Whitman CollegeEcon 107Exam 3April 17, 2008Write all answers on your exam. Show all of your work. The exam ends at 11:50.1. (a) (5pts) Suppose that mosquito nets are produced in a perfectly competitive industry. In thespace below, draw the industry supply and demand diagram for mosquito nets. Be sure to label your axes. On your diagram, label the quantity produced in the perfectly competitive industry Qpc. Question 1 is continued on the next page.1The use of mosquito nets reduces the spread of malaria. So, when someone buys a mosquito net,other members of society benefit from that purchase because they are less likely to become ill. (b) (10pts) On your diagram from part (a), draw the marginal social benefit curve. On your diagram from part (a), label the socially optimal quantity Qoptimal. (c) (5pts) In words, explain why the perfectly competitive quantity of mosquito nets is not the optimal quantity from society’s perspective.(d) (5pts) On your diagram from part (a), indicate the dead weight loss if the perfectly competitive quantity of output is produced. 22. (10pts) For each of the following people, state whether the Bureau of Labor Statistics (BLS) would consider this person to be a member of the labor force or not. If the person is a member ofthe labor force, indicate whether the BLS considers the person employed or unemployed.(a) A 34 year-old father who stays home to take care of his children, but who plans to look for a job next year, when his youngest child enters Kindergarten.(b) A 52-year old former chef who currently has no job and would like to have a job, but has made no effort to look for work.(c) A 14 year-old who has no job, is actively seeking a summer job, and is available to work all summer.(d) A 67 year-old former railroad worker who currently has no job, is actively seeking work, andis available for work.(e) A 21-year old clerk who works part-time.3. Use the following information to answer questions (a)-(c). In March there were 7.815 millionpeople unemployed and 145.969 million people employed in the United States. Suppose that the frictional rate of unemployment is 2.4% and that the structural rate of unemployment is 2.6% in the United States. (a) (10pts) What was the unemployment rate in March?(b) (5pts) What is the natural rate of unemployment for the United States?(c) (5pts) What was the cyclical rate of unemployment in March?34. Consider the trading experiment from class on March 25.(a) (5pts) A liquid item is something that can be easily traded for something that you want. In the trading experiment there were three items that people produced and traded. Of the three, which item was the most liquid, and what was it about that item that made other people more likely to accept it?(b) (10pts) Since August, the Federal Reserve has been dealing a with a credit crisis by trying tomaintain enough liquidity in the United States economy. Consider the laboratory economy in our trading experiment. Explain why having enough liquid items in the laboratory economy was essential for keeping that economy productive.45. Consider the inflation uncertainty experiment from class on April 1. In Period 8, the inflation rate could be any integer value between -1% and 9%, with each of those rates equally likely. In this period, Lender G lent to Borrower 7 at a nominal interest rate of 6.5%. (a) (5pts) From Lender G’s perspective, what would be the worst possible outcome for inflation? What would real interest rate would Lender G receive in this case?(b) (5pts) From Borrower 7’s perspective, what would be the worst possible outcome for inflation? What would real interest rate would Borrower 7 pay in this case?Lender G had the option of taking his own investment project rather than lending. G’s project provided a real return of 1.0%, whereas Borrower 7’s project provided a real return of 5.0%. Theactual inflation rate ended up being 6% in Period 8.(c) (5pts) G’s project offered him a guaranteed real return, something we call a hedge against inflation. In Period 8, would G have been better off to have taken his own project, thereby hedging against inflation, rather than lending in the credit markets? Explain.Question 5 continued on next page.5(d) (5pts) In Period 8, would society as a whole have been better off if G had hedged against inflation rather than lending in the credit markets? Explain your answer. (e) (10pts) Part of the Federal Reserve’s job is to keep credit markets functioning well. Use the situation in the inflation uncertainty experiment to explain why the Federal Reserve tries to keep inflation rates