Exam 1, Econ 102 Version 1

February 6, 2012
This exam has two parts: a multiple choice section consisting of 16 questions, each of which is worth 2
points, and a short answer/graphing section, worth 32 points in total. Submit your scantron and
completed short answers and sign yourself out at the end of the exam.
Multiple Choice. Choose the best answer

1. Which of the following would cause an increase in equilibrium price but decrease in equilibrium
quantity in for the iPad, a tablet computer (we consider all iPads to be the same – there is only one
competitive market for iPads)?
a. A competitor, Amazon, announces a stop to its production of Kindles, another type of tablet.
b. The unemployment rate keeps rising and average household income continues to shrink.
c. A Japanese earthquake makes some of the inputs in the iPad production process more costly.
d. The metal alloy used to manufacture iPads becomes cheaper.

2. Steven Adamson owns a copper mine and wonders how he should adjust his supply of copper today,
Qs(today). In particular, let P(today) be the price of copper, P(G) the price of gold, a marketable
byproduct of copper mining, w the wage rate of the miners he has to hire, and P(future) the price of
copper that he expects for next year. Given what we know about supply shifters, which equation best
expresses the supply of copper today?
a. Qs(today) = 5*P(today) – 2*P(G) + 3*w – 4*P(future)
b. Qs(today) = 5*P(today) + 2*P(G) - 3*w – 4*P(future)
c. Qs(today) = 5*P(today) + 2*P(G) + 3*w + 4*P(future)
d. Qs(today) = 5*P(today) – 2*P(G) - 3*w + 4*P(future)

3. A friend of yours from the Netherlands visits you in Beverly Hills and is surprised to see that few
people take the bus or trains. Which of the following arguments can explain the difference? “All
else is equal, but…
a. public transportation is an inferior good compared to cars and the citizens of Beverly Hills have
higher incomes than the citizens of the Netherlands.”
b. there are more people in Beverly Hills than there are in the Netherlands.”
c. the tax imposed on a gallon of gasoline (used to drive cars) is higher in Beverly Hills than in the
Netherlands.”
d. we provide larger subsidies to public transportation in Beverly Hills than they do in the
Netherlands.”

4. Consider the following PPF: L = 8𝑋 2 + 5𝑌 , where 𝐿 is units of labor, and 𝑋 and 𝑌 are amounts of
goods X and Y produced by the economy. The opportunity cost of Y in terms of good X is
a. increasing as production of Y rises.
b. decreasing as production of Y rises.
c. constant at 5.
d. constant at zero.

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5. If we consider a linear, constant-opportunity-cost PPF, the opportunity cost of the good on the
vertical axis at a point on the PPF is given by
a. X/Y at that point, where X is the quantity of the horizontal good produced and Y is the quantity
of the vertical good produced.
b. Y/X at that point, where X is the quantity of the horizontal good produced and Y is the quantity
of the vertical good produced.
c. -S, where S is the slope of the PPF.
d. -1/S, where S is the slope of the PPF.

6. To the right is the PPF for a market economy. Which

of the following is not a possible equilibrium price
𝑃
ratio(s) 𝑃𝑎 ?
𝑏
a. Zero
b. Infinity
c. One PPF
d. All of the above are possible

7. The Cobb-Douglas utility function produces indifferences curves that are in bowed in with respect to
the origin. What is a possible reason for this shape?
a. It is because of increasing opportunity costs of production.
b. Because consumers like variety (i.e. mixes of both goods) due to diminishing marginal utilities.
c. Because the utility rises with an increase in consumption of either good.
d. Otherwise the indifference curves will cross.

8. Imagine the economy produces two goods, K2 skis (S) and Patagonia jackets (J). Consumers get
utility U(S, J) from their chosen consumption bundle. Which of the following utility functions
violates one or more of the main “laws of utility functions” given in class?
a. U(S, J) = S + J
b. U(S, J) = 12 * S1/2 * J1/2
c. U(S, J) = √S + √J
d. U(S, J) = (S * J)2/3

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9. Give the following information, what is GDP in the economy?
Exports = $4
Consumption spending = $100
Government spending = $12
Investment spending = $20
Import = $8
a. $124
b. $128
c. $136
d. $144

10. Consider the following table of the prices and quantities of all final goods produced in a country in
two years. Let 2010 be the base year
2010 2011
Quantity of Footballs 7 7
Price of a Football $6 $10
Quantity of Basketballs 20 25
Price of a Basketball $9 $10
Quantity of Baseballs 30 28
Price of a Baseball $2 $2
What is the price level, as measured by the GDP deflator, in 2011?
a. 116
b. 282
c. 323
d. 376

11. Penny borrowed $100 from Leonard for 1 year. The inflation in that year is 5%. Leonard
anticipated zero inflation, and charges Penny a nominal interest rate of 2%. After she pays back her
loan at the end of the year, how mu7ch real value does Penny gain or lose in this deal?
a. lose $7
b. gain $7
c. lose $2.86
d. gain $2.86

12. A decrease in the savings rate, combined with improvements in human capital, will result in what
happening to the steady state capital per worker, k* ?
a. k* will certainly increase.
b. k* will certainly decrease.
c. k* will certainly remain unchanged.
d. It’s impossible to say with the information given.

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13. If technology and human capital were held constant, between the years 1970 and 2005, the increase
in capital per worker from 25,000 to 80,000 would lead to doubling of GDP from 40,000 to 80,000.
However, not only did capital increase over this time, but so did technological progress. The actual
change in GDP from 1970 to 2005 is from 40,000 to 320,000. Given this information, what is the
rate of growth attributable to the technological progress?
a. 2%
b. 4%
c. 6%
d. 8%

14. Suppose we have two countries, A and B, where both have aggregate production function
Y = T K1/3 L1/3 HC1/3, and the components of aggregate output are as follow:
A B
K 100 200
HC 300 400
L 100 300
T 10 8
Which of the following statements is true?
a. Per-worker human capital is higher in B than in A
b. Total output is higher in A than in B
c. Productivity per worker is higher in A than in B
d. B is more technologically advanced than A

15. If some unemployed people in the labor force become discouraged by search frictions and quit
looking for jobs, it means that the level of unemployment
a. increases
b. decreases
c. stays same
d. answer depends on number of people who quit

16. An economy starts at its full employment state. An unexpected negative productivity shock pushes
the economy into recession. This causes cyclical unemployment to rise by 3%, frictional
unemployment to rise by 2%, and overall unemployment is 7%. Structural unemployment in the
economy remains constant at 1%. What was the natural unemployment rate in the economy before
the shock?
a. 0%
b. 1%
c. 2%
d. none of the above

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Name ___________________________ GSI name & section time _________________________
(For admin purposes
Short Answer/Graphing. Answer the question in the space given (and – please leave blank)
ONLY the space given). Show your work, and label your graphs! Question Score
Please circle or highlight all of your final answers. 1
2
1. (8 points total) Consider the market for contact lenses, which is competitive. 3
a. (2 pt) The initial supply and demand equations for lenses are as follows: 4
Supply: Qs = -600 + 0.9P
Demand: Qd = 600 - 0.3P
What are the initial equilibrium price and quantity in this market?

b. (2 pt) A new type of lenses is introduced into the market. They are superior to past types, and
cause consumers to be willing to buy 12 more pairs than initially at any given price. Find the
new equilibrium price and quantity.

c. (4 pts) Suppose that prior to this innovation (i.e., based upon the supply and demand curves
given in part a), the government proposes to use dollars to tax or subsidize the production of
contact lenses so that the equilibrium quantity of contact lenses produced will be 450. Will the
government impose a tax or subsidy, and how large will it be?

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continued 
2. (10 points total) Suppose that Tea (T) and Coffee (C) are the only two goods in the economy. The
community utility function is given by: 𝑈 = 3𝑇 + 6𝐶
a. (4 points) Draw in one plot total utility as a function of tea consumption, keeping the amount of
coffee fixed at C =2. Draw in another plot an indifference curve where U = 24 (and T is on the
x-axis). In both graphs, clearly label intercepts and slopes of each line.

b. (6 points) Consider a PPF that takes the following form: when T < 7.5, the PPF is given by the
equation 30 = T + 3C. When T ≥ 7.5, the PPF is given by 30 = 3T + C. With T on the X-axis,
use the PPF and indifference curve graphs to illustrate what level of output a benevolent social
planner would choose. Label endpoints of the PPF and the level of utility in the graph.

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continued 
3. (6 points total) We said that “markets choose an economically efficient level of output when prices
are determined based purely on economic fundamentals.” What do we mean? In particular,
a. (2 pts) Explain in one sentence what it means to we say a point on the PPF is “economically
efficient”.

b. (2 pts) Explain in one sentence what the phrase “economic fundamentals” means.

c. (2 pts) Provide a short example of a situation where markets will NOT produce an economically
efficient level of output.

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continued 
4. (8 points total) Consider the Haitian economy at the beginning of 2010, before the earthquake that
devastated the country. The Haitian production function is given by:
𝑦 = 5√𝑘
where k is capital per labor. An average Haitian household saves 30% of its income and the capital
depreciates at 5% rate. All rates are annual.
a. (2 pts) If no earthquake had occurred, the capital stock would be 𝑘 𝑝𝑝𝑝 = 196 units at the
beginning of 2010. What would the growth rate of output be between 2010 and 2011 given this
initial setup?

b. (4 pts) When the earthquake occurs (at the outset of 2010) capital stock falls to 𝑘 𝑞𝑞𝑞𝑞𝑞 =100
units, while all else remains the same. What will the growth rate of output be between 2010 and
2011 given this shock to capital? Compare this to your answer from part (a), and briefly explain
why the economy grows faster or slower (whichever the case may be) given an earthquake than
without one.

c. (2 pts) What would be steady state capital stock of Haiti (i) if the earthquake had never
happened and, (ii) supposing the earthquake happens. Compare/contrast the steady states in the
two situations.

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