S. Klepper, Economics 73-100, Fall 2008

Exam II

There are a total of three major questions, each weighted according to the points listed to the left of the question. These are the points apportioned to each question. They sum to 100

Each of the major questions has a series of subsidiary questions. Each of these subsidiary questions is a true-false question. To answer the question, indicate in your exam booklet whether the answer is true or false and provide a brief explanation for your answer. Correct answers with insufficient explanations will get no points. When you finish, hand in only your exam booklet.

The exam is open-book and open-notes. If you have any questions at all, then ask the proctor to help you. Do not introduce any assumptions (beyond those introduced in class) without consulting the proctor.

[43] 1. Consider experiment 3 concerning demand. Suppose that the cost of producing good Y decreased, causing the price of good Y to fall by at least 75%. This price of good Y would apply to every round of the experiment. All other features of the experiment would remain the same, including the price of good X and the budget in each round. Which of the following statements correctly predict how this would have affected choices in the seven rounds of the experiment assuming that in every round consumers chose the combination of good X and good Y that maximized their level?

_____1. In every round, the consumer will have to give up more units of good Y to get another unit of good X than at the price of good Y in the version of the experiment conducted in class.

_____2. At each of the eleven points defining level 1, the consumer’s maximum willingness to pay for the marginal unit of good X will fall as a result of the decrease in the price of good Y.

_____3. In all rounds consumers will choose a combination of good X and good Y from among the points on level 1 that involved more units of good X and less units of good Y than in the version of the experiment conducted in class.

_____4. Consumers will be at least as well off in every round as they were in the version of the experiment conducted in class.

_____5. In every round, the willingness to pay of consumers for the last unit of good X consumed will be at least as great as in the version of the experiment conducted in class.

_____6. In every round, consumers will purchase at least as many total units of good Y as in the version of the experiment conducted in class.

_____7. The decrease in the price of good Y will cause the demand curve for good X corresponding to an income of $90 to shift to the right at every price.

_____8. After the fall in the price of good Y, at any price of good X the income elasticity of demand for good X when consumers have an income of $90 will equal 1.

[37] 2. Congress is anticipating that the U.S. economy is going to be in a deep recession in 2009 and many people will be unemployed. To help the unemployed, it intends to expand unemployment insurance, which will require raising money to fund the expanded program. It is planning on imposing a payroll tax of 10% on employers in 2009 to fund the expanded program. It may impose the tax on each employer’s total payroll in 2008 or 2009—it has not yet decided on how it wants to proceed. The total tax paid by employers in 2009 to fund the expanded unemployment insurance program will then be either 10% of their 2008 or 2009 total payroll. All companies that were in operation in 2008 and employed labor will be required to pay the tax. Assume that labor is the only input of production in all firms that can be varied in 2009 and firms use other inputs as well that cannot be varied in 2009.

Which of the following statements correctly describe this situation in 2009?

_____9. If the tax was imposed on the firm’s 2008 payroll, its supply curve in 2009 would lie to the left of its supply curve in 2008.

_____10. If the tax was imposed on the firm’s 2009 payroll, its supply curve in 2009 would lie to the left of its supply curve in 2008.

_____11. If the price at which a firm could sell its output was the same in 2009 as in 2008 and the tax was based on the firm’s 2008 payroll, then the firm would hire the same amount of labor in 2009 as 2008.

_____12. If the price at which a firm could sell its output was 10% greater in 2009 than 2008 and the tax was based on the firm’s 2009 payroll, then the firm would hire the same amount of labor in 2009 as 2008.

_____13. If the price at which a firm could sell its output was the same in 2009 as in 2008, the firm would not shut down in 2009 under either plan.

_____14. If the price at which a firm could sell its output was the same in 2009 as in 2008 and the firm continued producing under either plan, then it would pay the same total tax whether the tax was imposed on its 2008 or 2009 payroll.

_____15. If the price at which a firm could sell its output was 10% greater in 2009 than 2008, the firm would pay the same total tax whether the tax was imposed on its 2009 or 2008 payroll.

[20] 3. Consider the rise in the price of oil per barrel that has occurred since 2002. Between 2002 and 2006 the price per barrel of oil in dollars, adjusted for changes in U.S. prices, increased from approximately $20 to $60. It then increased further, reaching a peak of around $140 per barrel in July 2008. Since July the price of oil has dropped sharply and is now below $70 per barrel.

Based on the discussion in class of why the price of oil increased from $20 per barrel in 2002 to $140 per barrel as of July 2008, which of the following factors could explain the fall in the price of oil since July of this year?

_____16. Since July 2008, the income elasticity of demand for products manufactured from oil in the economies of China, India, and the Middle East has increased to 1.5.

_____17. Investigations of the price elasticity of demand indicate that since July 2008 the price elasticity of demand for gasoline and other products manufactured from oil in the United States and Europe has fallen to .1.

_____18. Since July 2008 the U.S. economy and the economies of Europe have been in a pronounced recession.

_____19. The Organization of Petroleum Exporting Countries (OPEC) reduced its daily production of oil as of July 2008.

_____20. Since July 2008 pressure has been mounting in the United States and Europe to increase their domestic tax on gasoline, which oil-exporting countries expect will be implemented next year.