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Principles of Macroeconomics (Econ 001) Signature: Drake University, Spring 2002 William M. Boal Printed name:
MIDTERM EXAMINATION #1: Version B
February 13, 2002
INSTRUCTIONS: This exam is closed-book, closed-notes, but calculators are permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100.
I. Multiple choice: Circle the one best answer to each question. [2 pts each, 18 pts total]
(1) The economic concept of “rational behavior” means a. the use of formal logic to guide one’s actions. b. careful calculation before making decisions. c. not letting personal preferences and values influence one’s decisions. d. doing the best one can with what one has. e. all of the above.
(2) “If the Federal Reserve raises interest rates now, unemployment will rise” is an example of a. a positive statement. b. a normative statement. c. both a positive statement and a normative statement. d. neither a positive statement nor a normative statement. e. cannot be determined from information given.
(3) Suppose a factory can produce 3 cars per hour or 6 pickup trucks per hour. Then the opportunity cost of producing a truck is a. half a car. b. 1 car. c. 2 cars. d. 3 cars. e. 6 cars.
(4) Jack can paint 200 square feet per hour, or wallpaper 200 square feet per hour. Jill can paint 100 square feet per hour, or wallpaper 50 square feet per hour. Who has a comparative advantage in painting? a. Jack. b. Jill. c. both people. d. neither person. e. cannot be determined from information given.
(5) Money is, by definition
a. made of paper. b. made of something valuable. c. produced by the government. d. accepted by everyone as payment. e. all of the above.
(6) Reasons why demand curves slope down do not include a. the income effect. b. the substitution effect. c. the Fisher effect. d. none of the above are reason why demand slopes down.
(7) In a well-functioning market a. the price of each unit sold equals its cost of production. b. gains from trade (earnings) are split evenly between buyers and sellers. c. buyers and sellers know each other personally. d. most trades at any given time are made at approximately the same price.
(8) Suppose there are no government price controls in a market. If at the current price, a market experiences excess supply, the price is likely to a. fall b. rise. c. remain where it is. d. drop abruptly to zero. e. move in an unpredictable direction.
(9) A fall in consumers’ income in any market will usually a. shift the demand curve to the right. b. shift the supply curve to the right. c. shift the demand curve to the left. d. shift the supply curve to the left. e. not shift any curves.
Drake University, Spring 2002
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II. Problems: Insert your answer to each question in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section.
(1) [Production functions: 14 pts] Melanie peels potatoes, with the production function shown in the first two columns below. Complete the table by computing Melanie’s average product and marginal product and placing your answers in the unshaded cells of the third and fourth columns below. Number of minutes
Potatoes peeled
Average product(AP) in potatoes per minute
Marginal product (MP) in potatoes per minute
Is Melanie’s production function characterized by diminishing returns to her labor input? Circle one.
a. yes. b. no. c. cannot be determined from the information given.
(2) [Production possibility curves, opportunity costs, comparative advantage: 24 pts] Country A and Country B can each produce agricultural goods and manufactured goods. They each face a tradeoff between these two kinds of goods because their workforces are of limited size. Their production possibility curves are shown below.
0
10
20
30
40
50
60
70
80
90
100
110
0 10 20 30 40 50 60 70 80 90 100 110 Manufactured goods
Agricultural goods
Country A's PP curve Country B's PP curve
a. [3 pts] Country A's opportunity cost of a unit of manufactured goods is how many units of agricultural goods?
units of agricultural goods b. [3 pts] Country #B’s opportunity cost of a unit of manufactured goods is how many units of agricultural goods?
units of agricultural goods c. [3 pts] Country A's opportunity cost of a unit of agricultural goods is how many units of manufactured goods?
units of manufactured goods d. [3 pts] Country #B’s opportunity cost of a unit of agricultural goods is how many units of manufactured goods?
units of manufactured goods e. [3 pts] Which country has a comparative advantage in manufactured goods?
f. [3 pts] Which country has a comparative advantage in agricultural goods?
g. [6 pts] Fill in the blanks: Both countries can have combinations of goods outside their individual production possibility curves if __________________________________ produces one unit of manufactured goods for __________________________________, which produces _______ unit(s) of agricultural goods in return.
Drake University, Spring 2002
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Quantity (thousands)
Price
(^) Supply
Demand
First, find the unregulated market equilibrium. a. Find the equilibrium price. (^) $ b. Find the equilibrium quantity. (^) thousand
Second, suppose a price floor (or legal minimum price) of $7 is placed on showshovels. No snowshovel may be sold for any lower price. c. Compute the quantity of snowshovels demanded at this price. (^) thousand d. Compute the quantity of snowshovels supplied at this price. (^) thousand e. Will there be excess supply or excess demand with this price floor? f. How much? (^) thousand
III. Critical thinking: Write a one-paragraph essay answering either question (1) or question (2) below, but not both. [4 pts] (1) “If a good has a high price, people think it is more valuable and buy more of it.” Do you agree or disagree? Why? (2) “If one country is better than another country at producing everything, then the first country cannot possibly benefit from trading with the second country.” Do you agree or disagree? Why? Which question are you answering, (1) or (2)? _________. Please write your answer below:
[end of exam]
