Question 7 is like a Review Question from Lesson I-7 Question 8 is like a Review Question from Lesson I-8

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1 This is Homework 4. The purpose is to review all of Part I and to prepare you for the format of your upcoming Exam 1. Just like your upcoming exam, there is one question from each of the 8 lessons in Part I; question 1 is from Lesson I-1, and so on. To separate students that have been studying 3 hours outside of class each week from those that have been studying 9 hours each week, some questions are more complex than others, and some are more familiar. You should answer each question because on an exam you can earn at least partial credit. You will earn full credit on Homework 4 if you make at least a reasonable attempt to answer each question. Remember your review priorities for Exam 1 and for Part I of the Final Exam: 1. Questions from Homework 1 through Questions in PowerPoint slides from Lessons I-1 though I Review Questions from Lessons I-1 though I-8. For example, in this Homework 4 Practice for Exam 1, Question 1 is like a Review Question from Lessons I-1and I-2 Question 2 is like a question in PowerPoint slides from Lesson I-2 Question 3 is like a question in PowerPoint slides from Lesson I-3 Question 4 is like a Review Question from Lesson I-4 Question 5 is like a question from Homework 3 Question 6 is like a question from Homework 3 Question 7 is like a Review Question from Lesson I-7 Question 8 is like a Review Question from Lesson I-8

2 BA 210 Practice for Exam 1 Dr. Jon Burke This is a 100-minute exam (1hr. 40 min.). There are 8 questions (12.5 minutes per question). The exam begins exactly at the normal time that class starts. To avoid the temptation to cheat, you cannot take this exam if you arrive more than 10 minutes late, and you cannot (without permission) leave the room and re-enter during the exam. Exam Grading Each individual question on the following exam is graded on this 4-point scale: 4 points if all is correct --- or there is only a small error. 3 points for missing or doing wrong part of a problem, but the rest is correct. 2 points for a reasonable and substanative attempt. 1 point if there is at least something of value in the attempt. After all individual questions are graded, I sum the individual scores, then compute that total as a percentage of the total of all points possible. I then apply a standard grading scale to determine your letter grade: % A; 80-89% B; 70-79% C; 60-70% D; 0-59% F Finally, curving points may be added to letter grades for the entire class (at my discretion), and the resulting curved letter grade will be recorded on a standard 4-point numerical scale: A = 4; A- = 3.7; B+ = 3.3; B = 3.0; B- = 2.7; C+ = 2.3; C = 2.0; C- = 1.7; D+ = 1.3; D = 1.0; F = 0 Tip: Pace yourself. When there is only ½ hour left, spend at least 5 minutes outlining an answer to each remaining question.

3 Question 1. Use the concept of opportunity cost to explain the following. a. More people choose to get graduate degrees when the job market is poor. b. More people choose to do their own home repairs when the economy is slow and hourly wages are down. c. There are more parks in suburban than in urban areas. d. Convenience stores, which have higher prices than supermarkets, cater to busy people. e. Fewer students enroll in classes that meet before 10:00 A.M. Answer to Question 1:

4 Question 2. Suppose you live in Southern California and have a friend in Indiana and a friend in Texas. Measure the value to you of writing them letters by the amount you would be willing to pay to send them each a letter. Suppose they do not value your letters but you value writing them letters as in the table below. And suppose the cost to the U.S. Postal Service of delivering a letter from you to Indiana is 24 cents, and the cost to Texas is 74 cents. Value of Letters to Indiana to Texas Value of Letter #1 $0.90 $0.60 Value of Letter #2 $0.60 $0.15 Value of Letter #3 $0.15 $0.05 Value of Letter #4 $0.00 $0.00 Would it be efficient to charge, as is the case, 44 cents for each letter to Indiana and 44 cents for each letter to Texas? That is, do those prices lead to efficiency? Compute the net profit to the U.S. Postal Service of delivering your letters. Answer to Question 2:

5 Question 3. Consider the following linear production possibilities of Army missions and computer programs from 1 high school dropout (D), 1 high school graduate with no college degree (H), and 1 college graduate (C). Army Output Civilian Output D 1 mission 1 program H 2 missions 4 programs C 3 missions 9 programs If you need 3.5 missions per month (for example, 7 every 2 months) and if the market price (or wage) for producing a computer program is 6 pesos each, then what should be the unit price paid per mission? Answer to Question 3:

6 Question 4. The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in each of the following cases. Note that supply and demand may shift simultaneously. a. Lobster prices usually fall during the summer peak lobster harvest season, despite the fact that people like to eat lobster during the summer more than at any other time of year. b. The price of a Christmas tree is lower after Christmas than before but fewer trees are sold. c. The price of a round-trip ticket to Paris on Air France falls by more than $200 after the end of school vacation in September. This happens despite the fact that generally worsening weather increases the cost of operating flights to Paris, and Air France therefore reduces the number of flights to Paris at any given price. Answer to Question 4:

7 Question 5: Consider the following demand curves for a Good X by women Abby, Betty, Carla and by men Doug, Ernest, Frank: Potential buyers of Good X Willingness to pay Abby $10 Doug $6 Betty $4 Ernest $3 Carla $2 Frank $1 And consider supply curves for the same Good X by women Gail, Heidi, Ingrid and by men Jim, Kyle, Leo: Potential sellers of Good X Cost to sell Gail $1 Jim $2 Heidi $4 Kyle $5 Ingrid $7 Leo $9 a. Compute the competitive equilibrium price and quantity. Compute consumer surplus and producer surplus. b. By considering Good X to be education at Pepperdine University, show the consumer surplus losses from affirmative action programs designed to help women. Specifically, suppose affirmative action programs cause Pepperdine University to accept Carla and reject Doug. c. By considering Good X to be teachers hired by the state of California, show the producer surplus losses if affirmative action causes California to hire Ingrid and reject Jim. d. By considering Good X to be patients accepted treated by Kaiser Permanente, show the lost total surplus if a US program of Universal Health Care forces Leo to treat Carla. Answer to Question 5:

8 Question 6: Consider the following demand curves for labor by Abby, Betty, Carla, Doug, Ernest, Frank: Potential buyers of labor Willingness to pay Abby $12 Betty $11 Carla $9 Doug $8 Ernest $5 Frank $2 And consider supply curves for labor by Gail, Heidi, Ingrid, Jim, Kyle, and Leo: Potential sellers of labor Cost to sell Gail $1 Heidi $2 Ingrid $3 Jim $4 Kyle $5 Leo $7 a. Compute the competitive equilibrium wage and employment. Compute consumer surplus and producer surplus (that is worker surplus). Now consider a minimum wage of $9 designed to help unproductive (high cost) workers. b. Show the lost producer surplus from the inefficient allocation of employment. Specifically, suppose Kyle successfully competes to sell labor instead of Heidi. c. Show the lost total surplus as minimum wages reduce employment. d. Show the wasted resources from potential workers competing for employment. Specifically, suppose potential workers compete for jobs by waiting in line. Answer to Question 6:

9 Question 7. U.S. winter wheat production increased dramatically in 1999 after a bumper harvest. The supply curve shifted rightward; as a result, the price decreased and the quantity demanded increased (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded Quantity Demanded 1.74 billion 1.9 billion (bushels) Average Price (per $3.70 $2.72 bushel) a. Using the midpoint method, calculate the price elasticity of demand for winter wheat. b. What is the total revenue for U.S. wheat farmers in 1998 and 1999? c. Did the bumper harvest increase or decrease the total revenue of American wheat farmers? How could you have predicted this from your answer to part a? Answer to Question 7:

10 Question 8. The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported trucks are given in the accompanying table. Quantity of imported trucks (thousands) Price of imported Quantity demanded Quantity supplied trucks $32, $31, $30, $29, $28, $27, a. In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? Illustrate with a diagram. b. Assume that the government imposes an excise tax of $3,000 per imported truck. Illustrate the effect of this excise tax in your diagram from part a. How many imported trucks are now purchased and at what price? How much does the foreign automaker receive per truck? c. Calculate the government revenue raised by the excise tax in part b. Illustrate it on your diagram. d. How does the excise tax on imported trucks benefit American automakers? Who does it hurt? How does inefficiency arise from this government policy? Answer to Question 8: