SHOW ALL YOUR WORK IN A NEAT AND ORGANIZED MANNER

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1 EQUATIONS YOU MAY NEED FOR THIS EXAM Depreciation = (Purchase price - salvage value) / years of useful life Average Value or Average Value of Investment = (Purchase price + salvage value) / 2 Slope = change in Y / change in X, or change in P / change in Q, or RISE / RUN Percent change = [(To - From)/ From] * 100 Percent change in Q d = [(Q 1 - Q 0 ) / Q 0 ] * 100 Percent change in P = [(P 1 - P 0 ) / P 0 ] * 100 Marginal revenue = change in total revenue / change in Quantity of control variable Marginal cost = change in total cost / change in Quantity of control variable Physical Efficiency = Units of Output / Units of Input Economic Efficiency = Value of Output / Value of Input = (Units of Output * Price of Output) / (Units of Input * Price of Input) = PE * (Price of Output / Price of Input) Change in Economic Efficiency = Change in the value of output / Change in the value of input Average Relative Price i in dollars = (Nominal Price i /CPI i ) X 100 Where i = year EXPLANATION OF TERMINOLOGY USED Graph = accurately scaled, precisely plotted, accurately drawn to scale, and labeled. Rough sketch or illustrate = not scaled or precisely plotted, but completely labeled. What explain means on one of my exams: Webster's Collegiate Dictionary defines EXPLAIN as: 1. to make plain or understandable 2. to give the reason of or cause of 3. to show the logical development or relationships of Webster's continues by enhancing the definition with the following statement: "Explain implies a making plain or intelligible what is not immediately obvious or entirely known." SHOW ALL YOUR WORK IN A NEAT AND ORGANIZED MANNER 1

2 Exam 3 ARE 012, Spring 1998 Answer the questions below to the best of your ability. Answer the questions on the test sheet. Answer all parts of each numbered question. You must show all work to receive full credit for your answers to numerical problems. The price associated with all parts of each question (input) is provided so that you may make an informed management decision regarding the production of this exam (output). Be thorough and complete in ALL your responses. Please read and sign the Honor Pledge on the test sheet below or your exam will not be graded: I have neither given or received unauthorized aid on this exam. Student Name (print please) Student s Signature Day and Time of Lab Circle the correct response for each multiple choice question below. Each multiple choice question has an opportunity cost of 2 points. 1. Assume the price of a one-gallon azalea was $1.20 in If the real price for a one-gallon azalea increased from 1990 to 1997, the nominal price for the azalea in 1997 could have been: a) $1.00 Inflation 1990 to 1997 = 22.8% b) $1.20 $1.20 x = $1.47 c) $1.60 d) not enough information to answer question e) none of the above 2. Movement from the point (3,4) on a demand curve to the point (5,4) on a demand curve represents: a) a decrease in quantity demanded b) an increase in quantity demanded c) an increase in demand d) a decrease in demand e) none of the above

3 3. The Law of Demand tells us that: a) more barbecue sandwiches will be sold at $1.00 than at $1.50, ceteris paribus. b) a reduction in the price for a commodity will probably increase the inventory of the good. c) an increase in the price of a commodity will result in a decrease in demand for that commodity, ceteris paribus. d) a decrease in the price of a commodity will result in a decrease in the quantity demanded of a commodity. e) none of the above 4. The change in the quantity demanded of a commodity that is associated with a given change in the price for the commodity would be of the greatest magnitude with the following type of demand curve: a) relatively inelastic b) relatively elastic c) unitary elastic d) unitary inelastic e) none of the above 5. An increase in the federal minimum wage represents: a) an increase in the quantity supplied of a commodity b) an increase in supply of the commodity c) an increase in the cost of production and a resulting decrease in supply d) a decrease in the cost of production and a resulting increase in quantity supplied e) none of the above 6. What was the inflation rate between 1970 and 1997? (5 points) (( ) / 38.8) x 100 = % 7. The nominal price of sugar in 1967 was $.09 per pound. The nominal price of sugar in 1993 was $.42 per pound. Calculate the average relative price for sugar in 1967 and (5 points) Average relative price sugar, 1967 = (.09 / 33.4) x100 = $.2695 or $.27 Average relative price sugar, 1993= (.42 / 144.5) x 100 = $.2907 or $.29 The real price of sugar increased or decreased? (circle one) 3

4 8. Jeff Buckshot's gross income in 1997 was $25,000. His wife Ellen grossed $45,000 in Jeff and Ellen have three children ages 2, 4, and 6 years of age. The standard deduction for a married couple jointly filing a 1997 Federal Tax Return is $6,900. Jeff and Ellen have itemized deductions that total $5,000. The personal and dependent exemption is $2,650 each. The combined Social Security and Medicare tax rate is 7.65%. The tax on Jeff and Ellen's personal property that is paid to their county government and local municipality totals $1,200. Jeff and Ellen purchased 1,500 gallons of gas for their vehicles in The combined federal and state excise tax rate on gasoline in North Carolina is $.404 per gallon. Jeff and Ellen incurred $2,800 of sales taxes during the year. They spend about 45% of their gross income on family living expenses (mortgage payment, food, clothing, car payments, utilities). a. Calculate Jeff and Ellen's taxable income for (2 points) NOT ON EXAM b. Calculate Jeff and Ellen's disposable income for (2 points) c. Calculate Jeff and Ellen's discretionary income for (2 points) 4

5 9. You have just purchased a new half-ton, extended cab pickup truck for $23,000 including all taxes, destination and delivery charges. You expect to drive the truck 15,000 miles each year. You plan to drive the truck 5 years, then sell it for $11,000. Auto insurance will cost you $750 per year for liability insurance, PLUS $24 per $1,000 of coverage for collision and comprehensive insurance. The property tax rate in your city and county totals $1.20 per $100 of value. You paid cash for your new truck from savings in your money market account that was earning 3.25 percent interest. Tags will run you $26.50 per year. Annual inspection in your county will run $19.50 per year. Average Value = $17,000 a. Please calculate the annual ownership costs for the truck below (Show Your Work and all units) (5 points): Depreciation: $2, per year Interest: $ per year Property taxes: $ per year Insurance: $1,158 per year Tags: $26.50 per year Inspection Fee: $19.50 per year Total Annual Ownership Cost: $4, per year b. Total annual operating cost for this vehicle (gas, oil and grease, tires, and general maintenance) is $1,750 per year. Please calculate total ownership and operating cost per MILE. (5 points) $4, per year + $1, per year = $6, per year $6, per year / 15,000 miles per year = $.407 per mile 5

6 10. Accurately graph the following supply schedule for 7 to 8 ft. Crimson King Maple trees for the Three Stooges Garden Center during the Fall planting season. Construct your graph in the open space below. Then calculate the slope. (ACCURATELY GRAPH TO SCALE AND LABEL.) (10 points) Price Quantity supplied per month $ Slope = Slope = +.40 or + 2/5 6

7 11. Using any commodity as an example you wish, illustrate a persistent SURPLUS by using a rough sketch. Label your axis, all prices and quantities, and the curves you draw. Does not need to be drawn to scale. (5 points) Persistent Surplus a. The price established by the government that results in the creation a persistent SURPLUS is referred to as a: Price Floor (4 points) (Fill in this blank) 7

8 12. You must determine at what weight our producer should market his hogs. The weight of a hog is determined by how much you feed it. Therefore, this is a marginal analysis problem to determine the profit maximizing use of an input (feed). Therefore, use Lbs. of feed as the control variable for this marginal analysis problem. Assume the price of feed is $.06 per pound (This is the marginal cost of feed). Lbs. Total Total Change in Marginal Of Weight Revenue Total Revenue Feed Of Hog per Hog Revenue a) Complete the table above by calculating total revenue per hog, change in total revenue per hog, and marginal revenue per hog. Assume the price of finished hogs is $.40 per lb. (5 points) b) At what weight should the producer market each hog? Find the weight at which marginal revenue per pound of feed is just equal to the marginal cost of feed. (5 points) 262 pounds is where MR = MC c) EACH feeder pig will cost you $ per head. You have determined the market weight at which to sell your hogs. Now determine your net return PER HOG in excess of feed, and feeder pig cost. (5 points) Total revenue per hog: ($.40 per lb. X 262 lbs.)= $_ Feed cost: ($.06 per lb. X _800 lbs. feed) = $_48.00 Feeder pig cost = Net Return per market hog: $_31.50 $ d) What is the MOST you could pay for a feeder pig and break-even considering only feed and feeder pig cost? (HINT: What does the feeder pig cost need to be in order for Net Return per market hog to equal zero?) (5 points) $ = $

9 13. List the determinants of demand and indicate whether a change in the determinant will cause the demand curve to "shift" or change its "slope". (5 points) Determinant Shift or Slope? 9

10 14. Below is the market that faces Sandberg Landscape Services. Sandberg Landscape Services concentrates its marketing efforts in Raleigh and Cary, North Carolina. Many other landscape service firms are operating in these markets, and demonstrate service of equal quality to that of Sandberg Landscape. Always start at GO! Read the statements below the graph and determine the new equilibrium point. This is an exercise concerning the determinants of demand and supply. P 4 S 1 S S 2 3 Go D 1 D 0 D 2 a) _2 There is an increase in the population of potential consumers in both Raleigh and Cary due to economic growth. b) 7 State and Federal government agencies employ a large percentage of the market Sandberg Landscape Services deals with. Salaries for State and Federal employees will be decreased 10 percent tomorrow due to the voter s desire to trim government. c) 7 Sandberg Landscape Services is accused of low quality workmanship, use of stressed and diseased plants, and billing people for work not contracted to be performed. This accusation by the "Parade of Homes" appeared in the News and Observer. d) 7 Three Stooges Landscapes Inc., a competitor of Sandberg Landscape Services announce in a full page news paper advertisement that they are cutting their contract rates by 20 % across the board. e) 3 The government announces that the "minimum wage" will increase from $4.25 per hour to $5.15 per hour. Sandberg Landscape s labor force consists of 75% minimum wage labor. Q Each of the above is worth one point 10

11 15. In 1922, an Associate Degree Program was started at NCSU in Agriculture entitled: Two Year Course in Practical Agriculture The following was the nominal cost per SCHOOL YEAR to attend the program: Tuition $45.00 Room rent, fuel, lights $40.00 Board in College: $ Fees (approximately) $20.00 Breakage and military equipment deposit $20.00 Total $ a. What was the real price per year of attending the first Agricultural Institute in 1922 as measured in dollars? (5 points) ($278 / 16.8) x 100 = $1, per year b. What was the price per year of attending the first Agricultural Institute in 1922 as measured by 1997 dollars? (10 points) $1, per year x = $2, per year 11

12 Bonus Question: In 1980 the average nominal price of gasoline was $1.25 per gallon. At this price, 71.9 billion gallons of gasoline were consumed in the U.S. that year. In 1988, the average nominal price of gasoline was $.95 per gallon. At this price, 71.0 billion gallons of gasoline were consumed in the U.S. a. Calculate the 1980 average relative price of gasoline, and the 1988 average relative price of gasoline. (5 points) 1980: ($1.25 / 82.4) x 100 = $ : (.95 / 118.3) x 100 = $.80 b. Graphically illustrate below what happened in the market over this time period. (10 points) The demand curve for gasoline shifted to the left (decreased demand) over the time period. Shift is exaggerated for clarity. P 1980 D 1988 P 1988 D 1980 Q 1988 Q