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Week 07, Day 1 - Midterm 1 Solutions

Week 07, Day 1 - Midterm 1 Solutions - MIDTERM I SOLUTIONS...

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MIDTERM I SOLUTIONS Part I: 1. Answer: only statement II is Statement I is a positive statement about what will be. Statements about the future are positive statements. Statement II is a statement about what should or ought to be. It is based on opinions and value judgments. 2. Answer: understatement, neither employed nor unemployed Discouraged workers are neither employed nor unemployed because they are not actively seeking work. Some believe that such people should be considered unemployed. However, since the official unemployment rate does not measure them as unemployed, the official rate is lower than what some regard as the “true” unemployment rate. 3. Answer: not change, decrease Canada’s Gross Domestic Product represents the income generated within Canada. Canada’s Gross National Product represents the income earned by Canadians regardless of where they live. Since the office building remains within Canada, the income generated remains part of GDP after it is sold. Therefore, Canada’s GDP would not change. However, since the income is no longer earned by a Canadian, Canada’s GNP would decrease. 4. Answer: shortage of 30 units exists. The equation Q = 2P – 20 represents the supply. When the price is $35, the quantity supplied is 50 units. The equation Q = 220 - 4P represents the demand. When the price is $35, the quantity demanded is 80 units. Since the quantity demanded exceeds the quantity supplied by 30 units, a shortage of 30 units exists. 5. Answer: 180. A price index is a set of numbers that is in the same ratio to each other as the cost of a market basket. Since $1,200 is 1.2 x $1,000, the price index value in 2007 is 1.2 x the price index value in 2006 (ie 150 x 1.2 = 180). 6. Answer: 180 million apples and 200 million pears. The United States can produce at most 300 million apples or 500 million pears and has a production possibility frontier that is linear. Therefore, for every 100 pears that the US produces, it must decrease its production of apples by 60. By producing 200 pears, the US must reduce its production of apples by 120 (from 300 to 180). 7. Answer: neither product, pears Canada with 1/10 th of the US’s resources can produce less than 1/10 th of the US’s apples and pears. Therefore, Canada’s resource are less productive than the US’s resources. Therefore, the US has an absolute advantage in both products and Canada has an absolute advantage in neither product. For every apple that Canada produces, it must give up 2 pears (ie 20:40 = 1:2). For every apple that the US produces, it must give up 1.67 pears (ie 300:500 = 1:1.67).
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