Page 1 of 9 Part I Matching 20 points For questions 1 5 match each concept to the BEST definition by placing the corresponding letter in the blank next to the concept 2 pts each CONCEPTS DEFINITIONS 1 Opportunity Cost A the monetary costs of an activity B the value of the next best alternative 2 GNP C the monetary value of a country s production 3 GDP D when you can produce the good at a lower opportunity cost than someone else 4 Absolute Advantage E when you can produce a greater quantity of goods than someone else with the same quantity of resources 5 Comparative Advantage F the sum of money values of all final goods and services produced in the domestic economy during a specified period of time G the sum of money values of all final goods and services produced in the nation s economy during a specified period of time H the cost of production in a country For questions 6 10 place the letter of each location on the circular flow diagram next to the number of the correct description 2 pts each For Example Payments for Output D 6 Businesses 7 Households 8 Factor Markets 9 Output Markets 10 Goods Services PART II SHORT ANSWERS 32 points Question 1 8 points Page 2 of 9 There are two small islands in Hawaii They have decided to build a series of lighthouses The lighthouses are nonrival in consumption as well as nonexcludable The demand equations for lighthouses are given below and the marginal social cost of providing a lighthouse is 7 Island A Q 20 2P Island B Q 20 5P a 2 pts What is the market demand curve for lighthouses b 2 pts In equilibrium how many lighthouses will be supplied c 4 pts How much money will each island contribute if preferences are revealed and each island pays according to the benefits it receives Island A Island B Page 3 of 9 Part II Short Answers continued Question 2 16 pts Consider the following information about the demand and supply of gasoline Qd 10 P Qs 2P 8 a 4 pts Draw the Supply S and Demand D curves on the given graph What is the equilibrium price and quantity of gasoline gallons P Q b 3 pts Suppose that the government decides to impose an excise tax of 3 on suppliers Will this tax result in a shift in or a movement along the supply curve Will this tax result in a shift in or a movement along the demand curve Will the new equilibrium price with the tax be higher or lower or the same Page 4 of 9 Question 2 continued c 4 pts Given the 3 tax described in part b calculate the consumer tax incidence tax revenue generated by the tax d Calculate the change in Consumer Surplus CS and the Deadweight Loss DWL due to the tax 1 pt Consumer Surplus after the tax 1 pt Consumer Surplus from part a 1 pt The Change in Consumer Surplus 2 pts The Deadweight Loss of the Tax Page 5 of 9 Part II Short Answers continued Question 3 8 points The PPFs for Albania AL and Botswana BO are given on the graph below There are only two goods investment goods and consumption goods 1 pt each a Is point II feasible for each country b Which country has an absolute advantage in producing Consumption Goods 2 pts each c Which of the labeled points will enable Botswana to grow their country the fastest d At which of the labeled points is Botswana s opportunity cost of Investment Goods the highest e Assuming that both Albania and Botswana are producing at point III which country has a comparative advantage in producing Investment Goods which country has a comparative advantage in producing Consumption Goods Page 6 of 9 PART III Multiple Choice Questions 12 questions 48 points 1 Which of the following is a positive economic statement A B C D E Government expenditures are included in a calculation of GDP using the expenditure approach We should increase the sales tax rate because consumption expenditures are too high The higher taxes imposed by the Deficit Reduction Act of 1993 are unfair The government should provide farmers a guaranteed price for their product Assessing taxes on gasoline is the fairest way to fund highway improvements Use the following information to answer the next two questions Hundred Acre Wood has two producers Pooh and Tiger Each producer can produce either Honey or Bounces We assume that the opportunity cost is constant along the PPF Pooh Honey Bounces 10 45 40 30 Tiger Honey Bounces 20 40 40 20 2 What is Pooh s opportunity cost for one more unit of Bounces A B C D E 2 units of Honey 1 2 units of Honey 2 units of Bounces 1 2 units of Bounces None of the above 3 In order to achieve the highest level of production A B C D E Pooh should specialize in Honey and Tiger should specialize in Bounces Pooh should specialize in Bounces and Tiger should specialize in Honey they should both spend equal amounts of time producing Bounces and Honey they should both specialize in Bounces they should not trade with one another at all 4 Which of the following transactions would be counted in GDP A B C D E A used car you purchase from your neighbor The purchase of 500 oranges from a farmer by a supermarket The purchase of 10 million shares of GM stock by a household The purchase of Budweiser American produced beer by a Japanese importer None of the above Use the following demand and supply model to answer the next two questions Page 7 of 9 D QD 50 2P S QS 11 P 5 Suppose the government sets a price ceiling of 18 What will be the effect of such a policy A B C D E Excess supply of 9 units Excess demand of 9 units No effect Excess supply of 15 units Excess demand of 15 units 6 Now suppose that the government wants to restrict the quantity bought and sold to 20 units If the government imposes an excise tax to reach this goal what is the collected tax revenue from this tax A 6 B 120 C 180 D 300 E We need more information to answer this question 7 Macroeconomics differs from microeconomics in that macroeconomics A ignores issues such as national unemployment B studies the effect of taxation on markets whereas microeconomics does not C analyzes marginal as well as average benefits and costs D emphasizes relative prices instead of price indices E studies the national economy while microeconomics analyzes the decisions of individual people and firms 8 Which of the following is an example of an intermediate good A The wood you purchase to build yourself bookshelves in your room B The chocolate you buy to make yourself some cookies Page 8 of 9 C The pizza sauce you purchase to make pizzas to sell for a fund raiser for an organization you belong to D …
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