SECOND HOURLY EXAMINATION Version B ECON 200 FALL, 2002 STUDENT S NAME: STUDENT S SOCIAL SECURITY NUMBER:

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1 SECOND HOURLY EXAMINATION Version B ECON 200 FALL, 2002 STUDENT S NAME: STUDENT S SOCIAL SECURITY NUMBER: PLEASE CIRCLE YOUR TEACHING ASSISTANT S NAME: Irani Arraiz Sarah Bohn Alexandre Castro Andri Chassamboulli, Yan Chen Naomi Griffin, Janet Hao Scott Imberman, Anthony Leegwater, Jeffrey Lewis Ying Li Mingfeng Lin Oleksandr Shepotilo Juan Trevino Your signature: DAY AND TIME YOUR SECTION MEETS: ENTER THE NUMBER UNDER SPECIAL CODES ON THE SCANTRON SHEET. BEFORE YOU BEGIN, PLEASE MAKE SURE THAT THIS EXAMINATION HAS BEEN DUPLICATED AND COLLATED CORRECTLY. THERE SHOULD BE 22 MULTIPLE CHOICE QUESTIONS AND THREE PROBLEMS. THE EXAM HAS 9 PAGES INCLUDING THIS COVER PAGE. ANSWER THE MULTIPLE CHOICE QUESTIONS ON THE SCANTRON SHEET. ANSWER THE PROBLEMS IN THIS EXAMINATION. BE SURE TO FILL-IN YOUR NAME (LAST NAME FIRST) AT THE TOP OF THE SCANTRON. FILL-IN YOUR SOCIAL SECURITY NUMBER UNDER IDENTIFICATION NUMBER ON THE SCANTRON SHEET. WRITE YOUR TA S NAME IN THE UPPER-RIGHT HAND CORNER OF YOUR SCANTRON SHEET. MULTIPLE CHOICE PROBLEM 1 PROBLEM 2 PROBLEM 3 TOTAL:

2 Problem 1 (16 points) Show all of your calculations. Defend all of your answerscarefully. Every month, Ed spends all his income on books and food. Throughout this question place food on the horizontal axis and books on the vertical axis. (a) Draw his budget line when his income is $90, the price of one book is $3.00, and the price of one unit of food is $1.50. What is the slope of his budget line? (b) Now suppose that Ed's income goes up to $120 and the prices are the same as in part (a). Draw his new budget line. What is the slope of his new budget line? (c) Now that his income is $120 Ed decides to buy 64 units of food. What is the maximum number of books he can consume? Show this consumption bundle in the diagram you drew in part (b) of this question. (d) Now suppose that Ed's income goes back to $90, but his friend gives him a $30 gift certificate at a local book store. This gift certificate can only be used to purchase books and Ed cannot sell the gift certificate. Draw his new budget constraint. What is the maximum number of books Ed can consume? What is the maximum amount of food he can consume? Can he consume the same bundle of goods that he consumed in part (c)?

3 Problem 2 (17 points) All University of Maryland students have free access to the Internet. When many people use the Internet at the same time the time to download files increases. (a) Explain why these two facts imply that the Internet is a common resource. (b) Five Maryland students are interested in using the Internet. Suppose that the total cost (including the value of time) of their using the Internet is as follows: Number of Internet Users Total Cost Private Cost Social Cost Complete the private cost and social cost columns of the table above. (Hint: recall that social cost equals the additional cost of one more person using the Internet.) (c) The private and social value of using internet is $17. How many people would you expect to use the Internet? What is the efficient number of users? Defend your answers carefully. (d) Suppose three people are using the Internet. Calculate the total damages the third user imposes on the two users who are already on the Internet. Defend your answer carefully. (e) Show that the University could reach the efficient outcome by charging people a $4 fee to use the internet. Defend your answer carefully.

4 Problem 3 (17 points) Present just one supply and demand diagram for this question. (Hint: you should read the entire question before you begin to draw your diagram.) If the U.S. did not engage in international trade the equilibrium price of computers in the U.S. would be $100. Now suppose the U.S. decides to engage in trade. Assume throughout this question that the U.S. can buy or sell computers without affecting the world price. (a) Initially the world price of computers is $150. In your diagram, label and identify (i) the quantity of computers purchased by U.S. consumers, (ii) the quantity of computers produced by U.S. firms, and (iii) the quantity of computers the U.S. would export. (b) The world price of computers rises to $175. Will U.S. computer exports rise, fall or remain constant? Use your diagram to defend your answer. (c) Clearly label the appropriate areas in your supply and demand diagram and then complete the following table: Consumer surplus World Price = $150 World Price = $175 Change Producer surplus Total surplus (d) Use the table above to answer the following questions. (i) Are U.S. computer consumers better off or worse off as a result of this price increase? (ii) Are U.S. computer producers better off or worse off as a result of this price increase? (iii) Did overall welfare in the U.S. (measured in terms of total surplus in the computer market) rise or fall as a result of this price increase? Defend your answers carefully.

5 Multiple Choice Each Question Is Worth 2.3 Points 1. Suppose Jan is starting up a small lemonade stand business. Variable costs for Jan's lemonade stand would include a. the cost of the lemonade mix. b. the cost of building the lemonade stand. c. the cost of hiring an artist to design a logo for her sign. d. all of the above. 2. The efficient scale of the firm is the quantity of output that a. maximizes marginal product. b. minimizes average total cost. c. minimizes average fixed cost. d. minimizes average variable cost. The next four questions refer to the following economic situation. You are given the following information about the ABC Widget Company s short run costs: Quantity of Widgets Total Fixed Cost Total Variable Cost Total Cost 0 $10 1 $1 2 $3 $13 3 $6 $16 4 $10 5 $25 6 $10 $21 3. The average fixed cost of producing 5 widgets is a. $2.00. b. $3.00. c. $5.00. d. none of the above. 4. The marginal cost of the third widget is than the average total cost of producing two widgets, and therefore producing the third widget leads to a in average total cost. a. greater, increase b. greater, decrease c. less, increase d. less, decrease 5. The average total cost of producing 4 widgets is a. $2.00. b. $2.50. c. $4.00. d. $ The marginal cost of producing the sixth widget is a. $1.00. b. $3.50. c. $6.00. d. Cannot be determined.

6 7. The impact of one person's actions on the well-being of a bystander is called a. competitive advantage. b. dead weight loss. c. market equilibrium. d. an externality. The next three questions refer to the following economic situation. Social cost, private cost, and demand in the market for Good X are summarized in the following diagram $ Social cost d g e f Supply = Private cost Demand = Private value = Social value Q 0 Q 1 Quantity 8. This is an example of a externality in. a. positive, consumption b. positive, production c. negative, consumption d. negative, production 9. A market would produce units of X. The efficient quantity of X is. a. Q 0, Q 0 b. Q 0, Q 1 c. Q 1, Q 0 d. Q 1, Q If the government does not intervene, the deadweight loss in this market will equal area a. d b. e c. f d. g

7 11. Flu shots are an example of a externality in consumption. The government could flu shots in order to lead people to obtain the efficient number of flu shots. a. negative, tax. b. negative, subsidize c. positive, tax d. positive, subsidize 12. Ed has the right to have loud parties at his home. He receives $50 of benefits from having a loud party. Ed s neighbor Bob hates noise and suffers damages of $70 when Ed has a party. The Coase Theorem says that an efficient outcome will result a. ONLY if the government passes a law banning loud parties. b. if Bob pays Ed $100 not to have a party c. if Bob pays Ed $60 not to have a party d. if Ed pays Bob $40 for the right to have a party. 13. The City of College Park has decided to put on a fireworks display. This display is a. excludable. b. rival. c. a public good. d. all of the above The next three questions refer to the following economic situation. Suppose the government imposes a $1 tax on suppliers. The equilibrium before the tax and the equilibrium after the tax are shown in the diagram below. $ S + $1 S A P 2 P 1 P 2 -$1 B D C E F G H D Q 2 Q 1 Quantity 14. According to the graph, the tax caused a reduction in consumer surplus represented by a. A. b. B + C. c. D + E. d. F.

8 15. According to the graph, the total surplus with the tax (including the tax revenue) is represented by a. A + B + C. b. D + E + F. c. A + B + D + F. d. C + E. 16. According to the graph, the loss in total surplus resulting from the tax is represented by a. A + B + C. b. D + E + F. c. A + B + D + F. d. C + E. 17. If a common resource is being overused, a. market forces cause the use of the resource to shift to a sustainable level. b. society voluntarily limits its use of the good. c. it continues to be overused because individuals have no incentive to reduce their use of the good. d. the good becomes a private good. 18. The benefits of a new lighthouse at the beach are greater than the costs. Nonetheless, the private market might fail to build this lighthouse because a. lighthouses are common resources. b. government intervention makes it hard for private lighthouse owners to compete in the market. c. ship captains have incentives to use lighthouses without paying. d. lighthouses are valued very little by ship captains these days. 19. A consumer that doesn't spend all of her income a. would be at a point inside her budget constraint. b. would consume none of one of the goods. c. must be consuming at a point where her budget constraint touches one of the axes. d. would be at a point outside of her budget constraint. 20. Assume that a college student spends all of her income on Coke and Snickers. The price of a Snickers candy bar is $0.50 and the price of a can of Coke is $0.75. If she has $20 of income, she could POSSIBLY choose to consume a. 24 Snickers bars and 12 cans of Coke. b. 22 Snickers bars and 14 cans of Coke. c. 15 Snickers bars and 18 cans of Coke. d. 10 Snickers bars and 20 cans of Coke.

9 21. Which of the diagrams shown above reflects an increase in the price of good Y only? a. panel A b. panel B c. panel C d. panel D 22. If one person s use of a good diminishes another person s enjoyment of it, the good is a. rival. b. excludable. c. normal. d. exhaustible.

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