Economics 1001 Fall, 2015 FIRST MIDTERM STUDY QUESTIONS

| November 24, 2016

FIRST MIDTERM STUDY QUESTIONS

Show, using marginal benefit and marginal cost curves, the impact of the following changes in parental property rights on the optimal quantity of children in a family: (a) children are required to go to school until age 18; (b) parents are required to pay for a child’s college education; (c) children are required to support their elderly parents; (d) parents are promised “job security” if they take off for extended (unpaid) maternity leave; and (e) parents are no longer required to pay social security taxes for household employees, including babysitters.
2. A local car dealer advertises that his prices are lower because he owns his lot and building. Explain carefully whether this claim makes any sense from an economic point of view.

3. Currently, Missouri offers $2,200 scholarships for MO students who attend public universities like UMSL and $3750 to those who attend MO’s private universities like WashU. Governor Nixon is proposing to replace this program with one in which all MO students receive $2700, no matter which MO university they attend. Show, using marginal benefit and marginal cost curves, the impact that passage of this proposal will have on: (a) the optimal quantity of private university attendance (credit hours); (b) the optimal quantity of public university attendance (credit hours); (c) the optimal quantity of public university professors.

4. In the late 1960s, the Catholic Church eliminated the requirement that observant Catholics eat fish every Friday. Show, using marginal benefit and marginal cost curves, the impact of this change on Catholic families with respect to the (a) consumption of fish; (b) consumption of beef; (c) consumption of beer (which Catholics drink with their Friday fish).

5. Opponents of disposable water bottles argue that these products are detrimental to the environment. Show, using marginal benefit and marginal cost curves, the impact on the quantity of disposable bottles consumed if the government (a) imposes a tax on each disposable bottle of water; (b) subsidizes the purchase of refillable bottles; (c) bans disposable bottles altogether. In the case of a ban, show on your diagram the total amount of well-being lost when the ban takes effect.

6. In 2012, the tax on capital gains (the amount that a person profits when the sales price of a stock is higher than its purchase price) increased. Show, using marginal benefit and marginal cost curves, the impact of this tax change on (a) the optimal amount of investment in growth stocks that typically generate capital gains; (b) the optimal amount of savings in bank certificate of deposits which typically generate “ordinary” taxable income; (c) the optimal investment in income (dividend) stocks which typically generate “ordinary” taxable income.

7. Draw a market demand curve for U.S. grown corn. Show how this demand curve changes, if at all, in response to the following changes in the economic environment: (a) there is a fall in the price of corn; (b) soda producers agree to reduce their use of corn syrup and replace it with sugar; (c) the government increases the percentage of ethanol (made from corn) required in gasoline; (d) the price of milk (used with cornflakes for breakfast) increases; (e) the Chinese government eliminates its trade barriers that had blocked the importation of U.S. produced corn by Chinese businesses.

8. President Obama has made it a top priority that more students complete high school rather than dropping out. He is considering two alternative approaches to the drop out problem: (i) make dropouts work without pay every Saturday cleaning litter off the highways; or (ii) provide a school clothing allowance to every high school student. (a) Show, using marginal benefit and marginal cost curves why either of these incentives would promote staying in school. (b) Which approach would the government prefer? Which would students and parents prefer? Explain.

9. The total benefit that Mike gets from consuming the first beer at a Cardinals game is (in money terms) $25; it goes up to $40 for two beers, $50 for three beers, $58 for four beers and $64 for five beers. Suppose that the price of each beer is $8. (a) What number of beers will Mike consume? (b) What is the total benefit he derives from drinking this amount of beer? (c) What is the total net benefit he receives? (d) What is the marginal benefit he receives from the second beer? (e) What is the net marginal benefit he receives from the second beer?

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