Economics 1 - Fall 2001 - Brown - Midterm 1

Economics 1 - Fall 2001 - Brown - Midterm 1 - Department of...

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Unformatted text preview: Department of Economics, UC Berkeley Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 ECONOMICS 1: MIDTERM EXAMINATION #1 PART A DO NOT OPEN THIS EXAM BOOKLET UNTIL YOU ARE INSTRUCTED TO DO 30! INSTRUCTIONS: 1. This is a closed-book, closed-notes, no-calculator eXam. 2. Write your answers in the space provided. Do NOT write on the backs of pages. 3. Be clear, complete and concise in your explanations. lll. Violations of the Code of Student Conduct The Chancellor or his or her designee may impose discipline for violation of, or an attempt to violate, any University policy or campus regulation, rule, or policy, including those activities proscribed in this Code of Conduct. The following types of conduct are specifically prohibited: B. Academic Violations 1. Cheating. Cheating is defined as fraud, deceit, or dishonesty in an academic assignment, or using or attempting to use materials, or assisting others in using materials which are prohibited or inappropriate in the context of the academic assignment in question. This includes, but is not limited to: a. Providing answers to or receiving answers from others for any academic assignment. in "group assignments" and "cooperative learning" situations, it is the responsibility of the student to ascertain from the instructor to what degree the work must be done exclusively by the student or may be done in collaboration with others; . Using notes, information, calculators, or other electronic devices or programs during exams or for assignments from which they have been expressly or implicitly prohibited; Improperly obtaining or using improperly obtained information about an exam or assignment in advance of its availability to other students, or assisting others in doing so; . Putting one's name on another student’s exam or assignment; or . Altering previously graded work for purpose of seeking a grade appeal. Your Name & S|D#: TA's Name & Section: 24/2 Department of Economics, UC Berkeley Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 © GOOD LUCK! © 1. Define the term(s) given in bold, state whether each statement that follows Is true, false, or uncertain, and explain your answer in two or three short sentences. Include graphs where appropriate to illustrate your answer. (26 points total; 17 minutes) a. If a t" rm 5 marginal cost exceeds its marginal benefit, the firm should Increase its output to maximize profits. (6 points) How WMWJ€”$’/ M M 05 am WM! b. Firms in a perfectly competitive market eventually will exit the market if economic profits fall to zero. (8 points) 0 Department of Economics, UC Berkeley Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 c. Because the price elasticity of demand for electricity is less than 1, electricity distributors (like Pacific Gas & Electric) can increase their total revenue by increasing the rates they charge to customers. (6 points) ‘ d. The Tragedy of the Commons teaches us that when the private marginal cost of a good is zero, then society will use the good optimally. (6 points) . (7 v M 7%( \ a W @e‘tfiz/g‘mflw/{WWJ miméw “if \ ~ Afl (:14 am 8??in W MEW- U Hc. ‘ W6 , WW 7%va Wei/W1 M < M aMIW'L M Wat-“ j prmmw fwimszwwof 47 Department of Economics, UC Berkeley Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 2. In the 19803, Argentina's state-owned water utility (OSN) was suffering from inability to collect bills, overstaffing, high wages, low investment levels, and deteriorated facilities. In 1992, the government decided to privatize the utility. (14 points total; 9 minutes) U . no)" b. Draw a graph for a natural monopoly with constant marginal costs. Include all relevant revenue and cost curves. Label the equilibrium price and quantity. indicate the deadweight loss. (6 points) :61. H9— Q c. Name two ways (other than government ownership) that Argentina's government could choose to regulate the privatized water utility. (2 points) ~W fie mm Mow: Met/WM? eru 3" "WW coral on W can/CM” “'5’" t z W. m. | ~ WW «new!» 605% f ~ WW ‘ 40 CW 40, “3’45: ”I 4 ‘ d. Choose one of the regulatory schemes you named above and explain briefly (2-3 sentences) how it works. What is an advantage of this method? What is a disadvantage of this method? (4 points) Department of Economics, UC Berkeley Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 ECONOMICS 1: MIDTERM EXAMINATION #1 PART B 3 l DO NOT OPEN THIS EXAM BOOKLET UNTIL YOU ARE INSTRUCTED TO DO SO! INSTRUCTIONS: 1. This is a closed-book,closed-notes, no-calculator exam. 2. Write your answers in the space provided. Do NOT write on the backs of pages. 3. Be clear, complete and concise in your explanations. Ill. Violations of the Code of Student Conduct The Chancellor or his or her designee may impose discipline for violation of, or an attempt to violate, any University policy or campus regulation, rule, or policy, including those activities proscribed in this Code of Conduct. The following types of conduct are specifically prohibited: 8. Academic Violations 1. Cheating. Cheating is defined as fraud, deceit, or dishonesty in an academic assignment, or using or attempting to use materials, or assisting others in using materials which are prohibited or inappropriate in the context of the academic assignment in question. This includes, but is not limited to: a. Providing answers to or receiving answers from others for any academic assignment. in "group assignments" and "cooperative learning" situations, it is the responsibility of the student to ascertain from the instructor to what degree the work must be done exclusively by the student or may be done in collaboration with others; b. Using notes, information, calculators, or other electronic devices or programs during exams or for assignments from which they have been expressly or implicitly prohibited; c. Improperly obtaining or using improperly obtained information about an exam or assignment in advance of its availability to other students, or assisting others in doing so; d. Putting one's name on another student’s exam or assignment; or e. Altering previously graded work for purpose of seeking a grade appeal. Your Name & SlD#: TA's Name & Section: Department of Economics, UC Berkeley I Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 © GOOD LUCK! © 1. In response to concerns about bioterrorism, the US Centers for Disease Control (CDC) plans to provide 40 million doses of smallpox vaccine by next summer. (14 points total; 9 minutes) a. State and define the two key characteristics of pure public goods. (4 points) b. Does the smallpox vaccine satisfy the two key conditions of public goods? Examine vaccines with respect to each characteristic listed above, state whether vaccines satisfy each condition. Explain. (2 points) c. Your friend argues there is no market failure and government should not intervene to speed up production of smallpox Vaccine. Do you agree with her? Explain why you agree or disagree with her. Include in your answerkwhether you believe there is a market failure. (4 points) d. Considering your answer in part 0) above, do you think private markets would provide a socially optimal level of smallpox vaccine? Explain and show on the graph at right, indicating the quantity of vaccine that would be produced in the private market, Qp, and the socially optimal level of vaccinations, Qs. Assume constant marginal costs for vaccine production. (4 points) W """"""""" W « Department of Economics, UC Berkeley Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 2. 2. The USDA has implemented a tobacco price support program to support farmers' incomes and stabilize the market price. The program operates via mandatory marketing quotas that limit the quantity of tobacco farmers can grow. For the following questions, assume the market for tobacco is perfectly competitive. (10 points total; 7 minutes) a. On the first graph below, draw supply and demand curves for the tobacco market BEFORE the price support is put into place. indicate the equilibrium price and quantity in the market, and clearly label consumer surplus, producer surplus, and any deadweight loss. (2 points) b. On the middle graph, draw the appropriate cost and revenue curves for the representative firm. Be sure to label the firm's equilibrium quantity and price. (2 point) c. On the third graph, draw supply and demand curves fer the tobacco market, then shew the quantity restriction imposed by the government. Assume that the imposed quantity is less than the market-clearing equilibrium, and that farmers are told what quantity they should grow before the season begins. Clearly label the new equilibrium price and quantity, consumer surplus, producer surplus, and any deadweight loss AFTER this'quantit'yrestriction is imposed. (3 points) Tobacco Market BEFORE Representative Firm Tobacco Market AFTER the Price Support the Price Support \ , , /" Qi— Wfité d. Based on your graphs above, compare the sizes of the consumer surplus, producer surplus, and deadweight loss before and after this quantity restriction on the tobacco market. Is there any way in which consumers are better off under a quantity restriction than under a price control? (3 points) ‘ WW swam ob , tie/magi» Z: :Zfloocér ,6me 50 £4?" flmfi M 00/5 Maw/flmd #MWW) o- 4 dadwzi «£03: (/9 “46¢me 11 60/,th WM wile flaw @4201}? W ears W M» W me/ CmMm/w 6M [1: W 0/0/ «(W Department of Economics, UC Berkeley Prof. Clair Brown Economics 1, Fall 2001 October 10, 2001 3. Short Questions (11 points total; 7 minutes) a. Define Opportunity Cost. (2 points) \}i flaw {/de #LM/ fed/‘WaZZ/‘f b. Write the formula for calculating the present discountéi value of_)(- dollars to be received t years in the future, at interest rate r. (2 points) ’ “kw-wj/ q M’wfiwé. fit 3: X f a 0. Which of the following has the higher present value? Explain using economic intuition, not math! \ if “a ‘ A: $150 to be received 3 years inthe future at an interest rate of 5% ((3 g6ints) H 625) v“ B: $100 to be received 2Kyears in the future tan interest rate of 10% M » m ma” W“ *‘ 3“ $9. ”34% M 6”” «WW/MM“ d. Define Economic Rent. (2 points) a? fade/W'M #411 Mffl 75/“, z [pm/4cm flaw/mm MW 044% “Wm M 1% M ”(a/gab .Mokrf 9K of [w . On the graph at right, indicate Bill Gates' equilibrium P Market for 3'“ Gates Time wage, p*, and hours worked per week, q*. Also , T \ , I s indicate what part of Bill Gates' earnings is economic rent. Explain briefly. (3 points) \ Vi EXTRA CREDIT QUESTIONS: (1 point each; 1 minute) o 1. How did the central banks (e.g., the Fed) react in the wake of the Sept. 11 attacks? 0 2. How much money has Congress approved for the airline industry bailout? 1- 3' What' apmeimate'Y: is the US monthly trade deficit? (give a number, not a definition!) $26] " " w» {L 7:, '706 W7) ...
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