ECON 471 Final: Econ471_final 2012.pdf

Instructions: Please answer the following questions related to current (Period 1) and future (Period 2) demands for groundwater within the context of our two-period model.

Suppose that Period 1 demand for groundwater is given by the linear equation QUOTE PToday=$10-0.4*Q Today. Furthermore, suppose climate change causes Period 2: demand for groundwater to be different linear equations, QUOTE PFuture=$12-0.3*Q future. The current reserves of groundwater to be allocated across both periods is Q=Q1+Q2=16, and future demand is discounted at a rate of so that the present value of future demand is given by 11.08*P2 and the present value of future net benefits is 11.08*NB2. The marginal cost of extraction is constant and equal in both periods: MC1=MC2=$3.

a) Determine the optimal quantity of groundwater to extract in Periods 1 and 2 when users in both periods are considered in one problem. Is more extracted today or in the future, and why? What does the marginal user cost?

b) Determine the number of units extracted in Periods 1 and 2 if current Period 1 user lack secure property rights over the aquifer. That is, solve the problem as if Period 1 users considered only their consumption in their problem.

c) Explain in words/in graphs/in equations (as you prefer) why the quantities extracted in b) represent a loss of overall welfare/net benefits when compared to the extraction in a).

d) What would the discount rate need to be to optimally solve the two-period model with equal quantities extracted in both periods? That is, what r sets present value of demand or net benefits equal in both periods while maintaining equilibrium extraction quantities at Q1*=Q2*=8?

Part I. Multiple Choice Questions. Please circle the right answer (one mark each)

1. Which of the following are economic goods?

a. Atlantic Ocean sea water.

b. Iowa farm land.

c. California coast line.

d. All of the above.

e. All of the above, except a.

2. The three fundamental questions of economic organization are:

a. closely related to the concept of scarcity.

b. not nearly as important today as they were at the dawn of civilization.

c. what, how, and why.

d. land, labor, and capital.

e. all of the above.

3. Which of the following statements applies to a mixed economy?

a. There is confusion and a lack of organization.

b. The allocation of resources changes from production period to production period.

c. There are no real examples of truly mixed economies.

d. Mixed economies include aspects of both market and command economies.

e. None of the above statements apply.

4. Capital is:

a. the same as money.

b. the headquarters of economic planning.

c. both an input and an output.

d. all of the above.

e. none of the above.

5. Land, labor, and capital are:

a. available only in finite amounts.

b. used to produce outputs.

c. the primary factors of production.

d. combined with technology in the production process.

e. all of the above.

6. Which of the statements below does not apply to the production-possibility frontier, or PPF?

a. The PPF is closely related to the concept of scarcity.

b. Quantities of inputs are measured along the axes of the PPF.

c. The PPF may shift over time.

d. Movements along the PPF may occur as the allocation of resources changes.

e. Technology may change the shape of the PPF.

7. Which of the statements below is a reason why an economy might produce a level of output that is beneath its production-possibility frontier?

a. The available resources are not equally suited to the production of both outputs.

b. The available body of technological knowledge is not being fully utilized.

c. Society prefers one product over the other.

d. In reality, economies produce thousands of goods not just two.

e. There are no frontiers left anymore.

8. In order to shift the PPF out (above and to the right), an economy would have to:

a. somehow increase its stock of inputs.

b. remove some incompetent bureaucrats from their jobs.

c. eliminate the sources of significant abuse of monopoly power.

d. all of the above.

e. none of the above.

.

9. Sana notices that no matter how many paper cups she buys, she always pays the same price per cup. This means that the supply curve which confronts her is:

a. perfectly inelastic.

b. perfectly elastic.

c. unit-elastic.

d. elastic, but not necessarily perfectly elastic.

e. none of these things, necessarily

10. A perfectly inelastic supply curve would be shown in the ordinary supply-and-demand graph as a:

a. vertical line.

b. horizontal line.

c. straight line, but neither horizontal nor vertical.

d. curved line.

e. any of the above.

Question 1

The law of demand states that there is a direct relationship between supply and demand.

True

False

4 points

Question 2

Equilibrium is a state of balance between supply and demand.

True

False

4 points

Question 3

Goods are scarce for both rich and poor.

True

False

4 points

Question 4

"The big corporations in this country, like ExxonMobil and GM, have deep pockets and need to be hiring more people." This is a positive statement about economic policy.

True

False

4 points

Question 5

The law of supply states that there is a direct relationship between price and quantity demanded.

True

False

4 points

Question 6

In the circular flow model, firms own economic resources, and householdsbuy the manufactured products and services.

True

False

4 points

Question 7

Households play a dual role of providing the factors of production whilepurchasing the goods and services of firms.

True

False

4 points

Question 8

Opportunity cost is the lowest valued benefit that must be sacrificed asthe result of choosing an alternative.

True

False

4 points

Question 9

Scarcity denotes that our desire for a good exceeds the amount that isfreely available from nature.

True

False

4 points

Question 10

Economics is a social science concerned with satisfying man's unlimitedwants with limited resources.

True

False

4 points

Question 11

Joint output of individuals or nations will be maximized when goods areexchanged between parties in accordance with the law of"comparative advantage".

True

False

4 points

Question 12

The production possibilities frontier assumes that the level of technologyvaries when applying the model.

True

False

4 points

Question 13

Excess demand in the market will cause the price of a product to decline.

True

False

4 points

Question 14

Demand is measured on the vertical axis and supply on the horizontalaxis.

True

False

4 points

Question 15

A change in quantity demanded is a movement along the same demandcurve.

True

False

4 points

Question 16

As globalization and world trade proliferates, individual markets withincountries' economies become more competitive.

True

False

4 points

Question 17

Which growth theory compares a subsistence real wage rate to the actual real wage rate?

4 points

Question 18

Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the ________ equals ________.

4 points

Question 19

Suppose there is a rise in the real wage rate. As a result, the quantity of labor demanded:

4 points

Question 20

GDP can be computed as the sum of:

4 points

Question 21

The real wage rate equals:

4 points

Question 22

If the CPI was 121.5 at the end of 2007 and 138.3 at the end of 2008, the inflation rate over these two years was:

4 points

Question 23

A movement along the production function is the result of a change in:

4 points

Question 24

All of the following are part of fiscal policy EXCEPT:

4 points

Question 25

Along a production possibilities frontier for real GDP and the quantity of leisure time, as leisure time increases, real GDP: