60 Points Total

Please answer five of the following seven questions. Clearly indicate which question you don't want graded. 12 points each.

1. A group of students has decided to get together to form a "house cleaning and cake baking" business. Experience tells them that they can bake 30 cakes and clean 0 houses or bake 28 cakes and clean 1 house, etc. according to the following table:

a. What is the opportunity cost of the first house? What is the opportunity cost of the 5^th house?

Opportunity cost of the first house=2 cakes (=30-28)
Opportunity cost of the fifth house=10 cakes (=10-0)

b. Say the group wanted to clean three houses and bake 24 cakes on one day. List two specific ways that they can accomplish this.

The group can find more people to join them (increased resources) or learn how to clean houses and bake cakes better (increased technology).

2. Graphically indicate what happens in the Arcata beer market when the following occur. Be sure to indicate what happens to the equilibrium price and quantity and briefly give your reasoning.

NOTE: Other answers are possible, but you must explain your reasoning.

a. It is St. Patrick's Day.

Demand increases (tastes and preferences) along with the equilibrium price and equilibrium quantity.

b. The city of Arcata reduces the number of permits for selling alcohol.

This reduces the number of suppliers, so Supply falls. Equilibrium price rises and quantity falls.

c. A new beer is created that can be stored without refrigeration.

This reduces costs to firms. Supply increases and the equilibrium quantity increases. The equilibrium price falls.

d. It is HSU's Spring Break.

The population of beer drinkers falls tremendously. Demand falls as well as the equilibrium price and quantity.

3. It is well-known that there are shortages of parking spaces on campus. Currently, people charged $12 per month for a parking permit.

a. Using Supply and Demand, draw the market for parking spaces. Indicate whether the market equilibrium price for parking permits greater or less than $12.

The equilibrium price is greater than $12.

b. HSU currently does not use price to allocate parking spaces. How does HSU allocate parking spaces?

First come, first serve. Also, faculty have access to lots that students do not.

c. What happens to the shortage if a new parking garage is built and the price remains at $12?

The shortage decreases.

4. Suppose a local tomato farmer is deciding how many workers to hire and the price of tomatoes is $3 per pound. The farmer knows how much workers will grow according to the following table:

# Workers	# Pounds of Tomatoes	Marginal Physical Product (MPP)	Marginal Revenue Product (MRP)
1	6	6	$18
2	10	4	$12
3	12	2	$6

a. Complete the above table for the MRP.

See the MRP column in the table

b. What is the most that the farmer will pay to hire the first worker?

$18=MRP

c. If the going wage rate is $6 per hour, how many workers will the farmer hire?

3 workers

5. Suppose that a local coffee house brews coffee for people to buy, but that it emits a strong and unpleasant smell when it produces coffee.

a. Which one of the four types of market failure does this illustrate?

Negative Externality

b. Explain why, if left to itself, the market will produce too much coffee from society's point of view. Be sure to discuss private, external, and social costs.

The coffee house (and its customers) pay only the private costs of producing the coffee, such as the costs of labor and the beans. However, there are externals costs (the air pollution) that are felt by society. Since the customer does not pay the true social cost (=private + external costs), customers demand too much coffee from society's standpoint.

Also, if customers did pay the true social costs (if there was no negative externality) then there would be less coffee demanded.

c. Suggest two specific ways in which the government could intervene to correct this problem.

The government could tax brewing coffee or require filters that protect the clean air.

6. Suppose that Garberville has 4,900 people of working age. Of these, 3,000 people are employed working full-time and 400 people are employed part-time. Further suppose that there are 500 people without jobs who are looking for work and 1,000 people without jobs not looking for work.

a. What is the unemployment rate of Garberville?

Unemployment Rate= 500 / (3000+400+500) = 500/3900= 0.128= 12.8%

b. Let's say Jethro loses his job as a traffic cop because Garberville installs a new traffic light. Of the four, which type of unemployment is Jethro suffering from?

He is structurally unemployed because new technology has made his job obsolete.

7. a. List two groups that are not hurt by unanticipated (unexpected) inflation? Explain.

Possibilities include:

People who borrow money, because they pay back dollars that are "worth" less than they anticipated.
Wage earners, since wages rise when there are periods of inflation.
People who hold real assets, such as real estate or stocks, since the value of these items generally rises when the price level does.

b. Say that you get a 3 percent raise this year and that the inflation rate was 5 percent. What happened to your nominal and real wages?

Nominal wages increased (your wage is higher).
Real wages decreased (your wage didn't rise as fast as inflation, so you can buy fewer goods).