Part 1:

1. Using the concept of elasticity, show that a drug enforcement policy aimed at getting rid of suppliers of heroin may not be very effective in reducing heroin consumption.

2. State the law of diminishing marginal utility and give a real-life example of it.

3. Explain the difference between diminishing returns and diseconomies of scale. What are the causes of each?

4. Suppose a perfectly competitive, increasing-cost industry is initially in long-run equilibrium and demand suddenly increases. Explain how the demand change affects price and quantity and who benefits from the increased demand.

5. Explain the existence of natural monopolies such as regional electric companies. What are the benefits and costs of allowing such firms to remain monopolies?

6. Explain why cartels are naturally unstable. Do these factors explain the decline of OPEC as an international cartel?

7. Explain why unskilled workers earn little economic rent, while much of a NFL quarterback's salary is rent.

8. Explain why a reduction in welfare benefits for the poor and a tax increase on the wealthy would have different effects on work effort.

9. Explain the costs and benefits to union members of a strike. Does it explain why most union negotiations end without a strike?

10. Suppose you buy a bond for $1,000 from the federal government, which guarantees that the owner will receive $80 a year forever (8 percent was the market rate of interest when you bought the bond). Suppose that, immediately after buying it, the market rate of interest rises to 10 percent. What is the new market value of your bond? (Show your work.)

11. Describe the variables that affect a firm's degree of vertical integration.

12. Explain the effects of airline deregulation on airline pilots' salaries and on airline fares.

13. What are the potential difficulties with majority-rule voting? Discuss.

14. Show or explain the externality argument for government regulation of the environment. Describe a policy the government could adopt that would reduce pollution but not require estimation of the optimal pollution tax.

15. Give a public choice explanation for the fall in the poverty rate for the elderly at the same time the poverty rate for children was rising.

Part 2:

1. Apply the "art of economic analysis" to your decision to attend college. What roles did rational self-interest, marginal analysis, and time and information play in the decision-making process?

2. What are absolute advantage and comparative advantage? Why will resources specialize according to their comparative advantages? Why will this specialization increase production? Why will specialization increase trade?

3. The demand curve shows that price and quantity demanded are inversely related. Briefly explain the two justifications for this relationship (the income and substitution effects). The supply curve shows a positive relationship between price and quantity supplied. What role does the loss of increasing opportunity cost play in this relationship? What role does profit play in this relationship?

4. Why does the government support public education when the private sector also provides this service? Are these reasons the same as those for government providing services such as police protection and the National Weather Service?

5. What is the basic thrust of Keynesian demand-side policies? Why was economic policy based on Keynes' ideas effective in promoting prosperity in the 1960's? Why was this policy less effective in the 1970's?

6. Explain why labor productivity is important but not the only key to improvement in living standards.

7. Who is counted as employed or unemployed in the unemployment statistics? What groups in society are not represented at all in the unemployment statistics (i.e., who is not a part of the civilian labor force)? How is the unemployment rate measured?

8. Describe the limitations of using Gross Domestic Product (GDP) as a measure of economic activity.

9. Explain how changes in net wealth, the price level, interest rates, and expectations alter the consumption function?

10. How does a change in the price level alter aggregate spending or consumption, investment and net exports in particular? How do changes in the price level create an aggregate demand curve?

11. What is potential output and how is it related to the natural rate of unemployment? Is every resource being used to produce the potential level of output? Explain.

12. Explain how fiscal policy may possibly affect the short-run aggregate supply curve.

13. How does classical economics explain its confidence in the ability of natural forces to return the economy to its potential level of real GDP?

14. What were the reasons for establishing the Federal Reserve System as 12 Reserve banks rather than a single central bank in Washington?

15. What is meant by the "independence" of the Fed? Is the Federal Reserve independent? Explain why or why not.