Exam 1 Sample Questions 1 Suppose that the economy produces two types of goods consumer goods C and capital goods K Use production possibilities curve PPC diagrams and brief verbal explanations to explain the following situations a The economy is operating at full employment producing a lot of capital goods when a legal price ceiling is imposed on capital goods b The economy is operating at full employment both before and after a major technological improvement in the production of consumer goods After the technological improvement however the economy is actually producing fewer consumer goods than before 2 Use competitive market supply demand diagrams of the camera market and the film market to illustrate how camera sellers expectations of lower future camera prices can lead to higher current film prices 3 Use a competitive market supply demand diagram and brief verbal descriptions to explain how the entire economic incidence of a per unit excise tax may fall on gasoline buyers even though the tax is legally imposed exclusively on gasoline sellers Briefly explain the determinants of price elasticity of demand Ed Why is price elasticity of demand an important concept 4 Consider the following The sharp rise in gasoline prices in the mid 1970 s lead to a sharp decline in the demand for gas guzzling cars and large unsold inventories surpluses when many dealers refused to cut their sticker prices Use a supply demand diagram of the fuel inefficient or gas guzzling car market and brief verbal descriptions to explain this quotation 5 In 1990 Congress passed a per unit excise tax on yachts The tax was legally imposed on the buyers of these luxury goods Within a year a number of New England yacht building firms failed and their unemployed workers protested vigorously Interestingly yacht buyers voiced little concern about the tax Use a supply demand diagram of the yacht market and your knowledge about the legal and economic incidence of a per unit excise tax to explain this episode 6 Suppose there is a technological advance in the production of hydrogen bombs Use a supply demand diagram of the hydrogen bomb market and a production possibilities curve PPC diagram showing military and civilian goods to illustrate this technological change Carefully explain the connection between your diagrams 7 Recently the Clinton administration proposed a 1 00 per unit pack excise tax on cigarettes which would be imposed legally or statutorily on cigarette sellers Some news reports have suggested that the proposed tax would increase cigarette prices by 1 00 per pack and be paid entirely by smokers cigarette buyers Using a competitive supply demand diagram of the cigarette market carefully show and explain the circumstances under which these new reports would be true 8 Why are there so many different nominal interest rates Explain carefully 9 Consider an economy that produces consumer goods and capital goods Suppose the economy is operating at full employment and all consumer goods are subject to legal price ceilings set below equilibrium prices Use a production possibilities curve PPC diagram and brief verbal descriptions to compare this economy s production combination in the absence of price controls 15 points In this case would the price controls result in higher or lower rates of future economic growth Why 10 Consider the following Under the Five Year Plans the Soviet leadership mandated a production mix heavily weighted toward capital goods As a consequence the Soviets enjoyed some years of significant economic growth Coupled with price controls on consumer goods however the Plans also meant that Soviet citizens had very few consumer goods to satisfy their collective wants Use a production possibilities curve PPC diagram and brief verbal descriptions to explain the Soviets economic growth Use another PPC diagram and brief verbal description to explain the small number of Soviet consumer goods 11 Suppose the out of pocket price for driving on a freeway is zero Now use a competitive supply demand diagram of the freeway space market to explain traffic jams at 8 00 am but no jams at 11 00 pm Also use your diagram to explain the toll price that would eliminate the morning traffic jams 12 Suppose the State legislature passes a 10 00 per credit hour tuition subsidy legally payable to OU students Use a supply demand diagram of the OU educational services market to explain the conditions under which the entire economic benefit of the subsidy would flow to the University not the students 13 Suppose that movies and popcorn are complimentary goods Further suppose that screenwriters wages a major cost of producing movies increase sharply due to a new union contract Using separate competitive supply demand diagrams of the movie and popcorn markets illustrate and briefly explain the probable effects of the screenwriters wage increase on Equilibrium prices equilibrium quantities and total revenues in the movie and popcorn markets 14 In 1992 Congress passed a per unit excise tax on yachts Although legally the tax was to be collected from yacht suppliers the law was intended to make the rich yacht buyers pay more of the tax burden The tax was repealed in 1993 in response to the vigorous protests of yacht manufacturers and their workers Use a competitive supply demand diagram of the yacht market and your knowledge of economic tax incidence to these events 15 Consider the following At the beginning of 1940 the United States economy was characterized by substantial unemployment The Soviet economy at that time however was operating at full employment By the end of the year the U S economy had moved to full employment increasing its output of both civilian and military goods The Soviet economy was still at full employment at year s end but producing many fewer civilian goods and many more military goods than at the beginning of the year Use production possibilities curve PPC diagrams of the U S and Soviet economies to illustrate and explain these historical events 16 Suppose there are two types of OU football tickets 1 good tickets and 2 bad tickets Further suppose that the bad ticket market is in equilibrium at 35 ticket but the good ticket market is not in equilibrium at that price Draw separate competitive supply demand diagrams of the good and bad ticket markets to explain this situation Specifically what disequilibrium situation do you expect in the good ticket market Why 17 Recently Congressional Republicans wanted