Appendix 3 - Examples of Class Materials

• Sample Problem Set (Introductory Economics, Fall 2015, Davidson College)

• Sample Writing Assignment (Introductory Economics, Fall 2015, Davidson College)

• Sample Quiz (Introductory Economics, Summer 2012, UNC-Chapel Hill)

• Sample Final Exam (Introductory Economics, Summer 2012, UNC-Chapel Hill)

1

ECO 101 @ Davidson Problem Set 4 Prof. Nungsari

Name: Section:

Date assigned: Monday, 9/6

Date due: Friday, 9/11

Instructions:

• Read the attached article from New York Times from this year’s Valentine’s Day and answer the

following questions in the space provided.

• There is one question with 4 subparts. The total number of points allocated for each subquestion is

indicated in the question.

1: (20 points total)

(a) The article states the following:

“The price of cocoa, the main ingredient in most chocolate, soared last year, forcing

chocolate producers to raise prices and shrink packages.”

Let’s try and show how the price of cocoa has risen by using a demand and supply framework and

graphical analysis. First, let’s think of the market for cocoa. Does the article provide any reasons for

possible demand curve shifts? If so, what are the reasons? Would the demand curve shift left or

right? (6 points)

(b) Does the article provide any reasons for possible supply curve shifts? If so, what are the reasons?

Would the supply curve shift left or right? (6 points)

1

ECO 101 @ Davidson Problem Set 4 Prof. Nungsari

(c) Illustrate the shifts of the curves that you highlighted (if any) from parts (a) and (b) in the market

for cocoa. (4 points)

(d) What has happened to the equilibrium price and quantity in the cocoa market? Your choices are:

increase, decrease, no change, can’t tell. (4 points)

2

9/6/2015 Valentine’s Day Chocolate Will Cost More This Year, as Cocoa Prices Rise - The New York Times

http://www.nytimes.com/2015/02/12/business/valentines-day-chocolate-will-cost-more-this-year-as-cocoa-prices-rise.html 1/5

http://nyti.ms/1vFRlpH

BUSINESS DAY

Valentine’s Day Chocolate Will Cost MoreThis Year, as Cocoa Prices RiseBy STEPHANIE STROM FEB. 11, 2015

This year, perhaps more than ever, kisses may not come cheap.

At least not those made of chocolate on Valentine’s Day.

The price of cocoa, the main ingredient in most chocolate, soared lastyear, forcing chocolate producers to raise prices and shrink packages.

A growing appetite for chocolate, particularly dark chocolate, whichrequires more cocoa, in China and other Asian markets is the primary cause,commodity analysts say.

“What’s driving up the price, really, is rising demand for cocoa in Asia,though it also was pretty strong in North America and Europe,” said EdwardGeorge, head of soft commodities research at EcoBank.

Another factor is the harmattan, a dry, dusty wind that began sweepingthe major cocoa producing countries in West Africa in December, thebeginning of the prime cocoa harvesting season. The harmattan has beenworse than usual this year.

Cocoa trees also suffered attacks by witches’ broom and frosty pod, fungithat can cause steep losses.

9/6/2015 Valentine’s Day Chocolate Will Cost More This Year, as Cocoa Prices Rise - The New York Times

http://www.nytimes.com/2015/02/12/business/valentines-day-chocolate-will-cost-more-this-year-as-cocoa-prices-rise.html 2/5

The average dollar price for a ton of cocoa was $2,921.05 last month,according to the International Cocoa Organization. That was slightly higherthan the price a year earlier — but less than the peak average price of$3,270.27 in August, which reflected fears that Ebola might hinder the harvestof cocoa beans in Africa.

Several major chocolate companies declined requests for interviews onthe effects of the high price of cocoa on their businesses. But Hershey,Mondelez International and Lindt & Sprüngli, a Swiss company that ownsRussell Stover, all raised prices as much as 8 percent last year to offset cocoacosts. Hershey’s raised prices across all its products.

“L&S, like other companies in the chocolate industry, had to makeoccasional price adjustments on selected products in 2014 to absorb some ofthe raw material cost challenges — even if at first we always try to counterthese challenges with increases in efficiency and volume,” Sylvia Kälin, head ofLindt & Sprüngli’s corporate communications, wrote in an email. Mars, themaker of M&Ms and Milky Way, also announced plans to raise prices.

Ms. Kälin said consumers so far had not punished the company for raisingprices.

Data from Nielsen, a consumer research firm, hints at the price increases.While the amount of chocolate Americans bought last year rose 1.2 percent, to2.2 billion pounds, the amount they paid for it rose 2.6 percent, to $13.6billion.

Mondelez, which has several brands that use chocolate, like Cadbury, Milkand Lu, was not so lucky. It was the first to raise prices in the first half of lastyear, and European retailers refused to play along. That led to what IreneRosenfeld, chief executive of Mondelez, described in an August conference callas “extended disputes and near-term distribution losses.”

Mr. George, the commodity analyst, said the backlash was a surprise.

9/6/2015 Valentine’s Day Chocolate Will Cost More This Year, as Cocoa Prices Rise - The New York Times

http://www.nytimes.com/2015/02/12/business/valentines-day-chocolate-will-cost-more-this-year-as-cocoa-prices-rise.html 3/5

“Several companies were shocked by how consumers simply switched tocheaper chocolate or stopped eating chocolate altogether,” he said.

Then the company faced an outcry during the holiday season when itannounced that it would no longer sell chocolate coins — though that was mildcompared to the complaints last month, when it said it would makeadjustments to Cadbury’s Creme Eggs. (The Creme Eggs sold in the UnitedStates are made by Hershey and so are not affected.)

Mondelez said it would no longer make the egg’s chocolate shell out ofCadbury Dairy Milk, but instead would use “a standard, traditional Cadburymilk chocolate,” according to Valerie Moens, a spokeswoman for Mondelez.Dairy Milk chocolate has a high milk content, and the price of milk rosesharply last year.

Mondelez also reduced the number of Creme Eggs in a package to fivefrom six. While Mondelez suggested a slightly lower price for the smallerpackage, Ms. Moens said, retailers set their own prices. And this week,Mondelez announced that it would sell a thinner version of its organic Green &Black’s chocolate bars, in hopes of giving consumers a lower-price option.

On a quarterly call with analysts on Wednesday, Mondelez announcedthat $1.6 billion of its revenue last year came from higher prices, mostlybecause of the high price of cocoa.

That was not enough, however, to offset the higher costs of thecommodities it uses because higher prices pushed sales down. Investmentanalysts pressed Ms. Rosenfeld about whether the strategy was sound. DavidDriscoll of Citi Research said the amount of chocolate the company sold inEurope last year was down by “double digits” and other companies didn’t seemto have suffered as much. “Why aren’t these competitors following?”

“The reality is that a number of our multinational competitors have justlagged a little bit in their pricing response, and that’s put some pressure on the

9/6/2015 Valentine’s Day Chocolate Will Cost More This Year, as Cocoa Prices Rise - The New York Times

http://www.nytimes.com/2015/02/12/business/valentines-day-chocolate-will-cost-more-this-year-as-cocoa-prices-rise.html 4/5

business,” Ms. Rosenfeld said.

She said she expected competitors’ higher prices to catch up over the firsthalf of this year. “There’s no question that the gap is wider than we would likeit to be,” she said. “We’re going to stay the course.”

Small artisanal companies have weathered the cocoa price roller coastersomewhat better, thanks to different ways of obtaining cocoa.

Madécasse, for instance, buys all its cocoa beans in Madagascar.Madagascar produces a tiny amount of cocoa each year, 6,000 to 8,000 tons,but it is of a variety, Criollo, that chefs and confectioners prize for its intenseflavor.

Criollo is also less susceptible to the diseases that strike the main type ofcocoa, Forastero, which makes up about 85 percent of the world’s supply. TheTrinitario variety, grown primarily in Latin America and Southeast Asia, endsup in high-end dark chocolate and is roughly 12 percent of the world’s cocoa.

“Our cocoa doesn’t even trade at a commodity price because there’s solittle of it,” said Tim McCollum, one of the founders of Madécasse. “Prices forCriollo are set in the spot market and go up and down day to day, so we don’treally pay attention to what’s happening in the commodity chocolate market.”

Similarly, Alter Eco, a little company that sells chocolate, quinoa, rice andcane sugar products, said it had had little problem obtaining cocoa because ofthe arrangements it has with cocoa producers to ensure fair trade and anorganic bean.

Alter Eco, which had sales of $15 million in 2014, works directly with itscocoa bean farmers in Latin America, returning some of its profit to them andinvesting in infrastructure to support their work, said Edouard Rollet, co-founder and co-chief executive of the company. It also helps them improveyields.

9/6/2015 Valentine’s Day Chocolate Will Cost More This Year, as Cocoa Prices Rise - The New York Times

http://www.nytimes.com/2015/02/12/business/valentines-day-chocolate-will-cost-more-this-year-as-cocoa-prices-rise.html 5/5

“The supply chain in West Africa is at the heart of the price problem,” Mr.Rollet said. “Farmers are at the bottom of the chain, and they’re not gettingany richer, thus they don’t see a future in cocoa,” he said. “So farmers there areplanting rubber trees instead of cocoa trees.”

Under the fair trade agreement Alter Eco has struck with its suppliers,farmers are paid a $200 premium for each ton of beans they sell. Mr. Rolletsaid the price had increased some, but Alter Eco has not yet raised prices on itschocolate bars and truffles. “If I was a smarter business person, I would raiseprices now,” he said.

After negative reports on labor conditions in cocoa production, Mars,Hershey and other large chocolate makers have committed to bring theirpractices more into line with Alter Eco’s.

Hershey, for instance, said last week that it now obtains about one-thirdof its cocoa from “certified and sustainable” farms and is working towardbuying all its beans from such farms by 2020.

On a call with investment analysts, Bert Alfonso, chief financial officer atHershey, said the company was increasing prices 5 to 6 percent. He predictedthat would reduce sales volumes 2 percent.

“While we’ve seen some improvement recently and that’s good, we stillhave cocoa that’s higher than the 2014 level,” Mr. Alfonso said.

A version of this article appears in print on February 12, 2015, on page B1 of the New York edition

with the headline: That Heart­Shaped Box Will Cost More This Year, as Cocoa Prices Rise.

© 2015 The New York Times Company

ECO 101 @ Davidson Reading Response 1 Prof. Nungsari

Name: Section:

Piazza Question Due: Post it to Piazza by Tuesday, 10/6 by 8 p.m.Discussion Day and Due Date for Reading Response: Wednesday, 10/7 (in-class)

Instructions:

• This assignment has 3 parts:

1. (Reading) Read the article titled “Drug Goes From $13.50 a Tablet to $750, Overnight”published on the New York Times on September 20th, 2015 by Andrew Pollack.

2. (Writing) Write a 1.5-2 page, 12 point font, 1.5-spaced reading response on the article. Allresponses must be typed and must include the following:

(a) 1-2 paragraphs summarizing the article.

(b) 2-3 paragraphs detailing three economic concepts that can be used to explain anypart of the article. To get full credit, you must provide the economic concept andelaborate on how it may be used to explain what is happening in the article. Be preciseand use the economic ‘language’ we have been developing in class.

3. (Discuss) Submit one discussion question regarding the reading to Piazza by 8 pm the daybefore the response is due (i.e. by 8 p.m. on Tuesday, 10/6). Come to class prepared todiscuss your questions and others.

1

Economics 101 - Summer I (2012) Melati NungsariIntroduction to Economics UNC at Chapel Hill

Student Last Name:Student First Name:PID:Honor Code Signature:

Quiz 2

Instructions:

• You have 30 minutes to complete this quiz.

• This quiz contains 10 multiple choice questions (equally weighted) and 1 short answer question (3subquestions).

• You must fill in a Scantron sheet with the answers to your multiple choice questions.

• For the short answer question, you may use the space provided underneath the subquestions.

• Partial credit will be given for those who show their work!

1. Driving a car causes more air pollution than taking the train but individuals face no costfor pollution (i.e., clean air is not priced). What sort of externality is this (if any)?

A. Positive Externality

B. Negative Externality

C. No Externality

D. Not enough information is given

2. From Question 1: What could the government do to insure that there is no externality?

A. Impose a tax on train fares

B. Impose a tax on gasoline

C. Subsidize the prices of cars

D. Do nothing since there is no externality

3. The demand for a lamb gyro at Med Deli is elastic because the percent change in thequantity demanded of gyros in response to a 10% rise in prices is

A. an increase of more than 10 percentt

B. a decrease of less than 10 percent

C. an increase of less than 10 percent

D. a decrease of more than 10 percent

4. Suppose the price of potato chips decreases from $1.45 to $1.25 and, as a result, the quantityof potato chips demanded increases from 2000 to 2200. Using the midpoint method, theprice elasticity of demand for potato chips in the given price range is

A. 2

B. 1.55

C. 1

D. 0.6

5. Which of the following is likely to have the most price inelastic demand?

A. Nike Air running shoes

B. shoes

C. running shoes

D. Nike running shoes

6. Suppose Martha has a weekly budget of $20 and she only wishes to buy 3 goods: pens, movietickets and roast beef sandwiches. Suppose that one sandwich costs $2, a movie ticket costs$6 and a pen costs $1. Here is the total utility attached to each of the following purchases:

Table 1: Total Utility for Each Purchase

Quantity Sandwich Movie Tickets Pens1 50 240 202 90 330 353 120 390 454 140 420 50

Let x be the number of sanwiches, y be the number of movie tickets and z be the numberof pens. What is Martha’s budget constraint?

Page 2

A. 2x + 6y + z = 20

B. 6x + 2y + 2z = 20

C. 6x + y + 2z = 20

D. x + 6y + z = 20

7. Which of the following combinations is a↵ordable given Martha’s budget?

A. 4 sandwiches, 3 movies, 4 pens

B. 2 sandwiches, 4 movies, 2 pens

C. 4 sandwiches, 1 movie, 4 pens

D. 3 sandwiches, 3 movies, 3 pens

8. What is the a↵ordable combination that provides Martha with the greatest utility?

A. 4 sandwiches, 3 movies, 3 pens

B. 3 sandwiches, 2 movies, 2 pens

C. 2 sandwiches, 2 movies, 4 pens

D. None of the above

9. At the optimal and a↵ordable consumption level that maximizes total utility, what is themarginal utility per dollar spent?

A. 20

B. 10

C. 15

D. 5

10. For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantitydemanded. Which of the following statements is most likely applicable to this good?

A. The relevant time horizon is short.

B. The good is a necessity.

C. The market for the good is broadly defined.

D. There are many close substitutes for this good.

Page 3

11. Anne is an opera singer and Bill is a writer. Anne and Bill live next door to each other.Bill loves his peace and quiet while Anne loves to practice singing. The following arethe monthly gains to Anne and Bill when Anne’s room is and is not soundproofed:

Table 2: Gains to Anne and Bill

Soundproofed Not SoundproofedGains to Anne 100 150Gaines to Bill 120 80

a) What does the Coase Theorem say? (2 points)

b) What is the socially e�cient outcome? (i.e. Is it e�cient for Anne’s room to be sound-proofed or not soundproofed?) Why? Explain your answer. (2 points)

c) Suppose that Anne has the legal right to make as much noise as she wants. Supposealso that Anne and Bill can negotiate at no cost. Will Anne soundproof her room? Is thischoice socially e�cient? Explain your answer. (4 points)

Page 4

Economics 101 - Summer I (2012) Melati NungsariIntroduction to Economics UNC at Chapel Hill

Student Last Name:Student First Name:PID:Honor Code Signature:

Final Exam

Instructions:

• You have 3 hours to complete this exam.

• This exam consists of 50 equally weighted multiple-choice questions (worth 50 points) and 3 shortanswer questions (worth 25 points). Answer all multiple choice questions by both marking yourScantron sheet and by circling the correct answer on the examination itself. In the case of conflict,the Scantron answer is the o�cial answer. The answers to the short answer questions should bewritten underneath the questions.

• You are allowed the use of a calculator but you may not use notes, books, cell phones or anyelectronic device. You may not talk with other students or look at the exam papers of other students.

• If you believe there is no right answer or more than one right answer to any question, explainyour reasoning on the “Appeals” page. I will not consider an appeal unless you have recorded yourargument on the exam sheet during the exam period.

• When you have finished the examination, sign the Honor Code Pledge. I will not consider anexamination valid unless you sign the pledge.

Appeals

Page 2

1. Peanut butter and grape jelly are complements. What happens in the peanut butter marketwhen the price of grapes rise?

A. the supply curve for peanut butter shifts to the right

B. the demand curve for peanut butter shifts to the right

C. the price of peanut butter falls

D. all of the above

2. All else equal, when the price of a good falls, consumer surplus

A. decreases

B. increases

C. will increase only if the good is inferior

D. none of the above

3. Suppose the banking system currently has $300 billion in reserves; the reserve requirementis 10 percent; and excess reserves amount to $3 billion. What is the level of deposits?

A. $3, 300 billion

B. $2, 970 billion

C. $2, 700 billion

D. $2, 673 billion

4. Suppose Joe starts his own business. In the first year of business, he earns $100, 000 intotal revenue and incurs $75, 000 in explicit costs. If Joe has a standing o↵er to work forhis brother at a salary of $50, 000, then the economic profit of Joes business is

A. $25, 000

B. $75, 000

C. -$25, 000

D. $100, 000

5. Residents of your city are charged a fixed weekly fee of $9 for garbage collection. Theyare allowed to put out as many trash bags as they wish. The average household disposesof three trash bags of garbage per week under this plan. Suppose that your city changesto a “tag” system. Each trash bag to be collected must have a tag a�xed. Tags cost $3each and are not reusable. What e↵ect do you think the introduction of the tag system willhave on the total quantity of garbage collected in your city? The Tag System is likely to

the quantity of garbage collected because .

A. Leave unchanged, because citizens have already shown that they are willing topay $9.00 to dispose of three bags per week.

B. Leave unchanged, because the average cost of garbage service is the same underboth plans.

C. Reduce, because the marginal benefit of discarding garbage is lower under the tagsystem.

D. Reduce, because the marginal cost of discarding garbage is higher un-der the tag system.

Page 3

6. Assume that Andia and Zardia can switch between producing wheat and producing beef.The following are the number of minutes needed to make 1 unit of each good.

Table 1: Minutes Needed to Make 1

Bushel of Wheat Pound of BeefAndia 20 12Zardia 15 10

What is Andia’s opportunity cost of producing one pound of beef?

A. 35

B. 65

C. 43

D. 53

7. Refer to Table 1. What is Zardia’s opportunity cost of producing one bushel of wheat?

A. 23

B. 34

C. 56

D. 32

8. Refer to Table 1. Andia has an absolute advantage in the production of

A. wheat and Zardia has an absolute advantage in the production of beef.

B. beef and Zardia has an absolute advantage in the production of wheat.

C. both goods and Zardia has an absolute advantage in the production of neithergood.

D. neither good and Zardia has an absolute advantage in the productionof both goods.

9. Refer to Table 1. Andia has a comparative advantage in the production of

A. wheat and Zardia has a comparative advantage in the production of beef.

B. beef and Zardia has a comparative advantage in the production ofwheat.

C. both goods and Zardia has a comparative advantage in the production of neithergood.

D. neither good and Zardia has a comparative advantage in the production of bothgoods.

10. Refer to Table 1. Andia should specialize in the production of

A. wheat and Zardia should specialize in the production of beef.

B. beef and Zardia should specialize in the production of wheat.

C. both goods and Zardia should specialize in the production of neither good.

D. neither good and Zardia should specialize in the production of both goods.

Page 4

11. Refer to Table 1. Assume that Andia and Zardia each has 60 minutes available. If eachperson spends all his time producing the good in which he has a comparative advantage,then total production is

A. 3 bushels of wheat and 6 pounds of beef.

B. 3.5 bushels of wheat and 5.5 pounds of beef.

C. 4 bushels of wheat and 5 pounds of beef.

D. 7 bushels of wheat and 11 pounds of beef.

12. If a firm has market power, then its marginal revenue

A. is less than its price

B. is negative at quantities where demand is elastic

C. is zero at the quantity the firm chooses to produce

D. remains constant as long as price remains above the marginal cost

13. Suppose a power plant is located on the banks of a river. The plant must decide how muchhot water to discharge into the stream. If the power plant discharges a large amount ofhot water, it is more valuable because it can cool its equipment at low private cost but thefishery is less valuable because the fish grow poorly. If it discharges a small amount of hotwater, it is less valuable and the fishery is more valuable. The table gives the values of thepower plant and the fishery as a function of the plants discharge decision.

Table 2: Value of power plant and fishery

Hot Water Discharge Decision Value of the Power Plant Value of the FisheryHigh Discharge $1, 000, 000 $10, 000Low Discharge $990, 000 $30, 000

The socially optimal decision is a discharge rate because .

A. High, Much more value is created by the power plant than by the Fishery

B. High, It is very expensive for the plant to cool its equipment by other means.

C. Low, low discharge triples the value of the fishery.

D. Low, the social value of the power plant and fishery are higher whendischarge is low.

14. Refer to Table 2. Suppose there is no law against the plant discharging hot water into thestream. Provided that bargaining is not very expensive and outcomes are easily verified byall, what will happen when bargaining occurs?

A. The fishery will pay somewhere between $10, 000 and $20, 000 to inducethe power plant to choose a low discharge rate.

B. The plant will pay the fishery something more than $10, 000 to allow it to choosea high discharge rate.

C. The power plant will decide that too much is at stake to bargain with the fishery.

D. A tax on hot water discharge will be necessary to obtain the socially optimaloutcome.

Page 5

15. The demand for a Ford Focus (a brand of a compact car) is likely to be elasticthan the demand for a compact automobile because .

A. Less, there are good substitutes for a Focus.

B. Less, an auto accounts for a small part of a consumers budget.

C. More, there are many di↵erent compact cars on the market.

D. More, many drivers are loyal to the Ford brand.

16. For years the citizens of Small Land had experienced an annual inflation rate of 3 percentandhad come to think of 3 percent as the normal rate of inflation. Then, in 2006, the rate ofinflation rose to 6 percent. Which of the following statements correctly describes the winnersand losers from inflation in 2006?

A. No one benefited because the rise in inflation created dead weight loss.

B. Small Land borrowers benefited at the expense of Small Land lenders.

C. Small Land savers benefited at the expense of Small Land investors.

D. Small Land workers benefited at the expense of Small Land employers.

17. As price elasticity of demand approaches 0, very small changes in price lead to

A. very large changes in quantity demanded.

B. very small changes in quantity demanded.

C. no change in quantity demanded.

D. None of the above is correct.

18. It is necessary for a Duke student to wait in line to obtain a ticket to a Blue Devil basketballgame but students are not required to purchase their tickets (i.e., they pay 0 to obtain theticket). Which of the following correctly explains why the cost of a ticket is not the samefor all students?

A. Some students care to sit closer to the playing floor than others.

B. Some students enjoy watching basketball more than others.

C. Some students are more loyal fans than others.

D. Some students have more valuable alternative uses of their time thanothers.

19. A checking deposit functions as

A. a medium of exchange and as a store of value.

B. a medium of exchange, but not as a store of value.

C. a store of value, but not as a medium of exchange.

D. neither a medium of exchange nor as a store of value.

20. A closed economy does not

A. trade with other economies.

B. have free markets.

C. allow financial intermediation.

D. All of the above are correct.

Page 6

Good Price Elasticity of DemandA 1.3B 2.1

21. Which of the following is consistent with the elasticities given above?

A. A is a luxury, and B is a necessity.

B. A is a good several years after a price increase, and B is that same good severaldays after the price increase.

C. A is a Kit Kat bar, and B is candy.

D. A has fewer substitutes than B.

22. Ryan says that he would buy one cup of co↵ee every day regardless of the price. If he istelling the truth, Ryan’s

A. demand for co↵ee is perfectly inelastic.

B. price elasticity of demand for co↵ee is 1.

C. income elasticity of demand for co↵ee is 0.

D. None of the above answers is correct.

23. A local park filled with picnickers is

A. excludable and rival in consumption.

B. excludable and not rival in consumption.

C. not excludable and rival in consumption.

D. not excludable and not rival in consumption.

24. Consider a small economy in which consumers buy only two goods: pretzels and cookies.In order to compute the consumer price index for this economy for two or more consecutiveyears, we assume that

A. the percentage change in the price of pretzels is equal to the percentage changein the price of cookies from year to year.

B. the number of pretzels bought by the typical consumer is equal to the number ofcookies bought by the typical consumer in each year.

C. neither the number of pretzels nor the number of cookies bought bythe typical consumer changes from year to year.

D. neither the price of pretzels nor the price of cookies changes from year to year.

25. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basketconsists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazinecost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in2007 was 125, then how much did a magazine cost in 2007?

A. $0.83

B. $2.25

C. $2.50

D. $3.00

Page 7

26. Which of the following is an example of a positive externality?

A. Sue not catching the flu because she got a flu vaccine

B. Mary not catching the flu from Sue because Sue got a flu vaccine

C. Sue catching the flu because she did not get a flu vaccine

D. Mary catching the flu from Sue because Sue did not get a flu vaccine

27. Because resources are scarce, an economist would say

A. The best things in life are free.

B. Wants are unlimited.

C. Every choice has an opportunity cost.

D. Marginal benefit is equal to marginal cost.

28. If a binding price floor is imposed on the video game market, then

A. the demand for video games will decrease.

B. the supply of video games will increase.

C. a surplus of video games will develop.

D. All of the above are correct.

29. Pepper’s Pizza is having a sale on pizza. Today only, a slice of plain cheese pizza is $1.75,rather than the normal price of $2.25. You decide to have three slices of pizza for lunchinstead of your normal purchase of two. Which of the following would be a correct economicexplanation of your decision?

A. The marginal benefit of the third slice was higher than the marginal benefit ofthe second slice.

B. The marginal cost of a slice was lower than the marginal benefit forthe third slice but higher than the marginal benefit for a fourth.

C. The sale implied that the marginal cost of pizza fell below marginal benefit andstayed there.

D. The sale implied that eating more pizza freed up resources for other economicactivities.

30. Imagine an economy in which: (1) pieces of paper called yollars are the only thing thatbuyers give to sellers when they buy goods and services, so it would be common to use,say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so youmight walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3)yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. Inthis economy,

A. the yardstick is a medium of exchange but it cannot serve as a unit of account.

B. the yardstick is a unit of account but it cannot serve as a store of value.

C. the yardstick is a medium of exchange but it cannot serve as a store of value, andthe yollar is a unit of account.

D. the yollar is a unit of account, but it is not a medium of exchange and it is not aliquid asset.

Page 8

31. If real GDP doubles and the GDP deflator doubles, then nominal GDP

A. remains constant.

B. doubles.

C. triples.

D. quadruples.

32. Suppose the banking system currently has $400 billion in reserves, the reserve requirementis $10 percent, and excess reserves are $3 billion. What is the level of loans?

A. $3, 603

B. $3, 600

C. $3, 573

D. $3, 570

33. The Fed increases the reserve requirement, but it wants to o↵set the e↵ects on the moneysupply. Which of the following should it do?

A. sell bonds to increase reserves

B. sell bonds to decrease reserves

C. buy bonds to increase reserves

D. buy bonds to decrease reserves

34. If you adhered to the classical economics paradigm, which of the following statements wouldyou disagree with?

A. Money has no intrinsic value.

B. Government regulation of markets is needed to ensure the harmony ofindividual and national interests.

C. The economy and markets are self-adjusting.

D. Real factors matter more than monetary ones in determining output and employ-ment.

35. The economy’s two most important financial markets are

A. the investment market and the saving market.

B. the bond market and the stock market.

C. banks and the stock market.

D. financial markets and financial institutions.

36. A national chain of grocery stores wants to finance the construction of several new stores.The firm has limited internal funds, so it likely will

A. demand the required funds by buying bonds.

B. demand the required funds by selling bonds.

C. supply the required funds by buying bonds.

D. supply the required funds by selling bonds.

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37. Suppose an increase in government spending on military equipment leads to an increasedgovernment budget deficit. If no other changes occur, there will be a(n) innational saving and a(n) in the real interest rate.

A. Increase, Increase

B. Increase, Decrease

C. Decrease, Decrease

D. Decrease, Increase

38. If the tax revenue of the federal government exceeds spending, then the government neces-sarily

A. runs a budget deficit.

B. runs a budget surplus.

C. runs a national debt.

D. will increase taxes.

39. Kathleen is considering expanding her dress shop. If interest rates rise she is

A. less likely to expand. This illustrates why the supply of loanable funds slopesdownward.

B. more likely to expand. This illustrates why the supply of loanable funds slopesupward.

C. less likely to expand. This illustrates why the demand for loanablefunds slopes downward.

D. more likely to expand. This illustrates why the demand for loanable funds slopesupward.

40. If the demand for loanable funds shifts to the left, then the equilibrium interest rate

A. and quantity of loanable funds rise.

B. and quantity of loanable funds fall.

C. rises and the quantity of loanable funds falls.

D. falls and the quantity of loanable funds rises.

41. If the inflation rate is 2 percent and the real interest rate is 3 percent, then the nominalinterest rate is

A. 5 percent.

B. 1 percent.

C. 1.5 percent

D. 0.67 percent.

42. Crowding out occurs when investment declines because

A. a budget deficit makes interest rates rise.

B. a budget deficit makes interest rates fall.

C. a budget surplus makes interest rates rise.

D. a budget surplus makes interest rates fall.

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43. Gross domestic product measures

A. income and expenditures.

B. income but not expenditures.

C. expenditures but not income.

D. neither income nor expenditures.

44. Bountiful Harvest Bakery buys $4.00 of flour from Grinkers’ Mill and uses the flour to makebread sold to the public for $12.00. Taking these two transactions into account, what is thee↵ect on GDP?

A. GDP increases by $4.00

B. GDP increases by $8.00

C. GDP increases by $12.00

D. GDP increases by $16.00

45. Sheri, a U.S. citizen, works only in Germany. The value she adds to production in Germanyis included

A. in both German GDP and U.S. GDP.

B. in German GDP, but is not included in U.S. GDP.

C. in U.S. GDP, but is not included in German GDP.

D. in neither German GDP nor U.S. GDP.

46. The CPI was 172 in 2007, and the CPI was 46.5 in 1982. If your parents put aside $1, 000for you in 1982, then how much would you have needed in 2007 in order to buy what youcould have bought with the $1, 000 in 1982?

A. $270.35

B. $1, 255.00

C. $2, 698.92

D. $3, 698.92

47. The BLS counts discouraged workers as

A. employed. Including them as employed makes the unemployment rate lower thanotherwise.

B. unemployed. Including them as unemployed makes the unemployment rate higherthan otherwise.

C. out of the labor force. If they were counted as unemployed the unem-ployment rate would be higher.

D. None of the above is correct.

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48. Raleigh is building a new convention center and financing it with revenues raised by acity hotel tax. Some politicians have said that the convention center is essentially free forRaleigh citizens because out-of-town visitors are paying for it. Someone thinking like aneconomist would disagree because:.

A. The hotel tax may cause a reduction in visits to Raleigh.

B. There are other projects that could be undertaken with the tax funds.

C. The convention center may not pass a benefit-cost test.

D. They believe that Raleigh does not need a new convention center.

49. If all workers and all jobs were the same such that all workers were equally well suited forall jobs, then there would be no

A. cyclical unemployment.

B. frictional unemployment.

C. natural rate of unemployment.

D. structural unemployment.

50. Unemployment data are collected

A. from unemployment insurance claims.

B. through a regular survey of about 60,000 households.

C. through a regular survey of about 200,000 firms.

D. using all of the above.

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51. For each of the following questions, state whether you agree or disagree with the followingbold statements and provide a brief explanation of why. No points will be awarded foranswers without explanations. State any assumptions that you make.

a) Jonathan consumes only steak and salad. At his current consumption bundle, he isspending all of his income. His marginal utility from eating steak is 14 and his marginalutility from eating salad is 6. The price of steak is 7. The price of salad is 2. Jonathanshould consume more salad and less steak. (6 points)

b) A firm su↵ering losses in the short-run will continue to operate as long as itsrevenue will at least cover its fixed costs. (6 points)

c) In reality, firms usually do not have identical costs. As a result, in a perfectlycompetitive market, di↵erent consumers will pay di↵erent prices for the sameproduct. (6 points)

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d) Suppose that there are two cities that are alike in every way (entertainment, restaurants,job opportunities, school system, salaries, etc.) except for the weather. In Good-Weather-City (GWC) the temperatures are comfortable all year long. In Bad-Weather-City (BWC),the winter brings snow and freezing rain, and the summer has intense heat and high hu-midity. One would expect that the price of similar homes (same size, number ofbedrooms, etc) to be same in both GWC and BWC. (6 points)

e) Cutting the price of a product never increases the amount of revenue raised.To increase revenue, prices have to be increased. (6 points)

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52. At first patents might seem like a deterrent to growth because in e↵ect they restrict the useof new technology. Yet many economists believe that patents generate economic growth.Explain why. (5 points)

53. The following questions are on macroeconomic schools of thought.a) What is a paradigm? (3 points)

b) Let’s go back to the 16th century when mercantilist thought emerged in Europe. Whatwere the two tenets of mercantilism? (6 points)

c) Classical economic thought emerged as an attack on mercantilism. Can you tell mewhat were the two features of classical economics that were key in this attack? (6 points)

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