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(ECON150)150f2006.midterm.key.pdf
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Department of Economics, HKUST
ECON 150
Big Problem in Economics: Issues, Ideas, and Principles

Semester: Fall 2006/07
Tutor: Peter K. Tsui Office number: Room 2393 (ext.7597) Email: [email protected] Office hours: Thu 2:30p.m. C 5:00p.m.
Note: This set of solutions serves only as guidelines for grading. Giving the same answers as suggested below is no guarantee of full credits. Detailed explanation is required.

Midterm Examination
(Solutions prepared by Peter Tsui)

1.
No. The people who use suntan lotion are those who often expose themselves to sunshine, and therefore are more likely to develop skin cancer.

2.
(a)


y

MC
Slope = . X
MCY
x The slope of the PPF measures the marginal cost of producing one good relative to the marginal cost of producing the other. The curvature of the PPF follows directly from the fact that the marginal cost of producing X relative to the marginal cost of producing Y is increasing.
(b)

MCX
Slope = . = Constant
MCY
x When the opportunity cost is constant, the PPF is a straight line.
(c) Uncertain If the Law of Diminishing Marginal Returns holds, the PPF is concave.
3.
No. The economic boom will encourage more people to enter the job market. This is called the Encouraged Worker Effect. As the number of people who are actively looking for jobs increases, the unemployment rate may go up.

4.
(a) Peter

(b)
5.5 tables

(c)
6 tables



5.
(a)

(b)
P = MC = 20 => Q = 3 TC = 60 = 20 3 . 60 = 0

(c)
The firm cannot set the price any higher than 20. => Q = 3 = 0



6.
(a) (i) $1,000,000 (1+ )4 = $1,041,222.3


Quantity AFC TVC ATC MC TC
0 -- 0 -- 0 0 or 10
1 10 20 30 30 or 20 30
2 5 30 20 10 40
3 3.33 50 20 20 60
4 2.5 80 22.5 30 90
5 2 120 26 40 130

0.0406
4 0.0405 12
(ii) $1,000,000 (1+ ) = $1,041,260.3
12 $1,000,000 should be deposited in Bank USA.
(b) Let the monthly repayment be C.
10%

The effective monthly interest rate = = 0.83%
12 C 1
$1,000,000 = (1. )
0.0083 1.008360
. C = $21,247.04

7. (a) Implicit costs are the opportunity costs associated with a firms use of resources that it owns. These costs do not involve a direct money payment.
The implicit costs in this question are:
Foregone salary $240,000 ($20,000*12)
Foregone interest income $2,400 ($60,000*4%)
Decline in equipments market value $18,000 ($60,000*0.3)

(b) TC = $100,000 + $288,000 + $12,000 + $240,000 + $2,400 + $18,000 = $660,400
= TR . TC
= $600,000 . $660,400 =.$60,400

No, Andrew should not quit his job.
8. (a) w* = 55 L* = 450
(b) (i) Ld = 200 Ls = 700
There will be an excess supply of 500 workers.

(ii) w* = 80 L* = 200
(iii) 500 people will be unemployed
(iv)

200 450 700 1000
DWL = 6,250 2 30)200)(80(450 = ..
(v) Not necessarily. More unemployment is created.
(c) (i) New Demand: Supply: 10)10(100