S. Klepper, Economics 73-100, Fall 2009

# 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.

[42] 1. Consider a producer of oil that operates a plant extracting oil from the ground.  Due to anticipated future increases in the price of oil, the producer is considering the opening of a new plant in a region in which it is more difficult to extract oil because it is deeper in the earth. Suppose the cost of building the new plant is the same as the original plant but twice as much labor is required to produce any level of output in the new plant than the original one. The price of oil at which each of the plants can sell its output is the same.

Assuming that labor is the only variable input to production in the short run and the firm maximizes its profits, which of the following correctly describe the situation faced by the producer in the short run? Mark true for correct statements and false for incorrect ones.

_____1 At every level of output, the marginal cost of production will be half as great in the original plant as the new plant.

_____2. At every level of output, the average total cost of production will be twice as great in the new plant than the original plant.

_____3. If the producer did not open a new plant and wanted to double its output, it could do so by doubling the amount of labor it employed in its original plant.

_____4. If the price of oil were such that the producer produced a positive level of output in each plant, the producer would always produce more oil in its original plant than in the new plant.

_____5. If the price of oil started to fall, the producer would shut down the new plant before it shut down its original plant.

_____6. If the price of oil were such that the producer produced a positive level of output in each plant, the original plant would employ an amount of labor that was more than half the amount of labor employed in the new plant.

_____7. If the price of oil were such that the producer produced a positive level of output in each plant, the marginal cost of the marginal unit of output would be the same in the two plants.

_____8. If the price of oil were such that the producer produced a positive level of output in each plant, the amount of labor used to produce the marginal unit of output would be greater in the new plant than the original plant.

[33] 2.  Consider experiment 3 concerning demand.  Suppose that a technological breakthrough occurred that greatly improved good Y.  Consequently, consumers needed only 60% as much of good Y as previously to attain any particular level.  For example, if previously the combination of 1 unit of good X and 120 units of good Y enabled them to attain level 1, then after the technological breakthrough 1 unit of good X and 72 units of good Y would enable them to attain level 1.  Similarly, if previously 2 units of good X and 90 units of good Y enabled them to attain level 1, then 2 units of good X and 54 units of good Y would enable them to attain level 1 after the technological breakthrough.  Suppose all other aspects of the experiment were the same, including the prices of good X and Y and the budget in each round.

Which of the following statements concerning this problem are correct? Mark true for a correct statement and false for an incorrect one.

_____9. For the combinations of good X and good Y defining level 1, the willingness to pay of consumers for each unit of good X would be 60% as great as in the version of the experiment conducted in class.

_____10. In every round the consumer would choose a point on level 1 with seven or less units of good X.

_____11. In every round of the experiment, consumers would purchase a combination of good X and good Y from among the points defining level 1 with a greater number of units of good X than they purchased in the version of the experiment conducted in class.

_____12. In every round of the experiment, consumers would attain at least as high a level as they did in the version of the experiment conducted in class.

_____13. In every round, the willingness to pay for the marginal unit of good X purchased would be less than it was in the version of the experiment conducted in class.

_____14. In every round, the amount consumers had to pay for a unit of good X (in terms of the number of units of good Y they had to give up to get another unit of good X) would be 60% as much as on the version of the experiment conducted in class.

_____15. At every price of good X, the demand curve for good X at an income of \$180 would lie to the left of the demand curve for good X at an income of \$90.

[25] 3. In recent years both China and India have experienced tremendous growth. Suppose that over the last ten years the real GDP of China has grown by an average of 10% per year and the real GDP of India has grown by an average of 8% per year. Furthermore, suppose that in both countries the total population did not change but over the last ten years the amount of labor increased by an average of 9% per year in China and 7% per year in India, reflecting a large increase in the proportion of the population in both countries engaged in work.  Suppose that both countries also had high savings rates, causing the amount of capital used in production over the last ten years to rise by an average of 10% per year in India and 15% per year in China.  Last, suppose that over the last ten years the fraction of GDP paid to labor was the same in India as it was in China.

Which of the following statements concerning this situation are correct?  Mark true for a correct statement and false for an incorrect one.

_____16. The average annual percentage growth in real GDP due to the growth in capital must have been greater in China than India over the last 10 years.

_____17. The average annual percentage growth in real GDP due to technical change over the last ten years was less than 1% in both China and India.

_____18. The average annual percentage growth in real GDP due to technical change must have been greater in India than China over the last ten years.

_____19. The average annual percentage growth in real GDP due to technical change was greater in the last ten years in India and China than in any of the richest Western countries since the end of World War II.

_____20. The average annual percentage growth in real GDP due to technical change was greater over the last 10 years in India and China than in any of the so-called “Asian Miracle” countries in any 10 year period since the end of World War II.