Midterm Exam
The Midterm Exam is a take-home exam and covers Chapters 1 - 7. Limit your answers
to one page per question. Submit using the Assignments area.
1. An article in the Wall Street Journal reported that large hotel chains, such as
Marriott, are tending to reduce the number of hotels that they franchise to outside
owners and increase the number the chain owns and manages itself. Some chains
are requiring private owners or franchisees to make upgrades in their hotels, but
they are having a difficult time enforcing the policy. Marriott says the upgrading is
important because “we’ve built our name on quality.”
a. What type of agency problem is involved here? This is a Principal-agent problem. The issue is the private owners
typically make decisions that for self-interest rather than what’s best for the
Marriott brand. You can fix these issues by stating in the contract that all
private owners must meet any upgrades and renovation that is issued by
Marriott.
b. Why would Marriott worry about the quality of hotels it doesn’t own but
franchises? The Marriott must care because it has an effect on their reputation and
name recognition (Brand). If someone has a bad experience at one of their
hotel they will not stay at another Marriott in general whether it’s privately
owned or company owned. The company must do their best to make sure that
their brand recognition is not tarnished in any away.
c. Why would a chain such as Marriott tend to own its hotels in resort areas, such as
national parks, where there is little repeat business, and franchise in downtown areas,
where there is a lot of repeat business? Think of the reputation effect and the incentive
of franchises to maintain quality. Because they want to do their best to increase the chance of repeat
business and recommendations to new business. In Downtown areas the
chances of new business is higher yet more competitive so owners will do what
they can to make sure they get that business so that profits can stay high. 2. Suppose you are the manager of a California winery. How would you expect the
following events to affect the price you receive for a bottle of wine? Explain your
answers.
a. The price of a comparable French wine decreases. If the French wine is a close substitute and the price decreases it will lead to
fall in the demand and price of wine.
b. One hundred new wineries open in California, This will heavily increase the supply of wine, the result of this influx will result
in a decreased equilibrium price of a bottle of wine.
c. The unemployment rate in the United States decreases. This will increase the number of consumers and increase income so demand
will increase. With an increase in demand the equilibrium price will increase.
d. The price of cheese increases. In theory you would assume that cheese is a complimentary good to wine and
if a complimentary good increases, the demand for wine will decrease, hence
decreasing the price. (Is there a direct correlation of wine and cheese?)
e. The price of a glass bottle increases significantly due to new government anti shatter
regulations. This will increase cost which will decrease the demand, the supply will also
decrease with the higher production cost.
f. Researchers discover a new wine-making technology that reduces production costs. With new technology there will be a decrease in cost, so supplies will increase
due to low production cost, so the price equilibrium will decrease.
g. The price of wine vinegar, which is made from the leftover grape mash, increases. This should have no effect on the wine market, because wine makers don’t
what to increase wine production which will increase the wine supply, which
will drop the price. Unless the increase in price of mash can offset that supply
increase.
h. The average age of consumers increases, and older people drink less wine. This will have a decrease on both the demand and price of the product 3. After Iraq invaded Kuwait, gasoline prices rose dramatically – up 50 percent. There
were many effects of the increased price of gasoline. Explain the following effects in
terms of the income effect, substitution effect, or both effects:
a. People drove less and purchased less gas. Both Consumers would buy less due to high prices while also driving less.
Which could result in more income because they are spending less.
b. People ate out less often. Income effect, if they viewed gas as more important they will just eat out less
and eat at home.
c. People had more tune-ups done on their cars. Income effect, tune ups cost money
d. Bike sales went up. Both, a bike is considered a good substitute for a car which would cause the
demand of gas to decrease and those who are still driving will but more. But
many consumers don’t view bikes as a sign of wealth.
e. The sale of lottery tickets fell. Income effect, less lottery tickets sold because consumers had less income due
to high gas prices.
f. People took vacations closer to home. Substitutions Effects, 4. Recently, the House of Representatives passed legislation to increase the minimum
wage in the nation from $5.15 to $7.50. What are the pros and cons of this proposal?
Provide an analysis based on the demand and supply of labor. The Law of demand applies to goods, services, and workers.
The pros of a higher minimum wage is that the purchasing power of workers
will increase consumers would purchase more goods and services and enjoy a
better lifestyle.
The Cons would be that prices would increase due to the fact that labor prices
has increased. Or as result fewer people would be hired and unemployment
would increase.
5. Assume the demand for plastic surgery is price inelastic. Are the following
statements true of false? Explain.
a. When the price of plastic surgery increases, the number of operations decreases. This
b. The percentage change in the price of plastic surgery is less than the percentage
change in quantity demanded.
c. Changes in the price of plastic surgery do not effect the number of operations.
d. Quantity demanded is quite responsive to changes in price.
e. If more plastic surgery is performed, expenditures on plastic surgery will decrease.
f. The marginal revenue of another operations negative.
6. Identify firms that periodically shut down their operations. What are the conditions
that exist when they shut down their operations and the conditions that exist when they
resume their operations? Explain your reasoning.
7. Recently there has be a drive to increase the production of alternative fuels from
corn. The argument used by many is energy self sufficiency. In light of the desire to
reduce our use of foreign produced oil, many have suggested we should subsidize this
production and shift to alternative fuels. Is this a good or bad idea from and economic
view? If you say “Yes” or “No”, why, explain your answer using sound economic theory.
Answer five of the seven questions. Each question is worth 20 points. Please
limit each answer to no more than one double-spaced page, not more. If you answer more than 5 questions, I will only grade the first 5.

Attachments:

• 1504687762-George Brisbon MidtermExam-2a .doc