumulate. c) the government will need to increase the multiplier. d) the marginal propensity to consume will decrease. e) new firms will enter the industry in an attempt to get some positive economic profits. Econ 10-7 Spring Final Exam Page 8 of 12

9 48. With respect to Fiscal Policy, if the government thought unemployment was too high, it could successfully combat this high unemployment by raising equilibrium GDP. The government could raise equilibrium GDP by a) raising taxes or raising government spending. b) cutting taxes or raising government spending. c) raising taxes or lowering government spending. d) cutting taxes or lowering government spending. e) cutting transfer payments to social security recipients. 49. Consider a government program that had no other effect but to transfer income from the poor to the rich (e.g. cut welfare payments to the poor and decrease taxes to the rich by an equal amount). In a macro model such as Figure 5 such a program would a) Increase equilibrium GDP if rich and poor people have the same marginal propensity to consume. b) Increase equilibrium GDP if rich people have a higher marginal propensity to consume than do poor people. c) Increase equilibrium GDP if rich people have a lower marginal propensity to consume than do poor people. d) Increase equilibrium GDP now matter what the relative sizes of poor and rich peoples marginal propensities to consume. e) Decrease equilibrium GDP in all cases. Information for Questions The diagram in Figure 6 shows government expenditure and net tax collections from a proportional income tax. 50. If the government has chosen to spend $10 billion (G) and the resulting GDP is $80 billion, the government budget will be running a) a balance budget. b) a budget deficit of $1 billion. c) a budget deficit of $2 billion. d) a budget surplus of $1 billion. e) a budget surplus of $2 billion. 51. If potential GDP is $130 billion, then at the current tax rate and level of government spending the government has Government Spending and Net Taxes (in billions) a) a structural deficit of $2 billion. Figure 6 b) a structural deficit of $3 billion. c) a structural surplus of $2 billion. d) a structural surplus of $3 billion. e) neither a structural surplus nor structural deficit T (net Taxes) G (Gov.Spending) GDP (in billions) 52. If the government in Figure 6 wishes to eliminate the structural deficit (surplus) it could do so by a) increasing GDP b) decreasing the tax rate and/or increasing government spending c) increasing the tax rate and/or decreasing government spending d) increasing potential GDP 53. If the government in Figure 6 wishes to close the gap between current GPD and potential GDP but Econ 10-7 Spring Final Exam Page 9 of 12

10 does not want to add to the national debt, which policy will work. a) Increase government spending while increasing taxes enough to cover the cost of the increased spending. b) cut taxes and cut spending. c) leave spending unchanged but cut taxes. d) raise taxes but cut spending by the same amount. e) none of the above, it is impossible to increase GDP while maintaining a balanced budget. 54. Consider a bond that matures in one year. One year from now the owner of the bond will receive the face value of the bond ($100) and the last interest payment ($5). The current interest rate on investments with the same risk as the bond is 3%. What is your best guess of what the bond is worth today? a) $100 b) $105 c) $ d) e) $ The Sun Trust Bank has $1.5 million in reserves and $4 million of checking deposit accounts. What is Sun Trust Bank's reserve position if the required reserve ratio (R ) is 10%? a) The bank has $600,000 of required reserves and $1,200,000 of excess reserves b) The bank has $400,000 of required reserves and $1,200,000 of excess reserves c) The bank has $1.5 million of required reserves and $1,100,000 of excess reserves d) The bank has $800,000 of required reserves and $800,000 of excess reserves e) The bank has $400,000 of required reserves and $ 1,100,000 of excess reserves Information for Questions The balance sheets for Banks and the Federal Reserve system shown below reflect the changes that occurred when the Fed purchased $500 million worth of securities (bonds) from banks. Assume that the bank initially held only required reserves, and assume the required reserve ratio is 20%. Banks Federal Reserve System Assets (millions) Liabilities (millions) Assets (millions) Liabilities (millions) +$500 (reserves) +$500 +$500 -$500 (securities) 56. By buying securities from banks, what is the Fed trying to do? a) Decrease the money supply, thereby reducing GDP. b) Increase bond prices, thereby reducing GDP. c) Increase the money supply, thereby increasing GDP. d) Decrease bond prices, thereby increasing GDP. 57. What does the $500 million increase in the Fed s liabilities represent? a) The securities sold to the bank. b) The bank s excess reserves on deposit at the Fed. c) The bank s required reserves on deposit at the Fed. d) New money creation. 58. If banks fully loan out all excess reserves, what is total effect of the Feds purchase of bonds on the money supply? a) The money supply increases by $500 million. b) The money supply decreases by $500 million. c) The money supply increases by $2,500 million. d) The money supply decreases by $2,500 million. 59. When the Fed purchases the $500 million in bonds, the price of bonds will and the market Econ 10-7 Spring Final Exam Page 10 of 12

11 interest rate will a) increase; decrease b) decrease; decrease c) increase; increase d) decrease; be unchanged e) not change; not change 60. When the Fed purchases the $500 million in bonds, we can expect GDP to because a) be unchanged; the increase in government spending crowds out any investment increase. b) decrease; raising interest rates will decrease investment. c) increase; falling interest rates will increase investment spending. d) increase; the purchase of bonds by the Fed is an increase in government spending. 61. Which of the following monetary policy actions have potentially the same impact on the economy? a) Increasing the discount rate, decreasing the required reserve ratio, and selling government bonds. b) Increasing the discount rate, increasing the required reserve ratio, and selling government bonds. c) Increasing the discount rate, increasing the required reserve ratio, and buying government bonds. d) Decreasing the discount rate, increasing the required reserve ratio, and buying government bonds. Information for questions The graphs in Figure 7 shows the Supply and Demand conditions in Burundi and Yemen for their respective goat cheese markets. Answer the following P Burundi S Yemen S If Burundi and Yemen do not engage in trade then the price for goat cheese in each country will be and respectively Figure 7 D a) 4, 12 b) 6, 10 c) 8, 8 d) 10,4 D 63. If Burundi and Yemen decide to engage in free trade, the equilibrium price will be: a) 6 b) 8 c) 10 d) The nation of will export units of goat cheese. a) Burundi, 5 b) Burundi, 8 c) Yemen, 8 d) Yemen, If the price in the two nations was 10, which of the following is true: a) Burundi has an excess demand of 15 b) Burundi has an excess supply of 15 c) Yemen has an excess supply of 8 d) Yemen has an excess demand of If the dollar appreciates relative to the Thai bot, which of the following is true: Econ 10-7 Spring Final Exam Page 11 of 12

12 a) The bot appreciates relative to the dollar b) The bot depreciates relative to the dollar c) The bot is unchanged relative to the dollar d) The bot becomes worthless 67. The United States will experience a capital outflow if: a) Foreign currency depreciates relative to the dollar b) US interest rates are higher than foreign interest rates c) US interest rates are lower than foreign interest rates d) US currency appreciates relative to foreign currency 68. In Manila you can buy a Big Mac for 40 Philippine pesos. In the US you can buy a Big Mac for $2.50. The current exchange rate is 20 pesos per dollar. Purchasing power parity would suggest a) the peso is over valued in terms of the dollar b) the peso is under valued in terms of the dollar c) the peso is properly valued in terms of the dollar d) The peso and the dollar are over valued. 69. Suppose the British pound is worth $1.5 American Dollars. If 4 dozen scones cost 8 pounds, then Americans should pay dollars for 4 dozens scones. a) 12 b) 8 c) 15 d) A current account deficit will be offset by a: a) trade surplus b) budget surplus c) capital account surplus 71. A balance of payments surplus is defined as: a) the amount by which the supply of currency exceeds the demand for currency b) the amount by which the demand for currency exceeds the supply of currency c) the amount by which the demand for exports exceeds the demand for imports d) the amount by which the supply of imports exceeds the demand for exports d) budget deficit 72. When the value of the U.S. dollar rises, imports into the U.S. will become while exports from the U.S.. a) cheaper for Americans; have the same foreign price b) more expensive for Americans; become more expensive for foreigners c) cheaper for Americans; become more expensive for foreigners d) cheaper for Americans; become less expensive for foreigners e) more expensive for Americans; become less expensive for foreigners Econ 10-7 Spring Final Exam Page 12 of 12