ECON 001 - Principles of Macroeconomics Drake University, Fall 2014 William M. Boal

EXAMINATION 1

### Version A

I. Multiple choice [1 pt each: 16 pts total]

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

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: 6 pts] Economic capital includes factories, buildings, machinery, equipment, vehicles, computers, and software: goods that help produce more goods. Note that economic capital is NOT the same as financial capital.

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

(4) [Production functions: 7 pts]

• Average product = total output/total input = 6, 5, 4 potholes per worker.
• Marginal product = Δ output/Δ input = 6, 4, 2 potholes per worker.
• YES, because MP decreases as the number of workers increases.

(5) [Production functions: 6 pts]

1. Average product of workers = packages/workers = 2 packages per worker.
2. Marginal product of workers = Δ packages/Δ workers = 1 package per worker.
3. Marginal product of trucks = Δ packages/Δ trucks = 3 packages per truck.

1. 2 tablets.
2. 1 tablets.
3. 1/2 bicycles.
4. 1 bicycle.
5. Country B (because it has the lower opportunity cost of producing bicycles).
6. Country A (because it has the lower opportunity cost of producing tablets).
7. ... if Country A produces and exports three million tablets to Country B, which produces and exports 2 million bicycles 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.

(7) [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 supplied is 3 or 4, while quantity demanded is 7).
2. \$9.
3. 6 units.
4. \$54 (equals price times quantity).
5. \$43.
6. Sellers enjoy higher total earnings.

(8) [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 left, supply shifts left, equilibrium price cannot be determined, equilibrium quantity decreases.

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

1. \$8.
2. 150 million.
3. 110 million.
4. 170 million.
5. excess supply.
6. 60 million.

III. Critical thinking [4 pts]

(1) One should disagree with this statement. The United States may have an absolute advantage in both cars and corn, but it logically cannot have a comparative advantage in both goods. A country has a comparative advantage over another country in producing a good if its opportunity cost of the good is lower than the other country's. If the United States and Mexico each specialize in producing the good in which it has a comparative advantage, and trade for the other good, both countries can benefit by enjoying combinations of goods outside their respective production possibility curves.

(2) The seasonal change in price is due to shifts in the supply curve. Watermelons in Iowa are expensive in winter because they must be grown in greenhouses or shipped to Iowa from far away. The cost of supplying watermelons is high in winter. So the supply curve shifts left, which raises the equlibrium price. In summer, watermelons can be grown outside locally, which lowers the cost of production. So the supply curve shifts right, which lowers the equilibrium price. (Full credit requires graph showing summer and winter supply curves and consequent difference in price.)

### Version B

I. Multiple choice [1 pt each: 16 pts total]

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

II. Problems

(1) [Using slopes: 2 pts]

1. decrease.
2. 8 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 1 percent.

(3) [Economic capital: 6 pts] Economic capital includes factories, buildings, machinery, equipment, vehicles, computers, and software: goods that help produce more goods. Note that economic capital is NOT the same as financial capital.

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

(4) [Production functions: 7 pts]

• Average product = total output/total input = 2, 3, 4 potholes per worker.
• Marginal product = Δ output/Δ input = 2, 4, 6 potholes per worker.
• NO, because MP increases as the number of workers increases.

(5) [Production functions: 6 pts]

1. Average product of workers = packages/workers = 3 packages per worker.
2. Marginal product of workers = Δ packages/Δ workers = 1.5 packages per worker.
3. Marginal product of trucks = Δ packages/Δ trucks = 3 packages per truck.

1. 2 tablets.
2. 3 tablets.
3. 1/2 bicycles.
4. 1/3 bicycle.
5. Country A (because it has the lower opportunity cost of producing bicycles).
6. Country B (because it has the lower opportunity cost of producing tablets).
7. ... if Country A produces and exports two million bicycles to Country B, which produces and exports 5 million tablets 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.

(7) [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 supplied is 6 or 7, while quantity demanded is 2 or 3).
2. \$4.
3. 5 units.
4. \$20 (equals price times quantity).
5. \$51.
6. Buyers enjoy higher total earnings.

(8) [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 right, supply shifts left, equilibrium price increases, equilibrium quantity cannot be determined.

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

1. \$10.
2. 130 million.
3. 110 million.
4. 140 million.
5. excess supply.
6. 30 million.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice [1 pt each: 16 pts total]

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

II. Problems

(1) [Using slopes: 2 pts]

1. decrease.
2. 20 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 3 percent.

(3) [Economic capital: 6 pts] Economic capital includes factories, buildings, machinery, equipment, vehicles, computers, and software: goods that help produce more goods. Note that economic capital is NOT the same as financial capital.

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

(4) [Production functions: 7 pts]

• Average product = total output/total input = 5, 4, 3 potholes per worker.
• Marginal product = Δ output/Δ input = 5, 3, 1 potholes per worker.
• YES, because MP decreases as the number of workers increases.

(5) [Production functions: 6 pts]

1. Average product of workers = packages/workers = 3 packages per worker.
2. Marginal product of workers = Δ packages/Δ workers = 2 packages per worker.
3. Marginal product of trucks = Δ packages/Δ trucks = 4 packages per truck.

1. 1/3 tablets.
2. 1/2 tablets.
3. 3 bicycles.
4. 2 bicycles.
5. Country A (because it has the lower opportunity cost of producing bicycles).
6. Country B (because it has the lower opportunity cost of producing tablets).
7. ... if Country B produces and exports two million tablets to Country A, which produces and exports 5 million bicycles 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.

(7) [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 supplied is 3, while quantity demanded is 6).
2. \$11.
3. 4 units.
4. \$44 (equals price times quantity).
5. \$39.
6. Sellers enjoy higher total earnings.

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

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

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

1. 6 percent.
2. \$150 billion.
3. \$170 billion.
4. \$130 billion.
5. excess demand.
6. \$40 billion.

III. Critical thinking

Same as Version A.