Solution to Midterm Exam (Macro Principles) Spring 2009

★★★★ Detailed Solution to Midterm Examination (Int'l Business, WUCL) ★★★★
Spring 2009 Instructor: 衛忠欣 (Jong-Shin Wei)
總體經濟學原理 (Principles of Macroeconomics) (07)342-6031 ext.6222
93001@mail.wtuc.edu.tw jsw12011958@gmail.com

3:10 pm ~ 4:40 pm, April 20, 2009
Open books/notes exam. 105 points in 90 minutes; absolutely no talking nor borrowing items during exams. 可使用自己的資料、字典或翻譯機。行動電話若響起，該生扣十分、以強調基本禮貌。務必工整依序作答。平時上課頻尿的極少數同學，考試時，切勿改變習慣。理由一：有害健康；理由二：迫使教師合理懷疑平時是否謊報。只是題目很多，目的在於測試是否有平日閱讀原文書之習慣。Watch your time and have fun!
Part One: 30 Multiple choice questions. [By multiple choice in an English-speaking academic environment, we mean that you must choose the most appropriate one from 4 alternatives. 依慣例，答錯不倒扣！] 75 points
1. Before taking externality into consideration, we know that demand for aluminum is P + Q = 10; supply of aluminum is 2P - Q = 8. At equilibrium, P* =
(A) 4;
(B) 6;
(C) 5;
(D) None of the above is correct.
Ans: B. [By 10 - P = 2P - 8 we have P* = 6 and Q* = 4.]
2. [continued from question 1] Q* =
(A) 4;
(B) 5;
(C) 6;
(D) None of the above is correct.
Ans: A.
3. [continued from question 1] The market allocates resources in a way that maximizes the total value to the consumers who buy and use aluminum minus the total costs to the producers who make and sell aluminum. Here, the maximized value is
(A) 12 (dollars);
(B) 10;
(C) 8;
(D) 6.
Ans: A. [Recall that CS + PS is the area of the triangle with vertex points (0, 4), (0, 10), and (4, 6), which is 4(10 - 4)/2 = 12.]
4. [continued from question 3] Here, the insight is
(A) Governments can sometimes improve market outcomes;
(B) Markets are usually a good way to organize economic activity;
(C) Sometimes we have government failure;
(D) There is no such thing as a free lunch.
Ans: B. [See p.203, text]

5. [continued from question 1] We now take negative externality into consideration. Suppose that the new supply (curve) of aluminum becomes 2P - Q = 10 while the demand for aluminum remains the same. This suggests that producing each unit of aluminum adds external cost to the society in the amount of
(A) 4 (dollars);
(B) 3;
(C) 2;
(D) 1.
Ans: D. [From P = 0.5Q + 4 to P = 0.5Q + 5]
6. [continued from question 5] The new equilibrium price is
(A) 19/3;
(B) 20/3;
(C) 6;
(D) 5.
Ans: B. [From P + Q = 10 and 2P - Q = 10 we obtain P** = 20/3 and Q** = 10/3.]
7. [continued from question 5] The new equilibrium quantity is
(A) 5;
(B) 4;
(C) 10/3;
(D) 11/3.
Ans: C.
8. [continued from question 5] Now CS + PS equals
(A) 12;
(B) 11;
(C) 10;
(D) None of the above is correct.
Ans: D. [It is (10/3)(10 - 5)/2 = 25/3.]
9. [continued from question 5] The social planner can achieve the optimal outcome (i.e., less aluminum at higher price) by
(A) subsidizing aluminum producers;
(B) increasing the number of aluminum producers;
(C) taxing aluminum producers;
(D) letting the invisible hand take full charge.
Ans: C. [See p.207, text]
10. Examples of internalizing the externality do not include
(A) 教師優先向授課中途尿遁的同學提問；
(B) 教師優先向授課中途伏案沉思的同學提問；
(C) 教師故意找勇於發言(even not appropriate sometimes)的同學提問；
(D) 班代呼籲同學在 red vs. green 加分題 (see the extra credits question)，一致採取某一行動。
Ans: D.
*11. Professors are hired by universities to provide teaching service for students who pay the tuition and fees in advance. Under such a contract, university administration also legitimately reviews professors’ performance based on teaching evaluations made by students. The resulting externalities do not include
(A) Professors tend to inflate grades, hence lower the reputation of the university;
(B) Students tend to demand easy grades (and easy courses) from professors;
(C) Professors with better evaluation scores may get a pay raise;
(D) Professors tend to put more effort on their own research and outside connection.
Ans: C. [Recall the definition of externalities]
*12. 如果宣導兩性(平權)教育的校外公益團體，在活動中免費發送保險套。其「外部性」包含
(A) 節省同學 (those who are sexually active) 的開支；
(B) 導致若干同學產生性衝動、嘗試性行為；
(C) 活動相關人員因此受懲處；
(D) 未婚懷孕案件數目下降。
Ans: B. [誰說經濟學很抽象？]
13. 如果學校禁止「身上有煙味、有狐臭、香水味道過重、剛吃完大蒜」的人員，使用電梯，此一規定
(A) 愚蠢；
(B) 反映對「外部性」之處理；
(C) 符合成本效益原則；
(D) 弘揚教義。
Ans: A. [Obvious]
14. The social planner recognizes the positive externalities in education. Hence, the planner will draw the demand curve by shifting up the original demand curve while keeping the supply curve unchanged. This justifies
(A) private schools being superior to public schools;
(B) public schools being superior to private schools;
(C) heavy subsidization made by governments;
(D) heavy taxation made by governments.
Ans: C. [See p.207, text]
15. If governments suddenly reduce subsidies in education, the initial impact will not include
(A) (average) price of education falls;
(B) level of education (in terms of the number of students receiving education) falls;
(C) positive externalities of education are diminishing;
(D) the economy achieves social optimum.
Ans: D. [See pp.207-8, text]
16. Ever wonder why most people do not litter? There are laws against it, yet these laws are not vigorously enforced. The old saying, “Do unto others as you would have them do unto you,” actually
(A) does not make sense to economists;
(B) is a good example of internalizing externalities as a private solution;
(C) is the opposite of internalizing externalities;
(D) shows the failure of government operation.
Ans: B. [See p.209, text]
*17. Bob owns a dog who barks at night and drives his neighbor Cindy crazy. Suppose that Bob gets $500 benefit from having that dog; Cindy bears $800 cost from the barking. Which one of the following is incorrect?
(A) Since cost (800) exceeds benefit (500), Bob should get rid of that dog, leading to social optimum;
(B) If Bob has the legal right to keep a barking dog while Cindy does not have the right to have a quiet night, then Cindy can pay Bob to get rid of that dog, leading to social optimum;
(C) If Cindy has legal right to have a quiet night while Bob does not have the right to keep a barking dog, then Bob must get rid of his dog, leading to social optimum;
(D) If Bob does not have the legal right to keep a barking dog and Cindy does not have the right to have a quiet night, then Cindy can still pay Bob to get rid of that dog, leading to social optimum.
Ans: A. [See pp.210-211, text. The key is Coase theorem.]
18. Question 17 illustrates a major contribution by R. Coase, namely,
(A) Cost-benefit analysis always works;
(B) Bargaining always works even at the presence of transaction costs;
(C) At zero transaction cost, private parties can bargain and lead to social optimum regardless of the initial distribution of property rights;
(D) Different initial distributions of property rights have no influence over final outcomes.
Ans: C. [See pp.210-211, text]
19. Economists argue that clean air and clean water
(A) obey the law of demand and have positive income effect;
(B) obey the law of demand and have negative income effect;
(C) violate the law of demand but have positive income effect;
(D) violate the law of demand and have negative income effect.
Ans: A. [See p.219, text]
20. Goods that are excludable but not rival in consumption include
(A) fish in the ocean;
(B) singing at KTV;
(C) using cable TV service;
(D) driving on congested toll roads.
Ans: C. [See p.224, text]
21. What public goods and common resources have in common is
(A) non-excludability;
(B) rivalry in consumption;
(C) low price;
(D) violating the law of demand.
Ans: A. [See p.224, text]
22. What common resources and private goods have in common is
(A) excludability;
(B) rivalry in consumption;
(C) low price;
(D) violating the law of demand.
Ans: B. [See p.224, text]
23. The free rider problem occurs with
(A) public goods but not with common resources;
(B) common resources but not with public goods;
(C) both public goods and common resources;
(D) goods that are non-rival in consumption.
Ans: C. [Non-excludability is the key]
24. 在全面點名的現況下，如果眾多同學任意翹課，事後(因為沒有擔當而)請假，教師不得已開始嚴格核假，此乃
(A) 莫非定律；
(B) 骨牌效應；
(C) 月暈效應；
(D) the tragedy of the commons.
Ans: D. [See p.231, text]
25. “What is common to many is taken least care of, for all men have greater regard for what is their own than for what they process in common with others,” was said by
(A) Socrates;
(B) Aristotle;
(C) Plato;
(D) V. Pareto.
Ans: B. [See p.230, text. Just want to find out who did not read the text page by page.]
26. A nice example of avoiding or resolving the tragedy of the commons is
(A) 國人習於構築籬笆或矮牆，圍成私人庭院；
(B) 系辦公室中午不開放；
(C) 系資源教室中午不開放；
(D) 社區球場夜間不開放。
Ans: A. [See p.231, text]
27. Last year Henry bought a made-in-Taiwan air-conditioner. It was included in the computation of last year’s GDP, along with
(A) Henry’s income tax collected by the government;
(B) Henry’s spending on building a new plant for a business at which he is an entrepreneur;
(C) Henry’s payment for speeding tickets;
(D) Henry’s mortgage loan payment.
Ans: B. [GDP := C + I + G.]
28. Find the correct statement about 消費券。
(A) The English term is consumption ticket;
(B) The English term is spending bonus;
(C) It increased the aggregate consumption (demand);
(D) It increased the money supply.
Ans: C. [Consumption voucher is the correct term.]
29. The circular flow diagram does not explain
(A) how prices are determined;
(B) what are in GDP;
(C) why economists often say that it takes two to tango;
(D) how savings and investment are related.
Ans: A. [It is called a fixed-price model.]
30. Pigovian tax may be inferior to setting up the pollution permit if
(A) producers have self-interest in mind;
(B) producers do not care about externalities;
(C) reducing pollution is costly;
(D) governments do not know the demand for pollution.
Ans: D.

Part Two: Analytical questions. [注意字體工整、邏輯順暢與不要出現錯別字或注音(與火星文)！如果字跡難以辨認，視同未答。畫蛇添足、答非所問、不知所云、自曝其短，將不利得分。教師也有權公告具有特色之作答。] 30 points
31. There are three industrial firms in Smog Valley, A, B, and C. The initial pollution level for A is 70 units; for B is 80 units; for C is 50 units. Under the current technology, the cost of reducing pollution by one unit is $30 for A; $25 for B; $10 for C. At present, the government gives each firm 50 tradable pollution permits.
Firm C proposes to sell 20 units of permits to firm A; sell 30 units of permits to B. For each permit sold, firm C has for $20. Explain why A and B agree to trade with C. Will this trading be socially optimal? Carefully justify your answers.
Ans: For A, -400 > -600; for B, -600 > -750; for C, 500 > 0. That is, two trades proposed by C will make each of these three firms better off. Since the total pollution level is still kept at 150, we can call it socially optimal.

32. 如果國家公園 (e.g., Grand Canyon) 一方面大幅提高門票價格，也同時提供當地居民優惠入場。理由為何？
Ans: skipped.

33. 文藻要求所有課程皆要點名，其立意是要求同學養成認真到課之好習慣。
(i) 此規定有那些「外部性」？
(ii) 針對你(妳)在 (i) 的一個答案，提出 “internalizing the externality” 之具體作法。
Ans: skipped.

Extra credits question (bonus range: 0 ~ 6 points)
red vs. green -- 選紅球呢？還是選綠球？規則如下：
如果在你(妳)以外的相對多數選的是紅球，你(妳)正好也選紅球，你(妳)會被加 5分。
如果在你(妳)以外的相對多數選的是綠球，你(妳)正好也選綠球，你(妳)會被加 2分。
如果在你(妳)以外的相對多數選的是紅球，而你(妳)卻選綠球，你(妳)會被加6 分。
如果在你(妳)以外的相對多數選的是綠球，而你(妳)卻選紅球，你(妳)會被加0 分。
Now make your pick.

Result: 40 GREENs and 14 REDs. In a way, we can say that we have the so-called prisoners’ dilemma here.


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