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Economics 051 12 October 2006P. ConwayMidterm ExaminationThis examination is conducted under the Honor Code. Please sign the following pledge:I pledge that I have neither given nor receivedassistance on this examination. ________________________Name (printed): ______________________________I. Definition. Define four of the following in no more than two sentences. (28 points)1. scarcity2. production possibility frontier3. buffer stock4. due diligence5. Coase TheoremII. Short Answer. Complete three of the following questions, using diagrams andcalculations where appropriate (72 points).1. The University of North Carolina system prides itself on charging its students an affordable tuition. As a public institution, the difference between tuition payments and education costs are paid by the state budget.What is the opportunity cost of this “affordable tuition” policy? Does your answer depend on whether you are speaking of opportunity cost to the university system, to the state, or to the enrolled student and her family? Explain. Be sure to define opportunity cost in your answer.Economics 051 Midterm – 22. Randy’s getting a bit older, and he’d like to hire some part-time help on his farm. He’s investigated the supply of part-timer workers in Deep Run, and has discovered that hiring one (or more) will cost $15 per hour once benefits are included.Randy then measured what the total benefit to him would be of having part-time help:Hours/week 1 2 3 4 5 6 7 8 9 10Total benefit (in $) 20 39 57 74 90 105 119 132 144 155Use marginal analysis to determine how many hours of part-time help Randy should hire per week. Explain your reasoning. Suppose the labor market tightens, and part-time workers are only available for $18/hour. How will this change Randy’s choice? Relate your answer to the law of demand.Economics 051 Midterm - 33. Yo Yo Ma has always wanted to live in the Southern Part of Heaven, and he recently purchased a house on McCauley Street. He was looking forward to quiet evenings at home playing music with his string quartet. He discovered after buying that the houses on all sides of his are rented to UNC students. Most nights, he can’t hear his chamber music for all the heavy metal music blaring from window-mounted stereo speakers. He’s often kept up past his usual 10:30 pm bedtime by the noise from neighboring houses. He has called the police on occasion; they come with decibel meters, and conclude that the noise is not loud enough to be in violation of city ordinances.Is there an externality at the heart of this story? (Be sure to define externality as part of your answer.) How can the externality be described in terms of marginal costs and benefits? Explain carefully Mr. Ma’s options for resolving his problem, indicate which option you would advise him to follow, and explain why. 4. R. J. Reynolds buys much of its tobacco through long-term contracts with growers, but each year it purchases some tobacco at auction. This year its choices at each price are given in the following table.Demand at auction Supply by Randy Supply by allPrice/lb. by R. J. Reynolds (thousand lbs.) farmers to auction(million lbs.) (million lbs.)1.70 35 140 1151.60 50 130 901.50 75 120 751.40 110 110 601.30 150 100 401.20 200 90 201.10 275 80 5The table also indicates for each price per pound the supply by Randy and by all farmers to the R.J. Reynolds auction.(a) Does Randy’s behavior illustrate the law of supply? Explain. What would happen to Randy’s quantity supplied if the price of LP gas (used in curing the leaf) were to rise? Explain.(b) Define equilibrium in this auction, and indicate what price and quantity combination is consistent with equilibrium. Explain your conclusion.(c ) What would happen in this market if a Japanese cigarette manufacturer joined the auction as a separate bidder willing to buy 40 million pounds at any price consistent with market equilibrium? Indicate the price and quantity you expect to observe, and explain your


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UNC-Chapel Hill ECON 051 - Economics 051 Midterm Examination

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