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Econ 1120 - INTRODUCTORY MACROECONOMICSMake-Up PRELIM #1 – Wissink – Fall 2016 – October7

________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_________________ Your Student Number:________________________________

Instructions and Exam Taking Policy:

There are two sections in this exam. Answer all questions.

Part I: 14 multiple choice/fill in the blank questions @ 3 points eachPart II: 3 problems @ 18, 20, and 20 points eachTotal Points = 100, Total Time = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.NO GRAPHING CALCULATORS.NO BOOKS. NO NOTES. NO HELP SHEETS.NO TALKING TO EACH OTHER.

Check the TA’s name for the section you regularly attend (that is, where you will pick up your prelim):

One more time, please…

_____________________________________ _________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_________________ Your Student Number:________________________________

GRADING

MC/FIB (out 42 points) =___________________

Q1 (out of 18 points) =__________________

Q2 (out of 20 points) =__________________

Q3 (out of 20 points) =__________________

TOTAL SCORE: =_____________________

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1. Which one of the following statements uses positive (a.k.a. descriptive) analysis?

A. If we doubled the size of transfer payments directed toward the poor, we would be doing the right thing for low income people.

B. Old age pensions should not raise the living standard of the elderly.

C. Increased female employment is bad since it means mothers no longer raise their own children.

D. An increase in the minimum wage tends to increase involuntary unemployment.

E. Illegal immigration should not be allowed to rob citizens of job opportunities.

2. Use the tables for Mexico and Guatemala. The marginal opportunity cost of producing a bushel of bananas in Guatemala is

A. twice as much as that in Mexico.B. half as much as that in Mexico.C. the same as that in Mexico.D. four times as much as that in Mexico.E. impossible to determine from this data.

3. Suppose that the weekly demand function for pumpkin cookies is typically shaped and is written as follows: QD = 2,000 – 4A + 3B – 32C + 100F . Pumpkin cookies are a normal good. Which one of the following statements is true?

A. Variable B could be the price of the pumpkins used to make the cookies.

B. Variable B could be the price of milk (a complement in consumption) that people drink along with their pumpkin cookies.

C. Variable B could be the price of pumpkin cookies.D. Variable B could be the number of firms making pumpkin

cookies.E. Variable B could be the consumers’ average income level.

Part I: Multiple Choice and Fill-In-The-Blank Questions. Do them ALL.Circle the letter for your answer or fill in the answer in the blank provided.

4. Which one of the following is most likely to decrease the supply of garlic?

A. Consumers suddenly do not want to use garlic in their cooking because Jamie Oliver tells them how bad it is, and he is a very popular chef and cookbook author.

B. The price of garlic decreases.C. A very cold and snowy spring freezes and kills many young

sprouting garlic plants.D. A binding price floor on garlic.E. Both C. and A. are correct.

5. Fill in the blank – all or nothing question. Assume 2015 is the base year. The Consumer Price Index for 2016 based on the table’s data is

____________________

Typical Urban Household’s Bundle

Units in 2015

Units in 2016

Prices in 2015

Prices in 2016

Good A 5 4 $1.00 $2.00Good B 10 12 $2.00 $1.50Good C 20 18 $4.00 $8.00

6. Michael runs a food stand that employs four people: Abe, Betty, Charlie and Dave. The table shows the maximum number of frozen bananas or corndogs that each employee can make during one day if that is the only output they make. Each worker can produce any linear combination of their extreme values. Of the four, which worker should be the last worker Michael would allocate to making corndogs in any given day if Michael allocates efficiently?

A. AbeB. BettyC. CharlieD. DaveE. They should all cooperate and share making both items at all

times.

Bananas CorndogsAbe 10 lbs 10 dozenBetty 10 lbs 20 dozenCharlie 15 lbs 5 dozenDave 25 lbs 30 dozen

7. For which of the following scenarios must the equilibrium quantity of green beans necessarily increase?

A. The price of corn, a substitute in consumption for green beans falls.

B. A new bean-eating worm is discovered which raises bean farming production costs.

C. The price of butter, a complementary good, falls and at the same time bean farms are finally protected from a blight that used to kill bean plants.

D. Harvest weather conditions are too wet for good bean crops and a new medical survey shows that bean consumption increases life span.

E. Consumers expect bean prices to fall in the future.

8. Suppose that a competitive market exists in the U.S. for both domestically made sugar and Brazilian made sugar. Suppose the U.S. government slaps a binding import quantity quota on Brazilian made sugar sold in the U.S. Which one of the following is the best prediction of the consequence of the quota?

A. The market price of U.S. made sugar falls and the market price of Brazilian made sugar rises.

B. Only the market price for Brazilian made sugar rises.C. The quantity exchanged in both the Brazilian made sugar

market and the U.S. made sugar market decreases.D. Only the market price of U.S. made sugar increases.E. The equilibrium price of both Brazilian made sugar and U.S.

made sugar increase.

9. Consider the graph. Suppose it illustrates the situation after the government has put a binding price floor into law. Which one of the following statements is true?

A. The price floor could be L.B. There will be a shortage of N-M units.C. M units will be traded.D. There will be a surplus of K-C units.E. The regulated equilibrium occurs at point F.

JK

L

M N

10. Which one of the following is an example of a final good or service in relationship to this year’s U.S. GDP? All transactions took place this year, unless otherwise noted. GDP=Gross Domestic Product.

A. Strawberries grown in Cortland, NY and purchased by Ithaca bakery in order to make strawberry filling for wedding cakes.

B. Car paint made in Buffalo, NY and purchased by the Ford Motor Company to paint this year’s car models being made in Detroit.

C. Children’s toys made in China that you bought at the Ithaca Walmart.

D. The used chemistry textbook (published and printed 3 years ago) which you bought on E-Bay this year.

E. The Corning glassware made in Corning, NY this year that was added to the inventory of a department store in Japan in anticipation of rising sales in Japan next year.

11. Francine, a French citizen, lives in London, England and works at a factory there making hats for the royal family. GDP=Gross Domestic Product and GNP=Gross National Product. She earns 30,000 British pounds sterling a year for this work. Her income would

A. count in the U.K.’s GDP and in France’s GDP.B. count in France’s GDP but not in the U.K.’s GDP.C. count in France’s GNP and in the U.K.’s GDP.D. count in France’s GDP and in the France’s GNP.E. not count in either France’s GDP or in the U.K.’s GDP.

12. Which one of the following transactions’ value would not be represented, one way or another, either in the income loop or the expenditure loop in the calculation of U.S. GDP in 2015?

A. Legal fees you paid your Ithaca based attorney for work in 2015 to settle a law suit.

B. Salary paid to Finnish gas station workers by a gas station located in Arizona in 2015.

C. Body armor made in West Virginia in 2015 and purchased by the defense department for the military to use in Afghanistan.

D. The winter coats made in Texas in 2015 that Walmart adds to its inventory in 2015 but is unable to sell in 2015.

E. The market value of the time you spent in 2015 ringing the Christmas kettle bell in front of Target on behalf of the Salvation Army.

13. Which one of the following is best categorized as structural unemployment?

A. Weak short term demand has caused a general economic slowdown. Because of that, Allen has temporarily lost his job at the glove factory in Gloversville, NY.

B. Dave, who works as an instructor at Greek Peak Ski Resort in Virgil, NY is out of work in the summer since there is no one to teach when there is no snow.

C. Steel worker Tom is thrown out of work by the introduction of new technology in the steel sector that now employs a more high-tech production process that will permanently requires a much smaller labor to capital ratio.

D. Joe, a computer programmer with a large bank, quit his job two months ago to look for a better paid programming position.

E. Patrick, who recently graduated from Cornell Medical School , is looking for a place to set up his practice.

14. Suppose the labor market was characterized by the following numbers last week. The number of unemployed people was 10,000. The number of employed people was 90,000. The only change between last week and this week in the labor market is that 2,000 people who were ‘discouraged workers’ think that the economic environment is improving and decide to re-enter the labor force and start looking for a job. All else equal, which one of the following must be true?

A. The unemployment rate has increased since last week.B. The unemployment rate has decreased since last week.C. The labor force has decreased since last week.D. The labor force participation rate has decreased since last

week.E. None of the above are true.

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1. Suppose that the following equations describe the expected demand and supply curves for Birkenstock sandals in Ithaca in 2015 (where Q is quantity and P is price).

DEMAND: QD = 100 – 1P

SUPPLY: QS = -20 + 2P

a) Write the equations for the inverse demand curve and the inverse supply curve (that is the equations for what we actually graph as demand and supply).

b) Graph the demand and supply curves and determine the equilibrium price and quantity in the market for Birkenstock sandals in Ithaca. Show on your graph. Label points and values.

c) Suppose the mayor (who hates these sandals) decides to use a quota to limit the number of pairs of these god-awful sandals sold in Ithaca. Suggest a value for the quota that will make it binding.

d) Using your graph from (b) and equations given and YOUR quota value, thoroughly analyze the economic consequences of the mayor’s policy directive.

ANSWERS

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

ANSWERS

2. 1Suppose Mr. Carson has three servants: Thomas, Alfred and Jimmy. There are two jobs that need to be done at Downton Abbey this week: (1) polishing shoes and (2) mending vests. Each servant works a total of 60 hours this week. Suppose the following information summarizes their individual production functions. Assume hours, shoes and vests are infinitely divisible into fractional units.

Time it takes to Thomas

Alfred Jimmy

Polish a pair of shoes 2 hours 5 hours 15 hours

Mend a vest 1 hour 10 hours 3 hours

a) Graph the individual PPFs for each of the three servants. Show endpoints number values on graphs.b) Find each servant’s marginal opportunity cost for polishing a pair of shoes.c) Suppose that Mr. Carson has each servant splitting his time evenly between the two tasks. Identify

each servant’s production point on your graphs in part (a). How many pairs of shoes and vests is each servant doing? And how many pairs of shoes and vests, in total, are being polished and mended at Downton?

d) Mrs. Hughes comes along and suggests to Mr. Carson that he is being terribly inefficient in his allocation of tasks. Demonstrate using an efficient joint production possibility frontier that Mrs. Hughes is correct! Show us where Mr. Carson’s aggregate production point is in your efficient joint production possibilities frontier. On your joint PPF make sure to indicate number values for all endpoints and any kink points.

IN ALL GRAPHS PUT PAIRS OF SHOES ON THE HORIZONTAL AND NUMBER OF VESTS ON THE VERTICAL. Thanks!

ANSWERS

ANSWERS

3. Consider the very simple closed economy of HappyLand. Only four goods are produced in HappyLand: pizza pies, cheese, cars and wine. There is no government, and no international sector.

Note the following very important information:

i) Pizza pies, cars and wine are final goods and final goods only.ii) Cheese is consumed as a final good AND it is used as an intermediate good by firms in the

production of pizza pies.iii) Each pizza pie requires 1/2 pound of cheese.

Item

Per unit Pricein 2010

Quantity in 2010

Per unit Price in 2012

Quantity in 2012

PizzasPies $20 100 $25 150

Cheese (pounds)

$4 600 $3 700

Cars $10,000 45 $12,000 50

Wine (gallons) $20 400 $25 500

The table provides ALL the information you need to know on prices and total output/production for the purposes of calculating national income statistics. Some work space is also provided.

SHOW YOUR WORK FOR EACH PART!

a) Calculate nominal or current GDP in year 2010.b) Calculate nominal or current GDP in year 2012.c) Calculate real GDP in 2012 assuming 2010 is the base year.d) How, specifically, as an economist would you address the following questions posed to you by a TV

news reporter? “Is HappyLand a strong and very happy place to live? Are the citizens of HappyLand doing better in 2012 than in 2010 and do they have a high standard of living?”

e) What is the implicit GDP deflator index in 2012, assuming 2010 is the base year?f) Calculate how much inflation there was between 2010 and 2012 according to the implicit GDP

deflator index, using 2010 as the base year.g) Suppose Harry, who lives in HappyLand, has a brother named Charles. Charles graduated from

college in 2010 and was given a gift of $10,000 from his grandmother. Harry is graduating in 2012. This same grandmother intends to give him $10,000 as well. Harry feels this is not fair. He thinks he should get more. Can you use the information from this problem to defend Harry’s position? In fact, how much would you suggest grandma give Harry so that the gifts seem more equal?

ANSWERS

ANSWERS

ANSWERS

1Econ 1120 Fall 2016 Make-Up PRELIM 1 Answers

D. Positive economics is an approach to economics that seeks to understand behavior and the operation of systems without making judgments. Normative economics is an approach that analyzes outcomes of economic behavior and evaluate whether they are good or bad. Certainly, only D involves descriptive evaluation and not judgment.

2. B. Look at change in oranges divided by change in bananas for each country and then compare. It’s 1 orange for each banana in Mexico and ½ an orange for each banana in Guatemala.3. E. Both A and D are factors that affect supply. B is a factor that would reduce demand. C is wrong because demand curves are typically downward sloping. Since cookies are a normal good, an increase in income will raise demand.

4. C. When the weather conditions are bad the supply will decrease. Answer A is wrong because it’s a demand side thing. Answer B is wrong because a change in the price will result in a change in the quantity supplied, not the supply. Answer D is wrong because a binding price floor will be a change in the price and will result in a change in the quantity supplied, not the supply. Answer E is wrong because A. is wrong.

5. 176 = 185/105 times 100

Typical Urban Household’s Bundle

Units in 2015

Units in 2016

Prices in 2015

Prices in 2016

Base yr bundle at base yr prices

Base yr bundle at current prices

Good A 5 4 $1.00 $2.00 $5 $10Good B 10 12 $2.00 $1.50 $20 $15Good C 20 18 $4.00 $8.00 $80 $160

$105 $185

6 C. Charlie, since his MOC to make corndogs is 3 bananas, the highest of all. So use him to make corndogs last.

7 C. Part A is incorrect. A decrease in the price of corn (a substitute in consumption for green beans) causes people to consume more corn, and buy less green beans instead (since green beans are now relatively pricier, compared to corn). Therefore, this event causes the demand curve for green beans to shift to the left. The supply curve remains unchanged. As a result, the equilibrium price and the equilibrium quantity will both decrease. Part B is incorrect. The new bean-eating worm causes the production costs of green beans to increase-shifting the supply curve of green beans to the left. The demand curve remains unchanged. As a result, the equilibrium quantity must decrease, and the equilibrium price must increase. Part C is correct. The fall in the price of butter causes people to buy more butter, and hence buy more green beans as well (since they are complementary goods). As a result, the demand curve of green beans shifts to the right. Furthermore, bean farms are protected from blight; hence, the supply curve shifts to the right. As a combined result, the equilibrium quantity must increase. We cannot tell what happens to the equilibrium price- this depends on the relative sizes of the shifts of the demand and the supply curves. Part D is incorrect. Wet harvest conditions shift the supply curve to the left. The new medical survey about the life benefits of green beans shifts the demand curve to the right. As a combined result, the equilibrium price must increase. We cannot tell what happens to the equilibrium quantity, without knowing the relative sizes of the shifts of the curves. The equilibrium quantity might increase or decrease, we do not know. Part E is incorrect. The expectation of lower bean prices in the future shifts the demand curve to the left. The supply curve remains unchanged.

As a result, both the equilibrium quantity and the equilibrium price must decrease.

8 E. The binding quota on Brazilian sugar means that the price in the market will be determined by the demand curve: i.e. consumers will be paying their maximum willingness to pay at the quantity determined by the quota. Because demand curves slope down, this price will be higher than what consumers were previously paying for Brazilian sugar. American and Brazilian made sugar are substitutes. An increase in the price of Brazilian sugar increases the demand for domestically made sugar. Therefore, the demand curve for American made sugar shifts out and to the right, increasing the equilibrium market price and quantity of American sugar. Altogether, the price of both Brazilian and American made sugar increases.

9 C. Since the floor is binding, quantity demanded is less than quantity supplied, so the quantity demanded determines the number of units traded which will be M.

10 E. Choices A and B are good examples of intermediate goods. C counts as GDP of China. D, the used textbook counts as GDP of the year it was made.

11 C. GDP is what is produced in the country. GNP is what’s produced by your country’s people. So Francine’s work counts towards the UK’s GDP but not its GNP and her work counts toward the France’s GNP but not its GDP

12 E. Since you donated the time it did not go through a market so would not be counted in GDP

13 C. Structural unemployment: the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries. An introduction of new technology in production process could be a cause of structural unemployment.

14 A. Last week, the unemployment rate was 10,000/(10,000+90,000)*100=10%. This week, the unemployment rate is 12,000/(12,000+90,000)*100=…%. Therefore, the unemployment rate increased since last week, as a result of 2,000 people entering the labor force.