Final examination 3-6 PM in the Haas Pavilion...
Final examination 3-6 PM in the Haas Pavilion...
Becky, who is 10 years old, lives with her parents and an older brother Sam in a suburban town in America's Midwest. Becky's father works in a firm specializing in property law. Depending on the firm's profits, his annual income varies somewhat, but is rarely below 145,000 US dollars ($145,000). Becky's parents met at college. For a few years her mother worked in publishing, but when Sam was born she decided to concentrate on raising a family. Now that both Becky and Sam attend school, she does voluntary work in local education. The family live in a two-storey house. It has four bedrooms, two bathrooms upstairs and a toilet downstairs, a large drawing-cum-dining room, a modern kitchen, and a family room in the basement. There is a plot of land at the rear - the backyard - which the family use for leisure activities.
For the purposes of this course, you cannot go wrong if you assume:
Remember this: carry it with you always (or at least until the final exam is over…)
Course: ECONOMICS 1 P 001 LEC:
Course Title: Introduction to Economics
Date/Time: MONDAY, MAY 7, 2012 3-6P
Location: 100 HAAS PAVIL
Instructor: DELONG, J B
Course Control Number: 22303
Final Exam Group: 3
W Apr 4: What Macroeconomics Is (Principles of Macroeconomics, lectures 1-3)
M Apr 9: Aggregate Demand and the Income-Expenditure Framework (Principles of Macroeconomics, lectures 4-5)
W Apr 11: Dealing with the Great Recession (Principles of Macroeconomics, lecture 6)
M Apr 16: Origins of the Great Recession (Principles of Macroeconomics, lectures 7-8)
W Apr 18: Inflation Economics: Aggregate Supply and the Phillips Curve (Principles of Macroeconomics, lecture 9)
M Apr 23: Budget Economics (Principles of Macroeconomics, lecture 10)
W Apr 25: Growth Economics (Principles of Macroeconomics, lectures 11-12)
M Apr 30: REVIEW
M May 7 3-6PM: FINAL EXAM
April 4, 2012 Introduction to Macroeconomics Lecture:
For your essay on Milton and Rose Director Friedmans' Free to Choose:
Due at the first section meeting after the April 11, 2012 lecture
Write an essay of between 700 and 1000 words on one of the following three topics:
Why is it really a very, very important thing for the Friedmans' argument that they convince peope that the Great Depression was the result of the failure of a government agency--the Federal Reserve--and not the failure of the market system?
What do the Friedmans think are the biggest things wrong with the U.S.'s welfare and social insurance systems as they stood in 1980? Do you think they would find the same to be the system's most important flaws today? Why or why not?
Explain why the Friedmans think that the Food and Drug Administration is unnecessary. The Chinese government executed the head of its counterpart Food and Drug Administration for failing to do his job: for being corrupt and allowing substances dangerous to health and life to enter the domestic and export food value chains. Does this change your view of the Friedmans' argument about the FDA? Why or why not?
Economics 1: Spring 2012: U.C. Berkeley Sample Second Midterm DRAFT Answers:
Part 0—(1 point/0.5 minutes):
Your name, your GSI, your SID
Part 1—do all five (15 points/7.5 minutes): Write a sentence about the importance of each of the following five concepts in this course:
1) The Friedmans' “three equalities”:
Milton and Rose Director Friedman argued that equality of outcomes is impossible for any society, and attempts to attain it destroy freedom; that equality of opportunity is a worthy goal but one that can never be fully attained; and that equality of perception—equality before God, equality before the law—is necessary for any free society.
2) Monopolistic competition:
A monopolitically competitive market structure is one in which small firms find themselves facing downward-sloping demand curves and thus possess a degree of market power; such a market structure will tend to have more firms and higher average total costs than would be economically efficient, and thus less producer surplus in the long run than would be desirable.
3) Substitution effects:
A substitution effect is that when one price rises and another price falls so as to keep real income constant, then consumers tend to buy less of the first good and more of the second; distinguished from income effects in which either price declines make consumers richer and so they buy more of everything or price rises make consumers poorer and so they buy less of everything.
4) Cost minimization:
Profit-maximizing firms practice cost minimization: they try to make the amount they produce at the least possible cost, and often working out the consequences of cost minimization is the easiest way to solve quantitative problems involving firm behavior.
A quota is when the government refuses to allow the quantity of a good sold on the marketplace to exceed a certain level; almost always a bad idea because an inefficient amount of the commodity will be produced and consumed, and it will be produced or consumed or both by the wrong people—by people who are not the low-cost producers or the high-value demanders.
Part 2—do all three (69 points/34.5 minutes):
1) Suppose that Johnny D’s Pirate Emporium has daily fixed costs of $10000, and its marginal cost curve is given by Q = P/2. Suppose that it produces an undifferentiated product in a perfectly competitive industry. Suppose that it is the most efficient firm around. Suppose that its technology and organization is easily copied. At what scale of production—what level of daily quantity Q—is its average total cost minimized for this firm? What does the long-run supply curve look like for this perfectly-competitive industry? Explain your reasoning.
Its average total costs are 10000/Q + Q. At a Q of 10000, ATC=10001; at a Q of 1000, ATC=1010; at a Q of 100, ATC=200, at a Q of 10, ATC=1010. It looks like we should explore what ATC cost curve looks around Q=100. At a Q of 50, ATC=250; at a Q of 100, ATC=250; at a Q of 99, ATC=200.01; at a Q of 101, ATC=200.01. A Q of 100 is the cost-minimizing scale of production for this firm, with an average total cost of 200 per unit.
If the market price is greater than 200, new entrant firms will find it profitable to copy Johnny D’s technologies and organizations, enter the market, and make money. So new firms will enter until the price falls to 200. At a price of 200, only firms as efficient as Johnny D’s will survive--but because its technology and organization are easily copied, there will be lots of such firms. >The long-run supply curve will be flat, horizontal, at a price of $200 per unit.
2) Suppose that we consider the daily market for ice-cream sandwiches in the neighborhoods surrounding Crony Capitalism Junior University in the town of Old Stick...
Supply: Q = 3000(P - 2)
Demand: Q = 66000 - 6000 P
What is the equilibrium price? What is the equilibrium quantity? What is the equilibrium producer surplus? Consumer surplus?
Supply = Demand happens when 3000P - 6000 = 66000 - 6000P; 9000P = 72000; P = 8; Q = 18000
Since we have a linear demand curve and the maximum willingness to pay is 11, the average willingness to pay is (11+83)/2 = 9.5, and the average consumer surplus per unit is 1.5. That gives us $27,000 of total consumer surplus. Since we have a linear supply curve and supply = 0 at a price of 2, the average cost to producers is (8+2)/2=5. The average producer surplus per unit is 3. That gives us $54000 of producers surplus.
3) When, broadly, might it be a good thing for a government to impose per-unit taxes on production? For it to offer per-unit subsidies? For it to impose quotas? Price ceilings? Price floors?
Per-unit taxes on production might be a good thing if the government needs to raise revenue to pay for programs that promote the general welfare, or if economic activities cause negative externalities that harm others not directly concerned with production and sale and thus unable to require that production and sale be win-win as a condition of their participation.
Per-unit subsidies might be a good thing if the economic activity subsidized produces positive externalities—spillovers—through advances in knowledge or other channels.
Quotas seem a bad idea always: there are other, better tools for regulation available.
Price ceilings can be welfare enhancing as a way of regulating a monopoly to reduce its market power and so inducing it to produce more. Price floors can be welfare enhancing as a way of regulating a monopsony—a single buyer—and so inducing it to demand more. If the distribution of wealth is inefficient from a utilitarian standpoint, price ceilings and price floors can serve as indirect ways of redistributing wealth to make it more efficient from a utilitarian point of view, but directly redistributing wealth is a better way to achieve that goal.
Part 3—answer the question (15 points/7.5 minutes):
Of all the market structures we have considered—perfect competition, monopolistic competition, oligopoly, and monopoly—which is the best and which is the worst? What do you think the government should try to do to improve market structure in the economy?
A perfect essay would make seven points:
- Monopoly is the worst of all possible market structures except when there are very important economies of scale, in which case it may be the best or the only sustainable market structure.
- Even when monopoly is the only sustainable market structure, a properly-regulated monopoly with a price ceiling that enables production at the efficient level is far superior, and if regulation is perfect it is as good as perfect competition.
- Oligopoly is a mix of perfect competition and monopoly, and partakes of the advantages and disadvantages of both.
- Perfect competition is the best of all market structures when producers are making an undifferentiated product and there are no economies of scale.
- Monopolistic competition is inferior to perfect competition when firm market power arises from consumers’ lack of knowledge about the market and from the costliness of search.
- Monopolistic competition can be superior to perfect competition when different consumers have a genuine liking for different varieties of the good produced.
- Regulating markets is a delicate task. Antitrust policies that break up monopolies may destroy efficient economies of scale. Price ceilings that are set too low may produce low quality or low levels of output. More detailed regulations may wind up entrenching monopolies as the only organizations that understand how to work the system the government has set up—especially if regulators use the “revolving door” and come to the government from jobs in and then return from the government to jobs in the regulated industry. You have to balance the costs of market failure against the costs of government failure.
From: Classroom Scheduling firstname.lastname@example.org
Your room request for ECON has been booked.
Start Date: 4/1/2012
End Date: 4/1/2012
Start Time: 7:00:00 PM
End Time: 8:00:00 PM
Day(s) of Week: Sunday
In Charge: DELONG
Confirmation Number: 188208
Dear Sophonts taking Econ 1--
Only 6 of the 700 of you showed up for my three hours of Wednesday office hours last week...
So I will be in Wheeler Auditorium to talk about all topics related to the course at the following times:
Friday March 16, 2012: 11-11:45 AM
Sunday April 1, 2012: 7-8 PM
Friday April 6, 2012: 11-11:45 AM
Friday April 20, 2012: 11-11:45 AM
Friday April 27, 2012: 11-11:45 AM
Econ 1: Spring 2012: UC Berkeley: Powerpoint Slides for March 12, 2012: Monopoly:
Sophonts taking Econ 1--
Only 6 of the 700 of you showed up for my three hours of Wednesday office hours this week...
So I will be in Wheeler from 11-11:45 on Friday to talk about quotas, taxes, subsidies, price ceilings, price floors, perfect competition, and monopolistic competition
We will stop at 11:45 to leave Bob Reich's class lots of time to flood in...
Econ 1: Spring 2012: U.C. Berkeley: Powerpoint Slides for March 7, 2012 Monopolistic Competition Lecture:
Economics 1: Spring 2012: Problem Set 5:
J. Bradford DeLong: U.C. Berkeley: Due at first section after March 12, 2012 lecture
Headnote: Remember that the utility—that is, the happiness—of the consumer is higher when the function:
U = (x1)θ(x2)(1-θ)
is higher. For this function the marginal rate of substitution is—that is, the utility stays the same as you move from (x1, x2) to (x1+Δx1, x2-Δx1) for small changes Δx1 and Δx2 if:
Δx1 = ((1-θ)/θ)(x1/x2)Δx2
Suppose we have students going to Railroad Monopoly University who spend their money on only two things all semester: vacations in Cabo San Lucas (V) and renting BMWs for the weekend (R). And suppose that their utility function is the Cobb-Douglas function with θ=1/3, and suppose that a student named Jonah takes vacations in Cabo on three weekends and rents a BMW for the other 15 weekends of the semester. What, for that consumption pattern, is Jonah’s marginal rate of substitution between Cabo vacations and renting BMWs?That is, if he takes an additional vacation, by how many BMW rentals could he cut back his BMW-renting and still be as happy, still be on the same indifference curve?
Suppose that Channing is also a student at Railroad Monopoly University, with the same utility function as Jonah. But suppose that Channing takes vacations in Cabo on six weekends and rents a BMW for six weekends of the semester. What, for that consumption pattern, is Channing’s marginal rate of substitution between Cabo vacations and renting BMWs—that is, if he takes an additional vacation, by how many BMW rentals per average semester could he cut back his BMW-renting and still be as happy, still be on the same indifference curve?
Suppose that renting a BMW costs $50 a weekend and taking a vacation in Cabo costs $500, and that Jonah has $2250 to spend and Channing $3300. Is either Channing or Jonah making a mistake in choosing their consumption pattern? If only one is, which one is making a mistake? Why are they making a mistake?
Explain to either Channing or Jonah—whichever one you think is making a mistake, or both—how they could make themselves happier (or at least more dissipated) if they changed their consumption pattern. In what direction do you think they should change their consumption pattern(s)? How far do you think they should change their consumption pattern(s)? (Or, if you think neither is making a mistake, explain why you think both are doing what they ought to do.)
Brie, with only $1100 per semester to spend, has different tastes and preferences. Her utility function has θ=5/6. If Cabo vacations cost $500 and BMW rentals cost $50, is she happiest buying 0, 1, or 2 vacations and spending the rest of her money on BMW rentals? Explain why her optimal ratio of vacations to rentals is different than the optimal ratio for Channing and Jonah.
Suppose that there is a BMW shortage. BMWs now rent for not $50 a weekend but $500 a weekend. And suppose that Jonah, Channing, and Brie have $2500, $3500, and $1000 to spend, respectively. How should each of the three spend his or her money? Explain your reasoning.
Suppose Phil and Chris notice that neither Channing nor Jonah actually likes riding around in BMWs. What they like, instead, is impressing each other by renting more BMWs than their co-star—and they feel unhappy when their co-star rents more BMWs than they do. That is, the utility function for Jonah is actually: Uj = (Vj)θ(Rj/Rc)(1-θ), where “j” as a subscript means that this applies to Jonah, and “c” as a subscript means this applies to Channing. And Uc = (Vcc)θ(Rc/Rj)(1-θ). Phil and Chris calculate how many vacations and BMW rentals, if BMW rentals cost $50 and Cabo vacations cost $500, Channing and Jonah should spend their money on to collectively make them the happiest. What do they conclude? Explain your reasoning. (Hint: suppose Phil and Chris decide to calculate the geometric mean of Channing’s and Jonah’s utility, and then to try to make that product as large as possible...)
Suppose that Phil and Chris are right, that you are in charge of Railroad Monopoly PDC, and that you try to make both Channing and Jonah happier by imposing a tax on BMW rentals. How high a tax do you think you should impose? Explain your reasoning.