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ECON 2367: Midterm

Joseph Rossetti

11/08/17

Pick 2 of the following three questions to answer. You should write your answers using complete paragraphs, but you do not need to write your answers as an essay (you do not need an argument, thesis, introduction, conclusion). You should use diagrams and figures wherever possible to clarify your explanation, and some questions may specifically ask you to do so. You do not need any outside sources or citations (this is an exam, not a research paper).

All supply and demand graphs should be completely labeled, and should have an accompanying narrative that explains what is going on in the graph. I will grade on correctness and completeness.

Type your responses and turn it in electronically.

Question 1. Cost of Living Indexes

• Explain the goal of a cost of living index: what does it measure (explain the theory), what is it used for by economists and the government (give examples)?

• Is the CPI a cost of living index, or does it have a bias?

• Explain three sources of bias in cost of living indexes, use supply and demand graphs to explain at least one of the three sources of bias, and mention the possible sizes of the biases.

Question 2. Wal-Mart and economic efficiency

• Explain the success of Wal-Mart: what is its competitive advantage (what is competitive advantage?), and how does its pattern of growth relate to its competitive advantages?

• What is productive efficiency? Does Wal-Mart have any economies of scale, scope, or density, are these related to its competitive advantage? What do these economies imply about the productive efficiency of Wal- Mart relative to firms that were its competitors?

• Finally, what is allocative efficiency? Does Wal-Mart’s market power in- crease or decrease allocative efficiency? Use a supply and demand graph to illustrate the normative issues with market power (its costs or drawbacks).

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Question 3. Impact of sports arenas

• How are sports teams and leagues able to convince local governments to build or finance stadiums? Why do owners want new stadiums? Who pays for sports stadiums?

• What is the estimated impact of sports arenas on local economies? Are there any non-monetary impacts to consider? Are sports teams a major part of local economies, why or why not?

• Explain local substitution as it relates to a sports arena? Explain how local substitution generates an opportunity cost. Use a supply and demand graph to illustrate how demand elasticity is related to spending on goods.

• Explain leakages and how they effect the multipliers on spending at dif- ferent locations within an economy.

• Provide a walk-through of the costs and benefits of a new sports arena.

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