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TAKE HOME QUIZ
Econ 1: Principles of Economics
Spring 2017
Due: Midnight on Tuesday, May 30th, 2017 Read the instructions carefully. Write your student ID number and name clearly in the
space provided. You may choose to work together on this quiz, but each student must
submit their own solutions. To submit the quiz, please email a pdf copy of this
question sheet, with your answers written in the spaces provided, to your TA
by the deadline. This quiz is worth a total of 36 points. Good luck! STUDENT ID: NAME: 1. Suppose that a country produces two goods: computers and wheat. In the space provided below, draw
an example of a production possibilities frontier that captures the idea that the opportunity cost of
producing wheat (in terms of computers) increases as wheat production increases. [2 points] Computers ANSWER: 5
0
4
3
2
1 10 20 30 40 50 Wheat For each of the following statements, indicate whether they are positive or normative:
2. The government’s role is to enforce laws and maintain institutions that are key to a market economy. [1
point]
ANSWER: Positive 1 3. The government’s role is to improve the welfare of the least well o↵ in society. [1 point]
ANSWER: Normative 4. Reducing the top marginal tax rate from 39.6% to 30% will stimulate growth by generating new economic activity. [1 point]
ANSWER: Positive 5. The California state government should increase income taxes and use the revenue to fund public schools.
[1 point]
ANSWER: Normative Suppose that two countries, the US and Germany, produce only two goods: computers and cars. Let’s
assume that both goods only require labor hours to produce, of which the US has a total of 320 million
and Germany has a total of 80 million. German workers take 10 hours to produce each car and 8 hours to
produce a computer. US workers, on the other hand, take 4 hours to produce a computer and 6 hours to
produce a car.
6. Which country has a comparative advantage in car manufacturing? [1 point]
ANSWER: Germany 7. Which country has an absolute advantage in car manufacturing? [1 point]
ANSWER: US 8. Starting from a situation in which each country uses exactly one quarter of its labor hours to manufacture computers and the rest on car manufacturing, is it possible to find a trading arrangement between
the two countries that makes their consumption of each good at least as large as before? If so, give one
possible trading arrangement that achieves this. [2 points]
ANSWER:
. For each good in which it has comparative advantage, the country should produce more goods than it consumes and trade the
rest to the other country. The total consumption will be higher in both US and Germany as a result. In this case, America should trade Computers
for Cars. Both countries will indeed benefit, because they can focus on what their good at and trade for the other goods to receive them at a lower cost. For each of the following markets, (i) indicate whether or not the supply and demand framework we studied
in class would be an appropriate model. (ii) If not, briefly explain why not.
9. The market for rides within a ride sharing platform (such as Lyft or Uber), where the supply side of the
market includes all drivers and the demand side includes all riders. [2 points]
ANSWER: The studied framework would be appropriate Page 2 10. The market for medical services in a city, where the supply side of the market includes all hospitals in
the city, and the demand side includes all patients. [2 points]
ANSWER: The studied framework would be appropriate 11. The market for high school education in a city, where the supply side of the market includes all high
schools in the city, and the demand side includes all high school students. [2 points]
ANSWER: The studied framework would be appropriate 12. The market for groceries in a city, where the supply side of the market includes all grocery stores and
the demand side includes all consumers. [2 points]
ANSWER: The studied framework would be appropriate The government of a small country is considering whether to participate in the international co↵ee market.
In the domestic co↵ee market, the price for a pound of co↵ee is $ 20, while the international price is $ 10.
Use the diagram in figure 1 to help you answer the following questions. Both the demand and supply curves
in this market are straight lines. Price S A $20
B E I F G J L P H K M $15
C
$10
D N
D QA QB QC QD Quantity Figure 1: The domestic co↵ee market. Page 3 13. If the government decides to participate in the international co↵ee market without imposing a tari↵, At
what price will a pound of co↵ee be traded in the domestic market? [1 point]
ANSWER: $10 14. Suppose that the government decides to participate in the international market but chooses to impose a
tari↵ of $ 5 on every pound of co↵ee imported. Which area(s) in figure 1 indicate(s) the loss in consumer
surplus compared to the free trade case? [1 point]
ANSWER: C 15. Compared to the case in which the domestic market remains insulated from the world, which area(s) in
figure 1 indicate(s) the loss in producer surplus when the government decides to enter the world market
with the $ 5 tari↵? [1 point]
ANSWER: C 16. Which area(s) in figure 1 indicate(s) the revenue generated by the tari↵? [1 point]
ANSWER: G, J 17. Which area(s) in figure 1 indicate(s) consumer surplus under free trade? [1 point]
ANSWER: A,B,C 18. Which area(s) in figure 1 indicate(s) producer surplus when there is no trade with the international
market at all? [1 point]
ANSWER: B,C,D 19. Suppose that the government generates $ 52.5 million in revenue from the tari↵ policy. How many
pounds of co↵ee were imported? [1 point]
ANSWER: 3.5 Million Pounds 20. Which area(s) in figure 1 indicate(s) the dead weight loss generated by the tari↵? [1 point]
ANSWER: F, L 21. Describe what this area represents [1 point]
ANSWER: The area represents the loss of economic efficiency that can occur when equilibrium for a
good or service is not achieved or is not achievable Page 4 22. With the information we have so far, is it possible to calculate exactly how much dead weight loss was
generated by the tari↵? If so, how much? [2 points]
ANSWER:
23. With the information we have so far, is it possible to calculate exactly how much producer surplus would
be under free trade? If so, how much? [2 points]
ANSWER:
24. The dead weight loss from the tari↵ can be eliminated under free trade. With reference to the welfare
of consumers as well as producers, discuss whether this means that the government should lift the tari↵.
[2 points]
ANSWER: Consider the following excerpt from the abstract of a recently published paper in Science (Chetty et al.
(2017)):
“We estimated rates of “absolute income mobility” — the fraction of children who earn more than their
parents. We found that rates of absolute mobility have fallen from approximately 90% for children born in
1940 to 50% for children born in the 1980s. Distributing current GDP growth more equally across income
groups as in the 1940 birth cohort would reverse more than 70% of the decline in mobility.”
25. What are two positive statements we can make based on the information contained in the above paragraph? [1 point]
ANSWER:
Rates of Absolute Income Mobility have fallen from 90% to 50% over a 40 year span.
Absolute Income Mobility is the fraction of children who earn morn than their parents. 26. The authors contend that distributing current GDP more equally would reverse some of the decline in
mobility. Explain how this claim may be challenged in light of the trade-o↵s we learned about in Chapter
1. [2 points]
ANSWER:
Due to trade-offs and unforeseen consequences, this economic action may not be as helpful in increasing
mobility as thought. When a government takes action, it also has to decide what actions NOT to take. By going
through with one action, they could possibly be choosing not to do another action that would be more effective. Page 5
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