ECON 2500 Practice for Exam 1 with Dr. Elaine Peterson

Use separate sheets of paper as needed to answer. Please be sure to put your name on your answer sheets and the part of the exam you are answering and the number of the question you are answering. Note there are 5 parts and each part is worth 20 points.

Part I: Please explain the following briefly:
1. What's the difference between empirical and theoretical economics?
2. When a presidential candidate says that taxes should be lowered is he making a positive or a normative economic statement?
3. What is the law of demand?
4. Is water scarce?

Part II: Suppose there are 2 goods, tomatoes and potatoes, with the following production possibilities schedule:

 Output Combinations Possible Goods A B C D E F Tomatoes 16 15 13 10 6 0 Potatoes 0 6 10 13 15 16

1) Draw a production possibilities curve for these goods.
2) When the economy moves from possibility D to E, what is the cost of a potato in terms of tomatoes?
3) How would you respond if the people in this society indicated they would like 10 tomatoes and 15 potatoes?
4) Is it technically inefficient to produce 16 tomatoes and 0 potatoes?

Part III: Using separate diagrams for each of the following, with supply and demand clearly labeled, please depict the effect on the equilibrium price and quantity of the good that will be produced and sold.
1) The effect of an increase in the cost of an input.
2) The effect of an increase in the population.
3) The effect of an increase in the price of a substitute.
4) The effect of an improvement in the production technology.

Part IV: Choose the best answer.
1. The largest share of total federal revenue comes from

A) corporate income taxes  B) payroll taxes C) personal income taxes D) excise taxes E) property taxes

2. The largest share of total state revenue comes from

A) corporate income taxes  B) payroll taxes C) personal income taxes D) excise taxes E) property taxes

Suppose the production possibilities for the US and Mexico are:

 U.S. Output Combinations Possible Mexico Output Combinations Possible Goods A B C D A B C D Apples 6 4 2 0 3 2 1 0 Oranges 0 4 8 12 0 4 8 12

3. The opportunity cost of an apple in the US is : A) 6 apples B) 4 oranges C) 2 oranges D) free E) 12 oranges

4. The US has: A) a comparative advantage in both goods. B) a comparative advantage in apples. C) an incentive to specialize in oranges. D) a comparative advantage in oranges. E) no potential gains from trade in this situation.

Part V: Explain one of the following thoroughly.
1. Why are tariffs good or bad and how does this relate to NAFTA ?
2. What are some of the important potential roles for government in a mixed economy and why might they be undertaken?