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MAKE-UP

Econ 1120-INTRODUCTORY MACROECONOMICS

PRELIM #1-Wissink-S2015-March 4

CLEARLY PRINT YOUR NAME: ______________________________________________________________

YOUR NetId:______________________ YOUR STUDENT NUMBER:________________________________

INSTRUCTIONS and EXAM TAKING POLICY:

There are two sections in this exam. Answer all questions.

Part I: 14 multiple choice or fill in the blank questions @ 3 points each

Part II: 3 problems @ 14, 22 and 22 points each

TOTAL POINTS = 100, TOTAL TIME = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.

NO GRAPHING CALCULATORS.

NO BOOKS. NO NOTES. NO HELP SHEETS.

NO TALKING TO EACH OTHER.

“X” the SECTION you regularly attend (that is where you will pick up your prelim):

|DIS # | |TA |Meeting Times |

| | | | |

|250, 251 | |Ye, Lei (Sandy) |Mondays 01:25-03:20 |

| | | | |

|252, 253 | |Kwon, Donghwee |Wednesdays 02:30-04:25 |

| | | | |

|254, 255 | |Lamachhane, Sujan |Fridays 09:05-11:00 |

| | | | |

|256, 257 | |Zhang, Xingtong |Fridays 01:25-03:20 |

One more time, please…

CLEARLY PRINT YOUR NAME: ______________________________________________________________

YOUR NetId: ___________________________

YOUR STUDENT NUMBER: ___________________________________

GRADING

MC (out 42 points)=___________________

Q1 (out of 14 points)=_________________

Q2 (out of 22 points)=_________________

Q3 (out of 22 points)=_________________

TOTAL SCORE: _____________________

Part I: Multiple Choice. Do them ALL.

CIRCLE the letter for your answer.

_____________________________________________

[i]. Michael runs a food stand that employs four people: Abe, Betty, Charlie and Dave. The table shows the maximum number of frozen bananas or corndogs that each employee can make during one day. Each worker can do any linear combination of their extreme values. Of the four, which worker should be the last worker Michael would allocate to making corndogs in any given day if Michael allocates efficiently?

A. Abe

B. Betty

C. Charlie

D. Dave

E. They should all cooperate and share making both items at all times.

|Max number of output per day |Bananas |Corndogs |

|Abe |10 |10 |

|Betty |10 |20 |

|Charlie |15 |5 |

|Dave |25 |30 |

[ii]. Suppose that the demand function for jelly beans, a normal good, is typical and is written as follows:

QD = 400 - 2F + 3J – 4G. Which one of the following statements is most likely to be TRUE?

A. Variable J could be the number of firms making jelly beans.

B. Variable J could be the price of jelly beans.

C. Variable J could be the price of an Easter basket to put the jelly beans in.

D. Variable F could be the price of sugar used to make jelly beans.

E. Variable G could be the price of jelly beans.

[iii]. Which one of the following is most likely to decrease the supply of wooden rocking chairs?

A. The price of wooden rocking chairs decreases.

B. Consumers’ income increases.

C. The cost of producing wooden rocking chairs decreases.

D. The price of wooden rocking chairs increases.

E. The cost of producing wooden rocking chairs increases.

[iv]. For which of the following scenarios must the equilibrium quantity of green beans necessarily increase?

A. The price of corn, a substitute in consumption for green beans falls.

B. A new bean-eating worm is discovered which raises bean farming production costs.

C. The price of butter, a complementary good, falls and at the same time bean farms are finally protected from a blight that used to kill bean plants.

D. Harvest weather conditions are too wet for good bean crops and a new medical survey shows that bean consumption increases life span

E. Consumers expect bean prices to fall in the future.

[v]. Suppose that a competitive market exists in the U.S. for both domestically made sugar and Brazilian made sugar. Suppose the U.S. government slaps a binding import quantity quota on Brazilian made sugar sold in the U.S. Which one of the following is the best prediction of the consequence of the quota?

A. The market price of U.S. made sugar falls and the market price of Brazilian made sugar rises.

B. Only the market price for Brazilian made sugar rises.

C. The quantity exchanged in both the Brazilian made sugar market and the U.S. made sugar market decreases.

D. Only the market price of U.S. made sugar increases.

E. The equilibrium price of both Brazilian made sugar and U.S. made sugar increase.

[vi]. Consider the graph. Suppose it illustrates the situation after the government has put into law a binding price floor. Which one of the following statements is TRUE?

A. The price floor could be L.

B. There will be a shortage of N-M units.

C. M units will be traded.

D. There will be a surplus of K-C units.

E. The regulated equilibrium occurs at point F.

[vii]. Which one of the following is an example of a final good or service in relationship to this year’s U.S. GDP? All transactions took place this year, unless otherwise noted. GDP=Gross Domestic Product.

A. Strawberries produced in Cortland, NY and purchased by Ithaca bakery in order to make wedding cakes.

B. Car paint made in Buffalo, NY and purchased by the Ford Motor Company to paint this year’s car models being made in Detroit.

C. Children’s toys made in China that you bought at Walmart.

D. The used chemistry textbook (published and printed 3 years ago) which you bought on E-Bay this year.

E. The Corning glassware made in Corning, NY this year that was added to the inventory of a department store in Japan in anticipation of rising sales in Japan next year.

[viii]. Francine, a French citizen, lives in London, England and works at a factory there making hats for the royal family. GDP=Gross Domestic Product and GNP=Gross National Product. She earns 30,000 British pounds sterling a year for this work. Her income would

A. count in the U.K.’s GDP and in France’s GDP.

B. count in France’s GDP but not in the U.K.’s GDP.

C. count in France’s GNP and in the U.K.’s GDP.

D. count in France’s GDP and in the France’s GNP.

E. not count in either France’s GDP or in the U.K.’s GDP.

[ix]. Which one of the following transactions’ value would NOT be represented, one way or another, either in the income loop or the expenditure loop in the calculation of U.S. GDP in 2015? GDP=Gross Domestic Product

A. Legal fees you paid your Ithaca based attorney for work in 2015 to settle a law suit.

B. Salary paid to Finnish gas station workers by a gas station located in Arizona in 2015.

C. Body armor made in West Virginia in 2015 and purchased by the defense department for the military to use in Afghanistan.

D. The winter coats made in Texas in 2015 that Walmart adds to its inventory in 2015 but is unable to sell in 2015.

E. The value of clothes you donated to the Salvation Army in 2015.

[x]. Which one of the following statements is FALSE?

A. One problem with any fixed-bundle price index (like the CPI) as a measure of the cost of living is that it does not account for substitutions that consumers might make in response to relative price changes.

B. An overall very broad indicator of inflationary pressures in the entire economy is the implicit GDP deflator index.

C. In general, the consumer price index somewhat understates the impact of changes in the cost of living during times of inflation.

D. The implicit GDP deflator can be used to convert current or nominal values into real values.

E. The producer price index is considered to be a leading indicator of future inflation rates.

[xi]. Which one of the following is best categorized as structural unemployment?

A. Weak short term demand has caused a general economic slowdown. Because of that, Allen has temporarily lost his job at the glove factory in Gloversville, NY.

B. Dave, who works as an instructor at Greek Peak Ski Resort in Virgil, NY is out of work in the summer since there is no one to teach when there is no snow.

C. Steel worker Tom is thrown out of work by the introduction of new technology in the steel sector that now employs a more high-tech production process that will permanently requires a much smaller labor to capital ratio.

D. Joe, a computer programmer with a large bank, quit his job two months ago to look for a better paid programming position.

E. Patrick, who recently graduated from Cornell Medical School , is looking for a place to set up his practice.

[xii]. Nominal (or current value) GDP in the United States in 2013 was roughly

A. $14 million

B. $17 trillion

C. $12 trillion

D. $17 billion

E. $14 billion

[xiii]. Suppose the labor market was characterized by the following numbers last week. The number of unemployed people was 10,000. The number of employed people was 90,000. The only change between last week and this week in the labor market is that 2,000 people who were ‘discouraged workers’ think that the economic environment is improving and decide to re-enter the labor force and start looking for a job. All else equal, which one of the following must be TRUE?

A. The unemployment rate has increased since last week.

B. The unemployment rate has decreased since last week.

C. The labor force has decreased since last week.

D. The labor force participation rate has decreased since last week.

E. None of the above are true.

|Typical Urban |Units in 2010 |Units in 2011 |Prices in 2010 |Prices in 2011 |

|Household’s Bundle | | | | |

|Good A |5 |4 |$1.00 |$2.00 |

|Good B |10 |12 |$2.00 |$1.50 |

|Good C |20 |18 |$4.00 |$8.00 |

| | | | | |

[xiv]. This last question is a fill in the blank – all or nothing – question. Assume 2010 is the base year. The Consumer Price Index for 2011 based on the data in the table is (round off to nearest whole number):

____________________

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

1. Suppose that the following equations describe the expected demand and supply curves for Birkenstock sandals in Ithaca in 2015 (where Q is quantity and P is price).

DEMAND: QD = 100 – 1P

SUPPLY: QS = -20 + 2P

a. Write the equations for the inverse demand curve and the inverse supply curve (that is the equations for what we actually graph as demand and supply).

b. Graph the demand and supply curves and determine the equilibrium price and quantity in the market for Birkenstock sandals in Ithaca. Show on your graph. Label points and values.

c. Suppose the mayor (who hates these sandals) decides to use a quota to limit the number of pairs of these god-awful sandals sold in Ithaca. Suggest a value for the quota that will make it binding.

d. Using the graph below and equations above and YOUR quota value, thoroughly analyze the economic consequences of the mayor’s policy directive.

Answer Space

2. Suppose Mr. Carson has three footmen: Thomas, Alfred and Jimmy. There are two jobs that need to be done at Downton Abbey this week: (1) polishing shoes and (2) mending vests. Each footman works a total of 60 hours this week. Suppose the following information summarizes their individual production functions. Assume all values are completely divisible.

|Time it takes to |Thomas |Alfred |Jimmy |

|Polish a pair of shoes |2 hours |5 hours |15 hours |

|Mend a vest |1 hour |10 hours |3 hours |

a. Graph the individual PPFs for each of the three footmen.

b. Find each footman’s marginal opportunity cost for polishing a pair of shoes.

c. Suppose that Mr. Carson has each footman splitting his time evenly between the two tasks. Identify each footman’s production point on your graphs in part (a). How many pairs of shoes and vests is each footman doing? And how many pairs of shoes and vests, in total, are being polished and mended at Downton?

d. Mrs. Hughes comes along and suggests to Mr. Carson that he is being terribly inefficient in his allocation of tasks. Demonstrate using an efficient joint production possibility frontier that Mrs. Hughes is correct! Show us where Mr. Carson’s aggregate production point is in your efficient joint production possibilities frontier.

IN ALL GRAPHS PUT PAIRS OF SHOES ON THE HORIZONTAL AND NUMBER OF VESTS ON THE VERTICAL. Thanks!

Answer Space

3. Consider the very simple closed economy of HappyLand. Only four goods are produced in HappyLand: pizza pies, cheese, cars and wine. There is no government, and no international sector.

Note the following very important information:

i) Pizza pies, cars and wine are final goods and final goods only.

ii) Cheese is consumed as a final good AND it is used as an intermediate good by firms in the production of pizza pies.

iii) Each pizza pie made uses up 1/2 pound of cheese.

|Item |Price |Quantity in 2010 |Price in 2012 |Quantity in 2012| | | |

| |in 2010 | | | | | | |

|Pizzas |$20 |100 |$25 |150 | | | |

|Pies | | | | | | | |

|Cheese |$4 |600 |$3 |700 | | | |

|Cars |$10000 |45 |$12000 |50 | | | |

|Wine |$20 |400 |$25 |500 | | | |

The table provides ALL the information you need to know on prices and total output/production for the purposes of calculating national income statistics. Some work space is also provided.

SHOW YOUR WORK FOR EACH PART!

a. Calculate nominal or current GDP in year 2010.

b. Calculate nominal or current GDP in year 2012.

c. Calculate real GDP in 2012 assuming 2010 is the base year.

d. How, specifically, as an economist would you address the following questions posed to you by a TV news reporter? “Is HappyLand a strong and very happy place to live? Are the citizens of HappyLand doing better in 2012 than in 2010 and do they have a high standard of living?”

e. What is the implicit GDP deflator index in 2012, assuming 2010 is the base year?

f. Calculate how much inflation there was between 2010 and 2012 according to the implicit GDP deflator index, using 2010 as the base year.

g. Suppose Harry, who lives in HappyLand, has a brother named Charles. Charles graduated from college in 2010 and was given a gift of $10,000 from his grandmother. Harry is graduating in 2012. This same grandmother intends to give him $10,000 as well. Harry feels this is not fair. He thinks he should get more. Can you use the information from this problem to defend Harry’s position? In fact, how much would you suggest grandma give Harry so that the gifts seem more equal?

Answer Space

Answer Space

MAKEUP ECON 1120 S2015 PRELIM 1 Answers to multiple choice questions

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[i]. C. Charlie, since his MOC to make corndogs is 3 bananas, the highest of all. So use him to make corndogs last.

[ii] E. J has a positive sign, so as J increase, quantity demanded increase. This does not apply to: number of firms making jelly beans (affect supply, not demand), price of jelly beans (should be reverse relationship by LoD), nor the Easter basket (complimentary good). Price of sugar is production cost so doesn’t affect demand. So only E is correct.

[iii] E. When the cost of producing chairs increases, production cost increases drops, resulting in a decrease in supply. Answer A is wrong because a change in the price will result in a change in the quantity supplied, not the supply. Answer B is wrong because a higher income will change demand but not supply. Answer C is wrong because it results in an increase in supply. Answer D is wrong because a change in the price will result in a change in the quantity supplied, not the supply.

[iv] C. Part A is incorrect. A decrease in the price of corn (a substitute in consumption for green beans) causes people to consume more corn, and buy less green beans instead (since green beans are now relatively more pricey, compared to corn). Therefore, this event causes the demand curve for green beans to shift to the left. The supply curve remains unchanged. As a result, the equilibrium price and the equilibrium quantity will both decrease. Part B is incorrect. The new bean-eating worm causes the production costs of green beans to increase-shifting the supply curve of green beans to the left. The demand curve remains unchanged. As a result, the equilibrium quantity must decrease, and the equilibrium price must increase. Part C is correct. The fall in the price of butter causes people to buy more butter, and hence buy more green beans as well (since they are complementary goods). As a result, the demand curve of green beans shifts to the right. Furthermore, bean farms are protected from blight; hence, the supply curve shifts to the right. As a combined result, the equilibrium quantity must increase. We cannot tell what happens to the equilibrium price- this depends on the relative sizes of the shifts of the demand and the supply curves. Part D is incorrect. Wet harvest conditions shift the supply curve to the left. The new medical survey about the life benefits of green beans shifts the demand curve to the right. As a combined result, the equilibrium price must increase. We cannot tell what happens to the equilibrium quantity, without knowing the relative sizes of the shifts of the curves. The equilibrium quantity might increase or decrease, we do not know. Part E is incorrect. The expectation of lower bean prices in the future shifts the demand curve to the left. The supply curve remains unchanged. As a result, both the equilibrium quantity and the equilibrium price must decrease.

[v] E. The binding quota on Brazilian sugar means that the price in the market will be determined by the demand curve: i.e. consumers will be paying their maximum willingness to pay at the quantity determined by the quota. Because demand curves slope down, this price will be higher than what consumers were previously paying for Brazilian sugar. American and Brazilian made sugar are substitutes. An increase in the price of Brazilian sugar increases the demand for domestically made sugar. Therefore, the demand curve for American made sugar shifts out and to the right, increasing the equilibrium market price and quantity of American sugar. Altogether, the price of both Brazilian and American made sugar increases.

[vi] C.

[vii]. E. A and B are good examples of intermediate goods. C counts as GDP of China. D, the used textbook counts as GDP of the year it was made.

[viii]. C. GDP is what is produced in the country. GNP is what’s produced by your country’s people. So Francine’s work counts towards the UK’s GDP but not its GNP and her work counts toward the France’s GNP but not its GDP.

[ix]. E. Since you donated them, they did not go through a market so would not be counted in GDP.

[x]. C. CPI tends to overstate inflation as CPI computation uses base year bundle. Implicit GDP Deflator Index (IGDPDI) tends to understate inflation.

[xi]. C. Structural unemployment: the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries. An introduction of new technology in production process could be a cause of structural unemployment.

[xii]. B. Find the answer or in PowerPoint for Lecture 8.

[xiii]. A. Last week, the unemployment rate was 10,000/(10,000+90,000)*100=10%. This week, the unemployment rate is 12,000/(12,000+90,000)*100=…%. Therefore, the unemployment rate increased since last week, as a result of 2,000 people entering the labor force.

[xiv] 176

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