ECON 401 Practice Exam- Herold

University of New Hampshire Fall 2018 Marc W. Hero Your name: September 18, 20 Economics 401. First exam Instructions: This exam covers Krugman’s modules 1-4, lectures class handouts and required readings. Each of the three parts in this exam counts equally (16 points). In Part il, please provide your calculations as we do grant partial credit. On the essay question (Part 111), | expect you to write in good English {(appropriate words, sentences and punctuation) which will be part of your grade. So please re-read what you wrote. Part 1. 16 short answers (each counts for 1 point) 1. The cost of going to college is: A) tuition and the cost of housing. B) tuition, the cost of housing, and the cost of books. C) tuition, the cost of housing, the cost of books, and forgone income. D) forgone income only. & Your elderly grandma tells you: “I haven't been taking my beloved walks because I'm ’ concerned about falling and getting hurt. See, there is always a cost to doing something. But if you don't do anything, then there is no cost.” Your grandma does not understand the concept of: A) scarcity in economics. C) opportunity cost in economics. B) efficiency in economics. D) marginal analysis in economics. ?), When someone says resources are scarce, this suggests that: A) lower-income individuals must be especially careful about the choices they make. B) choices need to be made in order to utilize resources in the best manner possible. C) additional resources could be found if there were additional funds allocated to the effort. ’ D) we can use resources for whatever purpose we choose. Ll If an economy has to sacrifice increasing amounts of good X for each unit of good Y produced, ' then its production possibility frontier is: A) bowed out from the origin. C) astraight line. B) bowed in toward the origin. D) avertical line.

Technological improvements will: A) leave the production possibility frontier unchanged. B) shift the production possibility frontier inward. C) shift the production possibility frontier outward. D) necessarily lead to increased unemployment. The U.S. production possibility frontier will if all computers using Microsoft operating systems contracted a virus that deleted all information on those computers. A) shiftin B) shift out C) not change D) Cannot be determined from the information provided. Abe starts exercising regularly, and after a few months discovers he can now do twice as much of everything—in a single day Abe can now make 10 hamburgers or 8 milkshakes, rather than the 5 hamburgers and 4 milkshakes he made in the past. We now know that Abe’s production possibility frontier: A) has shifted right, but his opportunity costs of making milkshakes are unchanged. B) has shifted right, but his opportunity costs of making milkshakes have decreased. C) has not changed, but his opportunity costs of making milkshakes have increased. D) has not changed, but his opportunity costs of making milkshakes have decreased. Economists generally believe that a country should specialize in the production of a good or service if: A) the production possibility frontier is larger than that of any other country. B) the production possibility frontier is smaller than that of any other country. C) the country can produce the product using fewer resources than any other country. D) the country can produce the product while forgoing fewer alternative products than any other country. If they produce only hamburgers, then in a single day Sarah can produce 10 hamburgers while Abe can produce 5 hamburgers, If they only make milkshakes, then in a single day Sarah can . produce 10 milkshakes while Abe can produce 4 milkshakes. We then know that: A) Sarah has an absolute advantage and a comparative advantage in making hamburgers. B) Sarah has an absolute advantage and a comparative advantage in making milkshakes. C) Abe has an absolute advantage and a comparative advantage in making hamburgers. D) Abe has an absolute advantage and a comparative advantage in making milkshakes. Suppose oranges and clementines are considered to be substitutes. Holding everything else constant, if the price of oranges increases, then the: . A) demand for clementines will increase. C) demand for oranges w%ll increase. B) demand for clementines will decrease. D) demand for oranges will decrease.

Part Il. Two problems (each worth 8 points) Problem 1. The PPC model As you know, the PPC model {based upon certain assumptions) seeks to explain a country’s production possibilities at a moment in time (time is held constant). Let’s assume two outputs — good A and good B - and that the economy is operating efficiently. (1). What is the most important thing which determines the shape of a country’s PPC? A 4 Cunits) PPC 5" [onifs ] (2). If the citizens want more of one output than another, what happens in the PPC graph above? Please explain in words too. (3). If a technological innovation occurs in output A only, what happens to the PPC? Please draw in the graph above and explain in words. (4). Let’s assume that inputs in making good B become more productive, what happens to the PPC and why? Draw in the graph above and explain.

Problem 2 . Comparative advantage theory and two countries Background: You are analyzing two countries each with a relative comparative advantage, Italy and Chile. Italy is a much larger economy. We are looking at two outputs which could be produced in both countries (copper and textile machinery). Italy has a comparative advantage in textile machinery and Chile in making copper (has big copper mines). (1). Draw the graph showing the two countries’ PPC’s given the above. Be sure to label the axes of the graph. /”//f 7§" 24 ,/,/ A copper [unifs) >textife mad\[q«j (unils] (2). Draw in the graph what comparative advantage theory says each country should do. Explain in words here:

Part lll. One essay (16 points) In class lecture (on Sc{DT' 5= 2018 ') explained how most of the time three powerful “invisibles” or three powerful forces, are work in a society when we examine an issue. Remember the case of child labor (handout) or the failure of the U.S war on drugs. Let’s now examine the market for human organs (like kidneys, livers, etc.) used for transplants. Some of this market activity is legal (donated organs) and some of it is not. The much larger part is illegal and international (operating outside laws and in underground clinics, through shady middlemen, with non-registered doctors, etc.). Write an essay (with 4-5 full paragraphs) which analyzes the interplay of these three powerful forces at work: the economic or market forces, the socio-cultural forces, and the politico-legal forces.