Economics 361 Assessment

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1 Economics 361 Assessment (1) Learning Objectives: Students who complete Economics 361 are expected to be able to use microeconomics as a means for evaluating alternative choices (e.g., policy choices; business and personal choices) and to have some understanding of microeconomics as a science (a discipline that helps us understand how people behave and how institutions work). The course makes use of functions (e.g., utility functions, cost functions, profit functions) and calculus (e.g., for characterizing optimizing choices in terms of marginal conditions). Appendix A contains a Course Objectives document that serves as a guide for all Economics 361 instructors. Because Economics 361 is a foundation and prerequisite for all 400-level Economics courses, this Course Objectives document also serves as a summary, for instructors in 400-level courses, of what they can expect their students to already know. That document contains a list of core topics that are covered in each section of Econ 361 and is thus a more detailed listing of Learning Objectives for Economics 361. Among the six departmental learning objectives, Econ 361 clearly focuses most directly on Critical Thinking: the course is about using analytical models to focus on an issue s essential features and to evaluate alternative courses of action. The course also addresses Social Responsibility (welfare economics, an essential part of the course, concerns criteria for weighing competing interests and evaluating alternative policy decisions) and Business Knowledge (essential parts of the course are the analytics of profit maximization, cost minimization, and competing in markets). (2) Assessment Instrument: The assessment will employ questions on the course exams midterms and final. Since the questions are worth a variable number of points, the score for assessment purposes will be the median fraction of the total possible score. For instance, if a question is worth 12 points, and the median grade for that question is 9, the score would be Critical Thinking Two questions assess critical thinking. The first is a straightforward application of a mathematical model with economic meaning, combining economics, mathematical analysis, and the economist s frequent tool of graphs: 2.1 A firm has the production function f(x!, x! ) = x!!/! x!!/! + x!!/!. (a) Does the technology have decreasing, constant, or increasing returns to scale? (Show how you know.) decreasing returns constant returns increasing returns (b) Based on your answer to part (a), roughly what shape will the long-run marginal cost curve be? (You can describe it with just one or two words.)

2 The second question is an application of an economic / mathematical model, but with a peculiar result. The student should be able to both identify what the model says will happen, and what aspects of the model are inappropriate and lead to the peculiar result. 2.2 In a competitive market, a firm has prices p = 2, w 1 = 1, w 2 = 4. After investing in some capital equipment, the firm has a constant marginal product of its variable input of MP 1 = 2. (a) According to these assumptions, what will this firm do to maximize short-run profits? (b) What assumption(s) is/are unreasonable in this problem, and what would really happen if the firm tried to do what you said in part (a)? Business Knowledge A relevant issue for any business is when it is worthwhile to stay in business or close up shop. The following question asks about that choice, as well as the decision about how much to produce (the firm s supply curve). It also checks for understanding on the meaning of the curves shown. 2.3 The graph below shows some short-run cost curves for a firm which is a price-taker in the output market. (a) On the graph, show the short-run supply curve for the firm. (b) Explain how we know the AC curve should be above the AVC curve.

3 A business with market power makes trade-offs between selling less of a product at higher prices, and selling more at lower prices. Two places this idea is captured are price elasticity of demand (ε) and marginal revenue (MR). This problem uses those ideas and asks about the implications for what the firm should do. 2.4 A monopoly faces the demand function Q(p) = (3 p)!. The firm has a marginal cost of zero in the short run. (a) Find the function for price elasticity of demand in terms of p. ε(p) = (b) Suppose the firm sets a price p = $2. (i) What is the price elasticity of demand at that price? (ii) How much will the firm sell at that price? (iii) What is the marginal revenue at that price? (iv) Based on your answer to (ii), the firm would like to sell: a greater quantity the same quantity a smaller quantity Explain your answer. Social Responsibility Economists address social responsibility largely through the notions of efficiency, welfare, and surplus. One of the most basic ideas of welfare is that there are gains from trade. The first question is about gains from trade and consumer surplus on a personal level. 2.5 You enter a store to buy a drink (soda, coffee, milk ). Do you usually receive consumer surplus? Yes No Explain how you know. The second question addresses consumer surplus in an overall market, relating to the demand curves. It also asks about the meaning of a Pareto improvement, which requires that nobody even a monopolist---be made worse off. 2.6 A monopoly faces the demand function Q(p) = 200 p. The firm has marginal cost of zero in the short run. Initially, they set the price at p = $100 but then, under government pressure, lower the price to p = $40. (a) How much is the gain in consumer surplus due to the price change? (b) Why can t we say the situation after the price change is a Pareto improvement over the situation before the price change? (You should be able to answer this with words no math is needed.)

4 (2) Assessment Results (Fall semester 2012): The different instruments were applied on exams at different times during the semester. An instrument applied partway through the semester (2.5) won t necessarily represent what a student will know by the end of the semester they may have improved their knowledge, or forgotten. An instrument applied on the final exam (2.4, 2.6) is applied to only those students who choose to take the final trying to improve their course grade. Students who received A s in the class based on earlier exams (or are otherwise satisfied with their course grade) can opt out of the final exam. Critical Thinking Instrument 2.1 was on the third midterm exam, given at the end of the semester. It was worth 15 points, and the median score was 8 points, so the score on this instrument is Instrument 2.2 was on the third midterm exam, given at the end of the semester. It was worth 12 points, and the median score was 4 points, so the score on this instrument is Business Knowledge Instrument 2.3 was on the third midterm exam, given at the end of the semester. It was worth 10 points, and the median score was 5 points, so the score on this instrument is 0.5. Instrument 2.4 was on the final exam. It was worth 14 points, and the median score was 4 points, so the score on this instrument is Social Responsibility Instrument 2.5 was on the second midterm exam, given halfway through the semester. It was worth 12 points, and the median score was 9 points, so the score on this instrument is Instrument 2.6 was on the final exam. It was worth 12 points, and the median score was 5 points, so the score on this instrument is 0.42.

5 Economics 361: Course Objectives Students who complete Economics 361 are expected to be able to use microeconomics as a means for evaluating alternative choices (e.g., policy choices; business and personal choices) and to have some understanding of microeconomics as a science (a discipline that helps us understand how people behave and how institutions work). The course will make use of functions (e.g., utility functions, cost functions, profit functions) and calculus (e.g., for characterizing optimizing choices in terms of marginal conditions). The following list of core topics is covered. Instructors vary in the emphasis and depth with which they cover these core topics, and also in any additional topics they cover. 1. Consumer Choice: Indifference curves and maps. Budget constraints. Constrained maximization (determination of the chosen bundle from a utility function and a budget constraint, and the MRS = price-ratio marginal condition). Deriving a demand function. Comparative statics. Substitution and income effects. Normal and inferior goods. Elasticity. Consumer surplus. 2. The firm: Revenue, cost, and profit. The profit maximization assumption and characterization via the MR = MC condition. Production function, marginal product, MRTS. Cost function via cost minimization for given output. Total, average, and marginal cost curves. Returns to scale. Long run and short run. Pricetaking ( competitive ) firm: P = MC. Derived demand for inputs. Comparative statics. 3. Competitive equilibrium: Market demand and supply functions as sums of individuals functions. Calculating equilibrium from demand and supply functions. Long run and short run. Comparative statics. 4. Welfare: Edgeworth box. Pareto efficiency, and characterization via the equalization of marginal rates. Efficiency of equilibrium and the importance of competitive conditions. Prices as signals for resource allocation. 5. Intertemporal choice: Present value of an asset and of a stream of returns and costs. Intertemporal interpretation of commodities, prices, etc., in the standard model. 6. Uncertainty: Risk aversion and risk premium. 7. Imperfect competition: Monopoly; welfare comparison of the monopoly and competitive outcomes. Cartels. Oligopoly: Cournot analysis (elementary game theory). Comparison of monopoly, oligopoly, competition. 8. Externalities: Public goods. Efficiency. Other externalities. The Coase analysis and its limitations.