How many rabbits must the magician pull out of the hat to pass this course?
Stay tuned for some helpful hints!
INSTRUCTIONS: Answer all of the following questions as directed. Watch the point value of the questions and prepare answers accordingly. Figure that an average C answer has one paragraph for each 5 points. Your answers are to be typed, using 12-point font. They may be single-spaced, with double spaces between paragraphs. They MUST include supporting diagrams, where necessary, to illustrate and support your answers. Your answers are due in class on Thursday, May 10, 2016. Late exams are subject to the 20% per late day penalty. Dr. Furfero accepts NO exams by email. Any questions, email Dr440 ASAP. Otherwise, Good Luck!
- (10 points) As a government official, you have decided that an excise tax (a specific or per unit tax) imposed on businessmen’s output is the best way to raise revenue for the State.
- Show by means of a DIAGRAM what happens to price and quantity in a competitive market when the tax is imposed.
- In order to be an effective revenue raiser, the demand curve must be ________________ (elastic/inelastic) and the supply curve must be ________________ (elastic/inelastic).
- Using your knowledge of the determinants of price elasticity, classify the demand and supply curves for the following items according to their relative elasticities, explain why some are better revenue raisers than others, and pick the best revenue raiser and the worst revenue raiser.
- football games
- diamond bracelets
- McConnell’s Principles of Microeconomics textbook
- (10 points) Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, depreciation and obsolescence charges, sales taxes, and rental payments on leased office machinery. Then, explain: “There are no fixed costs in the long run; all costs are variable.”
- (10 points) Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts) for economy Alpha:
Production alternatives Type of production A B C D E Automobiles 0 2 4 6 8 Forklifts 30 27 21 12 0
- Show these data graphically (DIAGRAM!). Upon what specific assumptions is this production possibilities curve based?
- What is the socially optimum output for Alpha?
- If the economy is at point C, what is the cost of one more automobile? Of one more forklift? Which characteristic of the production possibilities curve reflects the law of increasing opportunity costs: its shape or its length?
- If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 forklifts, what could you conclude about its use of its available resources?
- (10 points) The U.S. Department of Agriculture, publishes charts on the prices of farm products. Go to the USDA home page and select Charts and Maps and then Agricultural Prices (under Economics). Choose three farm products and determine whether their prices (as measured by “prices received”) have generally increased, decreased, or stayed the same over the past three years. In which of the three cases, if any, do you think that supply has increased more rapidly than demand? DIAGRAM and EXPLAIN! In which of the three cases, if any, do you think that demand has increased more rapidly than supply? Explain your reasoning. DIAGRAM and EXPLAIN!
- (10 points) Economics is…neither capitalist or socialist, it applies to every society. Economics would disappear only in a world so rich that no wants were unfulfilled for lack of resource. Such a world is not imminent and may be impossible, for time is always limited. Carefully evaluate and explain this quote. Do you agree that conceptually time is an economic resource?
- (10 points) Using the tools of supply and demand and the competitive market, demonstrate graphically and explain the difference between a “gas crisis,” in which prices are rising, and a “gas shortage.”
- (10 points – 5 points each) Address two (2) of the following issues:
- “There’s no such thing as bad publicity.” Evaluate this statement in terms of the recognition heuristic. Use Donald Trump and his run for the US presidency as your example.
- You just accepted a campus job helping to raise money for your school’s athletic program. You are told to draft a fund-raising letter. The bottom of the letter asks recipients to write down a donation amount. If you want to raise as much money as possible, would it be better if the text of that section mentioned that your school is ranked third in the nation in sports or that you are better than 99% of other schools at sports? Explain.
- Suppose that Ike is loss averse. In the morning, Dr440’s stockbroker calls to tell her that she has gained $1,000 on his stock portfolio. In the evening, her accountant calls to tell her that she owes an extra $1,000 in taxes. At the end of the day, does Dr440 feel emotionally neutral since the dollar value of the gain in her stock portfolio exactly offsets the amount of extra taxes she has to pay? Explain.
- Economist Gerd Gigerenzer characterizes heuristics as “fast and frugal” ways of reaching decisions. Are there any costs to heuristics being “fast and frugal”? Explain and give an example of how a fast and frugal method for doing something in everyday life comes at some costs in terms of other attributes forgone.
- In the early 1990s, New Jersey and Pennsylvania both reformed their automobile insurance systems so that citizens could opt for either a less-expensive policy that did not allow people to sue if they got into accidents or a more- expensive policy that did allow people to sue if they got into accidents. In New Jersey, the default option was the less-expensive policy that did not allow suing. In Pennsylvania, the default option was the more-expensive policy that did allow suing. Given those options, which policy do you think most people in New Jersey ended up with? What about in Pennsylvania? Explain.
- What is “precommitment” in terms of behavioral economics? Give an example from your own life of a situation where you or someone you know uses a precommitment to overcome a self-control problem. Describe why the precommitment is useful and what it compensates for. Avoid any precommitment that was mentioned in the book.
- (10 points) A college professor invents a new production technology for making vitamins. He decides not to patent it. Thus, it is available for anybody to copy and put into use. The Total Cost per bottle for production up to 100,000 bottles per day is given in the following table:
- What is Average Total Cost for each level of output listed in the table?
- Suppose that for each 25,000-bottle-per-day increase in production above 100,000 bottles per day, Total Cost increases by $5,000 (so that, for instance, 125,000 bottles per day would generate total costs of $85,000 and 150,000 bottles per day would generate total costs of $90,000). Is this an increasing-, constant-, or decreasing-cost industry?
- Suppose that the price of a bottle of vitamins is $1.33 and that at that price the total quantity demanded by consumers is 75,000,000 bottles. How many firms will there be in this industry?
- Suppose that, instead, the market quantity demanded at a price of $1.33 is only 75,000. How many firms do you expect there to be in this industry? Review your answers to parts b, c, and d. Does the level of demand determine this industry’s market structure?
- (10 points) In her spare time, Dr. Furfero runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? 2,000? 10,000? What is her ATC per poster if she prints 1,000? 2,000? 10,000? If the market price fell to 70 cents per poster, would there be any output level at which Dr. Furfero would not shut down production immediately? Make a DIAGRAM and show the different equilibria.
- (10 points) “Small is beautiful” or so Dr. Furfero’s mother told her when she stopped growing at 5’2″. Is it? Compare and contrast the performance of a pure and perfectly competitive firm with a monopoly firm in long-run equilibrium. Make DIAGRAMs to support your comparisons.
BONUS: (5 points) In the CNN-sponsored Republican Presidential Candidate Town Hall on February 18, 2016, Ted Cruz said of Planned Parenthood, “[It is] responsible for taking the lives of millions of unborn children.” Did Mr. Cruz make a positive or normative statement? How can you tell? Did he use loaded terminology? Explain.