Economics 1
Introduction to Economics
University of California,
Berkeley
Spring 2008
Professor Martha Olney
|
Midterm #1 from previous terms
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. sYou 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.
This is the first midterm from Prof. Olney's Spring 1999 offering
of Economics 1.
The exam was written as a 50 minute exam.
1. Suppose the only
two products that can be produced are rice and corn. Rice
requires relatively wet soil. Corn requires relatively dry
soil. Draw a production possibilities frontier below illustrating
the possible combinations of rice and corn that can be produced.
Why is your production possibilities frontier non-linear? Explain
completely.
2. Information for a profit-maximizing firm in a
perfectly competitive industry is illustrated in the graph at
right. Show the firm’s profit maximizing quantity. Show the
amount of its profit or loss. Should the firm shut down in the
short run? Should it exit the industry in the long run?
Briefly (one sentence each) explain each of your four answers.
3. There are two steps to having your own cell phone
number: buying a phone and buying monthly service. Three
years ago, cell phones cost $200 to purchase. Today, companies
that sell cellular phone service give customers the phone for
free. All else constant, what effect does this change have on the
equilibrium price and equilibrium quantity of cellular phone
service? Explain your answer. Illustrate with a
graph.
4. Levi Strauss, a clothing manufacturer, recently
announced that they will sell 11 of their 22 manufacturing plants in
the United States and Canada. Is this a long-run or short-run
decision? Explain.
5. California’s population has increased dramatically
since 1980. Twenty years ago, the land along Interstate 80
between Vallejo and Davis was all farm land. Today, there are
many housing developments where farms used to be. Use economic
analysis to explain why farmers sold their farms to housing
developers. Explicitly state any assumptions you make.
Illustrate your answer with a graph.
6. In order to increase tax revenue, a state
legislator suggests implementing a vehicle tax of 0.1¢ per mile
driven. In California in 1998, commercial trucks were driven 500
billion miles and personal cars were driven 300 billion miles.
The legislator therefore estimates 1999 tax revenue of $500 million
from commercial truck owners and $300 million from personal car
owners. (The arithmetic is ok.) An analyst says the
estimate of revenue from truck owners is probably ok, but the estimate
for car owners is too high. Explain the analyst’s reasoning.
7. <not relevant>