Name_ Economics and Institutions: MGMT 7730 Test 1 - Sample You have 150 minutes to complete the exam. Make sure you answer the easier questions first before getting bogged down on the tougher ones. There are 7 pages and 3 parts in the exam. Make sure you have all 7 pages, and write your name on top of each page. Answer the questions in the indicated spaces. You may use a calculator. Your calculator must not contain course related information. The exam is closed book and closed notes. The exam has a total of 40 points. The points for each question are indicated. I Short Answers (15 points). 1. What do economists mean when they say that there is no free lunch? Give an example to which this statement applies. (3 points) 2. Given the products below and the events that affect them, indicate what happens to demand, supply, equilibrium quantity, and equilibrium price in a competitive market. (a) Home heating oil. There is a severe winter in the regions using the oil; the cost of a barrel of oil rises for producers of home heating oil. (1.5 points) (b) Organic foods. People become more concerned about chemical additives in food; traditional farms are switching to more organic methods. (1.5 points) (c) Film cameras. The price of digital cameras falls for consumers; there is a decline in the number of stores selling film cameras. (1.5 points) (d) Bread. Many consumers adopt a low carbohydrate diet and avoid bread products; the price of flour falls for bread producers. (1.5 points) 1
Name_ 3. Give a brief description of the law of diminishing marginal utility and use it to explain the downward slope of the demand curve. (3 points) 4. Which of the following are included and which are excluded in calculating this year s GDP? Explain in each instance. (a) The purchase of a new truck by a trucking company (1 points) (b) Government purchase of missiles from a private business (1 points) (c) The purchase of a used tractor by a farmer (1 points) 2
II Applications (25 points). Name_ 1. In the spaces below each of the following, indicate the [increase (+), decrease ( ), or indeterminant (?)] on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply. (4 points) P Q (a) Increase in demand, increase in supply (b) Increase in demand, decrease in supply (c) Decrease in demand, decrease in supply (d) Decrease in demand, increase in supply 2. The following is a straight-line demand curve that confronts a single firm. Price Quantity demanded (3) (4) $6 1 $ 5 2 4 3 3 4 2 5 1 6 (a) In column 3, compute total revenue. In column 4, compute the coefficient for the price elasticity of demand at each price using the midpoints formula. (4 points) (b) Describe the character of elasticity across the prices based on the total revenue test and the elasticity coefficient. (2 points) (c) Does a straight-line demand curve have constant elasticity? (1 point) (d) Of what practical significance is your answer to (c)? (1 point) 3
Name_ 3. A consumer has an income of $24 to spend each day. The only two goods the consumer is interested in purchasing are goods A and B. The marginal-utility schedules for these two goods are shown in the table below. The price of B does not change and is $2. The marginal utility per dollar from B is also shown in the table. But the price of A varies as shown in the table. The marginal utility per dollar from A when the price of A is $8 and $4 is shown in the following table. Good A Good B Quantity MU MU/$8 MU/$4 MU MU/$2 1 48 6 12 24 12 2 32 4 8 15 8 3 24 3 6 12 6 4 16 2 4 8 4 5 8 1 2 6 3 6 4 0.5 1 4 2 Complete the table below to show how much of A the consumer will buy each day at each of the two possible prices of A. Also, show how much B will be demanded when the price of A changes. (4 points) Price of A Quantity of A demanded Price of B Quantity of B demanded $8.00 $2.00 4.00 2.00 4
Name_ 4. The table below shows the total production of a firm as the quantity of labor employed increases. The quantities of all other resources employed are constant. Compute the marginal and average products and enter them in the table. Inputs of labor Total product Marginal product of labor Average product of labor 0 0 1 40 2 100 3 165 4 200 5 225 6 240 7 245 8 240 (a) At what levels are there increasing returns to labor and at what levels are there decreasing returns to labor? (3 points) (b) Describe the relationship between the total product and marginal product. (1 point) (c) Describe the relationship between marginal and average product. (1 point) 5
Name_ 5. The following data show nominal GDP and the appropriate price index for several years. Compute real GDP for each year and indicate whether you have inflated or deflated nominal GDP in finding real GDP. All GDP are in billions. (4 points) Year Nominal GDP Price level index Real GDP Inflated (I) Deflated (D) 1 $117 120 2 124 104 3 143 85 4 149 96 5 178 112 6 220 143 6