Question 1 (10 points; 4-5 minutes) Game Stop stores sell video games.  The store on Shattuck Avenue in Berkeley closes at 8 p.m.  The store in the El Cerrito Plaza shopping center closes at 9 p.m.  Use concepts from class to explain why it might be profit-maximizing to close earlier in Berkeley than in El Cerrito.

Question 2 (38 points total; 17 minutes total)  A commentator recently said “Americans would rather pay more to big oil companies than pay more in gas taxes, even though the result is the same.”  Suppose that the gas stations where we buy gasoline for our cars are in a perfectly competitive industry. 
a.    (12 points; 5 minutes) Crude oil is a key input in the production of gasoline.  Crude oil prices are rising rapidly due to the popular uprisings in Libya and elsewhere.  In the short run, what effect will the increase in crude oil prices have on . . .
Briefly explain your answers. 
Draw a graph that supports your answers.  Use subscripts “1” to depict the initial conditions.  Use subscripts “2” to depict the effect of the increased cost of crude oil.  On your graph, shade and label the area of the new consumer surplus.  Shade and label the area of the new producer surplus.
b.    (12 points; 5 minutes) Suppose instead that the government imposes a new 50¢ per gallon gas tax.  In the short run, what effect will the new gas tax have on . . .
Briefly explain your answers. 
Draw a graph that supports your answers.  Use subscripts “1” to depict the initial conditions.  Use subscripts “2” to depict the effect of the new gas tax.  On your graph, shade and label the area of the new consumer surplus.  Shade and label the area of the new producer surplus.
c.    (8 points; 4 minutes) Does an increase in the cost of crude oil create a deadweight loss?  Does the new gas tax create a deadweight loss?  Explain.
d.    (6 points; 4 minutes) If the effects on market price and quantity are the same, is it better to pay more to big oil companies than to pay more in gas taxes?  Defend your answer.

Question 3 (20 points total; 9 minutes total) Now let’s look at the effect of the increase in crude oil prices on an individual gas station.  Suppose that gas stations are initially in long-run competitive equilibrium.
a.    (12 points; 5 minutes) In the short run, what is the effect of the increase in crude oil prices on the profit-maximizing quantity sold in the typical gas station?  Explain.  Draw graphs that support your answers.  Use subscripts “1” to depict the initial conditions.  Use subscripts “2” to depict the effect of the increase in the cost of crude oil.
b.    (8 points; 4 minutes) In the long run, what is the effect of the increased cost of crude oil on . . .
. . . the market equilibrium price of gasoline sold?
. . . the market equilibrium quantity of gasoline sold? 
. . . the profit-maximizing quantity sold in the typical gas station?
Explain your answers.  On the graphs you drew in part (a), add curves that depict the long run effect.  Use subscripts “3” for the curves you draw in this part.

Question 4 (12 points; 5 minutes) It has always been free to enter the Botanical Gardens in San Francisco’s Golden Gate Park.  But last year, the Parks Department initiated a $7 entrance fee for non-residents.  They expected to earn $650,000 in annual revenue.  Instead, revenue will actually be no more than $400,000.  So now they are considering lowering the entrance fee.  If the goal is to maximize revenue, should the Parks Department lower the entrance fee?  Explain.

Question 5 (20 points total; 9 minutes total)   
a.    (8 points; 4 minutes) According to article #4, “Wives Still Do Laundry, Men Do Yard Work,” by Frank Newport, what are tasks other than laundry that women are most likely to do in traditional heterosexual households?  What are tasks other than yard work that men are most likely to do in traditional heterosexual households?  Have the patterns of tasks-by-gender changed over the last decade or so?  Are the patterns of tasks-by-gender different for older couples than they are for younger couples?  In your answer, include enough detail from the article so that we know you read the article.  An answer that makes stuff up gets fewer points than an answer which honestly states “I didn’t read the article.”
b.    (12 points; 5 minutes) Use the concepts of production possibilities frontier and comparative advantage to explain why the authors of a new book, Spousanomics: Using Economics to Master Love, Marriage, and Dirty Dishes, would conclude that when couples take on only the tasks they are relatively better at, couples can gain time for the things they really want to do.

1. The average Russian drinks nearly 5 gallons of alcohol per year, about twice the amount considered dangerous.  President Medvedev wants to decrease Russian consumption of the most popular alcoholic beverage: vodka.  Last year, a half-liter of vodka cost $1.70.  The Russian government recently raised the minimum price of a half-liter of vodka to $3.00.  
a.    Is $3 a price floor or a price ceiling?  What should happen in the short run to the quantity of vodka sold?  Explain your answers.  Supplement your answer with a graph.  Label everything carefully. 
b.    How does the $3 minimum price affect consumer surplus?  Briefly explain.
c.    In fact, owners of Продукти stores (Produkti or convenience stores) say that despite increasing the price of vodka, there has been no drop in vodka sales.  How is this possible?
d.    Is raising the minimum price of vodka a good government policy?  Explain.

2. Gas-guzzling vehicles (GG cars) get relatively low miles per gallon of gas (mpg).  Assume the market for GG cars is perfectly competitive.
a.    In the short run, what happens to the equilibrium price and equilibrium quantity in the market for GG cars following an increase in the price of gas?  What happens to the profit-maximizing quantity of GG cars produced by the typical company?  Explain.  Supplement your answers with a graph.
b.     Hummer is a company that produces gas-guzzling cars.  Since the time gas prices rose, its owners have been trying unsuccessfully to sell the company.  Last week, the owners decided to stop producing GG cars.  Is trying to sell the company a short-run or long-run decision?  Is stopping production a short-run or long-run decision?  Based on your answer to part (a), what motivated the company’s long-run decision?  What motivated the company’s short-run decision?
c.   In the long run, what will happen to the equilibrium price and equilibrium quantity in the market for GG cars as a result of the increase in the price of gas?  Explain.

3.  Based on reader article #8, “Box-office Revenue up for 2009,” what factors caused which curve(s) – supply or demand – to shift?  For the economy at large, is going to the movies a normal good or an inferior good?  Explain.  In your answer, include enough detail from the article so that we know you read the article.  An answer that makes stuff up gets fewer points than an answer which honestly states “I didn’t read the article.”

4.  Beautiful Island (B.I. for short) and Ugly Mainland (U.M. for short) are two countries that can each produce two products: tourism and education.
   
a.  B.I. can produce
        •    (A) lots of tourism and little education, or
        •    (B) lots of education and little tourism
    Draw a production possibilities frontier (PPF) at the right for Beautiful Island.  Show combinations (A) and (B) on your graph.  Label everything carefully.  If there is no trade, does B.I.’s rate of economic growth depend upon which combination B.I. produces?  Explain.
b.  With trade, B.I. will produce tourism and U.M. will produce education.  Under which condition will Beautiful Island have higher rates of economic growth: with trade, or without trade?  Explain.

5.  What is the law of diminishing returns?  What is the definition of marginal cost?  Why does the law of diminishing returns imply that marginal costs increase?

1.    Suppose we divide the goods and services produced by Economy A into two categories: Consumption (C) and Investment (I).  Investment increases the amount of capital in the economy, and also increases worker productivity.  Consumption does not have these benefits. 
a.    Draw a PPF that illustrates Economy A’s production possibilities.  Label everything clearly.
b.    Economy A has a comparative advantage in the production of consumption goods.  A near-by economy, Economy B, has a comparative advantage in the production of investment goods.  State and briefly discuss one reason the economies may choose to specialize and trade.  State and briefly discuss one reason they may choose not to specialize and trade.

2.    Peanut butter paste produced in Georgia and Texas recently triggered a salmonella outbreak.  (Salmonella is a bacterium that causes food poisoning and sometimes death.)  Foods containing peanut butter were recalled and taken off grocery store shelves.  Peanut butter in jars does not contain salmonella, is perfectly safe to eat, and was not recalled nor removed from stores.
a.    Consumers responded to the salmonella outbreak by reducing their purchases of everything containing peanut butter, including peanut butter in jars.  What impact did their behavior have in the short run on the equilibrium price and equilibrium quantity sold of peanut butter in jars?  Why?  Using the axes at the right, draw a graph that supports your analysis.  Label everything carefully.
b.    Skippy is a popular brand of peanut butter in jars.  Skippy ran an ad in last week’s paper:  “Skippy is not part of the peanut butter recall.  Skippy is perfectly safe.”  The ad included a coupon for 50¢ off a jar of peanut butter.  Would you describe Skippy’s behavior as a shift of or movement along the supply curve for Skippy peanut butter?  Why?
c.    Peanut butter is made from peanuts which are grown by farmers.  As a result of the drop in demand for peanut butter products, many farmers have decided they will not plant peanuts this spring.  Compare next year’s equilibrium price and equilibrium quantity sold of peanut butter in jars with the pre-salmonella-outbreak price and quantity.  Would you describe the farmers’ decisions as short run responses or long run responses to the salmonella outbreak?  Why?

3.    In reader article #11, “Americans Start to Curb Their Thirst For Gasoline,” (Wall Street Journal, March 3, 2008), the author Ana Campoy discusses American drivers’ response to changes in gas prices.  Based on the information in the article, what can you say about American drivers’ price-elasticity of demand for gasoline?  Be sure to define “price-elasticity of demand” in your answer.   Also, be sure to include some detail from the article so that we know you read the article.

4.    Your aunt and uncle own a small fruit farm in the Central Valley.  While you think their fruit is the sweetest in the world, few others can tell the difference between your aunt’s peach and someone else’s.  At road’s edge, they have a small store in which they sell fresh produce.  Your cousin started advising his parents on their business after taking some Econ courses.  But your cousin isn’t explaining himself very well.  Now that you’re in Econ 1, your aunt and uncle have written you a letter asking you to help them understand your cousin’s statements.
a.    Your aunt and uncle write: “Your cousin told us we are not making a profit. But we cleared $50,000 last year.  Why would he say we’re not making a profit?”
b.    They continue: “Your cousin also told us that we are producing too many peaches.  But we are able to sell all the peaches we grow.  He drew us some crazy line drawings.  Why would he say we’re producing too many peaches?  And can you draw those graphs for us and label them clearly?”
c.    Your aunt and uncle conclude:  “Your cousin told us we should shut down immediately!  He said we should lock the doors of the store and not re-open.  What could possibly make him say something like that to us?”

5.    Tickets for the Obama Inaugural were distributed for free.  As we demonstrated in class, many people would have been willing to pay something for a ticket to the inaugural.  Compare two possibilities: [1] The ban on reselling inaugural tickets was fully enforced, so no one was able to resell their ticket; and [2] Anyone who wanted to resell their inaugural ticket could do so.
a.    In which case, [1] or [2] would there have been greater consumer surplus?  In which case, [1] or [2], would there have been greater producer surplus?  Explain your answers.
b.    Was case [1], free distribution of tickets with a ban on reselling, the best way of distributing tickets to the Inaugural?  Defend your answer.

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