Page 1 of 4 MIDWESTERN STATE UNIVERSITY College of Business Administration

Principles of Macroeconomics
(ECON 2333 101) Professor Owen Fall 2012

Exam 1 (Take-home Portion) Instructions (please read and follow them carefully): This portion is to be completed and a typed or written set of answers turned in before you begin the in-class portion of the exam on 01 OCT 12 (next Monday).

Please write on only one side of each page you turn in. Please write your name on each page you turn in.

Be sure to answer the question that is asked.

I will be available via email if you have questions, although I tend to suggest ways for you to think through your question rather than provide direct answers. This part of the exam counts up to 50 points toward your exam grade and up to 100 points as a homework grade. The value of each question is ten (10) points. Half of your total points earned will equal the exam score for this take-home portion.

Everyone is to answer all 10 questions.

Correct and brief answers are preferred. Complete sentences, correct grammar and punctuation, correct logic, and, where appropriate, correct math is expected. Enjoy your exam & homework and see you Monday. You need not bring a copy of the questions unless you have written your answers on the test. You must bring a Scantron sheet form # 882-E, printed in green ink. If you arrive without one, you must find a friend who will provide one or make a quick trip to the bookstore (and loose some valuable test time).

Page 2 of 4 1. Economists are scientists and therefore should not become involved in making value judgments which policy formulation necessarily entails. Do you agree? Briefly explain your reasoning.

2. A gasoline station very near a professional football stadium parks cars on its lot to make money on game days. Last year it charged $4.00 per car and parked 1000 cars. This year it raised the parking price to $5.00 and parked 850 cars. Did the station owner make a good economic decision in raising the parking prices from one year to the next? Explain.

3. Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply that causes the shift. (a) Digital cameras. There are improvements in the technology that increase the economic efficiency of production. (b) Automobiles. Consumer incomes rise as the economy moves out of recession. (c) Beef. Chicken prices fall because of a decline in the cost of feeding chickens. (d) Fast-food meals. The government imposes a significant tax on fast-food meals.

4. A production possibilities table for two products, corn and paper, is found below. Usual assumptions regarding production possibilities are implied. Corn is measured in tons, and paper is measured per units.
Combination A B C D E F G Corn 0 18 33 45 54 60 63 Paper 6 5 4 3 2 1 0

(a) Using the following graph construct a production possibilities curve from this information placing corn on the vertical axis and paper on the horizontal axis.

Page 3 of 4 Continued from previous page: (b) What is the marginal opportunity cost of producing the first unit of paper? The marginal opportunity cost of producing the fourth unit of paper?

5. Suppose the U.S. Congress is considering passing an excise tax that would increase the price of a pack of cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes? What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?

6. In the space below each of the following, indicate the effect [increase (+), decrease ()] on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/ or supply. P Q (a) Increase in demand, supply constant ________ ________ (b) Increase in supply, demand constant (c) Decrease in demand, supply constant (d) Decrease in supply, demand constant ________ ________ ________ ________ ________ ________

7. Explain this quote from Adam Smith: It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their own interest.

8. Last Word) Draw a supply and demand graph on the below diagram that illustrates the market for pollution rights. Label the axes and curves. Then show what happens to price and quantity when the demand for pollution rights increases in the market.

Page 4 of 4 9. A firm has the choice between producing product A, B, or C. In producing the products the firm faces a weekly cost of $10 for product A, $130 for product B and $200 for product C. The prices received for each product at different quantities are listed in the table below.
Output 5 10 15 Product A $3.00 2.00 1.25 Product B $15.00 12.00 9.00 Product C $35.00 20.00 10.00 Profit A _____ _____ _____ Profit B _____ _____ _____ Profit C _____ _____ _____

(a) Compute the firms profit for A, B, and C and enter this data into the table. (b) Which product will the firm choose to produce and how much output will maximize profit?

10. Below are six statements. Identify whether each is a positive or normative statement. (a) The national economy grew at a 6.2 percentage rate in the last quarter as the economy continues to recovers from the past recession. (b) The unemployment rate fell to 5.7 percent this month, and is expected to fall to 5.5 percent next month. (c) The rate of inflation should be reduced to zero to maintain the value of the U.S. dollar. (d) The government should take action to reduce the prices of prescription drugs charged by drug companies. (e) Interest rates for home mortgages are at their lowest rate in thirty years. (f) The Federal government should increase income taxes on the wealthy to reduce the budget deficit.