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The purpose of the practice exam is to help = you become familiar w= ith the general format of the exam and some of the kinds of questions you may be asked on the exam.  You should go through the practice exam and if a question seems diffic= ult review that area = in your text and notes since it is a sign that you need to think about that chapt= er more.
The actual exam will include similar t= ypes of questions, and cover the same chapters, but the questio= ns will not be exactly the same.&n= bsp;
During the exam read the questions carefully and think carefully.
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Practice Exam 3
The first part is worth 30 points. 
Since there are 6 questions this means each <= span style=3D'font-size:150%'>question is worth 5 points.
You should briefly explain your answers.
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<= span style=3D'font-size:82%;color:black;mso-color-index:1'>1. What deter= mines the demand for a resource?
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= 1. What deter= mines the demand for a resource?
The value of what the resource can produce, Marginal Revenue Product = (MRP)
 or
The resource’s productivity (marginal product) x  the value of the output to the = firm (marginal revenue)
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= 2. What law governs = the collective bargaining process and what are some of its provisions?
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National Labor Relations Act (also called = the Wagner Act).
Guarantees the right to form a union.
Requires employers to negotiate in good = faith.
Created the National Labor relations Board.
2. What law governs = the collective bargaining process and what are some of its provisions?
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= 3.  a) If you borrow $20,000 and are charged = $2,000 in interest to be paid at the end of the = year when you will also repay the $20,000 = what’s the effective interest rate?
  b) If you borrow $20,000 and are charged $2,000 in interest to be paid= at the end of the year, but you have to pay the $20,000 back in 12 equal installments over= the course of the year, what’s the effective interest rate?

=
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3.  a) If you borrow $20,000 and are charged = $2,000 in interest to be paid at the end of the = year when you will also repay the $20,000 = what’s the effective interest rate?

($2,000/$20,000) x 100% =3D 10% 
=
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<= span style=3D'mso-bidi-font-family:"Times New Roman";font-size:82%;color:black; mso-color-index:1'>3.    b) If you borrow $20,000 and are charge= d <= span style=3D'mso-bidi-font-family:"Times New Roman";font-size:82%;color:black; mso-color-index:1'>$2,000 in interest to be paid at the end of the = = year, but you have to pay the $20,000 back in = 12 equal installments over the course of the <= span style=3D'mso-bidi-font-family:"Times New Roman";font-size:82%;color:black; mso-color-index:1'>year, what’s the effective interest rate?

Since you must start paying back the money = right away effectively it’s as if you had on = average the use of only ½ of the principal over = the course of the year ($2,000/$10,000) x 100% <= span style=3D'mso-bidi-font-family:"Times New Roman";font-size:82%;color:#66006= 6'>=3D 20%
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= 4. What are some of the major principles to consider when designing a tax system?
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<= span style=3D'mso-bidi-font-family:"Times New Roman";font-size:82%;color:black; mso-color-index:1'>4. What are some of the major principles to <= span style=3D'mso-bidi-font-family:"Times New Roman";font-size:82%;color:black; mso-color-index:1'>consider when designing a tax system?


Efficiency (both in terms of distortions the tax may create and in administrat= ion of the tax),
& equity = (such as the benefits received & ability <= span style=3D'mso-bidi-font-family:"Times New Roman";font-size:82%;color:red'>t= o pay concepts) should be considered. <= /div>
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= 5. What’s the difference between a horizontal = merger and a vertical merger?
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= 5. What’s the difference between a horizontal = merger and a vertical merger?
 
A horizontal merger is a merger between firms t= hat make the same type of product. They are c= ompetitors and so they may be attempting to gain market power and be blocke= d by the Justice Dept.
A vertical merger is a merger between firms that contribute to different parts of the overall = production process for a good.
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6. What is = an externality?
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= 6. What is an externality?

Is a spillover benefit or cost to a third party n= ot directly involved in a transaction (not a b= uyer or seller in the market).
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Spillover Costs= =3D Negative externalities (example: air pollution caused by gasoline, water pollution caused by = pesticide use, cigarette smoke) =
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Spillover Benefits =3D Positive&= #13;
Externalities (examples: when = a student asks a question and = other students also learn, <= /span>= when the smell of a bakery <= /span><= span style=3D'font-size:183%;color:#006600'>attracts customers for other = nearby businesses, = innoculations)
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Practice Exam 3&#= 13;
The second part is worth 10 points. 
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Based on the following three individual demand schedules for a particular good, and assuming thes= e = three people are the only ones in the society, determine:
(a) the market demand schedule= on the assumption that t= he good is a private good (fill in the table),
(b) the collective demand sche= dule on the assumption that t= he good is a public good (fill in the table).
(C) Explain, what is the diffe= rence between a private good an= d a public good?   .  
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=
=
=
<= span style=3D'mso-special-format:lastCR;display:none'>
6
$1
8
$1
5
$1
=
5
$2
7
$2
4
$2
=
4
$3
6
$3
3
$3
=
3
$4
5
$4
2
$4
=
2
$5
4
$5
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$5
=
1
$6
3
$6
0
$6
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<= span style=3D'mso-special-format:lastCR;display:none'>
0
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0
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$8
0
$8
QD<= /span>
Price
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Price
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
Public Good
Private Good
Individual 3
Individual 2
Individual 1
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21
The market demand schedule for a private = good is based on the sum of the quantities demanded by all of the consumers at each = = price. 
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22
=
=
1= 9
$1
6
$1
8
$1
5
$1
= 16
$2
5
$2
7
$2
4
$2
= 13
$3
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$3
6
$3
3
$3
= 10
$4
3
$4
5
$4
2
$4
= 7
$5
2
$5
4
$5
1
$5
= 4
$6
1
$6
3
$6
0
$6
=
=
2=
$7
0
$7
2
$7
0
$7
=
=
1=
$8
0
$8
1
$8
0
$8
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
Public Good
Private Good
Individual 3
Individual 2
Individual 1
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23
= The collective demand schedule for a public = good is based on the sum of the prices representing the value to each of consumers = for each additional unit of the good.

The schedules differ because for private = g= oods each consumer enjoys the good separately, however since public goods are non-rival and non-excludable in = c= onsumption each unit benefits all the consumers.
 
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8
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19
$1
6
$1
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$1
5
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$2
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$5
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$5
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4
$6
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$6
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$6
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$6
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2
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$8
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25
8
19
$1
6
$1
8
$1
5
$1
7
16
$2
5
$2
7
$2
4
$2
6
13
$3
4
$3
6
$3
3
$3
5
10
$4
3
$4
5
$4
2
$4
4
7
$5
2
$5
4
$5
1
$5
3
4
$6
1
$6
3
$6
0
$6
2
2
$7
0
$7
2
$7
0
$7
1
= 5+8+6
1
$8
0
$8
1
$8
0
$8
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QD<= /span>
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QD<= /span>
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Price
Public Good
Private Good
Individual 3
Individual 2
Individual 1
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26
8
19
$1
6
$1
8
$1
5
$1
7
16
$2
5
$2
7
$2
4
$2
6
13
$3
4
$3
6
$3
3
$3
5
10
$4
3
$4
5
$4
2
$4
4
7
$5
2
$5
4
$5
1
$5
3
4
$6
1
$6
3
$6
0
$6
2
= 4+7+5
2
$7
0
$7
2
$7
0
$7
1
19
1
$8
0
$8
1
$8
0
$8
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QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
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Public Good
Private Good
Individual 3
Individual 2
Individual 1
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file:///C:/A4F9DA50/PracticeExam3Econ2510_files/slide0125.htm Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii" No Slide Title
27
8
19
$1
6
$1
8
$1
5
$1
7
16
$2
5
$2
7
$2
4
$2
6
13
$3
4
$3
6
$3
3
$3
5
10
$4
3
$4
5
$4
2
$4
4
7
$5
2
$5
4
$5
1
$5
3
3+6+4
4
$6
1
$6
3
$6
0
$6
2
= 16
2
$7
0
$7
2
$7
0
$7
1
19
1
$8
0
$8
1
$8
0
$8
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
Public Good
Private Good
Individual 3
Individual 2
Individual 1
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28
8
19
$1
6
$1
8
$1
5
$1
7
16
$2
5
$2
7
$2
4
$2
6
13
$3
4
$3
6
$3
3
$3
5
10
$4
3
$4
5
$4
2
$4
4
2+5+3
7
$5
2
$5
4
$5
1
$5
3
13
4
$6
1
$6
3
$6
0
$6
2
16
2
$7
0
$7
2
$7
0
$7
1
19
1
$8
0
$8
1
$8
0
$8
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
QD<= /span>
Price
Public Good
Private Good
Individual 3
Individual 2
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