Your Name: Exam #1: 23 Sep 2003 Econ 200 David Reiley

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1 Your Name: Exam #1: 23 Sep 2003 Econ 200 David Reiley You have 75 minutes to take this exam. There are a total of 100 points possible, plus one 10-point extra-credit question. Please make sure to pace yourself, so that you answer all questions, even incompletely. I do give partial credit for incomplete work, but I give zero credit for blank pages. 1) (4 points) The United States produces both automobiles and computers more efficiently than Mexico. Nevertheless, it is possible that both nations would benefit from trade in these items. The reason for this is: a) The law of comparative advantage. b) The inflation-unemployment tradeoff. c) Externalities. d) The cost disease of personal services. e) Attempts to repeal the law of supply and demand. 2) (4 points) The GDP per person in the United States is closest to: a) $37,000 b) $370,000 c) $3,700,000 d) $370,000,000 e) $3,700,000,000,000 3) (4 points) When a city imposes a $0.10 per cup tax on espresso drinks (see the New York Times article attached to the back of this exam), which of the following is most likely to happen? a) The equilibrium quantity of cappuccinos will increase. b) The consumer price of cappuccinos will decrease. c) The demand curve for cappuccinos will shift to the right. d) The supply curve for regular drip coffee will shift to the right. e) The demand curve for regular drip coffee will shift to the right. 4) (4 points) Farmer Jones is currently producing 10,000 bushels of wheat per year. At this level of output, the marginal physical product of labor is 10 bushels per hour worked, and the marginal physical product of seed is 30 bushels per pound of seed. Workers cost $6 per hour, and seed costs $12 per pound. Farmer Jones should: a) Produce less wheat. b) Buy only seed. c) Buy more seed and less labor. d) Buy more labor and less seed. e) Maximize his opportunity cost of producing wheat. 5) (4 points) Diamonds cost considerably more per pound than water does, even though water is considerably more valuable for human life. The most reasonable explanation for this seeming paradox is: a) Diamonds generate greater total utility but less marginal utility. b) Diamonds generate greater marginal utility but less total utility. c) The utility of water is a meaningless concept. d) Diamond production involves economies of scale. e) Ocean water can be desalinized to produce fresh water, but only at very great cost. 1

2 6) Suppose that the weekly demand for gasoline in Phoenix iss: Q = P And suppose the supply curve for gasoline in Phoenix can be represented as: Q = P Here, prices are measured in dollars, and quantities are measured in thousands of gallons. a) (10 points) Graph the supply and demand curves. What are the equilibrium price (to the nearest cent) and quantity in this market? b) (5 points) Would you say that demand is more elastic than supply, or less elastic than supply? Explain your reasoning. 2

3 c) (5 points) Now suppose that due to the burst of a pipeline, the supply curve shifts by 100 thousand gallons to the left, so that we now have a supply curve of Q = 200 P. Calculate the new equilibrium price (to the nearest cent) and quantity. Explain why the new equilibrium quantity does not reduce by exactly 100 thousand gallons. d) (5 points) Suppose that Arizona had a price-gouging law that forbade any gasoline price increases of more than 10% per week. What would happen in the week after the pipeline burst? Be as specific as you can about prices and quantities. 3

4 7) Bellas Refrigeration finds that its total costs for producing freezers vary as follows: Freezers (in thousands) Total Cost (in thousands of dollars) 10 8, , , , , , , , , ,000 a) (10 points) Over what levels of output are Bellas Refrigeration s returns to scale increasing, decreasing, and constant? Explain. b) (10 extra-credit points) Suppose that Bellas faces completely elastic demand, so that it can sell as many freezers as it wants at a price of $800 per freezer. How many freezers should Bellas choose to produce? What will be its total profit? 4

5 8) Leopold Bus Company runs daily service between Bigcity and Tinytown. It calculates that the cost per trip (wages, gas, insurance, payments on loans, etc.) is $140. Leopold sells the bus tickets for $5 each. The buses hold 40 people, but are usually just threequarters full. Leopold is considering offering half-rate tickets to students, on a standby basis. a) (5 points) Currently, with the buses three-quarters full, what is the average cost per passenger? b) (5 points) Does it make sense to offer the student standby tickets at $2.50 each? Explain why or why not. 5

6 9) Attached to this exam is an article about the proposed latte tax that was defeated in a Seattle referendum last week. The article may be useful in answering the following questions: a) (5 points) How does this article illustrate the concept of scarcity? What is the opportunity cost for the city of rejecting the tax proposal? b) (5 points) As discussed in the article, the Economic Opportunity Institute estimated the tax revenue for this proposal to be $6.5 million annually. How many espresso drinks are they predicting will be sold in the city per year? 6

7 c) (5 points) The population of the greater Seattle area was estimated in 2002 at 2.5 million. (This figure includes not just the 560,000 who live in the city proper, but also the residents of the suburbs.) Use your answer to part (b) to compute the approximate number of espresso drinks consumed per person per year in Seattle. Explain whether this figure seems reasonable to you (is it of the right order of magnitude?), and why. d) (5 points) Note that the city and the Economic Opportunity Institute (EOI) came up with rather different estimates for the tax revenue: the city predicted only half as much revenue as the EOI did. Give two different reasons why these estimates might differ. 7

8 e) (5 points) Would the revenue from the tax be greater if espresso drinks were inelastically demanded, or if espresso drinks were elastically demanded? Explain your reasoning. f) (5 points) The article mentions that the sales tax on restaurant meals in Seattle is higher than the sales tax on other goods. Do you think that a tax on restaurant meals is better or worse for the city than a tax on espresso drinks? Explain your reasoning. g) (5 points) If the 10-cent latte tax were imposed, would you expect the consumer price of a cappuccino to go up by an amount less than 10 cents, equal to 10 cents, or more than 10 cents? Explain your reasoning. 8

9 September 17, 2003 Voters in Seattle, Where Coffee is King, Reject a Tax on Espresso By SARAH KERSHAW SEATTLE, Sept. 16 A measure to levy a 10-cent-per-cup tax on espresso in what is known as the coffee capital of the nation was overwhelmingly rejected tonight by Seattle voters. With results from 59 percent of the precincts reporting and all the mail-in ballots, which made up a large portion of the votes cast in today's primary, 68 percent of the voters opposed the tax and 32 percent voted for it. The tax, which would have been the first of its kind in the nation, would have charged an extra dime for any coffee beverage containing a half-ounce or more of espresso but not apply to regular drip coffee. The revenue was intended to help finance early childhood education in the city, which is the birthplace of the Starbucks Corporation and scene of virtually constant coffee drinking. Some Seattle voters, typically willing to support taxes to raise money for social services, said it came down to a difficult choice between the many coffee shops that could be hurt by the tax and the beneficiaries of the revenue, young children. "There were as many reasons to vote for it as there were to vote against it," said Joe Brown, 25, who was drinking espresso tonight at Caffe Ladro in Seattle's Capitol Hill neighborhood and voted against the measure. "But I had a feeling it was going to go down." The espresso tax, formally called Initiative 77, would have been the first of its kind in the nation, according to the National Coffee Association, based in New York City, which tracks legislation and other developments related to the coffee business. The Economic Opportunity Institute, a think tank here gathered 30,000 signatures, 11,000 more than required, and got the measure on the ballot. The organization estimated that the espresso tax would have raised $6.5 million annually, based on gourmet coffee consumption statistics, said its executive director, John R. Burbank. City officials, using different coffee consumption figures, estimated the annual revenue at $1.8 million to $3.5 million. The money would have gone to subsidizing early childhood education programs, which have been deeply financially strained in the last few years as a severe budget crisis has gripped the Northwest. The initiative's sponsors said the proposed espresso tax was a creative but reliable way to raise the money. Mr. Burbank was clearly disappointed tonight, but he said: "I think the whole purpose of this campaign was really to find a funding source for early learning and care." 9

10 Some, even those who said they would normally support a tax to raise money for education argued that the espresso tax was merely a short-term Band-Aid to the problems created by the state's tax structure. Washington is one of seven states with no income tax, and Mr. Burbank's organization, among others, has lobbied unsuccessfully for a state income tax. Washington's retail sales tax is among the highest in the nation, at 8.6 percent, and 9.2 percent on meals served in restaurants. The opposition to the espresso tax, a coalition of coffee business, from Starbucks to small cafes called Joined Against the Latte Tax, or JOLT, argued that the tax would lead the city down a slippery slope of strange taxation. "I think the Seattle voters understood that childcare is important and funding with an unfair tax is not the way to deal with something that important," said Randy Pepple, a spokesman for JOLT. Meade Emory, a professor of tax law at the University of Washington, said he agreed in part with the opposition that an espresso tax was not the solution to the city's economic problems. But he said he, and his wife, voted for the tax today. "It sends a strong message," he said, "about the need for the City Council and the mayor and the Legislature to come up with funds for early education." 10

Economics Homework 4 Fall 2006

Economics Homework 4 Fall 2006 Economics 31 - Homework 4 Fall 26 Stacy Dickert-Conlin Name Due: October 12, at the start of class Three randomly selected questions will be graded for credit. All graded questions are worth 1 points.