ECON 001 - Principles of Macroeconomics Drake University, Fall 2013 William M. Boal

EXAMINATION 1

### Version A

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

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

II. Problems

(1) [Using slopes: 2 pts]

1. increase.
2. 10 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 3 percent.

(3) [Economic capital: 12 pts]

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

(4) [Production functions: 10 pts]

1. 8 shirts per worker.
2. 6 shirts per worker.
3. 6 shirts per worker.
4. 2 shirts per worker.
5. yes, because MP (=slope of production function) decreases as the number of workers increases.

1. 1/2 units of manufactured goods.
2. 1/3 units of manufactured goods.
3. 2 units of agricultural goods.
4. 3 units of agricultural goods.
5. Country Y (because it has the lower opportunity cost of producing a unit of agricultural goods).
6. Country X (because it has the lower opportunity cost of producing a unit of manufactured goods).
7. ... if Country X produces and exports two million units of manufactured goods to Country Y, which produces and exports 5 million units of agricultural goods 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. You should sketch the stairstep graphs of demand and supply curves before answering the questions.

1. excess supply (because quantity demanded is 3 or 4, while quantity supplied is 7).
2. \$4.
3. 6 units.
4. \$24 (equals price times quantity).
5. \$44.
6. Buyers enjoy higher total earnings.

(7) [Shifts in demand and supply curves: 15 pts] Full credit requires graphs showing new demand or supply curve(s).

1. Demand unchanged, supply shifts left, equilibrium price increases, equilibrium quantity decreases.
2. Demand shifts right, supply unchanged, 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: 12 pts]

1. \$10.
2. 140 million.
3. 120 million.
4. 150 million.
5. excess supply.
6. 30 million.

III. Critical thinking [4 pts]

It is possible for each country to consume combinations outside its production possibility curve, even though they have identical curves in this problem. Both countries have decreasing opportunity costs which implies that there are gains from specialization. One country must specialize in producing mostly (or only) cars. The other country must specialize in producing mostly (or only) electronics.

After trading, both countries can consume combinations of cars and electronics outside their PP curves. (Full credit requires plot showing each country's production before trade, and consumption after trade.)

[Paul Krugman won the Nobel prize in 2008 for developing the theory of international trade when countries have decreasing opportunity costs. He was motivated by rapid postwar expansion of international trade between similar countries--like France and Germany.]

### Version B

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

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

II. Problems

(1) [Using slopes: 2 pts]

1. decrease.
2. 6 units.

(2) [Percent changes: 2 pts]

1. decrease.
2. 2 percent.

(3) [Economic capital: 12 pts]

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

(4) [Production functions: 10 pts]

1. 2 shirts per worker.
2. 4 shirts per worker.
3. 4 shirts per worker.
4. 8 shirts per worker.
5. no, because MP (=slope of production function) increases as the number of workers increases.

1. 3 units of manufactured goods.
2. 2 units of manufactured goods.
3. 1/3 units of agricultural goods.
4. 1/2 units of agricultural goods.
5. Country Y (because it has the lower opportunity cost of producing a unit of agricultural goods).
6. Country X (because it has the lower opportunity cost of producing a unit of manufactured goods).
7. ... if Country X produces and exports five million units of manufactured goods to Country Y, which produces and exports 2 million units of agricultural goods 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. You should sketch the stairstep graphs of demand and supply curves before answering the questions.

1. neither (because quantity demanded = quantity supplied).
2. \$8.
3. 5 units.
4. \$40 (equals price times quantity).
5. \$38.
6. Sellers enjoy higher total earnings.

(7) [Shifts in demand and supply curves: 15 pts] Full credit requires graphs showing new demand or supply curve(s).

1. Demand shifts right, supply unchanged, equilibrium price increases, equilibrium quantity increases.
2. Demand unchanged, supply shifts left, equilibrium price increases, equilibrium quantity decreases.
3. Demand shifts right, supply shifts left, equilibrium price increases, equilibrium quantity cannot be determined.

(8) [Market equilibrium, price controls: 12 pts]

1. 10 percent.
2. \$110 billion.
3. \$120 billion.
4. \$100 billion.
5. excess demand.
6. \$20 billion.

III. Critical thinking

Same as Version A.

### Version C

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

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

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

II. Problems

(1) [Using slopes: 2 pts]

1. increase.
2. 12 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 8 percent.

(3) [Economic capital: 12 pts]

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

(4) [Production functions: 10 pts]

1. 10 shirts per worker.
2. 8 shirts per worker.
3. 8 shirts per worker.
4. 4 shirts per worker.
5. yes, because MP (=slope of production function) decreases as the number of workers increases.

1. 3/2 units of manufactured goods.
2. 3/4 units of manufactured goods.
3. 2/3 units of agricultural goods.
4. 4/3 units of agricultural goods.
5. Country Y (because it has the lower opportunity cost of producing a unit of agricultural goods).
6. Country X (because it has the lower opportunity cost of producing a unit of manufactured goods).
7. ... if Country X produces and exports three million units of manufactured goods to Country Y, which produces and exports 3 million units of agricultural goods 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. You should sketch the stairstep graphs of demand and supply curves before answering the questions.

1. excess demand (because quantity demanded is 5 or 6, while quantity supplied is 4).
2. \$10.
3. 4 units.
4. \$40 (equals price times quantity).
5. \$43.
6. Sellers enjoy higher total earnings.

(7) [Shifts in demand and supply curves: 15 pts] Full credit requires graphs showing new demand or supply curve(s).

1. Demand unchanged, supply shifts right, equilibrium price decreases, equilibrium quantity increases.
2. Demand shifts left, supply unchanged, equilibrium price decreases, equilibrium quantity decreases.
3. Demand shifts left, supply shifts right, equilibrium price decreases, equilibrium quantity cannot be determined.

(8) [Market equilibrium, price controls: 12 pts]

1. \$8.
2. 130 million.
3. 100 million.
4. 140 million.
5. excess supply.
6. 40 million.

III. Critical thinking

Same as Version A.