ECON 102 Exam 1 Practice Key Penn State Department of Economics ECON102 Practice Exam Instructor Dr Dave Brown Answer Key Answers are highlighted in yellow This practice exam consists of short answer graphing fill in the blank and multiple choice questions If you are able to answer all the questions in this format you ll do very well on your exam ECON 102 Exam 1 Practice Key 1 In class we discussed the minimum wage Is the minimum wage a price floor or a price ceiling Name one reason for and one reason against raising the minimum wage Minimum wage is a price floor It is a legal minimum price of labor For It may help a low skill worker earn more money Against It may cause higher unemployment or cause a firm to cut jobs 2 Our economy is self organized and decentralized What does this mean Who decides prices and quantities of goods You may want to think about the main characteristics of market economies when answering this question The forces of supply and demand in a market determine the prices and quantities of goods In a decentralized economy consumers and producers make their own decisions about buying and selling rather than a command economy which is planned from the top down A market economy is planned from the bottom up 3 Explain what it means for a good to be scarce There is not enough of the good to satisfy all wants at a price of zero 4 Intuitively explain in one sentence what opportunity cost is Opportunity cost is the next best alternative It s what we give up when we make a choice 5 What is marginal decision making Marginal means additional Making decisions at the margin means asking questions such as what are the marginal costs and marginal benefits of one additional hour of studying 6 What does ceteris paribus mean Ceteris paribus is Latin for all other things equal or everything else equal 7 Are the following statements positive or normative fill in the blank Economics students perform better on the LSAT than any other major Positive Janitors do a lot of hard work and should get paid more Normative Students who graduate from Penn State make more money than Purdue graduates Positive Everyone should go to Penn State Normative Everyone should work in a bank to see the true value of money Normative ECON 102 Exam 1 Practice Key 8 What is an incentive What is the purpose of an incentive Given some examples of incentives An incentive is a reward or punishment for engaging in a certain behavior The purpose of an incentive is to get an individual or a firm to behave in a way the incentive creator feels is more desirable Positive incentives Money candy subsidies extra credit employee of the month award Negative incentives Jail fines fees taxes failing grade getting fired from job 9 Define the following terms rationality self interest Rationality we will never intentionally do an action that will make us worse off Self interest when making a decision we examine our own costs and benefits and try to maximize our own well being We do what s best for ourselves 10 Give an example of a negative externality and briefly explain it Smoking or pollution An external cost is created that is borne by third parties Other examples Noisy or messy roommate flatulence effects other people in a negative way 11 Give an example of a positive externality and briefly explain it Vaccines or education For vaccines if I stay healthy you might stay healthy as well This is an external benefit Other examples Wifi internet raising hand during class and all students get an answer 12 If supply and demand both increase simultaneously what will the effect on P and Q be You may want to draw a few graphs By itself demand increasing will cause P to increase and cause Q to increase By itself supply increasing will cause P to decrease and cause Q to increase Thus if these two shifts occur simultaneously Q will definitely increase P could increase decrease or stay the same 13 Name two ways the government can correct a market failure in which a positive externality exists Remember that with a positive externality there are external benefits that we are not accounting for With a positive externality there are benefits that are not being accounted for Thus we need to make people internalize the benefits We need to increase the demand for the good We can do this by subsidizing or rewarding people who consume the good or require them to consume it 14 Name 1 source of comparative advantage for the individual level and the national level Individual inborn talent education training National resources topography climate culture and laws ECON 102 Exam 1 Practice Key Look at Laura s production possibilities curve for coffee and nuts to the right 15 Draw an unattainable point and label it as point A Any point outside of the line 16 Draw an attainable and efficient point and label it as point B Any point ON the line 17 Draw an attainable and inefficient point and label it as point C Any point inside of the line but not on the line Above is the PPC for pillows and blankets for a firm called Bedroom Store 18 What is the opportunity cost of moving from point A to B 6 pillows 19 What is the opportunity cost of moving from point B to A 9 blankets 20 Name 2 ways that this PPC could shift outward More technology more labor better labor less institutional constraints Also if the firm invests in capital goods today it may be able to produce more consumer goods tomorrow ECON 102 Exam 1 Practice Key 20 On both axes below draw a supply curve and a demand curve Label all curves and axes appropriately On the left graph draw a decrease in demand Label the original demand curve D1 and the new demand curve D2 On the right graph draw an increase in supply Label the original supply curve S1 and the new supply curve S2 On both graphs label the original equilibrium point E1 and the new equilibrium point E2 Clearly label the original and new price and quantities 21 Below are two equations Q 100 2P Q 20 2P Which equation is demand Which equation is supply How can you easily tell Top equation is demand Bottom equation is supply Demand has negative coefficient on price Supply has positive coefficient on price 22 Solve these two equations for equilibrium price and quantity Show all your work for full credit Set QD QS 100 2P 20 2P 80 4P P 20 Plug P into either equation to get Q QD 100 2 20 QD 60 QS 20 2 20 QS 60 Q 60 ECON 102 Exam 1 Practice Key 23a Consider the supply and demand functions Qd 600 3P Qs 25 2P Solve the equations for equilibrium Show