## Econ 1: Fall 2010: Sample Midterm (Draft)

1: International question: Write one paragraph—four sentences or so—explaining what the balance of trade is, and why it is an important concept in international economics.

2: Growth question: China’s total GDP today is about 1/6 that of the United States. China’s population is about four times that of the United States. The current level of GDP per capita in the United States is about $45,000 of marketed final goods and services produced per year. Current projections are that—if nothing goes wrong—GDP per capita in China will grow at an average rate of 6% per year for the foreseeable future. Current projections are that GDP per capita in the U.S. will grow at an average rate of 2% per year for the foreseeable future. In what year do you project that average GDP per capita in China will equal its level in the United States? What will the level of annually-produced GDP per capita be in that year? 3: Supply and Demand question: The supply and demand curves for the market for tennis rackets are: Qd = 500 – 4Pd Qs = –100 + 6Ps The government wants to raise money to provide public tennis courts, so they imposes a$10 tax on each tennis racket sold.

a: How many rackets were sold before the tax went into place?

b: How many rackets were sold after the tax went into place?

c: What is the after-tax price of rackets to the consumers?

d: How much money will the government raise to build new tennis courts?

e: What are the advantages and disadvantages of taxing tennis rackets in this case instead of implementing a general sales tax on all goods?

f: If we count the government revenue as part of the total surplus, what is the total surplus after imposing the tax?

g: Give a short argument for why we should nevertheless implement this tax.

4: Supply and Demand question: Let us return to the city of Avicenna and the market for yoga lessons. Suppose that the daily demand curve for lessons is: Q = 1000 – 10P, where Q is the number of lessons sold and P is the price of a lesson in dollars.

a: Suppose that there are only 25 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of $10 a student. What is the market equilibrium price of yoga lessons? What is the daily quantity? What is the daily producer surplus? What is the daily consumer surplus? What is the daily contribution of yoga lessons to measured GDP? b: Suppose that there are only 50 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of$10 a student. What is the market equilibrium price of yoga lessons? What is the daily quantity? What is the daily producer surplus? What is the daily consumer surplus? What is the daily contribution of yoga lessons to measured GDP?

c: Suppose that there are 100 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of $10 a student. What is the market equilibrium price of yoga lessons? What is the daily quantity? What is the daily producer surplus? What is the daily consumer surplus? What is the daily contribution of yoga lessons to measured GDP? 5: Market Structure question: Suppose that the Production and Distribution Coordination bureaucracy in the city of Avicenna around Euphoric State University decides that, to ensure quality, all yoga lessons must be provided by a single monopoly Euphoric Yoga Consortium. The daily demand curve for lessons is: Q = 1000 - 10P, where Q is the number of lessons sold and P is the price of a lesson in dollars. There are 100 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of$10 a student.

a: Suppose the Euphoric Yoga Consortium is organized as a profit-seeking monopoly firm. What is the price that it will charge for yoga lessons?

b: What is the daily quantity of yoga lessons that will be given at that price?

c: What is the daily consumer surplus?

d: What is the amount of its daily revenue that EYC will be willing to devote to campaign contributions for people running for seats on PDC if they can be confident of electing a PDC that will see things their way and ensure quality of yoga lessons by preserving EYC’s important social role as guarantor of quality in the yoga lesson business?

e: What is the daily amount of money that the assembled yoga instructors of Avicenna will be willing to contribute to people running for seats on PDC if they can be confident of electing a PDC that will see things their way and lift the oppressive dead bureaucratic monopoly-capitalistic hand of EYC from its position on the throat of the people?