ECON 500 – Fall 2004. Exam #1. 1. Suppose you have won $100 in a football pool. You are deciding between the following two options: I. spending the money now on a nice dinner for two at a fancy seafood restaurant (which would cost exactly $100) II. putting the entire sum of money away for exactly one year in a bank account that pays 4% interest. What is the true cost of the dinner at the seafood restaurant? Clearly explain. (10 points)2. Imagine a society that produces military goods (“guns”) and consumer goods (“butter”). The Production Possibilities Frontier for guns and butter is illustrated below. a. In the figure above, identify a point that is impossible for this economy to achieve (label this point “U”). In the figure above, identify a point that can be achieved, but is inefficient (label this point “I”). (4 points) b. Suppose the society has two political parties, the Hawks (that want a strong military, but still some consumer goods) and the Doves (that want a smaller military, and more consumer goods). In the figure above: identify a point that the Hawks might argue in favor of (label this point “H”); identify a point that the Doves might argue in favor of (label this point “D”). (4 points) c. Suppose that an aggressive neighboring country reduces the size of its military. As a result, both Hawks and Doves reduce their desired level of Guns by the same amount. Which party would realize a bigger “peace dividend,” measured by the resulting increase in butter production. Clearly Explain. (4 points) Guns Butter3. Consider a market in which Supply and Demand are respectively given by the inverse functions qqPS2)( = and qqPD324)(−=. a. Determine the functional form of )( pD . (3 points) b. Determine the number of units that consumers are willing and able to purchase at a price of $3 per unit. (3 points) c. Suppose “Supply Changes” so that the new inverse supply function is qqPnewS4)( = . Graphically illustrate Supply both before and after this change. Does this change correspond to an “Increase in Supply” or a “Decrease in Supply”? Clearly explain. (4 points)4. Clearly explain why each of the following statements is either correct or incorrect. (6 points each) a. "If the price of oil increases (with all other factors fixed), demand must decrease." b. "Dennis has a voucher from Southwest Airlines (with no expiration date) for 'one free round trip ticket, anywhere Southwest flies in the continental United States.' The true cost of using this voucher to fly to Las Vegas is zero, since he doesn't have to pay any money to obtain the ticket." c. "When deciding how much to study for an exam, you should always increase your 'study time' if doing so increases your expected grade on the exam."5. Nick and Chris devote each workday to producing either “apples” or “bananas.” On any given day Nick can produce either 8 pounds of apples or 16 pounds of bananas, while Chris can produce either 6 pounds of apples or B pounds of bananas. a. Based upon the provided information, which individual has an absolute advantage in the production of apples? Explain. (4 points) b. Based upon the provided information, which individual has an absolute advantage in the production of bananas? Explain. (4 points) c. Specify a value of B for which Chris has a comparative advantage in the production of apples. Justify your answer. (6 points) d. In general, is it ever possible for one individual to simultaneously have a comparative advantage in the production of both apples and bananas? Clearly explain. (4 points)6. a. State the “Law of Demand.” (6 points) b. If demand is given by the function ppD −= 8)( is the Law of Demand satisfied? Clearly explain. (4 points) 7. Scott and Brad devote each workday to producing either “computers” or “pizza.” On any given day Scott can produce either 4 computers or 12 pizzas, while Brad can produce either 8 computers or 16 pizzas. As a result, the opportunity cost of computers for Scott is 3=SCOC , while the opportunity cost of computers for Brad is 2=BCOC . Suppose that trade can take place between these two workers. a. Determine the maximum number of computers that these two individuals can produce collectively. (4 points) b. Which of these two individuals has a comparative advantage in the production of pizza? Explain. (4 points)c. Graph the daily Production Possibilities Frontier for this “two person economy.” Clearly label each intercept, as well as the slope of this curve at each point. (6 points) d. Is it possible for these two workers to collectively produce 10 computers and 9 pizzas in a single day? Clearly explain why or why not. (4 points) e. Argue that: “Without specialization and trade, it is not possible for Scott to consume 3 computers and 4 pizzas and for Brad to consume 5 computers and 8 pizzas. However, with specialization and trade these levels of consumption are possible.” (4 points)blank
View Full Document
Unlocking...