FinalAnswers 2003

FinalAnswers 2003 - Department of Economics University of...

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Department of Economics Professor Kenneth Train University of California, Berkeley Spring 2003 ECONOMICS 1 FINAL EXAMINATION May 16, 5-8pm INSTRUCTIONS 1. Please fill in the information below: Your Name: SUGGESTED ANSWERS Your SID#: DO NOT DISTRIBUTE TO STUDENTS! GSI’s Name: Section Days/Time: 2. There are a total of 180 points, 8 questions, and 11 pages (including this cover sheet). The suggested times to spend on each question are in parentheses. 3. Answer the questions in the space provided. (NO BLUE BOOKS.) If you need extra room to answer questions, use the backs of the pages. 4. Calculators are not permitted. 5. You may leave early if you finish prior to 7:45. So that the end of the exam is orderly, please do not leave between 7:45 and 8pm. 6. When time is called, stop writing immediately and pass your exam to your right. HAVE A GOOD SUMMER! J >>> D O NOT TURN THE PAGE UNTIL YOU ARE TOLD TO BEGIN THE EXAM . <<<
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Page 2 of 11 QUUESTION 1: 40 Total Points (40 Minutes) True, False, or Uncertain For each of the following decide whether the statement is true, false, or uncertain and explain why. Your explanation determines the grade; you will be given no credit for an answer without an explanation. Use diagrams where they are appropriate to complement your answer. a) [8 points] A competitive market maximizes social welfare because in a competitive market profits are zero. False. A competitive market maximizes social welfare because price is equal to MC in equilibrium. b) [8 points] The socially optimal level of pollution is zero. False. The socially optimal level of pollution is determined by the intersection of demand curve and marginal social cost curve in a market with a negative externality (e.g., pollution). As long as the socially optimal level of output is positive, the socially optimal level of pollution will be positive. c) [8 points] An additional dollar of tax reduction has the same effect on the economy as an additional dollar of government expenditure. False. An additional dollar of tax reduction increases aggregate expenditure (AE) through increasing consumption by MPC*$1, not by the whole dollar, whereas an additional dollar of government expenditure increases AE by the whole dollar. Therefore, the effect of $1 increase in G is greater than that of $1 reduction in T.
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Page 3 of 11 QUESTION 1 (Continued) d) [8 points] When OPEC triples the price of oil used by American producers, it causes aggregate output and prices to rise. False. If OPEC raises the price of oil used by American producers, then this is a supply shock. The AS curve shifts to the left and in the new equilibrium aggregate output is lower and prices are higher than before. e)
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FinalAnswers 2003 - Department of Economics University of...

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