History III

PRINCIPLES OF MACROECONOMICS

QUIZ #1 – COVERING CHAPTERS 1-4

DUE BACK ON FEBRUARY 11TH

INSTRUCTIONS: Please show your work / explain your answers or you will lose credit. Please email the quiz answers by midnight to the TA’s Gmail address listed on the syllabus.

1. What is the economic problem? Why does scarcity affect everyone?

2. Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or why not?

3. The following table shows output per hour for Martha and Stewart who make gift baskets and potholders:

	Output per Hour
	Martha	Stewart
Gift Baskets	10	16
Potholders	26	24

What is the opportunity cost of a potholder for Martha? What is the opportunity cost of a potholder for Stewart? Who has a comparative advantage in producing potholders? Who has comparative advantage in producing gift baskets?

SCENARIO 1: Assume a desert island economy in which labor is the only scarce resource and labor can be used to gather food (coconuts) or to build huts. There are six equally productive individuals on the island. Each inhabitant can gather 25 coconuts in one day or build one hut in one day.

4. Refer to Scenario 1. Draw the production possibilities frontier of the trade-off between coconuts and huts.

5. Refer to Scenario 1. Assume that in one day, two huts were built and 75 coconuts were gathered. What does this situation depict?

6. Refer to Scenario 1. What would have to occur for three huts to be produced along with 100 coconuts?

7. A) What is the relationship between price and Quantity demanded and what it the relationship between price and Quantity supplied?

B) Why do we use the term “Quantity”?

C) What causes a change in Demand?

D) What causes a change in Supply?

E) Do changes in price of the good in question cause a movement or shift?

8. Please define a price floor and price ceiling and draw an example of each.

9. If a company has a monopoly on a particular product, what will happen to the consumer surplus and producer surplus and why?

10. Please list the type of non-price rationing mechanisms that occur when there are shortages in the market.

Refer to the information provided in Scenario 1 below to answer the following questions.

SCENARIO 1: Consider the market for generic soda, a product that only has “soda” on its label. We know that demand for generic soda falls when income increases, demand rises when the price of other soda increases, and that demand rises when the price of potato chips falls.

11. Refer to Scenario 1. Graph “soda” and explain the effect on equilibrium price and quantity on an increase in income. What type of good is “soda”?

12. Refer to Scenario 1. Graph “soda” and explain the effect on equilibrium price and quantity of an increase in the price of premium soda (ex: Pepsi). How are the goods related?

13. Refer to Scenario 1. Graph and explain the effect on equilibrium price and quantity of “soda” due to an increase in the price of potato chips. How are the goods related?

14. The U.S. market for rice is shown below.

The world price of rice is $12 per bushel and the U.S. can buy all of the rice that it wants at that price. The government places a tax on imported rice of $2 per bushel. Show the effect of this tax on the graph above. What will happen to the amount of rice the U.S. imports?

15. Let's take a look at two, real-world episodes in the market for gasoline and try to figure out why the price fluctuates so much.

a. In the summer of 2008, the price of regular gasoline in U.S. soared to over $4 per gallon. Then, in the fall of that year, the U.S. economy fell into a deep recession that significantly reduced consumers’ income. Did the supply or demand curve shift in this circumstance? What happened to the equilibrium price of gasoline? For this part of the question, assume no other changes in the market for gasoline.

b. By the summer of 2014, the price of regular gasoline in the United States was hovering around $3.50 per gallon. But innovation in oil extraction technology, such as fracking, reduced the price of crude oil significantly (crude oil the primary input in oil production). Did the supply or demand curve shift in this circumstance? What happened to the equilibrium price of gasoline? For this part of the question, assume no other changes in the market for gasoline.

Price

Supply

12

20

World Price

Demand

Quantity of rice (bushels)

QS

QD