ECON 1 - Principles of Macroeconomics Drake University, Fall 2012 William M. Boal

EXAMINATION 1
Answer Key

### Version A

I. Multiple choice [1 pt each: 20 pts total]

(1)c. (2)a. (3)b. (4)c. (5)a. (6)c. (7)a. (8)a. (9)c. (10)b.
(11)a. (12)d. (13)b. (14)d. (15)b. (16)d. (17)a. (18)d. (19)a. (20)a.

II. Problems

(1) [Using slopes: 2 pts]

1. increase.
2. 12 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 2 percent.

(3) [Economic capital: 12 pts]

1. yes.
2. yes.
3. no.
4. yes.
5. no.
6. yes.

(4) [Production functions: 14 pts] Recall that average product = total output / total input, while marginal product = Δ output / Δ input.
10 spaces per worker 10 spaces per worker 8 spaces per worker 9 spaces per worker Number of workers Parking spaces marked Average product Marginal product 0 workers 0 spaces 2 workers 20 spaces 4 workers 36 spaces 6 workers 48 spaces
YES diminishing returns.

(5) [Comparative advantage, gains from grade: 17 pts]

1. 1/3 bicycles.
2. 1/2 bicycles.
3. 3 mobile phones.
4. 2 mobile phones.
5. Country A (because it has the lower opportunity cost of producing a mobile phone).
6. Country B (because it has the lower opportunity cost of producing a computer).
7. ... if Country B produces and exports two million bicycles to Country A, which produces and exports 5 million mobile phones in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(6) [Market equilibrium: 12 pts] Recall that equilibrium occurs when the quantity demanded equals the quantity supplied.

1. excess supply (because quantity demanded is 1 while quantity supplied is 5 or 6).
2. \$10.
3. 4 units.
4. \$40 (equals price times quantity).
5. \$37.
6. Sellers enjoy higher earnings.

(7) [Shifts in demand and supply curves: 15 pts]

1. Demand no change, supply shifts left, equilibrium price increases, equilibrium quantity decreases.
2. Demand shifts right, supply no change, equilibrium price increases, equilibrium quantity increases.
3. Demand shifts left, supply shifts left, equilibrium price cannot be determined, equilibrium quantity decreases.

(8) [Market equilibrium, price controls: 8 pts]

1. \$8.
2. 80 million.
3. excess supply.
4. 60 million.

III. Critical thinking [4 pts]

(1) One should disagree with this statement. The United States and Mexico can both benefit from trade if each country specializes in producing for export the good in which it has a comparative advantage. Both countries can then enjoy combinations of cars and corn outside their respective production possibility curves. Note that no country can have a comparative advantage in both goods.

(2) A price ceiling on vitamins would not help ensure that more people had access to vitamins. Any price ceiling creates excess demand and reduces the quantity traded. So a price ceiling on vitamins would decrease the amount of vitamins purchased. Fewer people, not more people, would have access to vitamins. (Full credit requires graph of the supply and demand of vitamins, showing the effects of a price ceiling and the quantity of vitamins purchased.)

### Version B

I. Multiple choice [1 pt each: 20 pts total]

(1)d. (2)b. (3)a. (4)b. (5)b. (6)b. (7)d. (8)a. (9)d. (10)c.
(11)b. (12)c. (13)c. (14)c. (15)a. (16)a. (17)b. (18)c. (19)b. (20)a.

II. Problems

(1) [Using slopes: 2 pts]

1. increase.
2. 8 units.

(2) [Percent changes: 2 pts]

1. decrease.
2. 2 percent.

(3) [Economic capital: 12 pts]

1. no.
2. yes.
3. no.
4. yes.
5. yes.
6. yes.

(4) [Production functions: 14 pts] Recall that average product = total output / total input, while marginal product = Δ output / Δ input.
6 spaces per worker 6 spaces per worker 8 spaces per worker 7 spaces per worker Number of workers Parking spaces marked Average product Marginal product 0 workers 0 spaces 2 workers 12 spaces 4 workers 28 spaces 6 workers 48 spaces
NO diminishing returns.

(5) [Comparative advantage, gains from grade: 17 pts]

1. 1 bicycles.
2. 2 bicycles.
3. 1 mobile phones.
4. 1/2 mobile phones.
5. Country A (because it has the lower opportunity cost of producing a mobile phone).
6. Country B (because it has the lower opportunity cost of producing a computer).
7. ... if Country B produces and exports three million bicycles to Country A, which produces and exports 2 million mobile phones in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(6) [Market equilibrium: 12 pts] Recall that equilibrium occurs when the quantity demanded equals the quantity supplied.

1. excess demand (because quantity demanded is 6 or 7 while quantity supplied is 2 or 3).
2. \$7.
3. 5 units.
4. \$35 (equals price times quantity).
5. \$46.
6. buyers enjoy higher earnings.

(7) [Shifts in demand and supply curves: 15 pts]

1. Demand shifts right, supply no change, equilibrium price increases, equilibrium quantity increases.
2. Demand no change, supply shifts left, equilibrium price increases, equilibrium quantity decreases.
3. Demand shifts right, supply shifts right, equilibrium price cannot be determined, equilibrium quantity increases.

(8) [Market equilibrium, price controls: 8 pts]

1. 7 percent.
2. \$400 billion.
3. excess demand.
4. \$300 billion.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice [1 pt each: 20 pts total]

(1)e. (2)a. (3)b. (4)a. (5)d. (6)a. (7)b. (8)b. (9)a. (10)d.
(11)c. (12)d. (13)d. (14)d. (15)b. (16)c. (17)e. (18)b. (19)c. (20)a.

II. Problems

(1) [Using slopes: 2 pts]

1. increase.
2. 15 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 5 percent.

(3) [Economic capital: 12 pts]

1. yes.
2. yes.
3. yes.
4. no.
5. yes.
6. no.

(4) [Production functions: 14 pts] Recall that average product = total output / total input, while marginal product = Δ output / Δ input.
9 spaces per worker 9 spaces per worker 7 spaces per worker 8 spaces per worker Number of workers Parking spaces marked Average product Marginal product 0 workers 0 spaces 2 workers 18 spaces 4 workers 32 spaces 6 workers 42 spaces
YES diminishing returns.

(5) [Comparative advantage, gains from grade: 17 pts]

1. 3 bicycles.
2. 1/2 bicycles.
3. 1/3 mobile phones.
4. 2 mobile phones.
5. Country B (because it has the lower opportunity cost of producing a mobile phone).
6. Country A (because it has the lower opportunity cost of producing a computer).
7. ... if Country A produces and exports one million bicycles to Country B, which produces and exports 1 million mobile phones in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(6) [Market equilibrium: 12 pts] Recall that equilibrium occurs when the quantity demanded equals the quantity supplied.

1. excess supply (because quantity demanded is 5 while quantity supplied is 7).
2. \$4.
3. 6 units.
4. \$24 (equals price times quantity).
5. \$40.
6. Buyers enjoy higher earnings.

(7) [Shifts in demand and supply curves: 15 pts] Full credit requires correct graphs.

1. Demand no change, supply shifts left, equilibrium price increases, equilibrium quantity decreases.
2. Demand shifts right, supply no change, equilibrium price increases, equilibrium quantity increases.
3. Demand shifts right, supply shifts left, equilibrium price increases, equilibrium quantity cannot be determined.

(8) [Market equilibrium, price controls: 8 pts]

1. \$6.
2. 100 million.
3. excess supply.
4. 40 million.

III. Critical thinking

Same as Version A.

[end of answer key]