201_Fall06_midterm1_solutions

201_Fall06_midterm1_solutions - Midterm1 Fall 2006...

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Midterm1: Fall 2006 NAME: …………………………… Macroeconomics 201 Prof. Gordon TAs: Jesse De Lille, Brandy Lipton Total Points: 60 (20 MC + 40 Short Answer) MULTIPLE CHOICE ANSWER SHEET (20 Points) 1.A 11.C 2.A 12.E 3.A 13.C 4.A 14.A 5.D 15.D 6.D 16.A 7.A 17.B 8.B 18.D 9.A 19.C 10.C 20.B
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SHORT ANSWER SECTION: (40 Points) Question1: (16 Points) Suppose that a two-person economy can allocate its resources to the production of two different goods: Research papers and textbooks. Each agent in the economy has his own production technology and the table below shows the maximum amounts of research papers and textbooks that the two agents, Professor A and Professor B, can produce if they only produce one good: Research Papers Textbooks Professor A 10 8 Professor B 6 9 A. Suppose that PPF’s are straight lines. Draw each professor’s PPF, putting Research papers on the vertical axis. (4 Points) B. What is each professor’s opportunity cost of producing an additional textbook in terms of lost production of research papers? What is each professor’s opportunity cost of producing an additional research paper in terms of lost production of textbooks? (4 Points) Answer: Prof.A: MC(Research Paper in terms of textbooks) = 0.6 Prof.B: = 9/8 C. What is Professor A’s comparative advantage? What is Professor B’s comparative advantage? Does either professor have an absolute advantage, if so which one? (4 Points) Answer: Prof.A has comparative adv. in Res.Papers, B in textbooks. Neither has absolute adv.
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D.Can the two professors gain from trade? Explain your answer. Give an example of a consumption for Professor A and a consumption for Professor B that they are able to attain with trade but that they could not attain without trading. Please draw each professor’s consumption point in your part A) diagram. Where is it in relation to each professor’s PPF? Assume that the price at which they can trade is 1 Research Paper for 1 Textbook. (4 Points) Answer: many possibilities: one example: A produces 10 RPs, B produces 9 TBs. And then A consumes (5RP, 5TB) and B consumes (5RP, 4TB). This is better than what they can achieve without trade. Question2: (24 Points) P Q D Q S 8 8 6 10 6 10 P: Price of a Movie ticket Q D : Quantity demanded Q S : Quantity supplied 1. Write down the demand and supply equation in the format: P = a + b.Q (4 Points) Answer: P = -Q D + 16 P = Q S /2 + 5 2. Plot the demand and supply curves. Denote the Y-intercepts and the slopes of each curve. (2 Points) 3. Compute the equilibrium price and quantity. (4 Points) Answer: Pe = 26/3 Qe=22/3 4. The government thinks that going to the movies is essential for the well-being of its citizens. It therefore imposes a price ceiling of $7. After the imposition of the price
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This note was uploaded on 09/04/2010 for the course ECON 201 taught by Professor Witte during the Spring '08 term at Northwestern.

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201_Fall06_midterm1_solutions - Midterm1 Fall 2006...

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