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Unformatted text preview: NAME: HAKAN YILMAZKUDAY MACROECONOMIC PRINCIPLES (HONORS) Econ 1901 Midterm Exam Please answer all the questions. Please read all the questions very carefully. Misreading a question is not an excuse. Total available points are 100. You have 80 minutes to complete this exam. Good luck! 1. (10 Points) Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why? ANSWER: Absolute advantage refers to productivity, as in the producer who can produce a product at a lower cost in terms of the resources used in production. Comparative advantage refers to the producer who can produce a product at a lower opportunity cost. Comparative advantage is the principle upon which trade patterns are based. Comparative advantage is based on opportunity cost, and opportunity cost measures the real cost to an individual or country of producing a particular product. Opportunity cost is therefore the information necessary for an individual or nation to determine whether to produce a good or buy it from someone else. 1  P a g e 2. (20 Points) The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers. Alpha's Production Possibilities Frontier Omega's Production Possibilities Frontier popcorn 300 275 250 225 200 175 150 125 100 75 50 25 300 275 250 225 200 175 150 125 100 75 50 25 popcorn 25 50 75 100 125 150 175 200 225 250 peanuts 25 50 75 100 125 150 175 200 225 peanuts a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts? c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now? d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B. 2  P a g e ANSWER: Alpha's Production Possibilities Frontier Omega's Production Possibilities Frontier popcorn 300 275 250 225 200 175 150 125 100 75 A 50 25 50 25 B 300 275 250 225 200 175 150 A B popcorn Consumption with trade Consumption with trade 125 100 75 25 50 75 100 125 150 175 200 225 250 peanuts 25 50 75 100 125 150 175 200 225 peanuts a. Alpha would be producing 125 units of peanuts and 75 units of popcorn (point A on its production possibilities frontier) and Omega would be producing 50 units of peanuts and 150 units of popcorn (point A on its production possibilities frontier). b. The total world production of peanuts would be 175 units and the total world production of popcorn would be 225 units. c. The total world production of peanuts would now be 250 units and the total world production of popcorn would now be 300 units. d. Alpha would be producing 250 units of peanuts and would trade 100 of them to Omega, leaving Alpha with 150 units of peanuts. Alpha would then receive 100 units of popcorn from Omega. Omega would be producing 300 units of popcorn and would trade 100 of them to Alpha, leaving Omega with 200 units of popcorn. Omega would then receive 100 units of peanuts from Alpha. 3  P a g e 3. (20 Points) Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides. a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally? b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides? c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides? ANSWER: a. If both tasks are divided equally, it will take 11 hours for the calculations and 15 hours for the writing, for a total of 26 hours. b. If Diane specializes in calculating and Gary specializes in preparing slides, it will take 22 hours to complete the project. c. If Diane specializes in calculating, her opportunity cost will be $60; hence, Diane would be better off if she paid Gary any amount less than $60 to do the calculating. Since Gary's opportunity cost of doing the calculations is only $50, he would be better off if Diane paid him between $50 and $60 dollars to do the calculations. In this case, the total time spent on the project would be 20 hours. 4  P a g e 4. (20 Points) Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change. a. Winter starts and the weather turns sharply colder. b. The price of tea, a substitute for hot chocolate, falls. c. The price of cocoa beans decreases. d. The price of whipped cream falls. e. A better method of harvesting cocoa beans is introduced. f. The Surgeon General of the U.S. announces that hot chocolate cures acne. g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise. h. Consumer income falls because of a recession, and hot chocolate is considered a normal good. i. j. Producers expect the price of hot chocolate to increase next month. Currently, the price of hot chocolate is $0.50 per cup above equilibrium. ANSWER: price (a) price (b) S S Pe' Pe Pe Pe' D D' quantity D' D quantity Qe Qe' Qe' Qe 5  P a g e price (c) price (d) S S' S Pe' Pe Pe'
D D quantity D' quantity Pe Qe Qe' Qe Qe' price (e) price (f) S S' S Pe' Pe Pe'
D D quantity D' quantity Pe Qe Qe' Qe Qe' 6  P a g e price (g) (h) price S' S S Pe Pe' Pe
D D' quantity D quantity Pe' Qe' Qe Qe' Qe price (i) price (j) S' S S Pe' Pe
D Pe+ $0.50 Pe Surplus D quantity Qe' Qe Qd Qe Qs quantity In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will cause a surplus in the market. It will not cause either demand or supply to shift. 7  P a g e 5. (15 Points) a. Given the table below, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity. Price Quantity Demanded Quantity Supplied Per Month Per Month $5 $4 $3 $2 $1 b. What is the equilibrium price and the equilibrium quantity? c. Suppose the price is currently $5. What problem would exist in the market? What would you expect to happen to price? Show this on your graph. d. Suppose the price is currently $2. What problem would exist in the market? What would you expect to happen to price? Show this on your graph. 6,000 8,000 10,000 12,000 14,000 10,000 8,000 6,000 4,000 2,000 8  P a g e ANSWER: a. 5 4.5 price Surplus of 4000 S Pe 4 3.5 3 2.5 2 1.5 1 0.5 Shortage of 8000 D 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 quantity Qe b. The equilibrium price (Pe) is $4 and the equilibrium quantity (Qe) is 8,000. c. A surplus of 4,000 flashlights would be the problem in the market, and we would expect the price to fall. d. A shortage of 8,000 flashlights would be the problem in the market, and we would expect the price to rise. 9  P a g e 6. (15 Points) Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes. a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that is efficient and a point that is inefficient. c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy. d. On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy. ANSWER: hammers hammers (ac) (d) infeasible discovery feasible efficient inefficient horseshoes horseshoes 10  P a g e ...
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This note was uploaded on 03/24/2011 for the course ECON 1901 taught by Professor Yilmazkuday during the Spring '11 term at Temple.
 Spring '11
 Yilmazkuday
 Macroeconomics

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