Print Your Name_________________________________ EC301 Professor

Final Exam Spring, 2008

Newmark

500 points maximum for the exam. Instructions. Do 10and only 10of the 15 questions. Each question is worth 50 points. For all questions except the multiple choice questions you must explain your answer or show your work. Please try to be concise. For the multiple-choice questions, circle only one answer. (There is no partial credit for the multiplechoice questions.) Note that you should sign the honor pledge on the last page. 1. True or false: A homeowner who sees a new housing development in his neighborhood should be unhappy because an increase in supply means lower prices. Explain.

2. Which of the following statements is true? A. In economics the short run refers to a period of time less than one year. B. The short-run AVC and ATC (average total cost) curves are U-shaped. C. In the short-run, capital is treated as fixed while in the long run labor is treated as fixed.
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D. If price is below marginal cost, a perfectly competitive firm should raise its price. E. The price at which a perfectly competitive firm shuts down in the short run equals the price at which it exits in the long run. F. Both A and E are true. G. None of the above is true. 3. The Wall Street Journal (11/6/07) noted that airports are heavily congested and that some want to try congestion pricing. Bur airlines say congestion pricing is just another tax on a financially ailing industry thats already heavily taxed. Another problem, some people assert, is that since so many people want flights at peak times, the government may not be able to levy fees high enough to really affect scheduling. Mr. Bill DeCota, aviation director of the Port Authority of NY and NJ said, There is no price that you could put in effect that would impact demand. Using economics, comment on what Mr. DeCota said.

4. The marginal revenue curve of a perfectly competitive firm is A. A straight line starting at the origin (0,0). B. Downward sloping. C. A horizontal line at the market price. D. U-shaped. E. We dont know without further information. F. None of the above. 5. True or False: If you can afford to, it is a good idea to pay off your debts as quickly as possible, so that the interest charges dont get too high. Explain.
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6. Because better weather makes farmland more productive, farmland in regions with good weather is more expensive than farmland in regions with bad weather. Over time, however, as advances in technology have made all farmland more productive, the price of farmland (adjusted for overall inflation) has fallen. Explain why productivity and farmland prices are positively related across space but negatively related over time.

7. Suppose that the only way a person can provide for consumption in his old age is by having children who will support him during his retirement. (And apart from this retirement-income effect, lets assume that parents have no interest in having children.) Further assume that the cost of having children today is proportional to the number of children born and that consumption during old age is proportional to the number of children who survive. Draw an indifference curve map with the good old-age consumption on the vertical axis and the good current consumption on the horizontal axis. Compare the optimum for a typical parent if the child-mortality rate is zero to the optimum
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obtained if the child-mortality rate is positive. Can you tell whether there would be more or fewer births if the child mortality rate decreases? If so, will births increase or decrease? You must explain.

8. Do each of the following comments reflect sound economic reasoning? Explain why or why not. A. I paid $200.00 for this economics course. Therefore, I am going to attend the lectures even if they are useless and boring. B. Since we own rather than rent, housing does not cost us anything. C. I own 100 shares of stock that I can't afford to sell until the price goes up enough for me to get back at least my original investment.

9. In the United States both state governments and the federal government assess per-unit gasoline taxes. In North Carolina for instance, the state tax is about 24.5 cents per gallon and the federal tax is about 18.5 cents per gallon. Recent research shows that consumers bear only about one-half of the economic burden of the federal gasoline tax but they bear almost the entire economic burden of the state taxes. Using economics from this course, present an explanation for this finding.

10. Youve won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? A. $0. B. $10. C. $40. D. $50. E. None of the above. 11. Have you ever noticed how few gasoline stations are found in the center of large cities? With such heavy traffic one ought to be able to do an excellent business. Why, therefore, are there so few? Use a specific economic concept.

12. The National Highway Traffic Safety Administration recently reported that when a state repeals its law requiring motorcycle riders to wear helmets, motorcyclist deaths increase by between 50 and 100 percent. A Chapel Hill student argues, Economics predicts that wearing helmets will make motorcyclists more reckless and will lead to more deaths. If repealing the law means fewer motorcyclists wear helmets, they should be more careful, and there should be therefore fewer deaths. Since the study shows repeal leads instead to more motorcyclist deaths, economics must be wrong! How do you respond? Explain.

13. Adam Smith Enterprises is currently making economic losses. The firms CPA argues that the firm should shut down in the short run because producing nothing would be better than making losses. But the firms chief financial officer argues that the correct rule is that the firm should shut down if and only if it is making economic losses (negative economic profits). Using economics, evaluate each of the two competing arguments. Explain carefully.

14. Suppose that the supply curve for apples in the little town of Newmarkville is perfectly horizontal. The price elasticity of demand for apples at the price for which supply is horizontal is -2.3. The government of Newmarkville decides that taxing apple sales would generate large revenues for the town, so it imposes a tax on apples of 1 cent per apple. The current equilibrium price of apples is 20 cents each. How will the number of apples sold in the town change, in percentage terms? Show your work.

15. No coffee is produced in the United States. Americans can buy as much coffee as they want from foreign producers at a price of $10/pound. At this price, we decide to buy 1,000,000 pounds per week. Harry Reid, trying to get more Democrats elected to the Senate, proposes that the U.S. government make coffee available to U.S. citizensas much as they want absolutely free. (Democrats new slogan, Wake up and smell the coffee!) The government would get the coffee by purchasing it from foreign producers at $10/pound. Draw and
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label a diagram that shows the deadweight loss if this law was passed.

Please sign the following statement: I have neither given nor received unauthorized aid on this test.