Old Midterm 1 Exams, Econ 1

Economics 1
Introduction to Economics
University of California, Berkeley
Spring 2009
Professor Martha Olney

Midterm #1 from previous terms

This is the first midterm from Prof. Olney's Spring 2008 offering of Economics 1. The exam was written as a 50 minute exam.

1. Assume the United States can produce two goods: “warfare” and “education.” “Warfare” includes military equipment and war-fighting. “Education” includes books, computers, and teaching.

a.    What is the opportunity cost of increased warfare? As resources are shifted from producing education to producing warfare, is the opportunity cost of increased warfare constant? Explain. At the right, draw a production possibilities frontier that illustrates your answer. Label everything carefully.

b.    Canada also produces warfare and education. The opportunity cost of producing warfare is higher in Canada than it is in the United States. Should the United States and Canada each specialize and then trade? Why or why not? (In your answer, include one reason why the United States should specialize and trade, one reason why the United States should not specialize and trade, your answer to the “Should...” question, and your defense of your answer.)

2. The market for pens with red ink (call them “red pens”) is perfectly competitive. The firms in this market are profit maximizers.

a.    A profit-maximizing perfectly competitive firm that sells red pens is producing its long-run equilibrium quantity at the current market price of $2 per pen. At the right, draw a graph that depicts this situation. How much economic profit is this firm earning?

b.    The government imposes a tax of $1 per red pen (but no tax on other colors). By how much will the market equilibrium price of red pens change in the near future (say, in the next few weeks)? Defend your answer. At the lower right, draw a graph that supplements your answer. Label everything carefully.

c.    After the tax is imposed, does the profit of the typical red pen firm increase, decrease, or stay the same in the near future (say, in the next few weeks)? In one sentence, why?

d.    How will the market for red pens change in the long run? Explain your answer.

3. Due to foreclosures and difficulties obtaining mortgages, the price of houses in California was lower and fewer houses sold in January 2008 compared with January 2007. Draw a supply and demand graph at the right which shows how foreclosures and difficulty obtaining mortgages has affected the California housing market. Label everything carefully. Briefly explain your graph below.

4. Briefly describe the experiment conducted by Marianne Bertrand and Sendhil Mullainathan, as described in reader article #12, “Economic Scene: Sticks and Stones Can Break Bones, but the Wrong Name Can Make a Job Hard to Find,” by Alan B. Krueger.” So that we know you read the article, be sure to include detail from the article that wasn’t mentioned in lecture.

5. Dairy farmers raise cows who produce milk. But cows also produce manure (that is, poop!). A new invention collects the manure and uses it to produce bio-gas, which can be sold to firms and businesses that use natural gas for power. So dairy farmers can now sell their manure for a higher price than was previously possible. Assume dairy farming is a perfectly competitive industry.

a.    All else constant, what impact will this invention have on the price of milk? Why? Supplement your answer with a graph. Label everything carefully.

b.    Dairy farmers hire workers to help raise the cows. Will this invention increase, decrease, or have no effect on the wages of workers on the dairy farms? Explain. (If you need to make an assumption in order to answer the question, be sure to write down the assumption you make.)

This is the first midterm from Prof. Olney's Spring 2007 offering of Economics 1. The exam was written as a 50 minute

1. Electronic devices – cell phones, Ipods, Blackberries – also tell time. Prices of these electronic devices have recently decreased. In the short run, what is the effect on the market for watches? Explain. What happens to the equilibrium price and quantity of watches? Using the axes at the right, draw a graph that supports your analysis. Label everything carefully.

2. Jimmy’s going to Disneyland!
a. Jimmy is going to Disneyland tomorrow. His mom didn’t even look at the price of Disneyland tickets before offering to take him there. What does that tell you about her price-elasticity of demand for Disneyland tickets? Explain.
b.   Tomorrow at Disneyland, Jimmy will ask to buy a trinket at the gift shop. His mom will say “Maybe. It depends on the price.” What does that tell you about her price-elasticity of demand for Disneyland trinkets? Explain.
c.   All Moms are like Jimmy’s mom. You are in charge of increasing revenue for Disneyland. Should you lower the price of tickets? Should you lower the price of trinkets? Explain.

3 Who knew the pill was so important!
a. According to article #11 by Claudia Goldin & Larry Katz, “Career and Marriage in the Age of the Pill,” what impact has the pill had on women’s labor supply and why? On demand for female labor and why?
b. Show these impacts in a graph of the market for female labor. What is the predicted effect on women’s wages? On women’s employment?

4 Construction companies build, repair and remodel homes. Suppose construction is a perfectly competitive industry and construction companies wish to maximize profit.
a. Initially construction companies are in long-run competitive equilibrium. Draw graphs below that show the market for construction and the typical company in long-run competitive equilibrium. Label all your curves with the subscript “1.”
b. A natural disaster destroys or damages thousands of homes. What is the short-run effect on the price of construction? On the profit of the typical construction company? On the graphs above, show these effects. Label all your curves with the subscript “2.”
c. In the long run, what will happen to the price of construction? To the profit of the typical construction company? Why? (No graphs please.) How long do you think the “long run” is in this case: days, weeks, months, or years? Why?

5 Your sister and brother-in-law are arguing about her business again. She wants to open the shop on Sundays. He says it’s not worth the hassle. He says her total costs for the year are $365,000 ($1,000 per day) and that she can’t bring in more than $700 of revenue on a Sunday. Again, your sister calls you: “Hey, you’re taking Econ. You explain this to him.” Politely, what do you say to your brother-in-law this time?

6 In the early 1700s, rice and sugar could be produced in both the Caribbean and the colony of South Carolina. The climate and land were relatively better for producing sugar in the Caribbean and for producing rice in South Carolina.
a.   Draw a production possibilities frontier for South Carolina, assuming rice and sugar are the only possible commodities. Explain the shape of your PPF.
b.   Due to piracy, trade in 1700 was difficult. Pirates of the Caribbean would board the ships and steal the cargo. Sometimes they would sing songs: “Yo ho! Yo ho! The pirate’s life for me!” But between 1720 and 1740, the British Royal Navy successfully eliminated piracy in the Caribbean and along the Atlantic Coast. What impact did defeating the Pirates of the Caribbean have on economic growth in South Carolina? Why?

This is the first midterm from Prof. Olney's Fall 2005 offering of Economics 1. The exam was written as a 50 minute exam.

1. Refineries convert crude (unprocessed) oil into refined petroleum: products used to heat homes and drive vehicles. Last month, Hurricanes Katrina and Rita shut down over 20 percent of U.S. refinery capacity. Refineries that remained in operation throughout the month reported increased profit. Assume refineries are perfectly competitive firms.
a. What is the short-run effect of the hurricanes on the market price of refined petroleum? Supplement your answer with a graph.
b. Before the hurricanes, refineries were in long-run equilibrium. Draw a graph at the right that shows both the initial long-run equilibrium and the short-run effect of the hurricanes on the profit of the typical refinery that remained in operation.
c. Do you expect these refineries will continue to report such high profit in the years ahead? Why or why not?

2. In August 2005, as gas prices hit $3 per gallon, usage of public transit such as SF Muni increased but Bay Bridge traffic decreased. Using (and defining) economic concepts, explain the changes in use of public transit and in Bay Bridge traffic.

3. Due to large increases in jet fuel costs, American Airlines cancelled 15 flights last week and simply left the empty planes on the ground.
a. For American Airlines, is jet fuel a fixed cost or a variable cost? Why?
b. A radio commentator said “Cancelling flights makes no sense! If they don’t fly the planes, they earn no revenue.” Using (and defining) economic concepts, explain why cancelling flights and grounding planes may be a very sensible decision for a profit-maximizing airline.

4. In Indonesia, consumers pay very low prices for gasoline because the Indonesian government pays gas companies a subsidy – a fixed amount per gallon of gas sold. But one-third of government spending has been for these gas subsidies. So on October 1, 2005, the Indonesian government decreased the gas subsidy by 50 percent.
a. What is the effect of decreasing the subsidy on the equilibrium price paid by consumers and the equilibrium quantity of gas sold? Supplement your answer with a graph.
b. Some argue that decreasing the subsidy will allow the government to invest more in education. Illustrate the choices faced by the Indonesian government in a graph. Show the effect of decreasing the gas subsidy. If more money goes to education, what will be the long-run effect on the economy? Explain.
C. Others argue the decreased subsidy will particularly hurt the poor. Is decreasing the subsidy a good idea? (Your answer will be graded not on your opinion but on your defense of your opinion.)

5. You own a small winery in Sonoma. Your goal is to maximize profit. If you hire one more worker, your revenue will increase by $500 per day. If you hire 10 more workers, your revenue will increase by $2,000 per day. Market wages in the wine industry are currently $300 per day. Do you hire one more worker? Do you hire 10 more workers? What additional information do you need in order to decide how many more workers to hire? Explain.

This is the first midterm from Prof. Olney's Spring 2005 offering of Economics 1. The exam was written as a 50 minute exam.

1     DVDs and VHS tapes are substitute goods. The price of DVDs drops. What happens to the equilibrium price and equilibrium quantity of VHS tapes? Explain your answer. Draw a graph of the VHS tape market. Label everything clearly.

2     Someone recently said, “Wal-Mart can make money anywhere in the United States. If we don’t stop them, Wal-Mart will buy land in every town in this country.” Use economic concepts to explain why this statement is true. Supplement your explanation with a graph.

3     Chiquita Banana, a profit-maximizing company, said, “We used to make lots of profit. But it is too easy for just about anyone to enter the banana business and sell their bananas in a grocery store.” In the long run, how much profit would the typical banana firm – such as Chiquita – earn? Why? Draw a graph that shows the typical short-run profit maximizing quantity & amount of profit for the typical firm selling bananas today.

4     Two types of people cross the Golden Gate Bridge: tourists and local residents. Tourists will pay up to $20 to cross the bridge. But most local residents will pay only a bit more than $5 to do so. Use the concepts of elasticity and consumer surplus to explain why the Golden Gate Bridge District would want to charge tourists a higher toll than they charge local residents. Draw a graph of demand for bridge crossings that shows the consumer surplus when the toll is $5.

5a.    Chris and Robin live together. Chris can cook, clean, and do laundry very well, but earns very little money working. Robin burns boiled water, doesn’t see dirt, and washes whites with darks, but makes lots of money working. Chris says they should specialize and trade. Who should specialize in what? Why? What will Chris & Robin gain if they trade? (Be sure to use economic concepts when you explain your answers.)

5b.    Pat and Thanh also live together. Pat and Thanh are equally skilled at housework and earn the same amount of money working. What, if anything, will Pat and Thanh gain if they specialize and trade? Explain your answer using economic concepts.

6     Yogurt Park, a small store on Durant Avenue, encounters diminishing returns in the short run as it increases the number of workers. Explain why the marginal product of the 7th worker at Yogurt Park is probably less than the marginal product of the 3rd worker. Use a specific example in your explanation. At a very large store such as Costco or Ikea, is the marginal product of the 7th worker less than the marginal product of the 3rd worker? Explain.