Exam 1 Sample Questions1. Suppose that the economy produces two types of goods: consumer goods (C) and capital goods (K). Useproduction 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 isimposed on capital goods.b. The economy is operating at full-employment both before and after a major technological improvement in theproduction of consumer goods. After the technological improvement, however, the economy is actually producingfewer consumer goods than before.2. Use competitive market supply/demand diagrams of the camera market and the film market to illustrate howcamera 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 taxis legally imposed exclusively on gasoline sellers.Briefly explain the determinants of price elasticity of demand (Ed). Why is price elasticity of demand an importantconcept?4. Consider the following: “The sharp rise in gasoline prices in the mid 1970’s lead to a sharp decline in thedemand for ‘gas guzzling’ cars and large unsold inventories (surpluses) when many dealers refused to cut theirsticker prices.” Use a supply/demand diagram of the ‘fuel inefficient’ or ‘gas guzzling’ car market and briefverbal descriptions to explain this quotation5. In 1990, Congress passed a per-unit excise tax on yachts. The tax was legally imposed on the buyers ofthese luxury goods. Within a year, a number of New England yacht building firms failed and their unemployedworkers protested vigorously. Interestingly, yacht buyers voiced little concern about the tax. Use asupply/demand diagram of the yacht market and your knowledge about the legal and economic incidence of aper-unit excise tax to explain this episode.6. Suppose there is a technological advance in the production of hydrogen bombs. Use a supply/demanddiagram 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 yourdiagrams.7. Recently, the Clinton administration proposed a $1.00 per-unit (pack) excise tax on cigarettes (which wouldbe imposed legally or statutorily on cigarette sellers). Some news reports have suggested that the proposed taxwould increase cigarette prices by $1.00 per pack and be paid entirely by smokers (cigarette buyers). Using acompetitive supply/demand diagram of the cigarette market, carefully show and explain the circumstancesunder 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 operatingat full-employment and all consumer goods are subject to legal price ceilings set below equilibrium prices. Usea production possibilities curve (PPC) diagram and brief verbal descriptions to compare this economy’sproduction combination in the absence of price controls (15 points). In this case, would the price controls resultin higher or lower rates of future economic growth? Why?10. Consider the following: “Under the Five Year Plans, the Soviet leadership mandated a production mixheavily weighted toward capital goods. As a consequence, the Soviets enjoyed some years of significanteconomic growth. Coupled with price controls on consumer goods, however, the Plans also meant that Sovietcitizens 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 PPCdiagram 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/demanddiagram of the “freeway space” market to explain traffic jams at 8:00 am, but no jams at 11:00 pm. Also, useyour 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 theentire 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 (amajor cost of producing movies) increase sharply due to a new union contract. Using separate competitivesupply/demand diagrams of the movie and popcorn markets, illustrate and briefly explain the probable effectsof the screenwriters’ wage increase on: Equilibrium prices, equilibrium quantities, and total revenues in themovie and popcorn markets.14. In 1992, Congress passed a per-unit excise tax on yachts. Although legally the tax was to be collected fromyacht suppliers, the law was intended to make the rich yacht buyers pay more of the tax burden. The tax wasrepealed in 1993 in response to the vigorous protests of yacht manufacturers and their workers. Use acompetitive supply/demand diagram of the yacht market and your knowledge of economic tax incidence tothese events.15. Consider the following: “At the beginning of 1940, the United States economy was characterized bysubstantial unemployment. The Soviet economy at that time, however, was operating at full-employment. Bythe end of the year, the U.S. economy had moved to full-employment, increasing its output of both civilian andmilitary goods. The Soviet economy was still at full-employment at year’s end, but producing many fewercivilian goods and many more military goods than at the beginning of the year.” Use production possibilitiescurve (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