ECONOMIC QUESTIONS

Final Examination ECONOMICS 201: Introduction to Microeconomics Frederick John Oerther III PhD Economics Assistant Professor of Economics Western Oregon University Monmouth, OR USA 97361 Email: ​[email protected] Campus Office: West House 210 December 2, 2015 This exam is worth 50% of your final grade, marked on a scale of 500 points possible. ​ Please answer Number One, Two, Three, and Number Four ​; and ​answer any three of the remaining questions ​. provide comprehensive answers to each of the five questions given below. Generally speaking, your goal is to demonstrate that you have thoughtfully and logically considered the materials which we have studied, both in the readings and the classroom discussion. Your work is due in my office (West House 210) - no later than 4:00pm Tuesday December 8th. No late exams will be accepted. Please turn in typed work only. The graphs can be hand drawn. :P Thank you. I hope you all have a blessed and happy holidays.

ANSWER NUMBERS ONE THROUGH FIVE: NUMBER ONE [70 points]. ​Using the production possibilities numbers for FRANCE and GERMANY provided below, please answer the following questions: (1) Which country has the comparative advantage in which item? (2) Is it rational for GERMANY to trade with FRANCE? (3) What hypothetical factors might prevent trade between the two countries? (4) When they go to make an exchange, what will keep GERMANY from over-charging FRANCE? {extra mile: draw the graph, use it to help you with the problem}

WINE ZINC FRANCE 900 300 GERMANY 1200 2100

NUMBER TWO [70 points].​ iPHONES. Suppose there is market for iPhones (iPs). Consider the following influences on the market for iPs: A. texting, email, and digital communication become more popular B. the income of the public decreases C. the price of an Android phone decreases D. the prices of cell phone apps decreases E. the sales tax imposed on the purchase of consumer electronics decreases F. technological innovations make cell phones more efficient and reliable G. the profitability of investing in the makers of iPhones, Apple, decrease ​Use the Supply and Demand model​, including the graphic presentation, to explain what happens in the market for iPhones under ​ each of the following three scenarios ​:

I. A and F occur at the same time II. B and G occur at the same time III. C and E occur at the same time

NUMBER THREE [70 points]. ​Friendship is a delight in life. Having other people with whom one can be close, but whom one is not affiliated by birth, adds variety and companionship to our existence. There is a real sense in which one is closer emotionally and spiritually with one’s friends than one is with their own family. Use the microeconomic idea of Rational Self-Interest to describe how people go about finding, screening, and the selecting their friends. How do people decide what burdens will be shouldered and what benefits will be shared within different “Friendships”? What happens when one comes into conflict with one’s friends - perhaps over a serious difference of opinion about religion, politics, or cultural matters? Does economics suggest that people will terminate those friendships and move on? What if you and your friends are getting along fine, but a bitter and quarrel breaks out between two of your friends so that they terminate their friendship in a way that forces you to pick which of them you are going to continue to associate with and which you are going to lose as a friend? How does economics suggest your decision would be made? How do you know who your true friends are? {Prompt: feel free to use any other basic Principles of Economic Thinking in formulating your answers as well.}

NUMBER FOUR [70 points]. ​Consider the data on gasoline prices provided below. Use the Supply and Demand model to describe some possible components of these differences in gasoline prices from city to city. What might explain the range of price offerings? Feel free to expand upon the dataset provided to enrich your answers. [source: http://www.fueleconomy.gov/FEG/gasprices/states/index.shtml​] (note: these prices were all collected on November 11, 2015 at about 4pm EST)

lowest highest Chicago IL $2.11 $3.69 Greensboro NC $1.88 $2.65 Houston TX $1.69 $2.89 Salem OR $2.19 $2.49 Miami FL $2.05 $3.89 New York NY $2.07 $3.73 SD CA $2.47 $4.39 SF CA $2.45 $5.03 LA CA $2.53 $4.59 Salem OR $2.19 $2.49 Seattle WA $2.20 $3.89

source: ​http://www.portlandgasprices.com/retail_price_chart.aspx

NUMBER FIVE [70 points]. ​In the United States, there is perennial political agitation to increase the minimum wage. The current federal minimum wage rate is $7.25 per hour. The state-wide minimum wage rate in California will increase from $9.00 to $10.00 per hour on January 1, 2016. Increases in city government mandated minimum wages to $15 per hour have been proposed in New York, Los Angeles, Seattle and other places. Suppose the equilibrium wage rate which would prevail in an unregulated free-market for unskilled labor in the U.S. might be approximately $5 per hour. Use the Supply and Demand model to explain what consequences - intended and unintended - would occur in the market for unskilled labor in the U.S. if the minimum wage were increased substantially. Who will benefit and who will be harmed by such a policy? Speculate briefly on what dynamic economic and social moves might attend the increase in the minimum wage if people decide that it is in their rational self-interest to break this law? How does the relative elasticity of demand for unskilled labor influence the consequences which would result from a significant increase in the minimum wage rate? ANSWER ​ANY TWO OF YOUR CHOICE​ OF NUMBERS SIX THROUGH EIGHT: NUMBER SIX [75 points]. ​Write an essay informed by your study of microeconomics in response to this set of prompt questions: How important is money to you? Describe the ways in which money is an important element to success in life. Is money the measure of a successful life, or of one’s worth as a person? How will you know when you have enough money, that is, what will be the signal which indicates you have “enough”? NUMBER SEVEN [75 points]. ​The accumulation of public debt by the federal government has grown over the years, and the increased size of federal budget deficits in both absolute and in percentage terms has accelerated especially in the last 15 years. As the preponderance of this debt matures, the U.S. Congress will likely have to face the prospect of increasing taxes. Use the Supply and Demand model and the concept of elasticity to compare two revenue-generating proposals: (1) a federal sales tax on final goods & services (including food, gasoline, clothing, automobiles, electronics, and medicine), and (2) a combination of increases in personal income taxes, corporate income taxes, and capital gains taxes. For each proposal, please explain (A) whether the tax will raise significant amounts of revenue for the government, (B) who will shoulder the burden of the tax (i.e. who will actually pay the tax), and (C) what will happen in the economy over time as a result of these taxes.

NUMBER EIGHT [75 points]. ​Consider the results of our ISSUES SURVEY presented below. Arguably the results describe the preferences of the American public concerning the creation of public goods and reduction of public bads which they would like the government to produce. Use your study of microeconomics to describe some of the externalities which accompany these “public goods,” and why the Supply & Demand apparatus of the capitalist marketplace will not produce the optimum quantities of these public goods when considered from the standpoint of the well-being of society as a whole. When there are “market failure” problems because of externalities situations, will these automatically be solved by having government tackle them? Explain. There are over 300 million Americans; what are some of the difficulties associated with “aggregating” (e.g. adding up and averaging) the preferences for public goods across a great many people? ISSUES SURVEY points percentage intense

of total preference ALCOHOL & DRUG ABUSE 22 3.41 CLIMATE CHANGE 34 5.27 DISASTER PREPARATION 16 2.48 x DISTRIBUTION OF INCOME 34 5.27 x DOMESTIC VIOLENCE 11 1.71 GOVERNMENT ABUSE OF POWER 48 7.44 GOVERNMENT CORRUPTION 50 7.75 xx GOVERNMENT DEBT 41 6.36 GUN VIOLENCE 29 4.50 x HOMELESSNESS 30 4.65 IMMIGRATION 34 5.27 x THE MACROECONOMY 27 4.19 PARENTING 12 1.86 POLLUTION 13 2.02 PRIVACY 14 2.17 PUBLIC SCHOOLS 70 10.85 xxxx RACISM 29 4.50 x SEXISM 17 2.64 TECHNOLOGICAL DEPENDENCE 7 1.09 TERRORISM 98 15.19 xxxxxxx YOUTH ALIENATION 2 0.31 other (please specify) HEALTH CARE 2 0.31

LGBTQ EQUALITY 2 0.31 SMALL BUSINESS 1 0.15 TEEN SUICIDE 2 0.31

total 645 100.00 [note: PROMPT: Allocate 10 points across these issues according to their importance. the survey included 65 students of USA citizenship. intense preference = a student who gave 4 or more points to one issue.] EXTRA CREDIT QUESTION [25 points]

[Note: This question is entirely voluntary. The points earned from this question by any students will not be used in calculating the curve or grade scale for the course, so that, not doing this question will have no adverse effect upon your grade.] Please write an essay impelled by the following prompt: THE 9-11-2001 PROMPT On December 8​th​ 1941, President Franklin Roosevelt came on the radio and addressed the people of the United States. He began, “Yesterday, December 7, 1941 - a day which will live in infamy - the United States of America was suddenly and deliberately attacked by naval and air forces of the Empire of Japan.” He went on to ask the Congress to declare that a state of war existed between America and Japan. Of the World War Two generation, it is common that virtually everyone remembers where they were when they first heard of the Japanese attack which propelled the U.S. into the war. On Friday November 22​nd​, 1963, at 12:30pm CST, President John F. Kennedy was shot as his motorcade proceeded through Dallas, Texas, he died almost immediately afterwards. The Presidential trip to Dallas was not being covered directly by the news media. A private citizen, Mr. Abraham Zapruder, caught one view of the assassination on his hand-held movie camera. Edited versions of stills from this film were shown on network TV news programs after they became available. Again, of the people of age at the time, most can recall vividly where they were, what they were doing, and how they felt as they watched the news reports on TV announcing of the death of President Kennedy. Recall where you were on the morning of Tuesday September 11​th​, 2001. What were you doing? What did you think when you first heard the news of the attacks? Were you afraid at first? When you were able to get to a TV, what impression did the images of the falling World Trade Center towers and the Pentagon burning have upon you? Do you recall things that your elders, teachers, parents were saying about what was being witnessed at that time? As the days after the attacks turned into weeks and then months, did you become less or more afraid of terrorism against the U.S.A.? Explain. What lasting impression, if any, have the events of 9-11-2001 had upon you? Until the on-going coverage of the 9-11 attacks, the coverage of the Kennedy assassination was the longest continuous news broadcast in TV journalism history. What do you think is of importance about the fact that most of us learned about the 9-11 events from TV news?

iPHONES Suppose there is market for iPhones (iPs). What happens in the market for iPs if:

A. texting, email, and digital communication become more popular B. the income of the public decreases C. the price of an Android phone decreases D. the prices of cell phone apps decreases E. the sales tax imposed on the purchase of consumer electronics decreases F. technological innovations make cell phones more efficient and reliable G. the profitability of investing in the makers of iPhones, Apple, decrease

iPhones KEY

A. tastes & preferences: Demand - - - > P and Q B. if iPs are normal good: Income - - - > Demand - - - > P and Q C. Android phones are substitute: P substitute - - - > Demand - - - > P and

Q D. apps are complements: P complement - - - > Demand - - - > P and Q E. taxes are a cost of production: Tax - - - > Supply - - - > P and Q F. technological advances reduce the cost of production: Supply - - - > P

and Q G. profitability of investing in Apple makes other investments more preferred:

Supply - - - > P and Q iPhones more complex problems; consult the previous list of possible changes and decide what happens in the market for iPhones if:

I. A and F occur at the same time II. B and G occur at the same time III.C and E occur at the same time

KEY I. A only D effect only - - - > P and Q

F only S effect only - - - > P and Q A and F together net effect - - - > ? no change in P and Q II. B only D effect only - - - > P and Q G only S effect only - - - > P and Q B and G together net effect - - - > ? no change in P and Q III. C only D effect only - - - > P and Q E only S effect only - - - > P and Q C and E together net effect - - - > P and ? no change in Q -------------------------------------------------------------------------------------------------