Economics 101 - Cornell University



Econ 1120 - INTRODUCTORY MACROECONOMICS

MAKEUP PRELIM #1 – Wissink – Fall 2018 – October 3

Clearly Print Your LAST (family) Name: ______________________________________________________

Clearly Print Your First Name: ___________________________________________________

Your Cornell NetId: ___________________ Your Student Number: __________________________

Instructions and Exam Taking Policy:

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

Part I: 14 multiple choice/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 there is something troubling you about a question, write us a note on the exam somewhere and we will deal with it as we are grading. If 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.

RESTROOM USE: If you absolutely need to use the restroom raise your hand and wait for the proctor. 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, IPODS OR DEVICES WITH CALCULATOR “APPS” or large screens.

NO GRAPHING CALCULATORS.

NO BOOKS. NO NOTES. NO HELP SHEETS.

NO TALKING TO EACH OTHER.

Circle the TA’s name for the section you regularly attend (that is, where you will pick up your prelim):

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One more time, please…

Clearly Print Your LAST (family) Name: _______________________________________________________

Clearly Print Your First Name: ___________________________________________________

Your Cornell NetId: ___________________ Your Student Number: __________________________

GRADING

MC/FIB = ___________________

Q1 = _________________

Q2 = _________________

Q3 = _________________

TOTAL SCORE: _____________________

[i]. Real economic capital, as economists use the term,

A. is the money firms spend to hire resources.

B. is the money firms raises from selling stock.

C. refers to the process by which factors of production are transformed into outputs.

D. refers to durable equipment that has already been produced that is used in turn to produce other goods and services.

E. is the stock that companies issue to shareholders.

[ii]. When the economy in the graph is efficiently producing more boxes of spaghetti than meatballs, what is the marginal opportunity cost of a box of spaghetti? (Make sure to include units of measurement.)

Your answer:

_______________________

| |Max # of |Max # of |

| |Sport Coat Designs |Dress Designs |

| |per week |per week |

|Isaac |20 |10 |

|Calvin |15 |3 |

|Georgio |10 |1 |

[iii]. Isaac, Calvin and Georgio are starting a new fashion label, Klizani. The table shows the maximum number of designs of sport coats and dresses for the three designers per week. If Klizani designs 25 sport coats and 10 dresses, how should the designers specialize to maximize total design production in any given week?

A. None of the designers specialize.

B. Georgio and Calvin specialize in sport coat designs and Isaac specializes in dresses.

C. Georgio and Calvin specialize in sport coat designs and Isaac designs both sport coats and dresses.

D. Isaac and Calvin specialize in dress designs and Georgio specializes in sport coat designs.

E. Isaac and Calvin specialize in dress designs and Georgio designs both sport coats and dresses.

[iv]. The table shows the weekly demand and supply information for chicken soup in Ithaca. The quantity actually traded in the Ithaca market will be 210 cups/week if

|Price ($/cup) |Quantity |Quantity |

| |Demanded (cups) |Supplied (cups) |

|$2.25 |0 |816 |

|$2.00 |60 |666 |

|$1.75 |135 |546 |

|$1.50 |210 |450 |

|$1.25 |310 |310 |

|$1.00 |450 |210 |

|$0.75 |585 |135 |

|$0.50 |735 |75 |

|$0.25 |900 |30 |

A. the local government enforces a price ceiling of $1.50/cup.

B. the local government allows the market to reach its natural equilibrium.

C. the local government enforces a price floor of $1.00/cup.

D. the local government enforces a price floor of $1.50/cup.

E. None of the above is correct.

[v]. How will the market for rollerblades (or roller skates) be affected by a simultaneous increase in the price of bicycles (a substitute) and a decrease in the demand for exercise of any kind?

A. Price of rollerblades rises, equilibrium quantity increases.

B. Price of rollerblades rises, equilibrium quantity decreases.

C. Price of rollerblades falls, equilibrium quantity increases.

D. Price of rollerblades falls, equilibrium quantity decreases.

E. Price change of rollerblades is ambiguous, equilibrium quantity change is also ambiguous.

[vi]. Suppose that the demand function for glasses of freshly squeezed orange juice at a local cafe in Ithaca is as follows:

QD = 600 + 7F – 0.5J + 1.9G. Which one of the following statements is most true?

A. Variable G is most likely the price the café owner paid for the oranges wholesale.

B. Variable J could be the price of chocolate milk, a substitute in consumption for orange juice.

C. The demand for orange juice must be vertical.

D. If the orange juice market satisfies the “law of demand” then J is most likely the price of orange juice per glass.

E. Variable F is most likely the café owner’s rental cost for her cafe.

[vii]. The graph represents the Cortland market for jelly beans this spring. Q is number of pounds. $ is the price per pound. Suppose the government imposes a price floor of $10 per pound. The consequence of this is that

A. there will be a surplus of 30 pounds of jelly beans.

B. there will be a shortage of 30 pounds of jelly beans.

C. there will be a shortage of 40 pounds of jelly beans.

D. there will be a black market price of $35 per pound of jelly beans.

E. a total of 40 pounds will be traded.

[viii]. Which one of the following is an example of a final good or service?

A. Wheat a bakery purchases to make bread.

B. Coffee beans Starbucks purchases to make coffee.

C. A computer purchased by Ezra Smith, a new Cornell freshman.

D. Lumber purchased by a construction company that gets used in building houses.

E. Aviv’s time, purchased by Cornell, to be used in making intro 1120 go more smoothly for students and Prof. Wissink.

[ix]. Which one of the following would not be counted in 2018's GDP, via either the income approach or the expenditure approach?

A. The 2018 salary of a used car salesman for his efforts at the used car lot in 2018.

B. The value of the car, produced in 2017, which you purchase on sale from a new car dealer in 2018.

C. The sale of an oven manufactured in 2018 and purchased in 2018 by a pizza parlor.

D. The value of a refrigerator manufactured in 2018 but not sold in 2018. It now sits in inventory.

E. Government expenditures on repairing pot holes in highways in 2018.

[x]. If no foreign citizens work in BadLand, but many of BadLand’s citizens work abroad, then

A. BadLand's GDP will tend to exceed its GNP.

B. BadLand's GNP will tend to exceed its GDP.

C. BadLand's GNP and GDP will tend to be equal.

D. BadLand's GDP will tend to be equal to its national saving.

E. BadLand's’s exports will be zero.

[xi]. The 2018 implicit GDP deflator index in Webworld was 95 using 2012 as its base year. This means that, on average, the prices of goods and services are

A. 105% higher in year 2018 than in year 2012.

B. 5% higher in year 2018 than in year 2012.

C. 105% higher in year 2012 than in year 2018.

D. 5% higher in year 2012 than in year 2018.

E. all increasing at exactly the same rate.

[xii]. Using the figures in the table, compute the value of GDP for this economy using the expenditure loop. Assume any values not reported are zero.

Your answer: _________________________

|Durable goods |$1500 |

|Nondurable goods |$500 |

|Services |$2500 |

|Gross private domestic investment |$500 |

|Depreciation |$200 |

|Government purchases of goods and services |$50 |

|Gross government investment |$40 |

|Federal government transfer payments |$100 |

|Exports |$300 |

|Imports |$500 |

|Value of home production |$1500 |

|Profits |$5000 |

[xiii]. Which one of the following is best categorized as cyclical unemployment?

A. Weak short term demand has caused a recession. 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.

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[xiv]. Refer to the table which lists the representative consumer’s base year bundle of blueberries, pineapples and cheese. Suppose 2011 is the base year. What is the value for the consumer price index in 2010?

Your Answer: ______________________________

Keep going……………………………..

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 the supply and demand curves for milk in Cortland are described by the following equations (where Q is measured in gallons and P is price per gallon):

Demand: QD = 18 - P Supply: QS = -6.0 + 5P

a. Graph the demand and supply curves as we have set it up in class (remember to label everything in your graph including endpoints of demand and supply).

b. Determine the proper equation for the demand curve as it is illustrated on your graph.

c. Determine the proper equation for the supply curve as it is illustrated on your graph.

d. Determine the equilibrium price and quantity values and label them on your graph.

e. Suppose Brian Tobin, the mayor of Cortland, gets the local government to enact a milk price floor of $6 a gallon in the Cortland milk market. Indicate the impact of this law on your diagram and briefly discuss. Calculate any shortage/surplus due to the policy.

Answer Space

Answer Space

2. Abe and Betty are the only producers/consumers in a small (American) football loving economy. Abe and Betty produce and consume only two things: NFL (National Football League) logo T-shirts and logo pins.

Given 60 hours of work in a week, Abe can produce a maximum of 4 T-shirts or 12 pins, or any combination along a straight line PPF between the two.

Given 60 hours of work in a week, Betty can produce a maximum of 5 T-shirts or 20 pins, or any combination along a straight line PPF between the two.

|Hours Required for One Unit of Output |

|Person |T-shirts |Pins |

|Abe | | |

| |_______hours |_______hours |

|Betty | | |

| |_______hours |_______hours |

a. Fill in the missing numbers in the table.

b. Who has the absolute advantage in T-shirt production? Who has the comparative advantage in T-shirt production?

c. Assume that Abe and Betty have not taken Econ 1120, and hence don’t know the wonders of trade. That is, they insist on self-producing everything they consume. If Abe wants to consume 2 T-shirts, how many pins, at most, can Abe have per week? If Betty wants to consume 16 pins, how many T-shirts, at most, can she consume per week? When Abe and Betty do this, what is the total number of pins and total number of T-shirts made summing over the two of them?

d. Assume Abe and Betty take Econ 1120 and see the light and realize they should be efficient. Putting PINS ON THE HORIZONTAL and T-SHIRTS ON THE VERTICAL, illustrate the efficient combined production possibility frontier. For full credit, if there are any kink points in your graph, label the number of units of each task at any/all kink points. Also label the endpoints of the PPF.

e. If Abe and Betty specialize and trade with each other, what would be the bounds of an “international” exchange rate between T-shirts and Pins between Abe and Betty? For full credit you must give a brief explanation of why.

Answer Space

Answer Space

3. Consider the economy of Wistler which uses Wistler dollars ($) as their currency. The table represents total production of final goods in Wistler for the years 2008 and 2014.

IMPORTANT NOTE: The Wistler Bureau of Labor Statistics has decided that the representative urban consumer’s bundle in the base year of 2008 includes only the following: 5 apples and 10 books.

a. Fill in all the missing cells in the table and determine: i) current 2008 GDP, ii) current 2014 GDP and iii) real 2014 GDP in 2008 dollars.

b. Determine the implicit GDP deflator index for 2014 (using 2008 as the base year) - show some work.

c. Based on the implicit GDP deflator index, has there been inflation or deflation since 2008? Briefly explain and quantify how much inflation or deflation there has been.

d. Determine Wistler’s consumer price index for 2014 (using 2008 as the base year) - show some work.

e. How would your answer to part (a) for current 2008 GDP be impacted if you learned that in 2008 book manufacturers gave away 100 of the books they made to faculty members at universities, hoping to get faculty at these universities to require that students buy lots of book in the future? YOU DO NOT NEED A NUMBER, JUST A DIRECTION like up, down or stays the same. For full credit you must give a brief explanation of why.

  |total number of units produced in 2008 |total number of units produced in 2014 |per unit prices in 2008 |per unit prices in 2014 |Current $ 2008 GDP |Current $ 2014 GDP |Real $ 2014 GDP

base year=2008 | |apples |100 |200 |$0.50 |$0.70 | | | | |books |300 |250 |$5.00 |$7.00 | | | | |military guns |50 |55 |$3.00 |$3.50 | | | | | | | | |Total GDP values for a(i), a(ii) and a(iii) | | | | |

Answer Space

WISSINK ANSWERS ECON 1120 F21018 MAKEUP PRELIM 1

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[i] D

Based on the standard definition of real economic capital – what we called Kapital in class.

[ii]. Answer is 1.5 meatballs

You are on the steeper part of the PPF (past (12, 12) on the graph) and so calculate MOC to be 12/8 = 1.5.

[iii]. B

Draw each person’s PPF and compare MOC.: Georgio should start making coats first, then Calvin and then last Issac. So if you are making 25 coats, then Georgio is making only coats (and he makes 10), and then you go to Calvin for the next 15 coats, which maxes him out in coats and he makes no dress designs. Issac is making 10 dress designs and no coat designs.

[iv]. D

Arguments of A and C are not binding, and thus it doesn’t affect natural equilibrium price and quantity. And in equilibrium the quantity is 310, so B is wrong. D is correct because the floor is binding and the demand curve binds the quantity traded here.

[v]. E

An increase in the price of bicycles increases demand for rollerblades since the two are substitutes. But, since a decrease in the demand for exercise of any kind decreases demand for rollerblades, we do not know whether the ultimate shift of the demand curve is left or right (decrease or increase). There is no change in the supply curve. So, either both the price and quantity rise or both the price and quantity fall.

Answer A is wrong because it assumes that the increase in demand for rollerblades resulting from the decrease in the price of the substitute will outweigh the decrease in demand for rollerblades caused by the decrease in demand for exercise in general. No magnitudes were specified in the question; so, this is not the best answer. Answers B and C are wrong because they are impossible if the supply curve is unchanged. Price and quantity must move in the same direction given the assumptions in the question. Answer D is wrong for the because it assumes that the decrease in demand for rollerblades due to the overall decrease in demand for exercise will outweigh the increase in demand for rollerblades caused by the decrease in the price of a substitute. Again, no magnitudes are given so this is not the best answer. (Partial credit: 1 point for answer A and D. Those two answer demonstrate an understanding that the supply curve did not shift.).

[vi]. D

Look at the algebraic signs in front of each variable and ask yourself if they make sense given the multiple-choice options. The answer is not A because this would affect supply, not demand. Assuming chocolate milk is a substitute, we’d expect an increase in the price of that to increase the demand for OJ. Therefore B is wrong. For C to be correct, we need to know that each of F, J and G are zero, and we do not know this. E affects supply, not demand.

[vii]. E

The price floor is not binding so we will be at the natural equilibrium and 40 units will be traded.

[viii]. C

A, B, D and E are not correct because they are used to produce some other goods or services. They are all examples of intermediate goods.

[ix]. B

Because the car was made in 2017 it’s in that year’s GDP calculation.

[x]. B

GDP measures the total market value of all final goods and services produced within a given period by factors of production located within a country, whereas GNP is the market value of all final goods and services produced during a given period by factors of production owned by a country’s citizens. Because there are no foreign citizens producing in BadLand, but many of the BadLand’s citizens produce abroad, BadLand’s GNP should be greater than its GDP.

[xi]. D

The index in base year is 100. The index in year 2018 is 95. Therefore, D is correct. Webworld experienced deflation between 2012 and 2018.

[xii]. $4890

Add together C + I + G + Ex - Im

[xiii]. A

Cyclical unemployment: the portion of unemployment that is due to the business cycle.

[xiv]. 94.2

The CPI in 2010, with 2011 as the base year, is defined as the base year bundle evaluated at 2010 prices divided by the base year bundle evaluated at 2011 prices, then multiplied by 100. [(8* 2.00) + (5 * 2.50) + (3 * 3.00)]/[(8 * 2.10) + (5 * 2.50) + (3 * 3.50)] * 100 = 94.2.

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Part I: Multiple Choice and Fill-In-The-Blank Questions. Do them ALL.

Circle the letter for your answer or fill in your answer in the blank provided.

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