Economics 101 - Cornell University



Econ 1120-INTRODUCTORY MACROECONOMICS

PRELIM #1-Wissink-Fall 2015 – October 8

Clearly Print Your LAST(family) Name: ______________________________________________________

Clearly Print Your First Name: ___________________________________________________

Your Cornell NetId: ___________________ Your Student Number: __________________________

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

Part I: 14 multiple choice 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 to say, check where you will pick up your prelim):

|"X" |DIS # |TA |Meeting Times |Location |

|  |252, 253 |Luoyi (Roy) Su |Mondays 12:20-02:15 |Goldwin Smith G22 |

|  |256, 257 |Naveen Sunder |Wednesdays 10:10-12:05 |Rockefeller Hall 102 |

|  |250, 251 |Sylverie Herbert |Fridays 09:05-11:00 |Uris Hall 202 |

|  |254, 255 |Tilahun Emiru |Fridays 01:25-03:20 |Rockefeller Hall 102 |

One more time, please…

Clearly Print Your LAST(family) Name: _______________________________________________________

Clearly Print Your First Name: ___________________________________________________

Your Cornell 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]. Drinking coffee is a popular activity in Paris. Which one of the following will decrease demand for coffee in Paris, assuming that coffee is a normal good?

A. A rise in the price of tea, a popular substitute for coffee.

B. A rise in the price of milk, a popular complement with coffee.

C. An increase in billboards showing a popular local artist drinking coffee.

D. A natural disaster that destroys half of the coffee bean crop.

E. An increase in income of the average Parisian.

[ii]. 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.

[iii]. Which one of the following is an example of an intermediate good?

A. The sugar you buy to put in your pantry.

B. The chocolate bar you bought for energy to stay awake in class.

C. The lumber you buy for your company to make doll houses to sell each weekend at the Ithaca Farmers Market.

D. The lumber you buy to build a dog house for your own dog.

E. The circular saw you buy for your company to cut the lumber to make doll houses to sell each weekend at the Ithaca Farmers Market.

[iv]. Suppose that the demand function for glasses of freshly squeezed orange juice at a local cafe in Dryden 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.

|Price |Quantity |Quantity |

|($/slice) |Demanded |Supplied |

| |(pizza slices) |(pizza slices) |

|$1.25 |4000 |250 |

|$1.50 |3500 |500 |

|$1.75 |3000 |750 |

|$2.00 |2500 |1000 |

|$2.25 |2000 |1250 |

|$2.50 |1500 |1500 |

|$2.75 |1000 |1750 |

|$3.00 |500 |2000 |

|$3.25 |0 |2250 |

[v]. The table shows the daily demand and supply information for the pizza market at Florida’s Disney World. A new study shows that pizza and rollercoasters do not mix well. The local government therefore imposes a quota on the number of slices of pizza allowed to be sold in the theme park per day. The quota is set at 1,000 slices. What is the new equilibrium price?

A. $1.50

B. $1.25

C. $2.00

D. $2.75

E. $0.50

[vi]. Jim, Pam, Dwight and Kelly are asked by their boss Michael to make paper airplanes and paper hats for the upcoming company party. The table shows the maximum number of airplanes or hats that each employee can make during one hour. Workers can produce any linear combination of their extreme values. The group decides to assign the tasks efficiently. Suppose Dwight is making both airplanes and hats. Given that information, which one of the following statements is TRUE?

| |Planes |Hats |

|Jim |30 |10 |

|Pam |20 |30 |

|Dwight |40 |40 |

|Kelly |15 |20 |

A. Jim is making only hats.

B. Pam is making only planes.

C. Jim, Pam and Kelly are also producing some of both.

D. Kelly is making only hats.

E. Everyone is making planes.

[vii]. Two friends, Tyrion and Jorah, decide to open up a blacksmith store. They both work eight hours per day. It takes Tyrion 30 minutes to make a sword, and 6 minutes to make a goblet. It takes Jorah 10 minutes to make a sword, and 12 minutes to make a goblet. Which one of the following statements is TRUE?

A. Tyrion has a comparative advantage in the production of swords.

B. Tyrion has an absolute advantage in the production of both goods.

C. Jorah has a comparative advantage in the production of swords.

D. Jorah has an absolute advantage in the production of goblets.

E. Tyrion and Jorah would be unable to mutually benefit based on the theory of comparative advantage.

[viii]. Migration is a politically sensitive topic. Much of the discussion is centered around the effect of migrants on local labor markets. Suppose the government decides to increase the number of migrants allowed into the country. Suppose that the only effect that this has is to increase the local supply of labor in the economy. Which one of the following predictions is most correct based on the perfectly competitive model of demand and supply?

A. The equilibrium market price of labor (wages) will definitely increase and the equilibrium quantity traded (employment) could go up or down.

B. Employment will definitely increase but wages could go up or down.

C. Both wages and employment will definitely increase.

D. Both wages and employment will definitely decrease.

E. Wages will definitely decrease and employment will definitely increase.

[ix]. Assume that the U.S. economy’s production possibilities can be depicted by the figure. Which of the points would represent an efficient use of the U.S. economy’s resources?

A. I

B. II

C. III

D. All of the above

E. None of the above.

[x]. Which one of the following would NOT be counted in 2014's GDP, via either the income approach or the expenditure approach?

A. The value of the car, produced in 2013, which you purchase on sale from a new car dealer in 2014.

B. The 2014 salary of a used car salesman for his efforts at the used car lot in 2014.

C. The sale of an oven manufactured in 2014 and purchased in 2014 by a pizza parlor.

D. The value of a refrigerator manufactured in 2014 but not sold in 2014. It now sits in inventory.

E. Government expenditures on repairing pot holes in highways in 2014.

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

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

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

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.

|YEAR |GDP (nominal) |GDP (real) |

| |in billions of current dollars |in billions of chained 2009 dollars |

|2008 |7414,720.3 |1714,833.6 |

|2009 |8114,417.9 |9314,417.9 |

|2010 |814,958.3 |8914,779.4 |

|2011 |9315,533.8 |4315,052.4 |

|2012 |7116,244.6 |9015,470.7 |

|2013 |2716,803.0 |1515,767.1 |



[xii]. Janice Yelling has two grandchildren, Mutt and Jeff. Mutt graduated from college in 2009 and Janice gave him a graduation present of $1,000. Jeff is younger than Mutt and graduated from college in 2013. Based on the GDP table, how much should Janice give Jeff if she wants to make sure that in “real” terms, she is giving Jeff the same present she gave Mutt?

A. $1,000

B. $1,066

C. $1,660

D. $7,600

E. $1,006

[xiii]. Wayne started looking for another job immediately after he lost his current job. As a result the

A. size of the labor force decreases.

B. size of the labor force increases.

C. unemployment rate increases.

D. unemployment rate remains constant.

E. labor force participation rate changes.

[pic]

[xiv]. Refer to the table. The unemployment rate is

A. 2.8%.

B. 5%.

C. 5.3%.

D. 7.2%.

E. none of the above

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. The market for "Ithaca is Gorges" t-shirts is perfectly competitive. The demand function for these t-shirts is best characterized by the equation: PD = 62 -2Q, while the supply function is characterized by: PS = 2 + 1Q.

a. Carefully graph and label the supply and demand curves. Indicate numerical values where demand and supply intersect the axes.

b. Calculate the equilibrium values for quantity (Q*) and price (P*) and indicate them on your graph.

c. Suppose the mayor of Ithaca imposes a binding price floor on this market. Give one reasonable justification for why the mayor might do this. Propose a $value for the mayor’s price floor. What happens as a consequence of this policy? Indicate on your graph.

Answer Space

Answer Space

2. Momma Bear, Poppa Bear and Baby Bear make two goods: beds and porridge. In a week’s time Poppa Bear can make 15 beds and no porridge, or 5 bowls of porridge and no beds, or any linear combination. Baby Bear can make 3 beds and no porridge, or 3 bowls of porridge and no beds, or any linear combination. Momma Bear is different. She can make 12 beds and no porridge, 8 beds and 8 bowls of porridge, or any linear combination between these two points. She can also make 8 beds and 8 bowls of porridge and no beds and 12 bowls of porridge, or any linear combination between these two points. The PPF for each bear is illustrated below.

a. Who has the absolute advantage in porridge? Defend your position.

b. Between Baby Bear and Poppa Bear, who has the comparative advantage in the production of porridge? Defend your position.

c. The Bear family wants to determine the family’s efficient joint production possibilities frontier. Putting BEDS on the VERTICAL, sketch out the efficient joint production possibilities 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.

d. If the Bear Family is efficiently making 10 bowls of porridge, how many beds are they making? Explicitly tell us how many units of each activity each bear is doing.

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.

  |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

Answer Space

ECON 1120 F2015 PRELIM 1 Answers

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[i]. B

If the price of milk increases, then the demand for coffee falls since now there is a smaller quantity demanded of its complement. A, C and E are not correct because these all lead to an increase in demand. D is not correct because a natural disaster would decrease supply, not demand.

[ii]. 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.

[iii]. C

It is clear that B is incorrect because the chocolate bar you bought for energy to stay awake in class is a final good. A, D, and E are less obvious. Then think about the definition: intermediate goods are goods that are produced by one firm for use in further processing by another firm. A and C are not correct because you are not “firms” to process those goods and to make a profit from them. In alternative E, you use saw to process goods but you are not processing the saw. C is correct because you process the lumber and add value to the lumber. (In this sense, you are a for-profit firm!).

[iv]. 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.

[v]. D

There is now a vertical supply curve at a quantity of 1,000. In order to equate quantity demanded to quantity supplied, the price must rise to $2.75.

[vi]. D

Draw each person’s PPF and notice the following with respect to the marginal opportunity cost of hats in terms of planes: Pam’s = 2/3, Kelly’s=3/4, Dwight’s=1 and Jim’s=3. So if Dwight is doing some of both, by now you have Pam and Kelly doing only hats, and Jim doing only planes.

[vii]. C

Based on the information given, Tyrion has to give up 5 goblets to make a sword. Jorah gives up 5 goblets to make six swords. Since 5/6 is less than 5, Jorah’s opportunity cost of making a sword is lower. Jorah has the comparative advantage in making swords while Tyrion has the comparative advantage in making goblets. Furthermore, Tyrion has the absolute advantage in goblets, and Jorah the absolute advantage in swords.

[viii]. E

The increase in supply shifts the supply curve to the right. This moves the equilibrium point down the demand curve so that wages fall and employment rises.

[ix]. B

Any point on the frontier of the PPF is an efficient allocation of resources in the economy.

[x]. A

Because the car was made in 2013 it’s in that year’s GDP calculation.

[xi]. A

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.

[xii]. B

GDPDI 2013 = (nominal GDP 2013) / (real GDP 2013) * 100 = 16,803 / 15,767.1 * 100 = 106.6, so the inflation between 2009 and 2013 is (106.6 – 100)/100 = 6.6%. This implies that the value of $1,000 gift in 2008 dollars is equivalent in real terms to $1,000*1.066 = $1,066 in 2013 dollars.

[xiii]. C

Wayne lost his job, but he is actively looking for another job, so he is now classified as the unemployed. As a result, unemployment rate increases, implying that D is not correct. He is still in the labor force, now as the unemployed, so the size of labor force is unchanged as well as labor force participation rate. Thus, A, B and E are incorrect.

[xiv]. B

The unemployment rate is (Unemployed) / (In the Labor Force) *100 = 5,000 / (5,000 + 95,000) *100 = 5%.

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