Supply and Demand of Affordable Housing

Transcription

1 ECONOMICS Final Exam Dr. John Stewart May 6, 2003 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet using a No.2 pencil. Note =1, =2 and so forth. Please note that some questions have four choices, others have five choices. On the answer sheet make sure that you have written and coded your name, your student ID number. When you have completed the exam, fill out and sign the last page and turn it in with your scan sheet. Each failure to follow directions will result in a one question deduction. All questions are weighted equally. You may keep this exam paper. Exam scores will be available on the ATN web site when the exam have been scanned. Final grade distribution will be posted on the course web site. Information for Questions 1-5. Assume that there are only two types of houses that can be built: small affordable houses and large luxury houses. Both housing markets are assumed to be competitive. Figure 1 shows the supply and demand curves for new affordable housing in Chapel Hill. 1. In market equilibrium, there will be new affordable houses built each year and they will sell at a price of. House price Thousands Supply and Demand of Affordable Housing $320 $280 $240 $200 $160 $120 Demand Supply 100, $160, , $100, , $120,000 d) e) 160, $160,000 $80 $40 $ Affordable Houses built per year 2. If the Chapel Hill city council passes an Figure 1 ordinance that the maximum price that can be charged for an affordable house is $120,000 then 140 new affordable homes will be built each year selling for $120,000 each. 120 new affordable homes will be built each year but there will be an excess demand of 20. d) 180 new affordable homes will be built each year but there will be an excess supply of 60. e) the ordinance will have no effect on the price or quantity of new affordable home. 3. If the affordable home and luxury homes are substitutes and the price for luxury homes increases, we expect the equilibrium price for affordable homes to and the quantity to raise, fall fall, raise d) fall, fall 4. If we consider a price change form $160,000 per house to $140,000 per house, the arc price elasticity for the demand curve shown in Figure 1 is d) 3.0 e) If the price is $160,000, then the point price elasticity for the demand curve shown in Figure 1 is. Econ Spring 2003 Final Exam, Page 1 of 16

2 d) e) If the percentage change in the price of a car is 5% and the resulting percentage change in quantity demanded for cars is 10%, then the price elasticity of demand for cars is: unitary elastic. inelastic. unchanged. d) 7. The price elasticity for McDonald s burgers is 2.0, the income elasticity of demand for McDonald s hamburgers is.05 and the cross price elasticity of McDonald s hamburgers and Tum s antacid is From this we can conclude McDonald s hamburgers are an inferior good and that Tum s and burgers are complements. McDonald s hamburgers are a normal good and that Tum s and burgers are substitutes. d) McDonald s hamburgers are an inferior good and that Tum s and burgers are substitutes. 8. A business facing an elastic demand curve for its product increases its price from $7 to $8. From this information you can correctly conclude that total revenue for the firm will increase that total revenues for the firm will be unchanged d) nothing about the way total revenues would change Information for Questions 9-14: Larry and Curly live on a desert island. The raw materials are suitable only for making beer and pizza, but these quantities are unlimited. What is scarce is labor. Curly and Larry can only work 10 hours a day. Curly can make 1 bottle of beer per hour or.2 pizzas per hour. Larry can make.5 bottles of beer an hour or 1.5 pizzas per hour. Hint: before answering the following questions, draw the production possibilities curve for Larry and Curly working together for a 10-hour workday. You may use the accompanying grid. Pizzas (per day) The opportunity cost for Larry to produce 1 bottle of beer is 1/5 pizza 5 pizzas d) 1/3 pizza Figure Beer (bottle per day) 10. If both Curly and Larry completely specialize in producing only what they can produce at the lowest opportunity cost, they will produce 17 pizzas and no beer 15 bottles of beer and no pizzas d) 10 pizzas and 15 bottles of beer 11. If Curly and Larry jointly decide to consume together a total of 3 pizzas and 14 bottles of beer, the efficient way to do this would be Curly produces 14 bottles of beer and Larry produces 3 pizzas Econ Spring 2003 Final Exam, Page 2 of 16

3 Curly produces 3 pizzas and 4 bottles of beer while Larry produces 10 bottles of beer d) Curly produces 3 pizzas and Larry produces 14 bottles of beer 12. In this economy, the production of 12 bottles of beer and 14 pizzas is feasible but not efficient feasible and efficient d. it is impossible to tell 13. In this economy, the production of 10 bottles of beer and 12 pizzas is feasible and efficient not feasible d) it is impossible to tell 14. Curly has an absolute advantage in the production of pizza both beer and pizza d) neither good 15. You are the manager of a perfectly competitive firm and are faced with the following situation. The market price for your product is $2.50 and you are currently selling 1,000 units. Your total fixed costs are $9,000 while your total variable costs are $2,400. Your short run marginal cost is $2.50 per unit. Given this information, to maximize profit in the short run you should decide to: immediately stop all production. expand output to cover more of fixed costs. d) decrease output so that you can cut down on variable costs. e) uncertain, there is not enough information in the problem deduce an answer. 16. Bill s Sandwich shop is currently charging a price of $3.00 per sandwich. At this price Bill is selling 100 sandwiches a day. The marginal cost of producing another sandwich is $2.00. An economist estimates that the price elasticity of the demand curve for Bill s sandwiches at his current output is 3.0. Bill comes to you with this information and asks for your advice. You should tell Bill that he can increase profits if he lowers his price a little. that he can increase profits if he raises his price a little. d) that he hasn t given you enough information for you to make a recommendation. 17. Carrots and green peas are substitutes on the demand side only. Carrots are sold on a competitive unregulated market where normal assumptions about supply and demand hold. If the price of peas were to increase then we would expect the price of carrots to and the output of carrots to. rise, fall fall, rise d) fall, fall e) uncertain 18. Given the information in question 17, the cross price elasticity of the demand for carrots with respect to the price of green peas must be equal to 1 b )greater than 1 less than 1 d) e) less than If a firm s long-run average cost curve is negatively (downward) sloped, then the firm is subject to Econ Spring 2003 Final Exam, Page 3 of 16

4 constant marginal returns decreasing returns to scale d) decreasing marginal returns Econ Spring 2003 Final Exam, Page 4 of 16

5 Information for Questions Table 1 shows a cheesecake factory's daily production of cakes. The only inputs used in production are ovens and workers. In the short run, the factory has rented 3 ovens at a price of $5 per oven per day and is unable to change the number of ovens in the short run. Each one of the workers is paid $3 a day. Table 1 Number of Ovens Number of workers Number of cheesecakes If the cheese cake factory produces 36 cheesecakes per day, what is the average fixed cost per cheese cake? $15 $5 $.35 d) $.38 e) 21. If the cheese cake factory produces 36 cheesecakes per day, what is the average variable cost per cheese cake? $3.00 $1.33 $1.00 d) $.67 e) 22. Given that the market price for the cake is $1 each and that the cheesecake market is perfectly competitive, how many workers will be hired in the Cheesecake factory? 7 6 d) 4 e) At the equilibrium short run employment (answer to 22) the marginal product of an additional oven is 7 cheesecakes. The firm should (hint: what likely happens to the MPP of labor if an oven is added or removed?) arrange to rent an additional oven and fire one laborer.. cancel the rental agreement on the third oven as soon as possible. d) cancel the rental agreements on all their oven and get out of the business as soon as possible. Information for Questions 24-27: Figure 3 shows market demand and supply for computers. The market for computers is perfectly competitive. Quantities are measured in number of computers per week. There are currently 200 identical firms supplying the market. Also shown in the $ Figure 3 Typical Firm MC AC $ Market Supply 200 Demand q firm Qmarket diagram are the average and marginal cost curves of a typical computer firm. Assume that all firms in the market face identical cost conditions and that there are no fixed inputs in computer manufacturing. (Thus there is no difference Econ Spring 2003 Final Exam, Page 5 of 16

6 between long run and short run cost curves) 24. Given that there are currently 200 firms operating in the market in the short run the equilibrium price will be $100 and the equilibrium market quantity will be 4,000 computers per week. the equilibrium price will be $400 and the equilibrium market quantity will be 10,000 computers per week. d) the equilibrium price will be $600 and the equilibrium market quantity will be 8,000 computers per week. 25. How much profit will each firm be making at the equilibrium described in question 24? $0 per week about $2,000 per week d) about $10,000 per week e) the firms are not making a profit. They are losing money. 26. In the long run, what do you expect to happen in this market? Nothing will change; it is in long run equilibrium. New firms will enter because there are profits. This will cause the market demand curve to shift to the left d) Existing firms will leave the market because they are losing money. This will cause the supply curve to shift to the left. e) Existing firms will leave the market because they are losing money. This will cause the demand curve to shift to the right. 27. In the final long run market equilibrium, price (P) will be and the market quantity (Q) will be P= $600, Q = 10,000 P= $600, Q = 12,000 d) P= $100, Q = 14, A profit-maximizing monopolist sets its product's price where MC=ATC. output where MC=ATC. d) MR=P e) output where P=MC 29. Consider a market for a good in which the production of the good results in an external cost (i.e. pollution). Which of the following is a true statement concerning the efficiency of a market equilibrium for the good? If the market is competitively structured, the market process will result in an output level such that marginal utility (measured in $) will exceed marginal social cost. If the market is structured as a monopoly, the market process will result in an output that is necessarily worse than the competitive outcome from a social perspective. d) If the market is structured as a monopoly, the market process will result in an output that is necessarily better than the competitive outcome from a social perspective. e) If the market is competitively structured, the market process will produce the correct amount of the good to maximize social welfare. Econ Spring 2003 Final Exam, Page 6 of 16

7 Information for Questions 30-34: Figure 4 shows the market demand and the marginal and average cost curves for a monopoly firm in the market. Hint: There is a missing curve in the diagram. If you were in class, you can (and should) draw it in accurately. 30. In Figure 4, profit-maximization would occur when: P=8 and Q=12 P=12 and Q=16 d) P=16.5 and Q=7 e) P=5 and Q=30 P Figure 4 MC AC Demand Q In profit maximizing equilibrium, the how much profit will the monopoly in Figure 4 be earning? d) 72 e) zero 32. From the point of view of the society, the optimal quantity of this good to produce is d) e) Recalling the relationship between marginal revenue and the price elasticity of demand, we can conclude that the point elasticity of demand at 12 units of output must be approximately d) 1.00 e) Considering the profit maximizing monopolist s output choice, if we could get the monopolist to expand output by one unit, social welfare would increase by about $10.00 $3.00 d) $1.00 e) $0.00, increasing output would not increase welfare 35. In the absence of any externalities, what rule must be followed to obtain a socially efficient allocation of resources? P = AC. MR = AC. P = AR. d) 36. Section 1 of the Sherman Act prohibits firms from monopolizing a market. price discrimination that creates monopoly power. mergers that create monopoly power. d) e) all of the above. Econ Spring 2003 Final Exam, Page 7 of 16

8 37. In order for a natural monopoly to develop, it is important that the firm be a very large firm. it is important that the firm prices its product below cost. d) it must be in the presence of government intervention. 38. Which of the following will occur if a natural monopoly is broken up into two smaller firms? Industry output will increase. The price will fall. d) Marginal Cost will fall. Information for Questions 39-41: The table below shows the price of two goods (x, y) in 1990, the quantity of those two goods that were purchased by consumers in the economy in Price 1990 Quantity 1990 Price 1992 Work Space Good X P x =$2.00 Qx = 1000 P x =$1.25 Good Y P y =$0.5 Qy = 1000 P y =$ If using the data for 1990 as the base year, the consumer price index for 1992 is d) 115 e) Using the information in Question 39 above and the additional information that nominal consumer spending in 1992 was $3000, the available information would allow us to conclude that real consumer spending in 1992 (measured in 1990 dollars) was $2,500 $2600 $2752 d) e) $ If nominal consumer spending in 1990 was $2600, we can conclude that consumers were better off in 1992 than they were in that consumers were equal well off in 1990 as they were in d) nothing about consumer welfare in the two years. 42. Consider an economy where for the current year national income is $1,500,000. The total amount of taxes collected by the government in the current is $700,000 and the government pays out $150,000 in social security payments to citizens. Given this information, disposable income for the economy is $1,200,000 $800,000 $650,000 d) Information for questions 43-47: Consider a simple macro economy with no foreign trade (you can ignore exports and imports, so total expenditure = C + I + G ). You may also assume that the price level is fixed. The consumption function can be described by the equation C = (Y-T), where Y is income and T is the amount of tax payments the government collects from consumers. Assume initially that government taxes (T) total $50 million and that taxes are autonomous "lump sum" taxes, government spending (G) is autonomous and is equal to $50 million and autonomous investment (I) is $100 million. 43. Given the numbers above, the equilibrium GDP for this economy will be. (Answers in millions of $) Econ Spring 2003 Final Exam, Page 8 of 16

9 d) 1500 e) In this model, the Government Expenditure Multiplier is and the Marginal Propensity to Consume is. 4;.8 5;.2 8;.8 d) e) 4; If the current equilibrium level of GDP is 50 million dollars below potential GDP, how could the government change taxes to reach full employment? increase government spending by $12.5 million decrease taxes by $10 million d) keep taxes at there current level of $50 e) decrease government spending and taxes by $50 million 46. A one dollar increase in government spending will have the same effect on equilibrium GDP as would a one dollar tax cut have a smaller effect on equilibrium GDP than would a one dollar tax cut d) have a smaller effect on equilibrium GDP than would a one dollar increase in investment spending 47. If the government replaces the lump sum tax with a 4% tax on income (T =.04Y) equilibrium income will increase and the government expenditure multiplier will rise. equilibrium income will stay the same and the government expenditure multiplier will fall. equilibrium income will fall and the government expenditure multiplier will rise. d) equilibrium income will fall and the government expenditure multiplier will fall. e) 48. Consider a government program that had no other effect but to transfer income from the poor to the rich (e.g. cut welfare payments to the poor and decrease taxes to the rich by an equal amount). In a macro model such as described above this program would Increase equilibrium GDP if rich and poor people have the same marginal propensity to consume. Increase equilibrium GDP if rich people have a lower marginal propensity to consume than do poor people.. d) Increase equilibrium GDP no matter what the relative sizes of poor and rich peoples marginal propensities to consume. e) Decrease equilibrium GDP in all cases. Information for Questions The diagram in Figure 5 shows government expenditure and tax collections from a proportional income tax. (You may assume that there are no transfers in this economy, and that this economy may be modeled with our demand side model. i.e., assume the price level is constant) 49. The proportional tax rate for this economy is 5% Government Spending and Taxes (in billions) Figure 5 G 20 (Gov.Spending) T (net Taxes) GDP (in billions) Econ Spring 2003 Final Exam, Page 9 of 16

10 15% d) 20% e) 25% Econ Spring 2003 Final Exam, Page 10 of 16

11 50. If the marginal propensity to consume in this economy is.8, the government expenditure multiplier for this economy will be. 4 ) d e) If the government has chosen to spend $20 billion (G) and the resulting equilibrium GDP is $100 billion, the government budget will be running a balanced budget. a budget surplus of $10 billion. d) a budget surplus of $20 billion. e) a budget deficit of $20 billion. 52. If potential GDP is $150 billion, then at the current tax rate and level of government spending the government has a structural deficit of $10 billion. a structural surplus of $10 billion. d) a structural surplus of $5 billion. e) neither a structural surplus nor structural deficit. 53. If the government in Figure 5 wishes to maintain the current level of spending but eliminate the structural deficit (surplus) it could do so by increasing GDP increasing the tax rate to 15.0% d) lowering the tax rate to 12.5% 54. If the government in Figure 5 wishes to close the gap between current GDP and potential GDP but does not want to add to the national debt, which policy will work. cut taxes and cut spending. leave spending unchanged but cut taxes. d) raise taxes but cut spending by the same amount. e) none of the above, it is impossible to increase GDP while maintaining a balanced budget. 55. The Bush administration budget for this year has an On-budget surplus, an Off-budget surplus and a structural surplus. an On-budget deficit, and Off-budget deficit and a structural deficit. d) an On-budget deficit, and Off-budget surplus and a structural surplus. e) an On-budget surplus, and Off-budget surplus and a structural deficit. 56. Which US President actually balance the federal budget at least once during his term of office? Ronald Reagan George Bush (Senior) George Bush (Junior) d) Jimmy Carter 57. Consider a bond that matures in one year. One year from now the owner of the bond will receive the face value of the bond ($100) and the last interest payment ($5). The current interest rate on investments with the same risk as the bond is 3%. What is your best guess of what the bond is worth today? Econ Spring 2003 Final Exam, Page 11 of 16

12 $105 $ d) $100 e) $ The Sun Trust Bank has $600,000 in reserves and $5 million of checking deposit accounts. What is Sun Trust Bank's reserve position if the required reserve ratio (R ) is 6%? The bank has $600,000 of required reserves and $600,000 of excess reserves The bank has $600,000 of required reserves and $0 of excess reserves The bank has $1 million of required reserves and $600,000 of excess reserves d) The bank has $300,000 of required reserves and $800,000 of excess reserves e) 59. If we know that the banks are allowed to loan out at most 9/10 of new checking deposits, then what can we say about the magnitude of the money creation multiplier? Nothing It is 0.1 It is 1 d) It is 5 e) 60. The FED goes out and purchases bonds from banks for a total of $250,000. Assuming that banks must keep 20% of deposits as reserves (but assume all banks fully loan out and excess reserves and all loans are redeposited,) the total increase in the demand deposits of all the banks (including initial $250,000 deposit made when the FED purchased the bonds) in the banking system would be: $250,000 $500,000 $1,000,000 d) $1,050,000 e) 61. As a result of FED s action described above, the total increase in reserves of all the banks in the banking system would be: $200,000 $1,000,000 d) $1,050,000 e) $1,250, If the FED goes into the open market and buys bonds the effect will be an increase in interest rates, a rise in investment, and a rise in equilibrium GDP. an increase in interest rates, a drop in investment, and a drop in equilibrium GDP. d) a decrease in interest rates, a drop in investment, and a drop in equilibrium GDP. e) an decrease in money supply D USA USA S USA Canada Information for Questions 63-70: The figure shows the domestic supply and demand curves for wheat in the US and Canada with price per ton on the vertical axis and quantity of heat in tons on the horizontal axis. Prices for both countries are expressed in US dollars to make prices comparable across the two countries. You may assume that the US and Price per ton (in $) Figure 6 Price per ton (in $) D Canada S Canada Wheat (tons) Econ Spring 2003 Final Exam, Page 12 of 16

13 Canada are the only two countries that produce and consume wheat. 63. If the US and Canada do not trade with one another, the quantity of wheat produced in the US will be and the quantity of wheat produced in Canada will be. 8; 9 12; 5 d) 10; 9 e) 6; If the US and Canada engage in free trade in wheat the equilibrium price of wheat in the US will be d) 3.00 e) Compared to the no trade equilibrium, the free trade equilibrium will cause US wheat farmers to production by tons of wheat. decrease; 4 increase; 2 increase; 3 d) e) decrease; In the free trade equilibrium, the US units of wheat from (to) Canada export; 4 export; 9 export; 13 d) import; 2 e) 67. Who are the winners from free trade? Canadian consumers and US wheat farmers US consumers and US wheat farmers d) Canadian consumers and Canadian wheat farmers e) no one. 68. Approximately how much consumer surplus do Canadian consumers gain (loose) when free trade in wheat is initiated? gain $.50 gain $5.25 gain $7.00 d) loose $.50 e) 69. The total value of the gains to trade of free trade in wheat between the US and Canada is $0 $1 d) $3 e) $4 70. If the US puts an import quota on Canadian wheat and allow only 1 ton of Canadian wheat per period to enter the US, what will the equilibrium price of wheat be in the US and Canada? $2.50; $2.50 $3.00; $2.00 $2.75; $2.00 d) e) $3.00; $ In Bangkok you can buy a Whopper for 3000 baht (the Thai currency). In the US you can buy a Whopper for $2.50. The current exchange rate is 1000 baht per US dollar. According to the theory of purchasing power parity, the baht is under valued against the dollar the baht is properly valued against the dollar d) Both the baht and the dollar are over valued. 72. When the value of the U.S. dollar falls, imports into the U.S. will become expensive for Americans while Econ Spring 2003 Final Exam, Page 13 of 16

14 exports from the U.S. for foreigners. less ; remain the same more ; become more expensive less; become more expensive d) less ; become less expensive e) Information for Questions 73-74: Figure 7 shows the world supply and demand for the Philippine peso in terms of US dollars. $/Pesos Demand for Pesos Supply of Pesos 73. If the peso is allowed to float the exchange rate per peso will be $.05 $.15 d) $.20 $.20 $.15 $.10 $ The Philippine Government and central bank are unhappy with the value of the peso and decide to impose strict currency controls. They fix the exchange rate at $.20. To hold the peso at this exchange rate, the Philippine government will have to sustain a balance of payments of per year. Figure Pesos (Billions per year) surplus; $3.2 billion surplus; $1.6 billion d) deficit; $1.6 billion 75. If inflation in the United States is higher than in England, what will happen to the exchange rate between the U.S. dollar and the British pound? The dollar and pound will both appreciate. The dollar and pound will both depreciate. d) The values of the dollar and the pound will remain constant 76. The Philips Curve shows the relationship between Government spending and unemployment Interest rates and investment Income and taxes d) GDP growth rates and investment e) 77. Currently in the US we have a balance of trade, a government budget and a capital account. surplus, surplus, surplus deficit, deficit, deficit surplus, deficit, deficit d) e) deficit, surplus, surplus 78. The US balance of trade would improve (smaller deficit or bigger surplus) if inflation in the US increased. the value of the dollar increased relative to foreign currencies. Econ Spring 2003 Final Exam, Page 14 of 16

15 d) Europe goes into a severe recession. Econ Spring 2003 Final Exam, Page 15 of 16

16 When you have completed your exam: Print your Name Write your Student ID number (PID) Sign the honor Pledge affirming that you have neither given nor received aid on this exam and have complied with all of the rules of this exam. Signature Tear this form off the back of you exam and turn it in with your answer sheet. You may keep the rest of the exam. Econ Spring 2003 Final Exam, Page 16 of 16