Principle of Economics

 Short answer: 7 of the following 9 questions will be chosen for the exam. You will have to answer 5 of them. Make sure you answers are complete and graphs are included where necessary.. (12 points each)

• Describe and draw the Circular Flow Model
• What is the theory behind Adam Smith’s “Invisible Hand.” Use a graph to show how the theory works.
• Describe what absolute advantage and comparative advantage are. Which is more important for trade and why?
• Draw and explain the production possibility frontier for an economy that makes computers and pizzas. Explain what the differences are in points within the curve, on the curve and beyond the curve. Explain the shape of the curve.
• What are complementary and substitute goods. Give examples of each. Use graphs to help explain what happens when the price of one good in each situation changes.
• Different types of goods have different levels of taxation. Draw the graphs and explain what happens when we put a $25 tax on a $500 ipad, a $2 tax on $10 six pack of beer and a $1,000 tax on a $10,000 luxury diamond watch. What happens to the equilibrium point? Who pays the tax? Does this cause a deadweight loss and if so is it large or small? What happens to deadweight loss when the tax is increased? Explain why the different goods have different rates of tax.
• Explain the difference between normal and inferior goods.
• What is the difference between a flat tax, progressive tax and a regressive tax, give examples of each type of tax? What groups benefit and which ones feel a negative impact from each of these taxes?
• Explain consumer and producer surplus and where they fit in a graph of supply and demand. What happens if the price rises or falls?
• What is the Coase Theorem? When does it work and when does it fail? Use an example to show how it works.

Essays:  3 of the following 4 essay questions will be on the exam. You will have to answer 2 of them. Make sure your answers are complete and graphs are included where necessary.. (20 points each)

• The government sees a cement company polluting the river. They want to internalize the externality of the cleanup costs to get the water safe for recreational use. They have two choices to accomplish their goal. They can either put a tax on a certain level of pollution or create a regulation that limits the amount of pollution allowed. If they use a regulation should they allow for pollution permits? Explain the benefits and detriments of each form of control. What would you recommend and why?

• Explain and draw a supply and demand curve for a normal good showing the equilibrium point. Explain the difference between moves along the curves and shifts in the curves. Give examples of what would cause movement and what would cause shifts and show the movement on your graph.

• The government gets involved in the marketplace for many reasons. One reason is to ensure the welfare of the public. To help people they sometimes put in price ceilings and price floors. Use the examples of minimum wage and rent control to explain the benefits and detriments of government involvement. Include graphs of each one to show how they work.

• Draw a demand curve from the accompanying demand schedule. Show where the curve is elastic, inelastic and unit elastic. Use different points on the curve to prove your answer by using the mid-point method. Explain what the different types of elasticity means. Why are firms interested in the type of elasticity of demand?