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Essay Examination 1
Basic Economic Concepts

These questions are from the test bank. An "A" answer requires at least three or four intelligent sentences. Some questions may require more sentences if they have multiple parts.

Lecture 1 - An Introduction to Economics

1. What is the difference between Microeconomics and Macroeconomics?

(a) What is an aggregate?

(b) Give two examples of a variable from Microeconomics.

(c) Give two examples of a variable from Macroeconomics.

2. What is opportunity cost?

(a) You quit your job and used your savings to open a business.  If your salary was $20,000 per year and you earned $500 per year in interest, what is the opportunity cost of your business?

Lecture 2 - The Market System and Circular Flow

3. What is Socialism/Communism?

(a) Who owns the property and controls the resources?

(b) Who sets the prices in the markets?  Did they correctly set the prices?

4. What is capitalism?

(a) Who owns all the property and resources?

(b) Is property rights essential for capitalism?  Explain in one sentence.

(c) What are two functions of government under capitalism?

5. What is the Index of Economic Freedom?

(a) Which country consistently is number one in terms of freedom?

(b) Is this index a perfect indicator?  Please explain.

Lectures 3 - Supply, Demand, and the Market Process

6. What is the Law of Demand?

(a) What is the Law of Supply?

7. Why does the demand function have a negative slope?

(a) What is the Law of Diminishing Marginal Utility?

(b) What is the Income and Substitution Effect?

8. Please draw the demand functions for two people:  Person 1 and Person 2.  Show graphically and explain in words how to derive the market demand function.

9. Please draw the supply functions for two firms:  Firm 1 and Firm 2.  Show graphically and explain in words how to derive the market supply function.

10. Please draw the supply and demand functions for cookies and set the equilibrium price at $3.   Make sure you label all the axes, and the supply and demand functions.  Assume the government does not impose any price controls on the cookie market.

(a) What happens if a price shock increases the price to $5?  Explain in words and show graphically.

(b) What happens if a price shock decreases the price to $1?  Explain in words and show graphically.

(c) Is the market inherently stable?

11. Please draw a market for soda drinks (like Pepsi and Coca-Cola).  A political disruption interferes with the production facilities of the soda industry, ceteris paribus.  Show graph and explain in words.

(a) Which function shifts?

(b) What happens to market price and quantity?

12. Please draw a market for the sugar market.  Consumers expect sugar prices to be higher, ceteris paribus.  Show graph and explain in words.

(a) Which function shifts?

(b) What happens to market price and quantity?   (Is this result interesting???)

13. Please draw a market for coffee.  An unusual drought for the last three years hits the region where Colombia grows coffee, ceteris paribus.  Unfortunately, this story is true.  Show graph and explain in words.

(a) Which function shifts?

(b) What happens to market price and quantity?

14. Many corn farmers are going out of business.  Government decides to help the corn farmers by imposing a price floor.

(a) Please draw the market for corn.  Label the axes, and the supply and demand functions.

(b) Show the impact of the price floor on the corn market.  Also explain in words the direct effect.

(c) What are secondary effects?

15. Many bread producers are charging high prices for bread.  Consequently, government wants to help appease the public and imposes a price ceiling on the bread market.

(a) Please draw the market for bread.  Label the axes, and the supply and demand functions.

(b) Show the impact of the price ceiling on the bread market.  Also explain in words the direct effect.

(c) What are secondary effects?

16. Why do black markets form?  Give three reasons.

(a) How can government reduce the size and impact of black markets?

Lecture 5 - The Global Economy

17. What are imports and exports? Also indicate which direction the money and products flow.

(a) If a country has a trade deficit, which direction does the money and products flow?

(b) If a country has a trade surplus, which direction does the money and products flow?

18. What are the four reasons why international trade is rapidly growing after World War II?

19. Please define an exchange rate?

(a) We have the exchange rate, 1 Euro = 1.3 dollars.  If the exchange rate changes to 1 Euro = $2, then which currency appreciated and which currency depreciated?

(b) What happens to U.S. exports and imports?

20. You have two countries: Bosnia and Herzegovina and Colombia.  Both countries grow tobacco and coffee.  The two countries can produce a maximum that is recorded in the table, given their resources.

Production Tobacco Coffee
Bosnia and Herzegovina 1,000 500
Colombia 500 1,000

(a) Please draw the straight line Production Possibilities Curve (PPCs) for both countries.

(b) What is the production level under autarky and each country sets its production level at the halfway point?

(c) Both countries engage in world trade.  Which products do both countries specialize in?

(d) What is the gain in production if these countries engage in free trade?

21. What is a trade agreement?

(a) What are Free Trade zones?

(b) What is a free trade bloc?  Give an example of a free trade bloc.

22. What is the General Agreement on Tariffs and Trade (GATT)?

(a) Which organization superseded GATT?

(b) Why did this new organization supersede GATT?

23. What are two reasons why a country imposes trade restrictions?

24. What are the four methods a country can use to restrict trade?

 

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