Microeconomics Midterm Exam Questions -

Q1) Let the monthly labor demand in Chapel Hill be given by D(w) = 30,000 × (40 - w) hours and let the supply be given by S(w) = 60,000 × (w - 10) hours, where w is the hourly wage. 

a) What is the hourly wage in Chapel Hill?

b) Suppose demand falls to D(w) = 30,000 × (37 - w). If wages are sticky and do not fall, what will be the reduction in hours worked in Chapel Hill?

c) Now suppose demand falls to D(w) = 30,000 × (37 - w) but that wages are not sticky. They immediately adjust to the new labor demand. What are wages and hours worked in Chapel Hill?

Q2) Suppose that demand for a product is very inelastic when the price is less than $8, but very elastic for higher prices. Which of these best describes the demand curve (Circle one):

Q3) Suppose the production of copper causes water pollution, which is a negative externality. Let the demand for copper be D(p) = 100,000 × (8 - p) and the supply of copper be S(p) = 100,000 × (p - 2). The negative externality is $2 per unit produced.

Draw a supply and demand graph of this industry, showing supply and demand for copper as well as a line showing the "true cost" of copper production. Label the intercepts, the "free-market" price of copper, and the quantity sold. What is the optimal tax per unit produced?

Q4) Yan is an analyst at Commerce-Merc and Co. He is tasked with preparing senior traders with reports on expected price movements resulting from news that has been released since the previous trading day. In each case below, determine whether Yan should tell the traders to expect higher or lower prices and, when possible, how much higher or lower.

a) The US Government has announced a tariff on imported steel. Which direction should Yan argue that steel prices in the US are likely to go?

HIGHER or LOWER

b) The US Government has announced a tariff on imported steel. Which direction should Yan argue that steel prices outside the US are likely to go?

 HIGHER or LOWER

c) The current price (that sellers receive) of grade A beef is $15 per pound. Yan has calculated that demand for beef is three times as elastic as supply. The state has just announced it will remove a $4 tax on beef, effective immediately. How much should Yan argue that the price that sellers receive is likely to rise?

d) A drought has damaged crops throughout the Midwest, and the latest report from the USDA states that the problem is much larger than previously believed. Which direction should Yan argue that crop prices are likely to go?

HIGHER or LOWER

e) Congress has been debating whether to impose either (1) a carbon tax of $10/ton, or (2) a cap-and-trade system in which the price of carbon is likely to be $10/ton. In the cap-and-trade system, permits would be given to industry for free. In a midnight vote, congress chose the carbon tax. Should Yan argue that industrial stocks are likely to be higher in the morning, or lower?

HIGHER or LOWER

Q5) Suppose that the supply of loans (that is, funds that banks make available to be borrowed) equals S(r) = 8 (in trillions of dollars) and the annual demand for loans from potential borrowers is D(r) = 10 - r, where r is the annual interest rate (in percentage points). For example, if the interest rate were 5%, then borrowers would wish to borrow five trillion dollars. Throughout the problem assume that the interest rate cannot be negative.

a) What is the interest rate? How much money will be borrowed this year?

b) Lower interest rates are often seen as stimulative, because lower interest rates make borrowing more attractive, increasing loan demand and therefore consumption and investment. Suppose the Federal Reserve increases the money supply so that the supply of loans is S(r) = 10 trillion dollars. What is the interest rate? How much money will be borrowed this year? Does this Fed policy actually increase borrowing?

c) Suppose that the Federal Reserve increases the money supply so that the supply of loans is S(r) = 12 trillion dollars. What is the interest rate? How much money will be borrowed this year? Does this Fed policy actually increase borrowing, relative to part (b)? In one or two sentences below, describe why your answer is different from part (b). For those of you who are interested, this situation is known as a "liquidity trap" and many economists believe that we experiencing one right now.