Business Conditions

First Midterm Examination

October 2, 2002

Mr. Upton

Directions: Each Problem has the indicated weight. Work all problems on the exam itself. If necessary, use the back of the exam sheets, indicating that you have done so.

Name:

 

1

2

3

4

5

S

1.     (10 Points).  In any international trade agreement, the nation with the comparative advantage will get the best terms.  Explain whether you agree or disagree with the statement.

2.       (10 points). A bright young MBA student who has a lifetime utility function of the form

U = log(c1)+ log (c2) + log(c3) +log(c4)

will, in period 1 of his life consume

 

(All of the above is true).  He expects to earn $60,000 in period 2, $360,000 in period 3 and then retire.  (All of the above is true).  The discount rate is 50% per period.  Baring surprises, he will consume $25,000 in the first period of life. 

Explain whether you agree or disagree with this statement.  Hint:  disagree, and give me the right number.

3.     (10 points).  Y=AK(1-b)Nb.  Explain why you agree or disagree with this statement.

4.       (20 points). West Backwater is typical of many poor countries, characterized by corruption, illiteracy, massive poverty, high mortality rates, high birth rates, a long running civil war, a high Gini coefficient, and economic power concentrated in a few wealthy families to name only a few problems.  Fortunately a charismatic leader has assumed power.  He has turned to you for advice on reorganizing the economy to improve economic conditions.

Here is the good only good news about West Backwater:  he is sufficiently charismatic that he can persuade people to go along with any program you propose.

What would you propose?  Explain your reasons, for you must persuade the leader before he will persuade others.

5        (20 points). Daffy Duck has been working 35 hours a week at $10 an hour, a wage rate he has been receiving for some time and that he expects to receive for t he foreseeable future.  20% of Daffy’s wages go to taxes.  A new tax law cuts Daffy’s tax rate to 10% for the coming year, but only for the coming year.  What will happen to the number of hours Daffy works?

Suppose now that, at the end of the year, in a surprise move, the tax cut is made permanent.  What will happen to the hours Daffy works. 

A couple of hints: there is an old proverb that a well-labeled and well-explained graph is worth a thousand words.  I fully expect a graph or two on this answer.  Note that you cannot tell me (I do not think) that Daffy’s hours will go up (or down) by 2 hours a week.  Tell me as much as you can.