S.
Klepper, Economics 73-100, Fall 2008
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.
[50] 1.
Consider the fifth market experiment concerning short-run and long-run
equilibrium. Suppose that in round 2 of
the experiment, two out of every five sellers were offered a payment of $.99 if
they sold no output and three of out every five sellers were offered a payment
of $1.39 if they sold no output.
Furthermore, suppose that in round 2 buyers received a commission of
$.01 on each unit of output they bought whereas sellers received a commission
of $.01 per unit beginning with the fourth unit they sold (i.e., they earned no
commission on the first three units they sold). Assume that the experimental
setup of eight traders was repeated eight times, so there were 40 sellers and
24 buyers. All other aspects of the
experiment would have been the same. Which
of the following correctly describe round 2 of the experiment under these
circumstances assuming that the price established in round 2 is such that the
quantity demanded equals the quantity supplied?
Hint:
Derive the minimum price in round 2 at which each seller would be willing to
sell output and use this to analyze the price in round 2 where the quantity
demanded equals the quantity supplied.
_____1. The total quantity
demanded at every price in round 2 would have been greater than in the version
of the experiment conducted in class.
_____2. No seller would have
been willing to sell a unit of output for less than $.69 in round 2.
_____3. Every seller would
have been willing to sell output in round 2 at a price of $.75.
_____4. Buyers would have
each earned less profits in round 2 than in the version of the experiment
conducted in class.
_____5. Excluding the
commission, every seller in round 2 would have earned zero economic profit.
_____6. The price would have
been greater than $.79 in round 2.
_____7. All buyers would
have purchased three units of output in round 2.
_____8. Every seller would
have sold a unit of output in round 2.
_____9. Every seller that
was offered a payment of $1.39 if they sold no output in round 2 would have
sold four units of output in round 2 if they sold any output at all.
_____10. For every seller
that sold output in round 2, the price at which the seller sold output would
have exceeded the marginal cost of the last unit sold.
[30] 2. Consider the market for oil. Oil is produced in many countries and is
consumed in every country in the world. In
order to produce more oil, in each country oil that is more costly to extract
must be tapped. Consequently, in each
country the marginal cost of production rises as the quantity of oil produced
rises, causing the each country’s market supply curve to be upward
sloping. The market demand curve for oil
in every country is downward sloping, reflecting that buyers will purchase less
oil the higher its price.
Suppose that the costs of exporting oil are
negligible, so that it is no more costly for producers in any country to sell oil
to buyers in their own country or any other country. Furthermore, suppose that the world market
for oil is perfectly competitive in that there are many producers of oil
throughout the world, none of which can influence the price of its
transactions. With the costs of
exporting negligible, the price of oil is determined on the world market to
balance the total quantity demanded worldwide with the total amount produced
collectively in all countries. The price
of oil in every country is equal to the world price of oil.
If the quantity of oil demanded by buyers in a
country is greater than the quantity that producers want to supply, then all
domestically produced oil is consumed at home and the rest of the domestic demand
for oil is satisfied through imports. If
the quantity demanded in a county is less than the quantity supplied, then the
difference is exported to other countries. As of 2008 the U.S. consumed about
20% of the world production of oil and was a net importer of oil. Suppose
that in 2009 Congress imposes a large tax on buyers of gasoline, causing the
price of gasoline in the United States to double. Gasoline is the main product refined from
oil. Which of the following correctly predict the effect of the tax in the
short run?
Hint:
First analyze the effect of the tax on the price and output of oil in the
world.
_____11.
The world supply curve for oil will shift to the left.
_____12.
Total consumption of oil outside the United States will rise.
_____13.
Total production of oil outside the United States will not change.
_____14. Total consumption of oil in the
U.S. will fall
_____15.
Total profits earned by all oil producers, both in the United States and
elsewhere, will decline.
_____16. Total exports of oil to the
U.S. will fall
[20] 3. It is projected that in
the next year U.S. automobile producers will sell 2 million automobiles at a
price of $20,000 each. Unfortunately,
this will put each U.S. producer in a precarious position that might force them
into bankruptcy, in which case they would lay off many workers. Congress wants to prevent this from
occurring. It would like to find some
way to increase the total number of people employed in the industry in the coming
year. Which of the following policies
would achieve this objective? Assume
that labor but not all other inputs can be varied in the next year, the U.S.
automobile industry is perfectly competitive, and foreign cars are an imperfect
substitute for U.S. cars.
_____17. Impose a tariff
(i.e., a tax per automobile) on automobiles produced by foreign automobile
producers.
_____18. Subsidize U.S.
automobile producers, giving each a payment equal to 10% of their total payroll
last year.
_____19. Purchase one of the U.S. automobile producers and shut it down.
_____20. If the price of a U.S. automobile can be reduced to
$17,000, consumers would buy 2.3 million U.S. automobiles. Accordingly, Congress would keep track of all
buyers over the next year and if total purchases of U.S. automobiles by the end
of the year exceeded 2.2 million then Congress would give each buyer a subsidy
so that the net price of U.S. automobiles (i.e., the sale price minus the
subsidy payment)
equaled $17,000.