Economics 320, Midterm Examination, Spring 2001 – Professor Hackett

Name: ______________key________________

Part I: Diagrammatic analysis and interpretation (10 points each). Be sure to answer each part of each question.

1. Suppose that apartments in Eureka are a substitute for apartments in Arcata, and that a large number of new apartment complexes are built in Eureka. (a) Carefully draw one fully labeled supply/demand diagram for the Arcata apartment market and (b) show how the increase in the number of apartments in Eureka will change equilibrium price and quantity in the competitive market for apartments in Arcata.

a. Draw S/D diagram as indicated.

b. See logical steps below for a way to approach answering this question:

1. Draw S/D diagram on scratch paper for the EUREKA rental market. Show how an increase in supply in Eureka causes the equilibrium apartment rent to fall.

2. Now draw a S/D diagram on scratch paper for the ARCATA rental market. Since apartments in Eureka are a substitute for those in Arcata, a drop in the price of Eureka apartments causes an inward shift in the Arcata demand for apartments. The result is a lower equilibrium price and quantity of apartments in Arcata.

3. Transfer your drawing from #2 to this space and indicate with arrows the inward shift in demand and the decline in equilibrium price and quantity.

2. Suppose that before the new apartments were constructed in Eureka, the City of Arcata had a rent control ordinance in force that resulted in apartment rents being significantly below the competitive market equilibrium rental price. Carefully draw one fully labeled supply/demand diagram for the Arcata apartment market and (a) show how rent control affects the competitive apartment market in Arcata (including any shortages or surpluses that may occur), and (b) show how the increase in the number of apartments in Eureka will change the impact of rent control in Arcata (including any shortages or surpluses that may have occurred).

a. Draw a S/D diagram for the Arcata apartment market. Draw a horizontal line for the rent control price. Have this line be significantly below the equilibrium price. Show that at the rent control price quantity demanded is larger than quantity supplied, resulting in a SHORTAGE.

b. See logical steps below for a way to approach answering this question:

1. Reproduce your diagram for part a of question 2 above. Show demand shifting inward as in part b of question 1 above.

2. With demand shifting inwards, show that the SHORTAGE you identified in part a of question 2 above is now EITHER smaller OR totally eliminated. Show this as clearly as possible.

3. (a) Carefully draw one fully-labeled supply/demand diagram for a labor market in which the supply of labor comes from high school graduates who could not afford to go to college. This labor market has a minimum wage in force that is significantly higher than what would otherwise be the competitive equilibrium wage rate. (b) If state government eliminates expensive college tuition and relaxes admission requirements, show how this policy will affect your diagram in part (a) above, including the impact of the minimum wage policy (such as shortages or surpluses that may have occurred).

a. Draw S/D diagram as indicated. Be sure to label axes of the diagram for a labor market, not for a good or a service. Indicate equilibrium wage and quantity of labor. Draw in the minimum wage as a horizontal line significantly above the equilibrium wage rate. Show that quantity supplied at the minimum wage is significantly larger than quantity demanded, leading to a SURPLUS of labor (unemployment).

b. Since the labor supply in this particular labor market comes from high school graduates who could not afford to go to college, if college becomes cheaper, many of these people will exit the labor market and attend college, causing the labor supply curve to shift inwards to the left. The inward shift in the labor supply curve EITHER causes the surplus to become smaller OR to be completely eliminated.

Part II: Matching (2 points each) There is one uniquely correct match that connects a word or phrase on the left with a description on the right. Only clear and unambiguous answers can be marked as correct.

Word or Phrase	Description
a. Scarcity	__F__ Occurs when price is below equilibrium in a competitive market.
b. Willingness-to-pay	__O__ The sum of all employed and unemployed workers.
c. Opportunity cost	__G__ The portion of the business cycle in which the economic growth rate is highest, inflation tends to be high, and unemployment rates are low.
d. Economics	__H_ Occurs when price is above equilibrium in a competitive market.
e. Business cycle	__A__ A condition that results from the lack of available resources, goods, or services to satisfy all desired uses.
f. Shortage (excess demand)	__C_ When a choice must be made, this is the value of the next-best alternative that must be given up in order to obtain something else.
g. Peak	__K__ The demand for labor is derived from this.
h. Surplus (excess supply)	__R__ A good having the following properties (i) It is difficult to exclude people from using it, and (ii) use by one does not subtract from what is available to others.
i. Trough	__E__ Alternating periods of economic growth and contraction over time.
j. Marginal physical product of labor	__D__ The study of how best to allocate scarce resources, goods, and services among competing uses.
k. Marginal revenue product of labor	__B__ The combination of consumer preference and income that forms the basis of consumer demand.
l. Equilibrium	__L__ Occurs when price causes quantity supplied to equal quantity demanded in a competitive market.
m. Monopoly	__I__ The portion of the business cycle in which the economic growth rate is lowest, inflation tends to be low, and unemployment rates are high.
n. Economic growth rate	__M__ A firm that produces the entire market supply of a particular good or service.
o. Labor force	__P__ The rate of increase in the average price level.
p. Inflation rate	__S__ A good having the following properties (i) It is difficult to exclude people from using it, and (ii) use by one subtracts from what is available to others.
q. Product labeling laws	__T__ A government intervention that can make markets work better when positive externalities lead to an inadequate quantity being produced.
r. Public good	__Q__ A government intervention that can make markets work better when consumers are poorly informed of product quality.
s. Common-pool resource	__J__ The increase in output caused by an increase in labor.
t. Subsidy	__N__ The rate of increase in real GDP.

Part III. Computational analysis (10 points each). Be sure to answer each part of each question.

For the next two questions, suppose that during 2001 the consumer price index (CPI) increased from 174 to 184 (1982 = 100).

1. Using the CPI data above, compute the rate of inflation for 2001. Show your work.

[(184-174)/174]*100 = 5.75%

2. Suppose that during 2001 your nominal income increased from $40,000 to $42,000. (a) Did your real income increase or decrease? (b) Compute the amount by which your real income increased or decreased. Show your work.

a. Decreased.

b. Beginning 2001 real income = $40,000/1.74 = $22,988.50. Ending 2001 real income = $42,000/1.84 = $22,826.09. Therefore real income declined by $162.41.

3. Suppose that the following data describe a nation's population:

	Year 1	Year 2
Population	400 million	403 million
Labor Force	220 million	225 million
Unemployment Rate	6 percent	6 percent

a. How many people are unemployed in each year? Show your work.

Year 1: (220 million x 0.06) = 13.2 million.

Year 2: (225 million x 0.06) = 13.5 million.

b. How many people are employed in each year? Show your work.

Year 1: 220 million - 13.2 million = 206.8 million.

Year 2: 225 million - 13.5 million = 211.5 million.