Ec102 Economics B: Summer 2008 Examination

2007/2008 Syllabus only not for resit candidates

Instructions to candidates: Time allowed: 3 hours. Write all of your answers on these sheets, in the spaces provided. For multiple choice questions, enter your answer in the blank. For short answer questions, write your answer in the box provided. Material written outside of these blanks and boxes will not be considered part of your answer. Use the back of the exam sheets as extra scratch space for computations as necessary. The exam has 3 sections: A: Easy multiple choice (24 questions); B: Harder multiple choice (12 questions); C: Short answer (10 questions). Answer all of the questions in all of the sections. Calculators are not allowed in this examination.

Enter your candidate number here: ___________________

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Section A: Easy multiple choice (24 questions, each worth 1 point). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #1: __________

Widgets are produced and sold competitively. They are not an example of a Giffen good. The price and quantity sold of widgets suddenly falls. This could happen because: a) Technological change increases productivity in the widget industry. b) The prices of inputs used in producing widgets fall. c) Either (a) or (b) could make this happen. d) Neither (a) nor (b) could make this happen.

Question #2: __________

Beer is not a Giffen good. A long hot summer increases the demand for beer. At the same time, a tax is placed on the sale of beer (paid by producers). As result of these two events, if beer is sold competitively: a) Equilibrium price and quantity will rise. b) Equilibrium price will rise; quantity will fall. c) Equilibrium price will fall; quantity will rise. d) Equilibrium price will rise; it is not possible to determine what happens to equilibrium quantity with the information provided. e) Equilibrium quantity will fall; it is not possible to determine what happens to equilibrium price with the information provided.

Question #3: __________

If the demand for widgets is inelastic, total revenue (i.e. P times Q) will _______ if the price of widgets increases: a) increase b) decrease c) remain the same d) None of the above is known with certainty; it depends upon the specific value of the elasticity.

Question #4: __________

You have an offer of a job paying 10/hour. The relevant range of potential wages are uniformly distributed between 5 and 15 per hour. Assuming the original offer stays open, what is your expected gain from engaging in a search for another offer? (Do not consider the cost of search). a) b) c) d) 2.50 5 $0 1.25

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Section A: Easy multiple choice (24 questions, each worth 1 point). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Figure 1
$/wk 200
1

Question #5: __________

Refer to Figure 1, which depicts a consumers decisionmaking regarding purchases of shelter and other goods. Which price-quantity combinations for the consumers demand for shelter are consistent with the figure? a) P = $200, Q = 40. b) P = $40, Q = 23. c) P = $25, Q = 20. d) P = $5, Q = 23.

20 23

331/3

40 Shelter

Question #6: __________

Refer to Figure 1, which depicts a consumers decisionmaking regarding purchases of shelter and other goods. Which statement is true about shelter in the figure? a) The demand curve is negatively sloped across the prices shown. b) c) d) e) The demand curve is positively sloped across the prices shown (i.e. the good is a Giffen good). The price consumption curve, if drawn, would be a horizontal line. Both (a) and (b) are true. Both (b) and (c) are true.

Question #7: __________

Refer to Figure 1, which depicts a consumers decisionmaking regarding purchases of shelter and other goods. Which statement is true about the consumers demand for shelter? a) b) c) Over the range of prices shown, it is always elastic. Over the range of prices shown, it is always inelastic. It is neither consistently elastic nor inelastic over the range of prices shown.

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Section A: Easy multiple choice (24 questions, each worth 1 point). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #8: __________

Say automobile insurance is priced so that the fee paid to purchase insurance equals the average payout (i.e. the probability of an accident times the damages/costs covered by the insurance in the event of an accident) under the assumption that all drivers buy insurance. Good drivers have fewer accidents than bad drivers, but both groups always drive as well as they can. If buying insurance is not compulsory: a) moral hazard may occur, as good drivers tend not to buy insurance. b) moral hazard may occur, as bad drivers tend not to buy insurance. c) adverse selection may occur, as good drivers tend not to buy insurance. d) adverse selection may occur, as bad drivers tend not to buy insurance.

Question #9: __________

Geometrically, the average product: a) is the slope of the line joining the origin to the corresponding point on the total product curve. b) at any point is the slope of the total product curve at that point. c) is that point at which the total product curve exhibits diminishing returns. d) at any point is the slope of the total product curve times the level of output.

Question #10: __________

I get 200 revenue from the sale of my product each day. I rent the factory that I use for 90 per day. The raw materials of the operation cost 115 a day. I do all the work myself. I can earn 30 a day if I work for others. Each day my: a) accounting profit = -5 and economic profit = -35. b) c) d) accounting profit = -35 and economic profit = -35. accounting profit = 25 and economic profit = -5. accounting profit = 110 and economic profit = -30.

Question #11: __________

According to the Coase Theorem, when the parties affected by externalities can costlessly negotiate with one another: a) an efficient outcome results if and only if the liability is placed on the party with the lowest cost of adjustment. b) an efficient outcome results no matter how the law assigns responsibility. c) the correct way to deal with a negative externality is to tax it. d) the correct way to deal with a negative externality is to subsidize it.

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Section A: Easy multiple choice (24 questions, each worth 1 point). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #12: __________

Given a constant c > 1, the defining characteristic of increasing returns to scale may be summarized as: a) F(cK,cL) > cF(K,L) b) F(cK,cL) = cF(K,L) c) F(cK,cL) < cF(K,L) d) Q = min(cK,cL)

Question #13: __________

Say the British bought 10 South African Rand in 2000 and buys 11 Rands today. Cumulative inflation since 2000 is 10% in the UK and 40% in South Africa. Comparing the two currencies, we can say that: a) the UK real exchange rate has appreciated. b) the UK real exchange rate has depreciated. c) d) e) f) g) h) the South African real exchange rate has depreciated. the South African real exchange rate has appreciated. (a) and (c) are both true. (b) and (d) are both true. (a) and (d) are both true. (b) and (c) are both true.

Question #14: __________

The quantity theory of money assumes that the demand for real money balances a) depends on both the nominal interest rate and real income. b) depends only on the nominal interest rate. c) depends on both the real interest rate and real income. d) depends only on real income. e) depends on both the nominal interest rate and nominal income.

Question #15: __________

Consider a fractional reserve banking system in which an individual who usually holds 100 in currency decides to deposit his money in a bank. The money supply expands when the bank: a) accepts the deposit. b) lends part of the 100 deposit out, holding a fraction as reserves. c) (a) and (b) are both true. d) Never, i.e. the deposit of 100 formerly held as currency in the banking system will never change the money supply.

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Section A: Easy multiple choice (24 questions, each worth 1 point). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #16: __________

Box A1: Take the following information as true. An economy produces two goods, apples and oranges. The quantities and price (per unit quantity) of these goods produced and consumed in two years is given in the table below. There is no I, G or X-M. All output is consumed. Apples Year 2000 2005 Quantity 2 5 Price 2 2.5 Oranges Quantity 6 5 Price 1 2.5 Refer to Box A1. The ratio of nominal GDP in 2005 to nominal GDP in 2000 is: a) 2/5 b) 1/1 c) 5/2 d) None of the above.

Question #17: __________

Refer to Box A1. Using 2000 base year prices, the ratio of real GDP in 2005 to real GDP in 2000 is: a) 3/2. b) 2/3. c) 4/5. d) 5/4. e) None of the above.

Question #18: __________

Refer to Box A1. A Paasche price index for the economy would find the ratio of prices in 2005 to those in 2000 to be: a) 5/2. b) 2. c) 5/3. d) 5/4. e) None of the above.

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Section A: Easy multiple choice (24 questions, each worth 1 point). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #19: __________

According to the sticky-wage model of economic fluctuations, when the price level is lower than expected, workers get a (i) _____ real wage than expected and (ii) ______ workers are hired than expected (indicate which words go on the blanks labelled (i) and (ii)). a) b) c) d) (i) lower; (ii) more (i) lower; (ii) fewer (i) higher; (ii) more (i) higher; (ii) fewer

Question #20: __________

To achieve the Golden Rule level of the capital stock, a policymaker must determine which steady-state savings rate produces: a) the largest MPK. b) the smallest depreciation rate. c) the largest output per worker. d) the highest savings per worker. e) the largest consumption per worker.

Question #21: __________

If s is the rate of job separation and f the rate of job finding, then in a steady state where the unemployment rate is constant, the unemployment rate equals: a) f/(f+s) b) (f+s)/f c) (s+f)/s d) s/(s+f)

Question #22: __________

If an economy has a job separation rate of .02 each month and a job finding rate of .08 each month (think of these events as taking place once a month in the middle of the month), and a total economically (market) active population of 100 million, then how many individuals lose/leave their jobs each month? a) 1.6 million b) 2 million. c) 6.4 million. d) 8 million. e) 0.4 million.

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Section A: Easy multiple choice (24 questions, each worth 1 point). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #23: __________

GNP equals GDP (i) _____ the income earned domestically by foreign factors of production, (ii) ______ the income earned overseas by domestically owned factors of production (indicate which words go on the blanks labelled (i) and (ii)): a) (i) plus, (ii) minus b) (i) minus, (ii) plus c) (i) plus, (ii) plus d) (i) minus, (ii) minus

Question #24: __________

In a small open economy in which net factor income and net unilateral transfers are both 0, if exports equal 20 billion, imports equal 30 billion, and national saving (public and private) equals 25 billion, then the change in net foreign assets equals: a) 25 billion. b) -25 billion. c) 10 billion d) -10 billion e) 45 billion f) -45 billion

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Section B: Harder multiple choice (12 questions, each worth 3 points). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #1: __________

Speedy Copying is minimizing the long run cost of producing copies in a perfectly competitive industry in long run equilibrium. The rental cost of one of their machines is 20 per day and the wage rate is 60 per day. The marginal product of a machine in Speedy Copying is 1000 copies per day. What must be the marginal product of one of their workers? a) b) c) d) e) f) 6000 copies per day. 4000 copies per day. 3000 copies per day. 2000 copies per day. 1000 copies per day. There is not enough information given to be able to tell.

Question #2: __________

Speedy Copying is minimizing the long run cost of producing copies in a perfectly competitive industry in long run equilibrium. The rental cost of one of their machines is 20 per day and the wage rate is 60 per day. The marginal product of a machine in Speedy Copying is 1000 copies per day. What is Speedy Copyings average cost of production? a) .01 per copy. b) .02 per copy. c) .03 per copy. d) .04 per copy. e) .08 per copy. f) There is not enough information given to be able to tell.

Question #3: __________

From the early 1300s to the mid-1400s, the real wage in the UK roughly doubled. If we take the UK capital stock as being constant and assume the production function was constant returns to scale Cobb-Douglas with a constant technology parameter A and a capital share of 1/3, then we can infer that the ratio of the real rental in the mid-1400s to the real rental in the early 1300s was approximately: a) b) c) d) e) f) g) 21/3 22/3 23 23/2 2-1/3 2-3 None of the above.

Question #4: __________

From the early 1300s to the mid-1400s, the real wage in the UK roughly doubled. If we take the UK capital stock as being constant and assume the production function was constant returns to scale Cobb-Douglas with a constant technology parameter A and a capital share of 1/3, then we can infer that the ratio of real output in the mid-1400s to real output in the early 1300s was approximately: a) b) c) d) e) f) g) 21/3 22/3 23 23/2 2-1/3 2-3 None of the above.

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Section B: Harder multiple choice (12 questions, each worth 3 points). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Box B1: Take the following information as true.

In Littletown, 3 citizens enjoy seeing fireworks on Guy Fawkes Day. Their individual demands for fireworks are given by: Elmers demand: P = 20 Q Ethels demand: P = 10 - .6Q Ediths demand: P = 10 - .4Q Fireworks displays are a public good, i.e. non-rival and nonexcludable. Fireworks are produced and sold competitively at a constant marginal cost = average cost = 18 per firework. In answering questions associated with this box, assume that fireworks are a continuous variable (i.e. not necessarily limited to integer values), so that surpluses can be calculated using simple formulas for the areas of polygons.

Question #5: __________

Refer to Box B1. The town mayor decides to maximize the social welfare associated with fireworks. He puts on a display with: a) b) c) d) e) f) g) h) i) 0 fireworks. 1 firework. 2 fireworks. 4 fireworks. 10 fireworks. 11 fireworks. 12 fireworks. 14 fireworks. None of the above.

Question #6: __________

Refer to Box B1. If the town mayor puts on a display that maximizes the social welfare associated with fireworks, total social surplus (in ) will be given by: a) b) c) d) e) f) g) h) i) 0. 2. 4. 40. 76. 121. 198. 400. None of the above.

Question #7: __________

Refer to Box B1. Say the town mayor does not put on a public fireworks display, and each citizen buys fireworks themselves, maximizing their own individual utility. The town will end up seeing a total of: a) 0 fireworks. b) c) d) e) f) g) h) i) 1 firework. 2 fireworks. 4 fireworks. 10 fireworks. 11 fireworks. 12 fireworks. 14 fireworks. None of the above.

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Section B: Harder multiple choice (12 questions, each worth 3 points). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #8: __________

Refer to Box B1. Say the town mayor does not put on a public fireworks display and each citizen buys fireworks themselves, maximizing their own individual utility. The towns total consumer surplus (in ) from the resulting display of fireworks will be given by: a) b) c) d) e) f) g) h) i) 0. 2. 4. 40. 76. 121. 198. 400. None of the above.

Question #9: __________

Refer to Box B2. If lenders were to offer loans at an interest rate of i ( 0 and 1), the total demand for such loans will be: a) b) c) d) e) f) g) 2000 2000*(1-i) 2000*(1-i) + 2000*(1/2)*i 2000*(1-i) + 2000*(1/2)*(i-1) 1000*(1-i) + 1000*i 1000*(1-i) + 1000*(1/2)*i None of the above.

Box B2: Take the following information as true.

There are two types of investment projects. Safe investment projects yield an output q in all states of the world. Risky investment projects yield an output of 2q in the good state of the world (probability = ), and 0 in the bad state of the world (probability = ). There are 2000 potential investors. Each investor knows of two projects, a safe project of type q and a risky project of the same type q (but with the risky payoffs). Quality q is distributed uniformly on [1,2]. Each project requires an investment of 1. There is no equity. In lending money, lenders think about the average (across all states of the world) that they receive from borrowers minus the amount they lend (i.e. 1). If ibar is this net return, then S = 2000*ibar. For example, if lenders receive an average payment of 1.25, then ibar = .25 & S = 500.

Box B2 continued. To simplify the problem, we assume that investors have a conscience, in the following sense: (1) If investors can borrow and make a positive ( 0) return on a safe project, they will do so, even if the risky project yields a higher average return. In this case, they will not invest in the risky project. (2) If investors cannot borrow and make a positive ( 0) return on the safe project, they will invest in the risky project if it yields a positive ( 0) average return. In this case, they will not invest in the safe project. (3) If both the safe and risky projects yield negative (i.e. < 0) average returns, the investors do not borrow or invest in any project.

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Section B: Harder multiple choice (12 questions, each worth 3 points). Choose the one alternative that best completes the statement or answers the question. Write the letter of this alternative in the blank space at the top of the question.

Question #10: __________

Refer to Box B2. If lenders were to offer loans at an interest rate i ( 0 and 1), meeting the demand for such loans (whatever it might be), the average net return on such loans, ibar, would be given by: a) i b) (1-i) c) i + (i-1)/4 d) i*(1-i)/2 e) i + i*(i-1)/2 f) i + i*(1-i)/2 g) 1/2 h) None of the above.

Question #11: __________

Refer to Box B2. Does credit rationing occur (i.e. there is no interest rate i ( 0 and 1) at which demand equals supply)? a) Yes, credit rationing occurs. b) No, D = S at i = 1/2. c) No, D = S at i = 4/5. d) No, D = S at i = 1/5. e) No, D = S at i = 2/5. f) No, D = S at i = 0. g) No, D = S at i = 1. h) No, D = S at all interest rates i ( 0 and 1). i) None of the above.

Question #12: __________

Refer to Box B2. As the interest rate i rises, the average return on loans (ibar) is influenced by: a) Moral hazard, but not adverse selection. b) Adverse selection, but not moral hazard. c) Moral hazard AND adverse selection. d) There is moral hazard (no adverse selection), but the average return on loans does not in fact change as i rises. e) There is adverse selection (no moral hazard), but the average return on loans does not in fact change as i rises. f) There is moral hazard AND adverse selection, but the average return on loans does not in fact change as i rises. g) None of the above.

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

1. If marginal cost is always zero, monopoly profit maximization equals revenue maximization. True or false. Explain.

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

2. Why does AVC reach its minimum before (i.e. at a lower level of output) ATC reaches its minimum?

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

3. Assume that preferences satisfy the standard assumptions (transitivity, nonsatiation, convexity and completeness). If the price consumption curve for shoes is a horizontal line, the income elasticity of demand for the composite of all other goods must be negative. True or false. Explain. (Hint: Draw the price consumption curve for shoes, with the composite of other goods on the vertical axis. Think about the substitution & income effects for shoes and what that tells you about the income elasticity of demand for the composite).

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

4. I take my children to a carnival and find that they have an offer where our first two rides are free. Is it possible for the carnival to actually SELL more tickets using this offer (i.e. the number of tickets I buy and pay for with the offer is greater than the number I would have bought without it)? Explain. (Hint: think about this question using a diagram with quantity of rides on the x-axis and expenditure on all other goods on the y-axis; draw indifference curves and budget constraints).

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

5. I consume two goods, Ice Cream and Biscuits. I shop once a week, spending 100, at either Sainsbury or Tesco. Interestingly, Ive noticed that the bundle I purchase when I visit Tesco costs more at Sainsbury. Similarly, the bundle I purchase when I visit Sainsbury costs more at Tesco. And yet, I find that I get the same utility from shopping at either store (i.e. the Sainsbury shopping bundle gives me the same utility as the Tesco shopping bundle). Explain how it is possible for all of these statements to be true. (Hint: draw a single indifference curve and have me maximize utility given a 100 budget and different prices in the two stores).

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

6. I recently read a newspaper article that pointed out that the United States, by itself, accounts for all of the net international lending in the world (i.e. the net international borrowing of the US is equal to the net international lending of the rest of the world). The article suggested that this was quite unusual for a net international borrower and reflected the USs extraordinary demand for loans. Comment on both sentences (you do not need any knowledge of the US to answer this question).

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.
7. Evaluate the impact of the introduction of taxes paid by producers on the sale of all goods and services on the long run price level (including the taxes) in an economy where nothing else changes (among other things being constant, think of output remaining at full employment, and assume no distortionary effects of the taxes). (Hint: Think about the equations determining the aggregate price level in an economy, holding everything else constant. This is a macro question, not a micro question.)

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

8. Central Bank A wants to stabilize the price level (i.e. keep it at its initial level). Central Bank B wants to keep output near full employment (i.e. without waiting for the economys own long run adjustment). Compare their response to an exogenous increase in money demand for each level of i & Y in an economy which is initially at full employment with an upward sloping short run AS curve. Inflation expectations are not a part of the problem, i.e. just take them as being 0.

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

9. Consider two economies, Dry and Wet. The capital depreciation rate is higher in Wet, because of the higher levels of rainfall. Otherwise, the two economies have the same rate of population (and labour force) growth and the same Cobb-Douglas production function (i.e. with the same, constant, A & parameters). Statement: The Golden-Rule investment/savings rate is lower in Wet. Is this statement true or false? Explain.

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Section C: Short answer (10 questions, each worth 4 points). Write your answer to each question in the question box. You do not necessarily have to fill the entire box.

10. Consider two economies, Dry and Wet. The capital depreciation rate is higher in Wet, because of the higher levels of rainfall. Otherwise, the two economies have the same rate of population (and labour force) growth and the same Cobb-Douglas production function (i.e. with the same, constant, A & parameters). Statement: The Golden-Rule capital/labour ratio is lower in Wet. Is this statement true or false? Explain. (Hint: Draw a Solow Y/L Golden Rule diagram for the two economies; see if anything differs between them).

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