questions answers and graphs
Principles of Economics II POINTS: The exam consists of 110 possible points. There are 10 points of extra credit questions/points built into the exam. In other words, the exam will be graded on the basis of 100 points allowing you to miss 10 points without penalty. INSTRUCTIONS: Please type your answers. You may hand draw your graphs, but they need to be neat, clear and large enough for me to read them without a magnifying glass. Your exam is due on WEDNESDAY, MARCH 6. Please bring a hardcopy of your exam to class. I. (15 POINTS) Predict the impact on equilibrium price and quantity for the CIGARETTE MARKET (cigarettes made with tobacco) given the following changes. Analyze graphically labeling all curves clearly and indicating original equilibrium price and quantity and the new equilibrium price and quantity. Draw a separate supply and demand graph for each part [you should have three separate graphs: a graph for part (a), a graph for part (b), and a graph for part (c)]. Please provide a written explanation detailing whether demand and/or supply changed, whether the change was an increase or decrease, and why. A clear explanation of each of your graphs is required. a. if the government increases the tax levied on the production and sale of cigarettes made with tobacco b. e-cigs or electronic cigarettes, an alternative to smoking tobacco cigarettes, gain popularity among smokers. c. if both (a) and (b) happen simultaneously. _____________________________________________________________________________________ II. (5 POINTS) A. Draw a supply-demand graph in the market for gasoline. Indicate equilibrium price and equilibrium quantity. At the equilibrium price, is gasoline scarce? Indicate a price at which there is a shortage of gasoline. Show the shortage of gasoline in your graph. Is gasoline at this non-equilibrium price scarce? Please provide clear explanations of your graph and answers. B. Draw a supply-demand graph in the market for wheat. Indicate equilibrium price and equilibrium quantity. At the equilibrium price, is wheat scarce? Indicate a price at which there is a surplus of wheat. Show the surplus of wheat in your graph. Is wheat at this non-equilibrium price scarce? Please provide clear explanations of your graph and answers. III. (20 POINTS) BRIEFLY DEFINE OR EXPLAIN THE FOLLOWING COMBINATIONS OF CONCEPTS AND THE RELATIONSHIP BETWEEN THE CONCEPTS: a. marginal benefit, marginal cost, optimal allocation of resources b. scarcity, opportunity cost, and rationing device (explain the role of a rationing device and discuss four different types of rationing devices or allocative mechanisms) c. decreasing opportunity costs, increasing opportunity costs, constant opportunity costs d. economic efficiency, technical efficiency, allocative efficiency IV. (40 POINTS) ANSWER THE FOLLOWING: A. Which of the following decisions has the GREATER opportunity cost (You are not being asked about profitability. Be sure to carefully think about what the opportunity cost is of each alternative remembering that the opportunity cost of the decision is the value of the resources in their next best alternative): (a) A decision to use an undeveloped lot in Shanghai’s Business District for an apartment building, or (b) A decision to use a lot of the same size lot in the desert for a gas station. Explain your answer. B. Comment on the following statement indicating whether you agree with the statement or disagree with statement and WHY. Graphical analysis may be used to support your answer. The government levies taxes on the production and sale of gasoline as well as other items. Since the tax is placed (levied) on the seller, it stands to reason that sellers bear the burden of this tax. C. Comment on the following statement indicating whether you agree with the statement or disagree with the statement and WHY. Colleges charge tuition and also use standardized test scores as admission criteria. Tuition serves in this instance as the rationing device while standardized test scores as admission criteria do not. D. Comment on the following statement indicating whether you agree with the statement or disagree with the statement and WHY. Consumers always will prefer low prices to high prices. V. 15 Points PROVIDE GRAPHICAL ANALYSIS TO SUPPORT YOUR ANSWER. PROVIDE CLEAR AND COMPLETE EXPLANATIONS. Suppose the government imposes a system of price ceilings in the health care industry as part of an overall health care reform bill. i. Assuming the market was initially in equilibrium, what will happen to quantity demanded and quantity supplied of health care over time? ii. Would a shortage or surplus result? Illustrate in your graph. iii. What happens to the amount of market exchange? Explain carefully. iv. Is the result allocatively efficient, ie, is there an optimal amount of resources allocated to the production and provision of health care? Why or why not. Is there an underallocation (are we producing too little health care) or an overallocation (are we producing too much health care) of resources to the production of health care from an efficiency point of view? Illustrate graphically. v. Does the regulation benefit the groups it is meant to? Explain carefully. vi. Who bears the cost of the regulation? Explain carefully. VI. 15 Points PROVIDE GRAPHICAL ANALYSIS TO SUPPORT YOUR ANSWER. PROVIDE CLEAR AND COMPLETE EXPLANATIONS. Suppose the government imposes a price floor in the labor market (minimum wage legislation). In your answer, be sure to examine the potential impact on unemployment and the potential impact on small businesses. i. Assuming the market was initially in equilibrium, what will happen to quantity demanded and quantity supplied of labor over time? Illustrate in your graph. ii. Would a shortage or surplus result? Illustrate in your graph. iii. What happens to the amount of market exchange (the number of workers actually hired)? Explain carefully. v. Does the regulation benefit the groups it is meant to (workers employed in the unskilled labor market – workers employed at low wages)? Explain carefully. vi. Who bears the cost of the regulation? Explain carefully.