2019_prelim_1_solution

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Cornell University *

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1120

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Economics

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May 15, 2024

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1 Econ 1120-03: Introductory Macroeconomic Theory Preliminary Exam 1 (March 5 th , 2019) Academic Integrity: This course strictly follows Cornell's Code of Academic Integrity. Violations will be taken seriously. You are not supposed to either seek help from any sources (other than a simple hand held calculator) or offer help to other students. Please initial in the box to indicate that you understand the Academic Integrity policy: NOTE: Only SIMPLE Hand-held Ordinary CALCULATORS are allowed during examinations. No questions can be asked about the questions during the Exam. If you need to leave the room or have a question please raise your hand and a proctor will come to you. In case you have to leave the exam room a proctor will hold on to your exam papers while you are away from the room. No cell phones, I-Touch/Tunes devices, or similar devices with graphing and/or web browsing, text reading capabilities or "apps" are allowed during the exam. No notes or books, and please refrain from talking to each other during the exam. Please answer all questions. Label your diagrams and show your mathematical derivations clearly. Please write your final answers down in the boxes/spaces provided to ensure proper credit. This Exam has 13 pages. Name: ID#: NetID:
2 SCORES (FOR TA USE ONLY) Q1 Q2 Q3 Q4 Q5 Total Score: Q1. Please circle the correct choice for the following 17 questions. (2 pts each) i. There are only two producers in Neverland: Amy and John. Amy works for 1 hour, and John works for 1 hour as well. They produce two goods: muffins and scones. It takes Amy 15 minutes to bake a muffin, and 25 minutes to bake a scone. It takes John 10 minutes to bake a muffin, and 30 minutes to bake a scone. Which one of the following statements is true? A. John has an absolute advantage in the production of both goods. B. Amy has a comparative advantage in the production of scones. C. John has an absolute advantage in the production of scones. D. John has a comparative advantage in the production of scones. E. John and Amy would be unable to mutually benefit based on the theory of comparative advantage. ii. Production inefficiency occurs: A. Only when an economy produces outside its PPF. B. Only when an economy produces at the wrong point on the PPF. C. Only when an economy produces underneath its PPF. D. Either when an economy produces outside its PPF or when the economy is producing the wrong combination of goods on the PPF. E. Either when an economy produces underneath its PPF or when the economy is producing the wrong combination of goods on the PPF. iii. Suppose Jack and Lucy are two producers of cake and muffin in Ithaca. It takes Jack 8 hours to bake a cake and 1 hour to bake a muffin. It takes Lucy 5 hours to bake a cake and 2 hour to bake a muffin. If they decide to produce and trade cakes with muffins between themselves, what is the terms of trade that they accept? A. Between 1/8 cakes for one muffin and 1/5 cakes for one muffin B. Between 5 cakes for one muffin and 16 cakes for one muffin C. Between 2.5 cakes for one muffin and 8 cake for one muffin D. Between 1/8 cakes for one muffin and 2/5 cakes for one muffin E. Between 5 cakes for one muffin and 8 cakes for one muffin. NetID: (Recommended)
3 iv. Refer to the information provided in the figure below to answer the following question. The opportunity cost of producing a bushel of alfalfa in the U.S. is: A. The same as that in Canada B. Half as much as that in Canada C. One third as much as that in Canada D. Twice as much as that in Canada E. Three times as much as that in Canada v. Refer to the information in the table to answer the following question. Trade will flow in both directions between countries only if the exchange rate for the euro in dollars is between: US Belgium Raspberries $9 27euros Chocolate $24 18euros A. $0.33 and $0.67 B. $1.50 and $3 C. $0.33 and $1.33 D. $0.33 and $1.67 E. $0.75 and $3
4 vi. Suppose that the supply function for chocolate pudding is typical and is written as follows: Q S = 100 – 2A + 3B – 4C + 5F. Which one of the following statements is most likely to be true? A. Variable B could be the price of chocolate used to make the pudding. B. Variable C could be the price of the plastic bowls that the pudding is sold in. C. Variable C could be the price of chocolate pudding. D. Variable C could be the number of firms making chocolate pudding. E. Variable A could be consumers’ average income level. vii. Which one of the following will decrease the demand for large powerful gas consuming automobiles assuming large automobiles are a normal good? A. A rise in the price of camping trailers and leisure boating crafts that owners tow around to use. B. An increase in consumers’ income. C. A rise in the price of large gas consuming automobiles. D. A fall in the price of gasoline. E. A rise in the price of small fuel efficient automobiles. viii. Consider the market for orange juice. Suppose two events occurred last week. During the course of this past week, the price of oranges (used in the production of orange juice) decreased. At the same time, the price of coke (a substitute for orange juice) doubled. What are the likely effects of these TWO events on the equilibrium quantity Q* and price P* of orange juice? A. Both Q* and P* decrease. B. Both Q* and P* increase. C. Q* decreases for sure, while P* might increase, decrease, or remain the same. D. Q* might increase, decrease or remain the same, while P* increases for sure. E. Q* increases for sure, while P* might increase, decrease, or remain the same. ix. Recently, some medical studies have suggested that consuming dark chocolate reduces the risk of cancer. At the same time, dark chocolate producers face rising energy and cocoa bean costs. Which one of the following predictions is correct? A. Both the equilibrium price and quantity will increase. B. Both the equilibrium price and quantity will decrease. C. Market price for dark chocolate will not change. D. The market price of dark chocolate will increase but the equilibrium quantity could go up or down. E. The equilibrium quantity of dark chocolate will increase but the equilibrium price could go up or down.
5 x. The table below shows the daily demand and supply for lollipops in Ithaca. If there is a price floor of $3 per pound imposed in this market, the quantity traded will be Price ($/lb) Quantity demanded(lbs) Quantity supplied(lbs) 1 100 5 2 80 20 3 63 42 4 50 50 5 42 58 6 35 64 7 32 68 8 30 70 A. 42 B. 63 C. 21 D. 50 E. None of above. xi. If 2017 is taken as the base year, and the 2018 GDP deflator index is reported as 75, then between 2017 and 2018 A. There was inflation of 75% B. There was deflation of 75% C. There was inflation of 25% D. There was deflation of 25% E. There was stagflation of 75% xii. Suppose that the implicit GDP deflator index in year 3 is 150 using year 1 as a base year. This means that the prices of goods and services are A. 150% higher in year 3 than in year 1. B. 50% higher in year 3 than in year 1. C. 1.5% higher in year 3 than in year 1. D. 0.5% higher in year 3 than in year 1. E. 0.25% higher in year 3 than in year 1.
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