Foundations Final Exam_F2013

Dodge, EricNAME:______

Please use the space provided, or additional space on the back, to respond to the following. You may not attach additional paper to this exam. If something is unclear, please ask for clarification.

1. The nation of Elitopia produces only two things with its economic resources: mittens and kittens.

a. Draw a production possibilities curve (PPC) for Elitopia that demonstrates increasing opportunity costs. (5 points)

b. What is the economic rationale for drawing the PPC with increasing opportunity costs? (6 points)

c. In the PPC you have drawn above, identify a point “U” that is currently unattainable and a point “I” that is currently inefficient. (4 points)

2. Suppose the market for cotton mittens is in equilibrium. Given the following scenarios, identify the shifter involved, the shifts that are occurring, andpredict changes to the equilibrium price and quantity of mittens. A diagram is not required to answer these questions, but might be useful to you. (5 points each)

a. All else equal, the price of cotton has increased.

b. All else equal, the price of a winter scarf decreases.

c. All else equal, a winter blizzard is predicted to hit most of the U.S. three days from now.

d. All else equal, combine the effects of a) and c).

3. Suppose the market for kittens, is represented by:

P = 25 – 2Qd whereQd is the # of kittens demanded per day at the kitten factory and P is the price per kitten, and

P = 1 + 2Qs where Qs is the # of kittens supplied per day.

a.Draw the market for kittens, being sure to label curves, axes and intercepts. (7 points)

b. Hired as a consultant for kitten producers, solve for equilibrium price and quantity. Show these on the above graph. (6 points)

c. Computeconsumer surplus enjoyed by kitten consumers. (5 points)

d. Suppose that you have determined that the price elasticity demand for kittens is equal to .50. Explain what this price elasticity means to someone unfamiliar with the concept. (6 points)

4. According to the text, who is to blame for the rapid increase in the price of textbooks? Explain. (6 points)

5. There is an area of the Pacific Ocean that has collected a sizeable amount of floating plastic trash. Estimates of the size of this “Pacific Garbage Patch” vary, but for the sake of argument, suppose that it is the size of about half of the United States. Why would economists predict that it is more likely for the Pacific Ocean to have this garbage patch than it would be for half of the United States to be covered in plastic trash? (6 points)

6. Economists understand that a nation’s GDP[1] is not synonymous with the overall health and welfare of a nation. Thoroughly explain 3 reasons why this is the case. (12 points)

7. A country has the following labor statistics:[2]

Population under 16 years old / 2.5 million
Population over 16 years old who are working part time / 3 million
Population over 16 years old who are working full time / 13 million
Population over 16 years old without jobs, but actively seeking jobs. / 2 million
Population over 16 years old without jobs, but not actively seeking jobs. / 1 million

7a. Calculate the size of the labor force and the unemployment rate. (6 points)

7b . Suppose that 1 million of those who were unemployed become “discouraged” and drop out of the work force. How would this affect the official unemployment rate? Why? Recalculate the unemployment rate to support your assertion. (6 points)

8. What impact would the following events have on the aggregate demand (AD) or aggregate supply (AS) curve, other things being equal? First, explain your shifts. Second, predict changes to the aggregate price level and to GDP. Note: graphs are not required for your answers. (6 points each)

a. The government has reduced spending.

b. Interest rates have decreased.

c. In the international market for the U.S. dollar, it used to take 2euros to purchase one U.S. dollar. Now it takes 2.5 euros to purchase one U.S. dollar. In other words, the dollar has appreciated in value against the euro.

9. Recently the unemployment rate in the U.S. fell to 7%. Reporters and economists began speculating that the Fed would end the expansionary monetary policy that began in 2008. What is expansionary monetary policy? Why was the Fed conducting such policy since 2008? What is the desired impact of such policy? (8 points)

10. In 2008 Jimmy earned $52,500 as a nominal salary, and in 2013 he earned a nominal salary of $60,000. The CPI in 2008 was 124.4 and the CPI in 2013 was 134. Adjust Jimmy’s nominal salaries in both 2008 and 2013 to real values. Note: The base year for the CPI is 1999. In a real sense has Jimmy’s purchasing power increased, decreased, or stayed the same? (8 points)

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[1] Extra credit 1 point: What is the organization that calculates and publishes the U.S. GDP? ______

[2] Extra credit 1 point: What is the organization that calculates and publishes the U.S. unemployment rate? ______