Detailed Solution to Midterm Examination (F2011 Micro Principles)

★★★ Detailed Solution to Midterm Examination ★★★
Fall 2011 Instructor: 衛忠欣 (Jong-Shin Wei)
經濟學(一) (Principles of Microeconomics) (07)342-6031 ext.6222
Dept. of Int’l Business Administration WUCL jsw12011958@gmail.com
3:00 pm ~ 4:20 pm, Monday, Nov. 7, 2011
Open books/notes exam (excluding texts written in Chinese). Absolutely no talking nor borrowing items during exams.，可使用自己的資料(中文課本除外)、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。題目較多，目的在於測試是否有平日閱讀英文資料之習慣。3:40 pm後，不可使用字典或翻譯機。Watch your time and have fun! Total: 105 points
Part One: 25 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. An economic agent, called A, has 10 hours to be spent on producing goods X and Y under linear (or fixed rate) technologies specified as follows. Spending a hours, with 0 ≦ a ≦10, on the production of X can bring him 2a units of X (or expressed by x = 2a); spending a hours, with 0 ≦ a ≦10, on producing Y can yield a units of Y (i.e., y = a). A’s production possibility frontier (or PPF for short) is
(A) (a/2)x + ay = 10;
(B) x + 2y = 20;
(C) x + 2y = 10;
(D) None of the above is correct.
Ans: B. [In light of linear (or fixed rate) technologies, since a hours can produce 2a units of X, 1 unit of X requires (labor in the amount of) 0.5 hour. Similarly,a hours can produce a units of Y, implying that 1 unit of Y requires (labor in the amount of) 1 hour. Hence, 0.5x + y = 10.]

2. [continued from question 1] Find the correct statement.
(A) The slope of A’s PPF is -2;
(B) The horizontal intercept of A’s PPF is 10;
(C) The vertical intercept of A’s PPF is 20;
(D) None of the above is correct.
Ans: D. [From x + 2y = 20 we see that its slope is -0.5, its horizontal intercept is 20; its vertical intercept is 10.]

3. [continued from question 1] Since a/2 units of X are trade-off for a units of Y, we shall say that the opportunity cost of producing
(A) 1 unit of Y is 2 units of X;
(B) 1 unit of Y is 0.5;
(C) 1 unit of X is 0.5;
(D) 1 unit of X is 2 units of Y.
Ans: A. [It follows from 2a : a = 2 : 1 in light of that 2aunits of X are trade-off for a units of Y (due to the same time spent).]

4. [continued from question 1] We know that
(A) A has the absolute advantage in producing X;
(B) A has the absolute advantage in producing Y;
(C) A has the comparative advantage in producing Y;
(D) None of the above is correct.
Ans: D. [Although one unit of good X costs A 0.5 hour; one unit of good Y costs A 1
Hour, we cannot say that A has the absolute advantage in producing good X. Recall
definitions of absolute advantage and comparative advantage given in Lecture 3.]

5. [continued from question 2] Suppose that A is the only producer in the economy which is entirely isolated from the rest of the world. The (domestic) relative price of good X (in terms of good Y) is
(A) 1;
(B) 2;
(C) 0.5;
(D) None of the above is correct.
Ans: C. [Since 2aunits of X are trade-off for a units of Y, the relative price of good X is a/(2a) = 0.5.]

6. An economic agent, called B, has 20 hours to be spent on producing goods X and Y under linear (or fixed rate) technologies specified as follows. Spending a hours, with 0 ≦ a ≦20, on the production of X can bring him a/2 units of X; spending a hours, with 0 ≦ a ≦20, on producing Y can yield a/2 units of Y. B’s PPF is
(A) x + y = 10;
(B) x + y = 20;
(C) x + 2y = 20;
(D) None of the above is correct.
Ans: A. [In light of linear (or fixed rate) technologies, since a hours can produce a/2 units of X, 1 unit of X requires (labor in the amount of) 2 hours. Likewise,a/2 hours can produce a units of Y, implying that 1 unit of Y requires (labor in the amount of) 2 hour. Hence, 2x + 2y = 20 or x + y = 10.]

7. [continued from question 6]
(A) The opportunity cost of producing 1 unit of Y is 2 units of X;
(B) The opportunity cost of producing 1 unit of Y is 0.5 unit of X;
(C) The opportunity cost of producing 2 units of Y is 2 units of X;
(D) None of the above is true.
Ans: C. [1 : 1 = 2 : 2]

8. [continued from questions 1 and 6] Regarding A and B,
(A) A has the absolute advantage in producing good X only;
(B) A has the absolute advantage in producing good Y only;
(C) B has the absolute advantage in producing both goods;
(D) None of the above is correct.
Ans: D. [For x = 1, A needs to spend 0.5 hour; B needs to spend 2 hours. For y = 1, A needs to spend 1 hour; B needs to spend 2 hours. Hence, A has the absolute advantage in producing both goods X and Y.]

9. [continued from questions 1 and 6] Regarding A and B,
(A) Neither has the comparative advantage in producing X;
(B) A has the comparative advantage in producing X;
(C) B has the comparative advantage in producing X;
(D) None of the above is correct.
Ans: B. [For A, the opportunity cost of producing 1 unit of X is 0.5 unit of Y. For B,
the opportunity cost of producing 1 unit of X is 1 unit of Y. Hence, A has the comparative advantage in producing X. Also, B has the comparative advantage in producing Y. Intuition? A’s PPF is flatter than B’s PPF.]

10. [continued from question 9] Suppose that both agree to specialize and trade. What might be the relative price of good X (with respect to good Y) in trading?
(A) 1/3;
(B) 1/2;
(C) 2/3;
(D) 1.
Ans: C. [Let A produce x = 20 and y = 0; let B produce y = 10 and x = 0. When the trade takes places, the relative price of good X will be somewhere between 0.5 and 1.]

11. [continued from questions 5 and 10] We see the intuition as follows. If the home country exports bananas to another country that produces no banana, then the relative price of banana at trade will be
(A) higher than the domestic relative price of banana (with no trade);
(B) lower than the domestic relative price of banana (with no trade);
(C) the same as the domestic relative price of banana (with no trade);
(D) different in both countries.
Ans: A. [Think about the change from 1/2 to 2/3.]

12. 期初，我徵求課堂義工兩位。有人說：「為什麼不讓同學輪值呢？同學在中小學階段，應該已經習慣如此。」以經濟學思維，讓同學輪值，與下列何者相似？
(A) 發放消費券；
(B) 發放老人年金；
(C) 不去監理所驗車；
(D) 生輔組的廣播。
Ans: D. [Efficiency and reducing externalities are the key issues.]

13. Anna Smith 堅持約會時 “Go Dutch.” Which of the following is consistent?
(A) She is trying to reduce sunk costs;
(B) She is trying to get more dates;
(C) She is trying to reduce the opportunity costs of dating;
(D) She is testing to see whether boys are sincere.
Ans: B. [Trivial]

14. Becky Dow 對這門課考前準備不足，既沒閱讀課本，也忘記帶至考場。She chose to turn in exam paper earlier so as to work on Tuesday’s exam. The key explanation is related to
(A) externalities;
(B) incentives;
(C) sunk costs;
(D)比例原則。
Ans: C. [Obvious]

15. 國內大學難以禁止同學穿著拖鞋進入校園，其原因與下列何者較無關？
(A) cost-benefit principle;
(B) incentive principle;
(C) enforcement is costly;
(D) Trade can make everyone better off.
Ans: D. [Trivial]

16. None of the following four job applicants could answer some question during interview. Which applicant deserves a better chance of being hired?
(A) 表示知道答案，但是不確定是不是面試官要的；
(B) 表示曾經知道答案，但是畢業就還給老師了；
(C) 表示不知道答案，因為老師沒教過；
(D) 表示不知道答案，請求跳至下一題。
Ans: D. [Trivial]

17. April Woo spent 3000 dollars on going to 85oC café last year just to attract a part-time worker’s attention. June Wang spent 500 dollars last month on going to a video store for similar reason. In the end, both April and June were disappointed. 如果單純由金錢支出來看，April 似乎比 June 聰明一些。其理由與下列何者較相關？
(A) Decision Pitfall (陷阱) 1 in Lecture 1;
(B) Decision Pitfall (陷阱) 2 in Lecture 1;
(C)學姐拾金要求報酬之新聞；
(D)新生盃球賽為何不排在週末。
Ans: A. [比例原則]

18. The textbook mentions an example of outsourcing in Chinese.
(A) It is about sending out spam mails;
(B) It is about playing computer game;
(C) It shows that the comparative advantage principle might fail;
(D) It demonstrates outsourcing differs from international trade.
Ans: B. [See p.59, text]

19. Recall questions 1 and 6. 依據教科書的介紹方式，如果沒有貿易，則
(A) A will produce 10 units of X;
(B) A will produce 20 units of X;
(C) A will produce 10 units of Y;
(D) B will produce 10 units of Y.
Ans: A. [See Figure 1 on p.51, text]

20. [continued from question 19] The reason for doing that is to better illustrate
(A) fairness;
(B) efficiency;
(C) simplicity in calculation;
(D) gains from trade.
Ans: D. [Notice the move in the upper-right (or NE) direction.]

21.王姓學長曾經連續兩年出現在英語初戀營的相見歡活動，告訴新生：「經濟學不用買課本啦」。This reminds us of
(A) p.37, text;
(B) Figure A-6 on p.47, text;
(C) Figure 2, on p.26, text;
(D) p.11, text.
Ans: B. [Key: omitted variable.]

*22. 假設學校將全班期末平均成績為50分的所有課程，查出教學評量並求出平均值。接著，將全班期末平均成績為51分的所有課程，查出教學評量並求出平均值。… 最後，將全班期末平均成績為99分的所有課程，查出教學評量並求出平均值。以x軸記錄全班期末平均成績；以y軸記錄對應的教學評量平均值。這樣得到的50個點，概括連線後，極可能不是「正斜率」走向。
(A) This highlights reverse causality;
(B) This suggests that tough grading is not the reason for getting poor rating in teaching evaluations;
(C) This reminds us of the danger of having missing variables;
(D) This shows why we need calculus.
Ans: C. [Midterm exam score is the missing variable.]

23. There are three projects, a, b, and c. Denote by B(i) the benefit of project i; C(i) the cost of project i, where i = a, b, and c. Assume B(a) = 100, B(b) = 100, B(c) = 80, C(a) = 80, C(b) = 90, and C(c) = 60.
(A) This shows that we shall choose the project with the lowest opportunity cost;
(B) The opportunity cost of choosing a exceeds the opportunity cost of choosing b;
(C) The opportunity cost of choosing b exceeds the opportunity cost of choosing c;
(D) According to text, three projects all have opportunity costs as 100.
Ans: D. [The opportunity cost of choosing any project is 20. The net benefit of choosing project a is 20; the net benefit of choosing project b is 10; the net benefit of choosing project c is 20.]

24. Linda was desperately attracted to Frank while she did not feel the same way toward George. George loved Linda a lot while Frank did not love Linda that much. Finally, Linda chose George and left Frank. Suppose that Linda’s decision is consistent with “maximizing net benefit” as well as “minimizing opportunity costs.” Using the notations introduced in question 23, we’d better assume:
(A) B(F) = 30, B(G) = 18, C(F) = 22, C(G) = 8;
(B) B(F) = 30, B(G) = 20, C(F) = 20, C(G) = 10;
(C) B(F) = 30, B(G) = 18, C(F) = 22, C(G) = 10;
(D) B(F) = 30, B(G) = 28, C(F) = 20, C(G) = 18.
Ans: A.

25. Suppose that producing 30 units of good X and 20 units of good Y is known to be inefficient for some economy. This economy’s PPF might be
(A) x + 4y = 110;
(B) x + 3y = 80;
(C) 3x + y = 100;
(D) 2x + 3y = 130.
Ans: D. [The point (30, 20) must sit below the PPF. Notice 2(30) + 3(20) = 120 < 130.]



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。] 30 points
26. For (i) and (ii), answer true or false. Must briefly justify your answer.
(i) If country A has the absolute advantage of producing good X (over country B), then the horizontal intercept of country A’s PPF must be greater than the horizontal intercept of country B’s PPF.
(ii) If the slope of country A’s PPF is greater than the slope of country B’s PPF, then A must have the comparative advantage of producing good X.
Ans:
(i) false! See question 8. Note that A has the absolute advantage in producing Y, yet the vertical intercept of x + 2y = 20 is the same as the vertical intercept of x + y = 10. If we modify the story by interchanging X and Y in questions 1 and 6, we will get 2x + y = 20 and x + y = 10.
(ii) true! See the connection between the slope of PPF and the opportunity cost.

27. Think like an economist! “Grade inflation” has received lots of attention in U.S.A. Scholars including economists argued that emphasis on teaching evaluations eventually pressured professors to give easy grades, causing grade inflation. However and with regret, this issue has not got enough attention in Taiwan.
(i) What will you do if you are the university president?
(ii) What will you do if you are a professor who has been very serious in teaching and grading?
Ans:
(i) It is well known that individual student’s grade should be kept confidential. Nevertheless, the average grade of any course taught by any faculty member can be made public! The president can require information such as average midterm exam score and average final grade be open to students, faculty members, and even parents. For years, in many universities, core courses at lower levels are curved in the sense that professors are asked to keep the average grade within some range. [Google the term grade inflation for more on this issue.]
(ii) Knowing that single-handedly changing the world is truly impossible, the professor must think carefully so as to avoid the so-called adverse selection problem. Keep up with the Jones! Do not be too tough on students at large even if the majority seems to deserve a failing grade; teach elective courses rather than required courses; try to reduce the number of students in elective courses (by inducing students to follow the self-selection pattern); incorporate this issue to exams as I am doing now, ….

28. 扼要寫出一個日常生活情境。再提出一項措施或行動，足以提升both efficiency and equity。 Warning: 取材僅限於日常生活情境
Ans: skipped.

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Performance:
60 students
Adjusting rule: Max{(unadjusted score + 15)(1.4), 40}
Average: 64.0
Highest-lowest: 91-40
期中預警人數：8