Econ 100 Assignment 05

Deadline: 4 pm, Monday 12th December, 2011 1. Change in the price of goods produced in foreign country and consumed locally will: a) change the GDP deflator b) change the CPI c) both a) and b) d) none of the above 2. Which of the following statements is correct? An individual worker's labor supply curve a.can never slope downward. b.slopes downward if that person responds to a higher wage by taking fewer hours of leisure per week. c.slopes downward if that person responds to a higher opportunity cost of leisure by working fewer hours per week. d.slopes upward if that person works the same number of hours per week, regardless of the opportunity cost of leisure. 3. The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts and 2 pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonias inflation rate in 2006? a.30 percent b.24.4 percent c.21.6 percent d.It is impossible to determine without knowing the base year. In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes and 2 gallons of gasoline. The per-unit prices of these goods have been as follows

Year 2002 2003 2004 2005

Apples $1.00 $1.00 $2.00 $3.00

Bread $2.00 $1.50 $2.00 $3.00

Robes $10.00 $9.00 $11.00 $15.00

Gasoline $1.00 $1.50 $2.00 $2.50

4. Using 2002 as the base year, what was the inflation rate between 2002 and 2003? a.-8.89 percent b.-7.14 percent c.3.75 percent d.11.25 percent 5. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the inflation rate in 2007 was 16 percent, then how much did a magazine cost in 2007? a.$2.08 b.$2.32 c.$2.50 d.$2.64
6. In the circular flow model: a) business firms earn most of the income flow in the form of profit. b) business firms earn a small part of the income flow in the form of profit. c) households supply resources to the business sector. d) business firms buy goods and services from the household sector. 7. Gross Domestic Product (GDP) is defined as the market value of: a) all goods and services sold during the year. b) all final consumer goods produced during the year. c) all intermediate goods produced during the year. d) all final goods and services produced in the domestic economy during the year. 8. Which of the following is the best example of an intermediate good? a) A car that is produced in 1995, but sold in 1996. b) A used car that was produced in 1990. c) Steel used to produce cars. d) Computers sold to a Canadian firm. 9. . The four major categories of expenditures in the economy are: a) consumption, gross investment, government purchases and exports. b) consumption, net investment and net exports. c) consumption, fixed investment, government purchases and net exports. d) consumption, gross investment, government purchases and net exports.

10. In the equation GDP = C + I + G + NX, in which NX equals exports minus imports, imports are
subtracted from the other types of expenditure because:

a) imports reduce national welfare. b) other countries do not import goods from the U.S. c) the value of imports is included in the other components of spending. d) the value of imports is difficult to determine due to the fact that they are frequently stated in terms of foreign currency.

11. Which of the following statements is false?

a) Purchases of new homes are included in the investment component of GDP. b) GDP measures the value of sales of goods and services during a year. c) GDP measures new production only. d) Any change in business inventories goes in the investment component of GDP. 12. The difference between GDP and national income is: a) equal to the difference between exports and imports. b) equal to the difference between government purchases and investment. c) the sum of depreciation and indirect business taxes. d) the value of inventories accumulated during the year. 13. Suppose 1995 nominal GDP = $6,500 billion. Suppose prices were 30% higher in 1995 than in 1987. What is 1995 real GDP if 1987 is used as the base year? a) $4,000 billion. c) $5,000 billion. b) $4,500 billion. d) $5,500 billion.

14. Suppose 1984 nominal GDP was $3,600 billion. Suppose prices were 20% lower in 1984 than in
1987. What is 1984 real GDP, using 1987 as the base year. a) $4,500 billion. c) $5,000 billion. b) $4,800 billion. d) $5,200 billion. 15. Suppose that in 1985, nominal GDP was $3,600 billion and in 1995 it was $6,700 billion. Suppose the price index was 90 in 1985 and 125 in 1995(1987 = 100). Based on this information we can conclude that between 1985 and 1995, real GDP measured in 1987 dollars rose by: a) $1,280 billion. c) $1,480 billion. b) $1,360 billion. d) $1,560 billion. 16. . Assuming that C = $4,500, I = $1,000, G = $1,200, Exports = $450, Imports = $550, Depreciation = $600, and Indirect Business Taxes = $500 (all in billions of dollars), GDP equals: a) $5,500 billion. c) $6,400 billion. b) $6,000 billion. d) $6,600 billion. 17. . Referring to the numbers given in the previous question, national income is: a) $5,000 billion. c) $6,000 billion. b) $5,500 billion. d) $6,300 billion.

18. . All of the following statements are true except: a) The difference between gross and net investment is replacement investment. b) In the equation GDP = C + I + G + NX, the I refers to net investment. c) Depreciation is part of GDP that does not flow to households. d) Households earn income by contributing factor inputs to the production of consumer and capital goods.

19. Which of the following would be included in 1995 GDP? a) Money deposited in a savings account during 1995. b) The purchase of a house built in 1980. c) Social Security payments made to individuals during 1995. d) The production of wheat during 1995 that is sold to China. 20. . If 1995 nominal GDP = $7,000 billion and 1995 real GDP = $5,000 billion, with 1987 as the base year, what is the implicit price deflator for 1995? Assume that 1987 GDP = $4,500 billion. a) 120. b) 125. c) 140. d) 150. 21. Suppose the cost of a loaf of bread to a grocery chain is $0.50 and the grocery's value-added through packaging and transporting the loaf is $0.75. Which of the following statements is true? a) The price of the loaf will be $0.75. b) The price of the loaf will be $1.25. c) The price of the loaf will be $1.25 only if the grocery earns zero profits. d) The price of the loaf will be $0.25.

22. All of the following are reasons GDP is not a good measure of social welfare except: a) the value of leisure time is not included in the calculation of GDP. b) GDP ignores the effect of negative externalities. c) GDP does reflect the effect of pollution. d) GDP does not include services.
23. The following data were collected for the country of Wannabegone for 1995. (Data are in millions of dollars.) Exports.................................................$580 Purchases of Plant and Equipment.........$800 Consumption.......................................$2000 Imports................................................$730 Transfer Payments...............................$150 Depreciation......................................... $70 Government Purchases.........................$650 Indirect Business Taxes........................$100 a. Using these data, calculate the following: GDP = ________ b. Assuming that the price index is 125 (base year = 1987) calculate real GDP for 1995.

24. In the circular flow model: a) business firms supply the factors of production to the household sector. b) households use the income they earn from their factors of production to buy goods and services. c) households supply goods and services to the business sector. d) business firms buy goods and services from the household sector. 25. The major categories of spending in the economy are: a) consumption, investment, government purchases, and taxes. b) consumption, savings, and taxes. c) consumption, fixed investment, government purchases, and net imports. d) consumption, investment, government purchases, and net exports.

26. Which of the following is not included when calculating nominal GDP for a given year?
a) Consumption purchases. c) Government spending on transfers. b) Gross investment spending. d) Net exports. 27. The prices paid for intermediate goods should: a) be included separately in the calculation of GDP because intermediate goods add to the value of final goods. b) be included separately in the calculation of GDP because failure to do so would result in an underestimate of the total value of production in a given year. c) not be included separately in the calculation of GDP because to do so would result in double counting of the value of intermediate goods. d) not be included separately in the calculation of GDP because intermediate goods do not add to the total value of production in the economy. 28. For 1979 the Consumer Price Index (CPI) was 72.6 and for 1980 it was 82.4 (Base Year = 1983). Based on this information, the inflation rate between 1979 and 1980 was approximately: a) 9.8%. c)11.9%. b) 11.3%. d) 13.5%. 29. One of the problems with using GDP as a measure of social welfare is that it: a) overstates the value of production that occurs in the home. b) more than adequately capture the impacts of production on the level of environmental quality. c) fails to capture the value of spending on imported goods. d) fails to capture the adverse effect increased production may have on the amount of leisure time workers are able to enjoy. Purchases of Plant and Equipment . . . . . $1,202 Residential Construction . . . . . . . . . . . . $ 445 Net Change in Inventories . . . . . . . . . . . $ !60 Government Purchases . . . . . . . . . . . . . . $1,858 Indirect Business Taxes . . . . . . . . . . . . . $ 775 Depreciation . . . . . . . . . . . . . . . . . . . . . . $1,329 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . $1,034 Imports . . . . . . . . . . . . . . . . . . . . . . . . . . $1,383 30. Using the data above, in 2001, gross domestic product (GDP) was equal to: a) $9,698 billion. c) $11,081 billion. b) $10,083 billion. d) $11,586 billion. 31. Assuming that the GDP deflator in 2001 was 109.4 (base year = 1996), real GDP in 2001 was (approximately) equal to: a) $10,590 billion. c) $9,217 billion. b) $10,129 billion. d) $8,865 billion.

32. Which of the following statements is correct?

a) The growth of real GDP per person depends primarily on the growth of worker productivity. b) An increase in inflation would cause the growth of real GDP per person to increase.

c) There is no connection between the growth rate of real GDP per person and the rate of productivity growth. d) If worker productivity increases, real GDP per person will decline since fewer workers are needed to produce the same level of output.

33. Answer the following questions based on the table. A consumer is able to consume the following bundles of rice and beans when the price of rice is $2 and the price of beans is $3.

RICE 12 6

BEANS 0 4

a. b. c.

How much is this consumer's income? Draw a budget constraint given this information. Label it B. Construct a new budget constraint showing the change if the price of rice falls $1. Label this C.

d.

Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this consumer's income increased to $48. Label this D.

34. Assume that a consumer faces the following budget constraints.

a. b. c.

Assuming that income is the same on both occasions, describe the difference in relative prices between Panel A and Panel B. If income in Panel B is $126, what is the price of good X? If income in Panel A is $84, what is the price of good Y?

d.

Assuming that the price of good X is the same on both occasions, describe the difference in income and price of good Y between Panel A and Panel B.

e. Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of a normal good.

The graph below illustrates a price decrease for potato chips. Moving from point A to point B illustrates the substitution effect, while moving from point B to point C illustrates the income effect. Figure 21-9

35. Refer to Figure 21-9. Given the budget constraint depicted in the graph, the consumer will choose bundle

a. b. c.

B. C. D.

d.

E.

36. Refer to Figure 21-9. It would be possible for the consumer to reach I2 if

a. b. c. 37. d. a. b. c. d. 38. a. b. c. d. 39. a. b. c. d. 40. a. b. c. d.

the price of Y decreases. the price of X decreases. income increases. Refer to Figure 21-9. Bundle B represents a point where All of the above would be correct. MRSxy > Py/Px. MRSxy = Px/Py. MRSxy < Px/Py. MRSxy > Px/Py. Refer to Figure 21-9. Bundle C represents a point where MRSxy > Py/Px. MRSxy = Px/Py. MRSxy < Px/Py. MRSxy > Px/Py. . Refer to Figure 21-9. Bundle D represents a point where MRSxy > Py/Px. MRSxy = Px/Py. MRSxy < Px/Py. MRSxy < Py/Px.

The income effect of a price change is depicted by a parallel shift of the budget constraint at the old set of prices. a parallel shift of the budget constraint at the new set of prices. a movement along the budget constraint holding the level of satisfaction constant. not observable and is therefore neither a shift nor a change in the slope of the budget constraint.

41. Assume that a college student purchases only coffee and Snickers bars. The substitution effect associated with a decrease in the price of a Snickers bar will result in a. an increase in the consumption of coffee only. b. a decrease in the consumption of coffee only. c. an increase in the consumption of Snickers bars and a decrease in the consumption of coffee. d. a decrease in the consumption of Snickers bars and an increase in the consumption of coffee. 42. Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution effect by itself will a. cause the consumer to buy more of good Y and less of good X. b. cause the consumer to buy more of good X and less of good Y. c. not affect the amount of goods X choose a medical insurance policy with a 43. An unhealthy person would likely and Y that the consumer buys. in an upward-sloping demand for good Y if the substitution a. low premium and a deductible. Table d. result Tricia, Sarah, highKatie -- are deciding whereSarah together effect is positive. all agree that they Three 22-1 -friends and Tricia to go for vacation. They Katie b. high premium and a high deductible. should go to one of three places: Ireland, Italy, or Greece. They also agree that they will have two pairwise votes to First choice Ireland Italy Greece c. high premium and no deductible. determine where to go on vacation, with the majority determining Second choice unhealthy person would choose not to be insured. the outcome on each vote. The first, second, and Italy Greece Ireland d. The third choice indicated Thirdchoices for each person are asGreece in the table below. Ireland Italy 44. 45. a. a. b. b. c. c. d. d. Refer to Table 22-1. If the first vote pits Ireland against Italy and the second vote pits Greece against the Refer to Table 22-1. If then the outcome is as follows: winner of the first vote, the first vote pits Ireland against Greece and the second vote pits Italy against the Ireland wins first vote, then the outcome is as second winner of the the first vote and Greece wins thefollows: vote, so they go to Greece. Ireland wins the first vote and Ireland wins the second vote, so they go to Ireland. Italy wins the second vote, so they go to Italy. Ireland wins the first vote and Ireland the second vote, so they they Italy. Italy wins the first vote and Italy wins wins the second vote, so go togo to Ireland. Greece wins the first vote and Greece wins the second vote, they go to Greece. Italy wins the first vote and Greece wins the second vote, so so they go to Greece. Greece wins the first vote and Italy wins the second vote, so they go to Italy.

46. Refer to Table 22-1. If the first vote pits Italy against Greece and the second vote pits Ireland against the winner of the first vote, then the outcome is as follows: a. Italy wins the first vote and Ireland wins the second vote, so they go to Ireland. b. Italy wins the first vote and Italy wins the second vote, so they go to Italy. c. Greece wins the first vote and Greece wins the second vote, so they go to Greece. d. Greece wins the first vote and Ireland wins the second vote, so they go to Ireland. 47. a. b. c. d. 48. a. b. c. d. Refer to Table 22-1. Depending on the order of the pairwise voting, the friends could go to either Ireland, Greece, or Italy. the friends could go to either Ireland or Greece, but they will not go to Italy. the friends could go to either Greece or Italy, but they will not go to Ireland. the friends could go to either Ireland or Italy, but they will not go to Greece. Refer to Table 22-1. If the friends change their minds and decide to choose a vacation destination using a Borda count, then the friends will go to Ireland. the friends will go to Italy. the friends will go to Greece. A Borda count will not result in a single winner in this case.
1. 2. 3. 4. 5.

49. True/False The Condorcet paradox implies that the order in which items are voted on under majority rule is unimportant. A "satisficer" is a person whose decisionmaking is the same as that predicted by mainstream economic models. In the employer-worker relationship, the employer is regarded as the "principal" and the worker is regarded as the "agent." An example of asymmetric information is when a seller of a house knows more than the buyer about the houses condition.

50. How have insights from the field of psychology influenced the thinking of economists in recent years?
51.