Foundations Exam 2_Fall 2013

Dodge, Eric NAME:______

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. When you are done, please quietly exit the classroom. Have a nice weekend![1]

1a. Suppose a monopoly exists in the bookstore of a small college. Use a clearly labeled graph to show the profit maximizing level of output the monopolist would produce. Show the price the firm would charge and the area of profit. (10 points)

b. Would this profit exist in the long run or would it disappear? Explain. (5 points)

2. Tickets to an economics lecture are sold out[2], but there are many fans who want to attend the lecture but do not have a ticket. Assume the face value of the ticket is $5 and the market price of the ticket is $50 if scalping tickets is allowed. First, draw a graph that portrays the market for these scalped tickets. Show both the face value and the market price of the tickets. Using your graph, and the concepts of consumer and producer surplus, explain why the economist giving the lecture would be in favor of scalping the ticket as a way to improve efficiency. (8 points)

3. In 1995 Jimmy earned $32,500 as a nominal salary, and in 2013 he earned a nominal salary of $71,000. The CPI in 1995 was 152.4 and the CPI in 2013 was 234.1. Adjust Jimmy’s nominal salaries in both 1995 and 2013 to real values. Note: The base year for the CPI is 1982-84. In a real sense has Jimmy’s purchasing power increased, decreased, or stayed the same? (8 points)

4. 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. (8 points each)

a. The price of crude oil and other sources of energy have rapidly increased.

b. The government has given tax cuts to most households.

c. In the international market for the U.S. dollar, it used to take 1.5 euros to purchase one U.S. dollar. Now it takes 2 euros to purchase one U.S. dollar. In other words, the dollar has appreciated in value against the euro.

5. The graph below shows the labor market for fast-food workers. In the graph, show where an effective minimum wage would lie. Clearly label the area of deadweight loss from the minimum wage. (6 points)

6. Firms in a perfectly competitive market are currently experiencing short-run losses. How will this market adjust in the long run and how will this adjustment affect typical firms in the market? (6 points)

7. A country has the following labor statistics:[3]

Population under 16 years old / 2.5 million
Population over 16 years old who are working part time / 4 million
Population over 16 years old who are working full time / 14 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. / 1.5 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. Economists understand that a nation’s GDP[4] is not synonymous with the overall health and welfare of a nation. Thoroughly explain 3 reasons why this is the case. (15 points)

9a. Explain what it means when we say that there are “external costs” in the market for tobacco. (2 points)

9b. In a clearly labeled graph of the tobacco market, show how external costs create a difference between the market outcome (price and quantity) and the socially optimal outcome of tobacco (price and quantity). (4 points)

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[1] Extra credit 1 point: What is the organization that determines when recessions begin and end? ______

[2] Seriously, it could happen! J

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

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