ECON 500 Examination 1 - Spring 2005 1. Clearly answer each of the following: a) What is the difference between a positive statement and a normative statement? (8 points) b) Does the following statement appear to be a positive statement or a normative statement: “In auctions on eBay many bidders engage in ‘sniping.’ That is, they do not submit their bids until seconds before the end of the auction.”? Explain. (8 points) c) Does the following statement appear to be a positive statement or a normative statement: “In order to be fair to all bidders, eBay should change their rules so that an auction cannot end until at least 5 minutes after any bid has been submitted.”? Explain. (8 points)2. Clearly explain why each of the arguments presented below is either valid or not valid. (8 points each) a. “Tony has a voucher from JetBlue Airlines (with no expiration date) for ‘one free round trip ticket, anywhere JetBlue 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.” b. “The Air Quality Index (AQI) in the San Fernando Valley is currently 137. As a result, the Environmental Protection Agency classifies the air as ‘unhealthy for sensitive groups.’ Since breathing polluted air is not good for people, regulations should be put in place to decrease the AQI to 50 so that the air quality will be ‘good.’” c. “Gene and Mo spend their time mowing lawns and raking leaves. Gene is exceptionally good at yard work and therefore possesses a comparative advantage in performing both tasks.”3. Imagine a country that produces military goods (“guns”) and consumer goods (“butter”). The current Production Possibilities Frontier for guns and butter is illustrated below. This country 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). Currently the Hawks are in power and have chosen for the society to be at point “H.” a. Suppose the Doves gain control of this society. Identify a point in the graph above that might be chosen as a result of this change in power – label this point “D.” (6 points) b. Suppose a new butter-churning machine is developed. How would this change in technology alter the graph above? Clearly explain, and illustrate the anticipated change in the figure above. (6 points) c. If the Doves remain in power after the improvement in technology described in part (b), are they still likely to choose point “D” which you identified in part (a)? Clearly explain why or why not. (6 points) Guns Butter H4. Adam and Scott devote each workday to producing either computers or bicycles. On any given day Adam can produce either 6 computers or 12 bicycles, while Scott can produce either 9 computers or 36 bicycles. Suppose that trade can take place between these two workers. a. Which individual has an “absolute advantage” in the production of computers? Clearly explain. (5 points) b. Which individual has a “comparative advantage” in the production of computers? Clearly explain. (5 points) c. Determine the maximum number of computers that these two individuals can produce collectively. (5 points) d. Determine the maximum number of bicycles that these two individuals can produce collectively. (5 points)e. 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) f. Consider the output combination of “12 computers and 6 bicycles.” For these two individuals, is this combination of output: “unattainable,” “attainable and efficient,” or “attainable but inefficient”? Clearly explain. (8 points)EXTRA CREDIT - 3 points! Yair and Pradeep grow apples and bananas. Their individual Production Possibilities Frontiers are illustrated below. Suppose that currently Yair is allocating his time so that he produces point “Y,” while Pradeep is allocating his time so that he produces point “P.” Does it appear as if these individuals could collectively produce more of both goods by reallocating their time? If so, suggest how they might do so; if not, explain why it is not possible to do so. Apples Bananas Y Yair: Apples Bananas P Pradeep:Blank
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