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(ECON150)150f2006.midterm.pdf
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Department of Economics, HKUST
ECON 150

Big Problems in Economics: Issues, Ideas, and Principles
Semester: Fall 2006 Professor S. F. Leung
Midterm Examination October 26, 2006 12:00 noon C 1:20 pm
This is a closed book examination. You have 80 minutes to complete the test. Write coherently, lucidly, and legibly. Explain your answers wherever necessary. The maximum score for this exam is 80 points. Points are marked next to the questions and may be served as a rough guide to how much time you should allocate on each question. Points will be deducted for irrelevant materials. Use mathematics and/or diagrams wherever appropriate to support your answer.
This exam contains 4 pages and 8 questions.
1.
(5)

Recent reliable scientific studies show that people who use suntan lotion are more likely to develop skin cancer. It is reasonable to conclude from this fact that people should try to avoid using suntan lotion. Do you agree? Explain.

2.
(6)


(a)
What will be the shape of the production possibilities frontier if there is increasing opportunity cost? Explain.

(b)
What will be the shape of the production possibilities frontier if the opportunity cost is constant everywhere? Explain.

(c)
What will be the shape of the production possibilities frontier if all workers are identical? Explain.


3.
(5)

The unemployment rate must go down throughout the expansion phase of a business cycle. Do you agree? Explain.

4.
(6)


Consider the following table for Peter and Paul:
Hours of Work Required for: Peter Paul
Making one chair 11 hours 12 hours
Making one table 2 hours 2 hours

(a)
Who is more efficient in making chairs? Explain.

(b)
What is Peter's opportunity cost of making a chair? Explain.

(c)
What is Paul's opportunity cost of making a chair? Explain.


5. (13)
A firm has the following cost table, where AFC = average fixed cost, TVC = total variable cost, ATC = average total cost, MC = marginal cost, and TC = total cost.
Quantity AFC TVC ATC MC TC
0
1 30
2
3 20 60
4 80
5 2 26

(a)
Find the missing entries in the table.

(b)
If the firm is a price-taker and the market price is $20, what will be the firms profit?

(c)
If there is no barrier to the entry and exit of firms, what will happen to the firms profit and output? Explain.


6. (10)
Bank America offers an annual interest rate of 4.06 percent, compounded quarterly, while Bank USA offers an annual interest rate of 4.05 percent, compounded monthly.
(a) Suppose you make a $1,000,000 deposit now, how much will you get back one year from today if you deposit the cash in
(i)
Bank America?

(ii)
Bank USA?


In which bank should you deposit your money?
(b) If the lending annual interest rate is 10 percent, compounded monthly, calculate the monthly repayment required on a five-year $1,000,000 loan. Assume that the first repay