Econ 107 Spring 2007 Final Exam

Econ 107 Spring 2007 Final Exam - r... 1% Economics 107...

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Unformatted text preview: r... 1% Economics 107 FINAL March 23, 2007 INSTRUCTIONS - READ CAREFULLY. 1. Use a # 2 pencil on your Scantron. If you don’t have such a pencil, request one. 2. WARNING. Experience shows that if you make an erasure on your Scantron or use a #1 pencil, you run the risk that the optical scanner - which is very sensitive - in the grading machine will score your answers as being incorrect. F or obvious reasons, we are going to take the scanner ’s grading as final. So don ’t make erasures and use the correct pencil. Hint: score your answers on this examination paper, and transfer them to your Scantron when you have completed your work. There are a few blank Scantrons available in the room for 25 cents. 3. There are 12 pages to this examination on 6 sheets. Check that you have the correct number of sheets. Note that there are always 5 options to any of the following statements. Only one is correct. 4. Save this examination so that you can check your answers on the Econ 107 Website. Answers will be available today by noon. 1. Most economists Would agree that the first economics paradigm emerged with Adam Smith’s Wealth of Nations. One of the ing conditions did NOT lead to this emergence: Smith had been much impressed with Newton’s work and he and Hume wanted to do in moral philosophy what Newton had accomplished in natural philosophy - delineate a basic order to the phenomena of interest. {conomic life had become sufficiently complex and obtrusive that it had got the attention of thinking people. ,t./tehe Scottish Enlightenment had produced an environment in which educated persons could speak relatively freely about the issues of the wealth of nations. 0 d. the Calvinist church in Scotland’s emphasis on education helped produce the Scottish Enlightenment. Adam Smith used the term “economic system”, started lecturing on “Economics” at the University of Glasgow, and worked out the ' equations for a general equilibrium of the British economy of his day, thus creating the paradigm. 2. What is wrong with Malthus's belief that population increases by a geometric progression is: Malthus is just wrong that the only checks to population are (a) starvation, wars, and (b) abstention from sex. . countries with developed economies actually always experience linearly growing populations. c. that he‘copied this belief from Alfred Marshall without looking at any data. d. that be restricted this belief to underdeveloped countries ignoring the fate of the developed Western economies. e. that he was accepted the Utilitarian view that all life creates total utility and so any sensible government will be maximizing the size of its population in order to maximize total social utility. 3. Pinkerton argued that if we read Malthus carefully: gr“ e will find out that Malthus‘s European travels had convinced him all the more that wages tended towards subsistence.” We will find out that Malthus in his later books simply repeated the convictions of the first edition of his Essay on Population.” we will find out that “toward the end of his life, Malthus altered his views. In “Principles of Political Economy” (1820), he acknowledged that economic growth would improve the prospects of the populace.” d. “we shall find out that Malthus was a member of an elite that looked upon their fellow humans as liabilities.” e. “we shall find out as we read successive editions of his Principle of Population. Malthus becomes even more convinced of the views exposited in his first edition. . _ Real 5 , 5-» $3 4. In the diagram to the right which appeared in early 60‘- versions of Samuelson’s text, the Malthusian CF equilibrium would be at: CE: :1 ' seat d: bog”- e. W. I . ‘ I Page 3, Sheet 2 13. Ricardo believed [I] the falling rate of profit: a. for exactly the same reasons as Karl Marx. This is where Marx got his ideas from - Ricardo. b. as being just around the corner for England. This is why Carlyle called economics ‘the dismal science.” . as being something statesmen could do little about. It was a law of nature. 6. as a tendency which technological growth and wise statesmanship (e.g. by expanding world trade) could prevent from emerging. e. as only true for European countries, not for England. 14. Professor Murphy has called Gootzeit's model of Ricardo's stationary state "a catastmphice state model" because at quilihrium: profits are zero. Capital and superintendence will not be brought to the market in the period after the so-called “stationary state” equilibrium as there is no return to them. b. rents are zero. c. the wage level is below the subsistence wage. d. the marginal physical product schedule is monotonically increasing. e. low profits will produce political revolutions. This is where Marx got the idea. 15. Ricardo followed Adam Smith in using the Law of Equal Return when: a. he showed how countries with similar Absolute Advantages would be equally prosperous. b. he computed Comparative advantages. . he worked out his Equivalence Theorem. showed returns at his intensive and extensive margins were equal. e. he argued England would eventually emulate Portugal and produce wine at the same rate of profit. 16. Ricardo’s equivalence theorem can he explained in this way: a. The present value of funding an increase in government spending by either taxation or floating bonds are only equivalent if the tax rate is zero. If we assume that the annual payments on a perpetual Bond, B, are Br, then the present value of those payments in Brlr. Hence the present value of the bond burden is B. c. Trade could only tke place between England and Portugal only if they had equivalent prices for the traded goods. d. That it is not true if the government uses “consols” [perpetual bonds] as British governments did use in Ricardo’s day. This is because the longer the life of the bond, present value becomes slowly increased as a function of time. e. Ricardo, in Parliament was deeply interested in finding a way for the British government to avoid paying any taxes at all. 17. Ricardo in his Chapter XXIII. 0n Machinery, of his The Principles of Political Economy and Taxation, 1817: a. showed great sympathy with the Luddites of his day who were going around destroying machines because they created unemployment of labor. In Parliament he advocated that machines be phased in at a very slow rate to minimize transition costs to labor. b. believed that a rational policy in this area was impossible as such a policy would be opposed by the irresistible power of special interests. ® argued that new machinery made England more competitive, and reduced the costs of living of workers. In addition new machinery created employment because they had to be built and to be serviced. d. Opposed the introduction of new machinery as it upset the equilibrium of the Stationary State. e. Showed how the introduction of machinery was preparing the grounds for a Marxian revolution. 13. “Benthams’s interpretation of utilitarisn rested on some clear-cut value judgements” [Backhouse]: C; Society’s interest is the sum of the interests of the members of society. . Every man needs a wise advisor to find out his own interests. c. The rich have a much greater capacity for happiness than the poor. d. The utility that women get from consumption is less than men get. e. The utility that women get from consumption if far higher than men get. 19. James Mill {1773-1836} was another classical economist who believed in Say’s Law. [Your text, p. 142] This meant, according to ackhouse, that he believed: . é that there never could be a shortage of demand in general. . French economics was better than British._ c. that depressions arise from a shortage of demand in aggregate. d. that depressions arise due to shortages in demand for particular commodities. e. if enough people “say” something, it will affect the market for stock and produce a depression. [11' you mark this one as correct, I am going to thump you! Prof M. ] 20. Jean Baptiste Say’s Law is: a. Demand creates its own supply b. Demand creates an equal supply. c. Competitive demand is perfectly inelastic. . Market supply is perfectly inelastic. Supply creates its own demand 29. J. S. Mill did not believe one of the following: Page 5, Sheet 3 a. that a class of commodities had perfectly inelastic supplies. ' . b. that industries had long run constant returns to scale. c. that agriculture had long run decreasing returns to scale. -. that the Stationary State might be an acceptable equilibrium. that Nature rigidly determines the distribution of income so that it cannot be altered by humans. 30. J. S. Mill is the first major classical economist to: a. side with the mercantilists and argue for an export surplus. ide with the physiocrats and argue that only agn'culture produces a Produi't Net. @ilt out the benefits of an import surplus. . write out the equations for a general equilibrium. e. solve the adding up problem. 31. J. S. Mill made an advance on Ricardo's theory of comparative advantage by showing that: . he terms of trade between two products will depend o the ratios of absolute advantage. . ®the terms of trade between two countries will depend on the relative strength of demand of the two countries for the other countries exports. c. the terms of trade between two products will depend on purchasing power parity. d. the terms of trade between two products is infinite when price is zero. This is a purely theoretical result. e. in some cases you did not have to have comparative advvantage in the free market for trade to take place. 32 J. S. Mill believed that the stationary state : a. was just a bunch of nonsense that Ricardo had thought up. . was only possible centuries ahead for England. écould be desirable. It would reduce the “trampling, crushing, elbowing, and treading on another's heels.... It is only in the backward countries of the world that increased production is still an important object; in those most advanced, what is economically needed is a better distribution.” d. was a bunch of Marxist nonsense. e. only occurred if you had Ricardian equivalence. where supplies were perfectly inelastic, like wines of rare vintages or old masters. . where demands were perfectly inelastic, like all items of food. c. where both demands and supplies were perfectly inelastic. d. where both demands and supplies were perfectly elastic. People had an infinite eed for the production of this market. e. where it would take generations for an equilibrium to emerge. . J. S. Mill thought in terms of three kinds of markets one of which was markets: a horizontal supply curve and a downward sloping demand curve. . a downward sloping supply curve and also a downward sloping demand curve but of a different slope. c. an upward sloping supply curve, and a downward sloping demand curve. J d. a perfectlyinelastic supply curve and a downward sloping demand curve. F 61. J. 8. Mill believed that industrial markets displayed: e. constatly fluctuating elasticities of both demand and supply. 35. With respect to J. S. Mill’s views on agricultural markets: a. the diagram to the right is accurate. It shows Mill )0 agreed with Malthus that there was a limited amount P of agricultural supply. b. The diagram is not relevant as it shows Mill’s views of industrial markets. '- The diagram to the right is irrelevant. It deals with G? commodities like rare wines, and old masters. d. it is impossible to diagram them as they are so complex. e. In the diagram above, be is using Adam Smith’s diagram. 6 In J. S. Mill’s writings 0 international trade, he i - - '6 concluded, correctly, that the terms of trade between two countries depended on the relative demands for the imported products of those countries. b. made absolutely no contributions at all. e. felt that tariffs had no effects on on the terms of trade. . d. felt that there were no adjustments in trade brought about by unilateral transfers between countries. e. saw no real benefits - he was essentially a Mercantilist. 37. Herman Heinrich Gossen’s First law is: a. that MPP decreases at an increasing rate. _ _ _ _ ' . . thhat consumers get satiated with a good - in other words after a point marginal utility drops at an increasing rate With successive increment of a good and could eventually become zero and then negative. _ _ c. that the extensive margin will be cultivated up to the same level of output as the extensive margin. d. the hill of output is cardinally measurable. I . e. Total untility is inverse to the number of persons who consume a particular commodity. 47. in the Marshallian short/rim: Page 7, Sheet 4. a. the firm‘is~ ecessarily, in'eqii’ilibrium. c. wehave angldpntggal-sitfation to Ricardo’s stationary state. d. the firm must-7' spat-[e profit or the short run situation will not be an equilibrium one. Quasijaents are 5 'ly the difference between total costs and total fixed costs. atleastflne factor 0 oduction is in perfectly inelastic supply - there are fixed costs.. 48. The Marshallian long run is the period during which ; I a. fundamental social and economic parameters like institutions, technology, and population can change. b. there is sufficient time for demand curves to become inelastic due to the expansion of the number of substitutes. c. quasi rents are infinite. d. as Keynes said - for Marshall it is when We are all dead. @each and every factor of production is variable. 49. For Marshall the 'secular period was: - . a. after the Protestant reformation so that Economics no longer had to worry about ethics or religion. b. remarkable, because, as Weber had showed, the Protestant religion was highly important in the development of capitalism. c. Pareto optimal and Pareto desirable as economic judgments were not clouded by ethical consideration. :. was when the Catholic church no longer had power to talk about just prices and just wages. e hen there are gradual or Secular movements of normal price, caused by the gradual growth of knowledge, of population and of capital, and the changing conditions of demand and supply from one generation to another. 50. Both the long run and the short run “Marshailian” average total cost curves are U-shaped : a. and the reason for that is the same. In both cases it is due to crowding of the fixed factor. b. and the reason is that after the low point of Average Total Cost is arrived at, marginal costs start falling. c. and the reason is that as a first class mathematici Marshall liked things to be symmetrical. d. because you find this in Ricardo. ut the reasons for this are dissimilar. For the short run the reason is crowding of the fixed factor. For the long run the reason is the “coordination problem.” 51. For Marshall a Pure Profit was a signal: a. that all factors shares had been fully imputed. b. that the firm ws in an industry that should be regulated by government. . that a firm should contract output or its success would attract the attention of the tax man. é. that a firm that earned it was in an industry that was not in equilibrium and factor costs may not have been correctly imputed" e. that a firm that produced the product was a pretty ethical outfit. It got profits in a pure way. 52. The key idea behind Marshallian quasi-rents is that: a. Land really isn’t fixed in supply and you can create new land. For example, the Dutch build polders to keep out the sea, and O reclaim land behind the polders. So Marshall essentially said: Come on economists. Land isn’t in fixed supply so let’s be honest and say it gets something like a pure rent - let's call it quasi—rent.” So capital gets profit. Management gets interest. Labor gets wages. And land gets quasi-rent. ,K Marshall pointed out that land always got taxed, so taxes were just like rents. So he called them quasi-rents. c. The total of quasi-rents could support the government just as Henry George had rgued. . ® Any factor of production whose supply is fixed for the period of production under examination can be viewed as having a perfectly inelastic supply function, and thus earning as return similar to land during the period when it is in fixed supply. Marshall was nostalgic for the days when he was a tutor in Latin at Clifton College and loved to pretty up his work with Latin words. \. 53. In “Marshallian” economics, cost ladder adjustments are produced by: a. government regulations. b. the central economic plan of the government. . quantity adjustments only. After all competitive prices are fully determined. é exit and entry, factor imputation,. changes in scale. . By price adjustments only. Firms never change the outputs they produce near an equilibrium. 54. Factor imputation is the process whereby in perfect competition: - a. factors are able to successfully bargain for higher wages, rents, profits and interest regardless of whether a firm is at full equilibrium or not. factors earn the their marginal physical products. factors can switch to other industries where they get their marginal physical product. actors can bargain and get the value of their marginal physical product as a wage, rent, profit, or interest. . in each and every firm, the entrepreneur knows how to calculate how many factors his competition are using. 55. Exit in “Marshallian” economics is triggered by: a. Normal profits existing in the relevant industry. . prices that fall below Average Total Costs. hen prices fall below Average Total Costs but are above Average Fixed Costs and the scrap value of the firm exceeds the present value of quasi-rents. d. Government regulation. e. If firms earn an impure profit. [Not : “Marshallian” means Marshall’s economics plus recent extensions of his theories. ] G3 ..... ............. “““ ............. .........................Page$5th5 . . Keynes simple [textbook] employment multiplier is equal to: a. the marginal propensity to save @ ll-MPC] or II] [1-b} c. the slope of the investment function. I. ll[the slope of the investment function.] e. all of the above. 67. One of the cheerful aspects of the Keynesian model is: a. that unlike Ricardo’s model, landowners get zero. . while workers get subsistence wages at least they will be fully employed. @ that while Government has to come in to spend in order to push up aggregate spending in a recession , the multiplier makes the intervention much less expensive than the amount of the spending gap. d. that Keynes thought as money-making was a neurosis, we all would be better off with a recession. e. that it predicted a convergence between capitalist and communist economies. 68. In Economics [one below is false}: a. there is a paradigm . b. There is an accepted canon or canons. c. There are recognized classical situations. d. There is a standard econometric practice. ® There is total agreement on what is correct economic policy. are crucial to a discipliue’s view of its own emergence as a discursive entity with its own chronology. [Brown]. . are timeless so that they do not involve meaningless cataloging of a discipline’s credemtials by providing useless chronologies according to which the modern discipline tries to record its own achievements and advances. [Brown]. c . are always static, and frozen in content. . d. never include a series of minor canons reflecting the interests of subordinate or dissenting practices within a discipline. e. are barren of any use to a particular discipline of knowledge.. [0n Vivienne Brown]. According to'Brown, Canons: 70. [On Robbins] According to Lord Lionel Robbins in “Malthus as an Economist” was concerned, among other things, to show that: a. Malthus had worked out a consumption function before Keynes. . Malthus hd independently solved the product exhaustion problem. éMaltbus’s arithmetic for increases in agriculture was based on a fairly well developed idea of diminishing returns in agriculture. . Malthus was not so hard hearted as some represent. He was in favor of the Poor Laws. e. Malthus made no contribution at all to the theory of rent. 71. Amartya Sen, in looking at population issues, remarked that: - we can relax about global warming as women get more rights and do not hear so many children. a high rate of population growth entails a loss of freedom that women suffer when they are shackled by persistent bearing and rearing of children. ®the sharp increase in fertiliy rates in Bangladesh were due to loss of female rights. . rising prices of basic food stuffs is a major problem. e. the advance in the rights of women have no major impact on economic issues. 72. John Maurice Clark in his article “Distribution” notes that the beginning of the abstract study of the distribution of income starts with: a. Petty. (DThe Physiocrats. c. Adam Smith. d. Ricardo, e. His father, John Bates Clark. 73. Joan Robinson in her article “Euler’s Theorem and the Problem of Distribution” shows that a problem for past economists using the marginal approach has been: being able to understand the mathematics of the problem. how to handle entrepreneurship as a variable factor input. c. their fascination with Marxian economics. . . d. a lack of useful theory whatsoever. Nothing had been done in distribution theory until after World War 1. e. that no one ever has resolved the product exhaustion problem.r 74. George Stigler in his article “Ricardo and the 93% Labor Theory of Value” is concerned to show that Ricardo: ‘ a. did not have had a labor theory of value. b. did at have a labor theory of value and this was pointed out by Marshall, Diehl and Vine. @had an analytical labor theory of value. . assumed that labor costs were only 3% of total costs. e. Land values were the best approximators of relative prices. 75. George Stigler in “Perfect Competition, Historieall Contem ,- : - - - a - a ' - - ' - ‘ ~ = I e con - Itions for competition. any advance on Adam Smith. _ the first steps in the analytical refinement of the concept of competition were made by the mathematical economists. c. Edgeworth was the first to produce a satisfactory analysis of the small hum-berscase. . d. Marshall due to his brilliance as a mathematician introduced much more rigor Into this area of knowledge. e®Clark was so concerned with product exhaustion that be ignored this area of economics. 8‘7. Diagram 2 re resents: a. a firm in the shd‘rt run. Page 11’ Shut 6 . a market in the short run. C§ a market in the market period. . a market in the long ru. e. a market in the secular period. ian short run. . arshallia equilibrium. c. with ze pure profit. . with asi-rents at einte ve margin. 90. We can expect the firm in Diagram 3 to be exposed to all but one of the below. Which is incorrect? a. Entry of other firms into the industry it is in. b. Factor imputation. c. decreasing quasi-rents. decreasing pure profit. Bankruptcy because of changes a to d. full Marshallian long run equilibrium. the arket period. c. the secular period. d. the short run. c. Cannot pay factors their VMPs. @. The firm represented in diagran 4 is in: 92. The firm represeted in Diagram 4 has enough receipts to: a. pay all of its factors except capital. b. only cover its l'ix'ed costs. c. but not enough to be able to pay stockholders anything as it has no profit. is at both the intensive and extensive margin. e. will be exposed to lots of entry ad demands for increased factor returns due to its pure profits. 93. Assume a simple Keynesian model. Consider a consumption function: C=200 + .SGNP. If there is an increase in spending on Investment [Gross Capital Formation] then the multiplier is:I \ 7/ w .5 p. ‘, I3 2 /' S :1 h c. 5 \' . d. 200/[l-b]. . . e. None of the above. 94. Assume the simple Keynesian model. In the nest three multiple choice I want you to work out the Trygve Haavelmo theorem for yourself. The consumption function is C = 100 + .BGNP. There is a balanced budget. Government now spends an additional 100. sume the government spending multiplier is ll[l-b]. The effect on the economy is: ' @+ 500. l \ / fl (fl . + 400. / q) 1 . 1,- ’ c. Zero. \ ‘ - ‘ ' d. Indetermiante. e. 100 + [.81100] = 280. 95. Same situation as 94. The government now taxes by 100. The government tax multiplier is -b {l - b]. , The effect on the economy from taxes is zero. After all the budget is balanced. - 400. e. Indeterminate. d. -500. e. -{200 + .81100} = -280. 38 Herman Heinrich Gossen’s Second Law was: Page 6, Sheet 3 a. that marginal utilities increase as people become more sensitive and better educated. that the first Law is not true at Christmas. Due to Santa Claus, marginal utilities increase stupendously at this time. @that a consumer maximizes satistaction when MUI IP, = MIUP‘. . MU. IP for each and every good consumed. . that a consumer maximizes satisfaction when average total utility is maxi zed. e. that the First Law is only true for rational maximizers [e.g. women]. crl Marx: Died before Hegel was born. Otherwise he would obviously have been a follower as he had so many beliefts in common. 39 d as a young man was much influenced by the Hegelians both at the University of Bonn, and at the University of Berlin. opined that there was nothing to be learnt from philosophy which is why he did his degree in law as his Father wished. d. did his University work at Manchester University so that he could study the British working class. He stayed in the home of Engels. As a consequence he was ignorant of German philosophy. e. Attempted to mathematize Hegel but found it so difficult he gave it up in disgust. 40. Karl believed that history showed;: - steady progress of universal humanitarianism. a dialectical process but the process was not Hegel‘s but influenced by Feuerbach‘s materialist conception of history. the steady rise in influence of the Prussian state which was his model for the perfect society. d. a rising real wage for workers but declining political influence. e. that all abuses of labor and their exploi ation came from religion. He said “religion is the opium of the working class.” 4 . t sac W] a. increas - productivity of capitalism. b. was constant 0 pitalist countries arrived at the Stationary State. c steadily incre e due to the exploitation of underdeveloped countries. d fell over time n g due to the demands of technological progress. S and V were relatively constant. - I a sts of“ course, - tedrto increase the rate of exploitation SN but there was some point below which you ‘9 . - ot drivdfiS'f-‘QHo‘KE e. was ". eresting but no of critical impo ance. W at was important for the revolution was military force. 42 Karl Marx believed in three alienations. a. religious, educational and familial. self-alienation , product-alientation and species-alienation. . military, political, and sociological. d. military, religious, and ecological. e. substantive, spiritual, and ontological. 43. The issue came up - if each worker got paid the VMP in a firm, would the firm earn enough to cover those VMPs. a. John Bates Clark used Euler’s theorem to do this successfully. b. Philip Wicksteed used Euler’s theorem to do this successfuly . Wicksteed and Clark succeeded in proving this. Wicksteed and Clark attempted to prove this but did not succeed. e. Cournot had already given the proof of this before Wicksteed and Clark had a shot at it.. 44. John Bates Clark [1847—1935] is noteworthy because: a. he successfully solved the product exhaustion problem. b. be was the first to draw the distinction between normative and positive economics, and to assert no true economists involved himself in ethics. c. be was able to successfully mathematize Marxian economics and to show in the long run, Marx was no different in his , conclusions than Marshall. e drew the ethical conclusion that under competition each agent of production gets a just reward. For the VMP is composed of a measure of the marginal contribution to output of the worker, and a price on which individuals voted on in the market place by their demands. It was just that people who were good at producing what people wanted were rewarded for this, and the market did this perfectly. e. be was the first to analyze cartels. 45. Marshall solved many of the punles that economists had inherited from the classical economists by introducing the notion of time into his analysis. a. he made a distinction between clock time and Universal time. b. He did this because he wanted to introduce differential equations into a new dynamic economics. c. He did his because Marshall’s father was the Royal Astronomer and had made his son fond of clocks. @ He divided analysis of a market into the market period, the short run, the long run, and the secular period. c. He believed that economists had ignored clock time thus impoverishing the discipline of empirical content. 46. For Marshall the market-period: a. was fixed by ancient British customs. There was “market day.” Americans have imitated this so there is a “market day” in Santa Monica, and in Westwood. b. 0n market day in Santa Monica, and in Westwood, the markets there are in the ‘market period.’ c. was important. But Prof M. said there is no actual example in our present economy of a market period. . revealed information that would lead to exit or entry or to factor imputation. _ The market period exists when a supply is perfectly inelastic and there is no reservation price. Page 4, Sheet 2 Suppose a city with production of various agricultural crops around it. At each distance_ from the central place the farmer will plant the product promising the highest rent. The result is von Thunen’s famous rings. b. farmers will minimize the walking distance to their suppliers. c. farmers will produce to Gootzeit’s stationary state equilibrium. d. farmers will insure against weather variabiity by planting different crops in different places. e. farmers will plant crops in such a way as to minimize their taxes. . Von Tbu'en produced a theory of location by arguing: 2. Von Thiinen argued that the “natural wage” was the one consistent with a Ricardian stationary state. was the one consistent with a Marshallian equilibrium. was the square root of a multiplied by p. d. was a medieval concept like the “just price” which sensible economists should ignore. e. could only be realized with extensive government policing of labor markets. . Vo Th'unen cotributed to Marshall who adopted von Thiinen’s; “Natural wage” theory I /) marginal productivity doctrine. ‘ Stationary State model. ’ d. International trade theory. e. Business cycle theory. 24. Antoine Augustin Cournot: . was the first economist to use linear programming. ® was the first economist to use supply and demand curves but he put quantity on the y-axis, and price on the x-axis. . was the first economist to challenge Say’s Law. . d. wrote to Job Maynard Keynes congratulating him on the Iatter’s Treatise on Money. e. spent part of his time as a revolutionary prosecutor dealing with economic crimes but changed his name to Fouqier-Tinville. 25 Antoine Augustin Cournot: a. thought that all historical occurrences were highly determined. The job of the economist was to find the causal mechanism. L’hazard, or chance, for Cournot simple did not exist. [Correct answer. ] “Couruot was preeminently the theorist of chance. I opposition to Laplace, who thought of chance events as occurrences of whose causes we are ignorant, he defied chance as the unpredictable concurrence of two independent causal series and thus attributed to chance as much essential reality as to cause. It was this notion of chance which led him to indicate the importace of the probability calculus for statistics, whose aim he described as the coordination of observations for the purpose of establishing numerical relations purged of accidental influences and exhibiting the operation of regular causes. “ [ Bougle] c. believed economists should work out solutions with mathematics and then bury the mathematics in footnotes so it would not disturb businessmen and politicians who read his work. d. was a successful farmer and autodidact who lived in Prussia and thus was heavily influenced by the German Historical School. e. mathematized Sir Thomas Muu’s English Treasure by Forrm‘gu Trade. . [I am giving you the answer on this oe because when I checked the class Lecture Notes, the quotation in b from the Encylopedia of the Social Sciences had not been included as I had believed it had been. [ 26. Cournot: a. analyzed a number of market situations like pure competition, monopoly, etc. but he missed cartels. (Banalyzed a case of two duopolists [owners of wells] and concluded that the obvious result would be the emergence of a cartel. c. argued that economic processes would always lead to the emergence of perfect competition. d. argued that economists should recognize the unit of analysis for them was the polity and they need to work out the political laws and mathematize them. e. argued like Nassau Senior, that it was none of the busiess of economists to make recommendations to the government. They should provide their analyses to statesmen who would then consider the politics of the recommendations and tako action. ' ' 7. Dupuit: @vus the first to work out the idea of consumer surplus. . was the first to produce a general equilibrium model. c. was the first to produce an underemployment equilibrium. d. thought the French state should produce new bridges to the point where the utility of the last added bridge was zero- e. though that economicsf was of no use to engineers building bridges for the French government. 28.John Stuart Mill has posed a problem for liberalism because: a. he so strongly believed in communism. . he thought centralized socialism would solve many of Britain’s problems. 11 the one hand in On Liberty he makes a strong case for individual liberties, while on the other hand in other works he saw many grouds for state intervention that might abridge those same liberties. d. he did not believe the market system was efficient. e. be believed individuals had the right of suicide and that of murdering unfaithful wives or husbands. no P - Page 2, Sheet 1 5. The curve to the right is known as the: trots-L5“ p the logistic curve of population growth. . the law of eventually diminishing returns. c. the law of increasing real cost. d. the law of satiation of demand. e. the law of bureaucratic growth. 6. Samuelson used a diagram that showed four stages in population growth. This diagram had: t "he a. a first stage when death rates and birth rates are stabilized at 10 per thousand. b. a second stage when industrialization raised death rates. c. a third stage when Malthusian pressures raised hirthrates to an all time high. d. a fourth stage when nuclear war destroyed most of the world's population. fourth stage when in mature societies, couples have around 2 children, so population stabilizes. 7. Consider Nassau Senior’s second Proposition was: “That the Population of the world . . . is limited only by moral ad physical evil, or by fear of deficiency of those articles of wealth which the habits of the individuals of each class of inhabitants lead them to require.” This proposition:: P} a. is known as Say’s Law. , is an outright rejection of Malthus’s views on population. is empty in predictive power. If population is growing then the limits aren’t working. If it is falling then the limits are working. It does focus on what Senior considered the variables of interest in the situation. I 6) was accepted by Malthus in his 1st edition of his Principles of Population which he wrote after reading Nassau Senior. . e. for Nassau Senior this proposition was simply a matter of consciousness. You knew it to be true when you Woke up in the marning. 8. Which of the following was one of Ricardo’s assumptions? . Labor costs are approximators of relative value and price relatives. I). That his stationary state depended on the government adopting the appropriate monetary policy. The state had to follow the Friedman rule. . c. That wages would steadily increaxe over time. d. That profits would steadily increase over time. c. That landowners tended to be ill informed and poor judges of their own interests. 9. In discussing international trade Ricardo assumed England could produce cloth with 100 men for a year, and wine with 120 men -. a year. Portugal could produce wine with 80 men for a year and cloth with 90 men for a year: fi' 'cardo asserted that trade would occur as comparative advantages existed. . Prof M. said this was clearly historically accurate as Portugal was far advanced beyond England in cloth production. c. This meant England had an absolute advantage in wine. d. This meant that England had an absolute advantage in the production of cloth e. Prof M. said that under such circumstances you cannot have trade as England has absolute advantage in everything. 10. England can produce 500 wheat or 500 wine. Portugal can produce 100 wheat or 100 wine. England has: . a comparative advantage in wheat. So will trade wheat for wine with Portugal. b. Portugal has a comparative advantage in wine. So will trade wine for wheat with England. )(England has an absolute advantage only in wine. So will trade wheat where it has absolute disadvantage. . ortugal has an absolute advantage only in wine. So will trade wheat where it has comparative advantage. England has an absolute advantage in wheat and wine. No trade will take place between England and Portugal 11. Ricardo in considering the rate of exchange between wheat and wine for two countries that are engaging in trade concluded: a. that how much wheat will be given for wine, and vice versa, by the two countries is indeterminate. b. that how much wheat will be given for wine, and vice versa, by the two countries will depend on the relative strengths of the Q demands in the two countries. t would be an average of the relative opportunity costs. ‘ said there could be no trade between England and Portugal given the greater industrial strength of England. e. said there could be no trade between England and Portugal given the greater industrial strength of Portugal. 12. When Ricardo assumes that the differences in the prices of goods are related to the differences in labor cost, ,a’. be is following Karl Marx who became influential on Ricardo in his later years. b. be is basically following Adam Smith who argued this was always the case. c. be is basically following Edgeworth who was an apprentice to Ricardo in the London stock market business. d. be is clearly correct for England of the day when there was hardly any capital used in production. e really is arguing the labor costs are useful approximators for prices and values.. "V Page 12 . Sheet 6 96. Considering the effect of government spending in 93 and the effect of government taxing in 94 we can conclude an increase ' - 7 overnment spending that is fully financed and which keeps the budget balanced has a multiplier effect of: . An indeterminate amount. e. Ten. 97. Suppose the Consumption Function ia C = 100 + .8 GNP. Government spends 100. Capital investment is 100. Exports are 100. Full employment GNP is 2,500. What will the government have to spend - according to Keynes — to reach full employment? 100. (y 200. . 300. d. 400. e, 500. 98. Assume in 97 that employment is directed correlated to the level of GNP. Before the government spends what is the amount ofu :_,-.n loyment? [Work out your percentage as a percentage of full employment] a. 25%. 320% c . 15%. d. 10% e. 50% . In the simple Keynesian model the aggregate supply function is: simply a plot of GNP on GNP. It is a ray that is at 45 degrees with respect to the both x and y axes themselves values of GNP. b. is just a constant value that does not vary over time. c. is totally unrelated to the GNP demanded. d. assumed to be a constant point value. e. is linear decreasing in time. 100. If you are a critic of Keynes you might say: - a. given sensible monetary and fiscal policy we are not going to get major depressions. What we get are shocks. b. Let’s focus on the supply side not the demand side. By changing regulations, encouraging technical change, encouraging international trade we can move out each year in the amount supplied. c. If you get government into the spending game, how do you get it out? d. Can you be sure that you know when to start increasing government spending? If you get it wrong you could make matters worse not better. [The government might start spending just when the economy is going to boom anyway.} [e] I] of the above arguments have been used. . We discussed this in some of the tutorials but not in the class, so this is a freebie. 76. With respect to John Maurice Clark’s article on distribution, find the incorrect statement below. Page 10, Sheet 5 a. The central problem of distribution in economic theory may be defined as the analysis of the forces which under free exchange govern the divisio of the product between those who perform different functions or supply different factors. b. The shares ay, however, be differently distiguished: according to the contractual agreement-under which the proceeds are received, according to the underlying functions or actors which constitute the sources of income. Thus there are geographic distributions, temporal distributions, and national distributions. Thus there are contractual distribution, personal distribution, and functional distribution. ‘ Although these distinctions are generally made in economic textbooks and maybe useful for didactic purposes, the main body of economic theory has for a log time concerned itself with functional distribution only. . 7'7. For Ricardo the real wage at the extensive and intensive margins: a. naturally had to differ. Farmers each made their own intensive decisions but the nth farmer made the extensive decision, i.e. the ® farmer using the most marginal land" ad to be the same due to the Iaw'of equal return. was zero. For the last hour of work you would pay the worker zero. Naturally you never got actually to these margis but only in _ the neighborhood. d. equaled the value of the marginal physical product in current prices [VMIP] e. was determined by the scarcity values of labor. Ricardo basically disagreed-with Malthus u this. f GOOD s m ' --.n:_>- 78. Consider a Gootzeit diagram in which MPP = 200 -Q. Subsistence wage = 100 quarters of wheat. Landowners r5. fully imputed to themselves what they consider to be the correct rent of land. Rents will be: a. Zero. b. 1250 quarters. c. 2500 quarters. - d. 2000 quarters. @SMOquarters. 79. Consider the equilibrium situation given in 78 above. Now imagine that due to international trade wage costs are lowered per worker to 40 quarters of wheat. What will short runs profits be to farmers before landowners show 0 demand more reut> \“ m 650. / 1250. c. 1800. , d. 2400. 7800. ml l ) «a / :7 00‘ . a ; L0 ‘5 _/%Biu v00 ' :69 '* m 80. Ricardo was 0th a bright a and more interested in dynamic questions. e, himself, was not overly cd’icerned about the bad aspects of the Stationary state. He also [find the incorrect one]: a. saw farmers as earning ‘the wages of superintendenee.’ , b. Saw labor costs declining, and creating short run profits for farmers. This was due to international trade lowering the costs of wage goods in agriculture. c. Saw the productivity of farming as increasing due to technical change. This again created short run profits for farmers. Saw that in a progressive economy farmers would benefit from both lowered wage costs ad increased productivity. Saw that Britain’s absolute advantage in agricultural production would make it very rich anyway. 81. Assume the following Ricardian model : assume MPP is 00-q in quarters of corn, the real wages is 50 quarters of corn. At the stationary state, total rents would equal: . (to Lg; . ‘7 4‘. U a. 50 quarters b. 2500. @250. 5' '1 “7 d. 5000. e. 7500. 82. In the odel above t wages paid to labor would-equal: a. so quarters. 500. c. 1250. d. 5000. e. 7500. 83. For Ricardo rent [lid the incorrect one]: a. is a difference in the productivity of land which occurs when good land ceases to be free, and agriculture pushes out into inferior land. b. is empirically observable. Different plots of land will have different marginal physical products in terms of quarters of wheat. . will grow in total as population increases and agriculture is forced to use more and more inferior land. ill be zero at the stationary state equilibrium. e. will be equal at the extensive and intensive margins. .: - . Ricardo did believe in Adam Smith’s law of Equal Return because in his examples: 6 e has both the intensive and extensive margin as equal. ' A ' . because due to his belief in Euler’s theorem he believed in product exhaustion. c. because due to his correspondence with Edgeworth he believed in product exhaustion. d. because due to his correspondence with Wickste'ed he believed in product exhaustion. e. he uses a mathematical production function which gives this result. 85. The diagram to the right refers to: ' Y . The Marshallia long run. The Marshallian short run. c. The Marshallian secular period. d. The Marshallian market period? ‘ ___.- __ a. e. a market in the secular period.: 86. In the same diagram theafii‘in: V is earning pure profits. earning zero profits. c. has zero quasi-rents. is paying zero VMP to capital. @‘ils earning ®normal or ordinary rate of return. q- "l Page 8 Sheet 4 56. For there to be a full Marshallian equilibrium of the firm, as analyzed in Marshall‘s Pmciples, it must also be the case that: a. there is no liquidity trap. b. that businesmen‘s animal spirits are high and confident. @factors are getting rewarded with the value of their MPP. . that a country not have an import surplus. e. that the rate of inflation is normal. 57. For consumers to be in equilibrium in Marshallian economics, they must have: . good paying jobs. at have too high a tax bill. aximised the utility of the goods they consumed and be in accord with Gossen’s two laws. . enough money so their children have adequate educations. e. maximized their investments in human capital. 58. Gordon’s rule for shutdown is: a. a firm should shutdown when Average Receipts falls below Average Total Costs. a firm should shut down if its scrap value is greater than the present value of future quasi-rents. c. a firm should shut down when it ceases to have pure profits. d. a firm should shut down when Total Variable Costs equals Total Fixed Costs. e. a firm should shut down when the present value of the firm is less than it was when it started in business. 59. Wicksell was responsible for providing: a. the concept of rent. b. the concept of scrap value. the formulation of the price-specie flow mechanism, he final step in resolving the product exhaustion problem. e. a proof that Euler’s theorem is incorrect and of no use to the economist. 60. Keynes father was: a cashier in the Bank of England. author of Scope and Method ofPolin'col Economy, [1891]. Registrar of the University of Bristol. . was an unmarried, Communist sympathizer. e. Mayor of Oxford. : . Keynes in his Treatise on Money: continued the tradition he had learnt at Cambridge under Marshall which was based on the Cambridge equation M=kY . repudiated Say’ Law. c. argued that Mr. Winston Churchill had been disastrous as the British Chancellor the Exchequer. d. argued that the World War I allies of the USA, England, France and Italy had helped create conditions for World War 11. e. vehemently attacked any notion of international organizations like the IMF as being abridgements of individual liberty. 62. With Keynes. we can doubt that monetary policy will work in a severe depression. Past experience shows that banks .u ring depressions responded to the efforts of central banks to expand the money supply by: building up “excess” reserves. [That “excess” is in the legal sense, not an economic sense.] . by over expanding their loans thus created inflationary pressures. c. going into speculative lending in markets like subprime markets. (I. by totally ignoring central bank actions. e. by borrowing heavily from foreign banks. . Keynes “propensity to consume”: a. is measured empirically by the consumption function. is a variable he discussed but found himself unable to explain. c. is basically a mathematical formulation of Say’s Law. d. is highly unpredictable and unstable, e. was borrowed from von Th'l'inen. 64. Keynes very early on in his General Theory of Money, Employment and Interest: : declares his purpose is to provide a sound empirical underpinnig to Say’s Law. @ launches an attack on Say’s Law. It was possible, said Keynes essentially, for goods to be supplied to the market and not be purchased. @argued that the most important contributor to Economics in the nineteenth century was Jean-Baptiste Say. d. argued that it would be possible to modify Say’s law to take account of recent changes in the British economy. e. argued that Say’s Law was correct provided current prices were deflated by measures of inflation. 65. Investment becomes a key variable in Keynes’s model because he saw Investment as: . taking up a large part of the spending between consumption expenditures and GNP as a whole. g being highly volatile due to the “animal spirits” of business men. being leveraged in its effect by the investment multiplier. d. beinéoversupplied so it was good if its amount fell. e. becoming less important in modern economies. ...
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Econ 107 Spring 2007 Final Exam - r... 1% Economics 107...

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