S. Klepper, Economics 73-100, Fall 2011

# 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.

[47] 1. Consider the fourth class experiment concerning supply.  Suppose a new technology was being developed that would reduce the amount of labor required to produce any level of output by 20% to 30%.  Thus, depending on how much saving was realized from the new technology, the second plant would require only 70% to 80% as much labor as the first plant to produce the same level of output.  The new technology could only be implemented in a new plant in which anywhere from 0 to 9 units of output could be produced.  Suppose that each producer in the experiment was able to build such a plant, so they had two plants to use in production. Assume that the fixed costs of the second plant were the same as the first plant, \$20, and once built, producers would have to incur this \$20 cost for the second plant whether or not they produced any output in the plant.

Suppose the price of labor and the price of output in each of the six rounds of the experiment were the same as in the version of the experiment conducted in class.  Assuming producers maximized their profits and the second plant required 70% to 80% as much labor as the first plant to produce any level of output, which of the following correctly describe the costs of the two plants, the amount of output producers would have produced in their two plants in each round, and the amount of labor producers would have hired in their two plants in each round?  Mark true for a correct statement and false for an incorrect one.

_____1. The average total cost of production at every level of output was at least 20% lower in the second plant than the first plant.

_____2. The minimum price at which producers were willing to produce a positive level of output was at least 20% lower in the second plant than the first plant.

_____3. In at least one round of the experiment, producers produced a positive level of output in the second plant but no output in the first plant.

_____4. Producers produced a positive level of output in the second plant in every round of the experiment.

_____5. In every round in which it was profitable to produce a positive level of output in the first plant, producers produced a positive level of output in the second plant.

_____6. In every round in which it was profitable to produce a positive level of output in the first plant, producers earned greater profits from the output they produced in the second plant than the output they produced in the first plant.

_____7. In every round in which it was profitable to produce a positive level of output in the first plant, producers produced an output in the second plant that was at least 20% greater than the output they produced in the first plant.

_____8. In every round in which it was profitable to produce a positive level of output in the first plant, the marginal cost of production of the last unit of output produced was greater in the first plant than the second plant.

_____9. In every round in which it was profitable to produce a positive level of output in the first plant, the quantity of labor producers hired in the first plant was greater than the quantity of labor they hired in the second plant.

`[20] 2. Consider the way movies are distributed.  Theaters commit to accept all the movies produced by a particular company before they know how popular the movies will be.  They must pay a fixed distribution fee for each movie that they receive from a production company, and then must decide whether to show the movie.  If they decide to show a movie, they incur the costs of projecting it, which are independent of the number of people that view the movie.  Theaters set their own ticket price for each movie based on demand for the movie. `

Assuming it is profitable for theaters to show all the movies they receive and will set a price for each movie that maximizes their profits, which of the following statements correctly describe this situation?  Mark true for a correct statement and false for an incorrect one.

_____10.  A theater should set a ticket price for each movie that just sells out the theater—i.e., at the chosen price the quantity demanded should equal the capacity of the theater.

_____11. If the price of tickets for a movie were such that the quantity demanded exceeded the capacity of a theater, the theater could not be maximizing its profits.

_____12. If the price of tickets for a movie were such that a theater did not sell out and the price elasticity of demand was greater than one, then the theater could not be maximizing its profits.

_____13. If the price of tickets for a movie were such that the income elasticity of demand was greater than one then a theater could increase its profits by lowering the ticket price for movies.

_____14. If the price of tickets for a movie were such that the price elasticity of demand were less than one, then a theater could not be maximizing its profits.

[33] 3. Suppose that over the last 15 years, Chile and Brazil experienced an average annual growth in real GDP of 9% per year, comparable to the Asian Miracles over the 30 or so years before 1990.  Suppose that in this period of time the population did not change in either country, both countries experienced a 8% growth per year in labor as more of the population worked, and capital increased by 9% per year in Chile and 12% per year in Brazil.  Furthermore, suppose the fraction of GDP paid to labor could not be determined exactly for either country but it was known to be greater than 0 and less than 1 in both countries and was greater in Chile than Brazil.

Which of the following statements concerning this situation are correct regardless of the precise fraction of labor paid to labor in either country?  Mark true for a correct statement and false for an incorrect one.

_____15. The growth in labor and capital in Chile and Brazil over the last 15 years contributed to at least 8% per year growth in the real GDP of both countries.

_____16. The fraction of the 9% growth in real GDP experienced by both countries that was due to growth in labor was greater for Chile than Brazil.

_____17. The residual annual growth in GDP attributable to technical change was greater in Chile and Brazil over the last 15 years than in the average Asian Miracle country over the 30 or so years prior to 1990 considered in class.

_____18. The residual annual growth in GDP attributable to technical change was less in Chile and Brazil over the last 15 years than in the average high income Western country over the 30 or so years prior to 1990 considered in class.

_____19. In Chile some part of its 9% annual growth in real GDP was due to technical change.

_____20. The residual annual percentage growth in real GDP attributable to technical change was greater in Brazil than Chile.