MICROECONOMICS

INSTRUCTIONS: Answer all of the following questions as directed. Watch the point value of the questions and prepare answers accordingly. Figure that an average C answer has a minimum of one paragraph for each 5 points. The answers MUST include supporting diagrams, where necessary, to illustrate and support your answers. Your answers are to be typed, using 12-point Times New Roman font. Please single-space paragraphs with a double space between paragraphs. Your answers are due in class on Thursday, May 12, 2016, at 12:15 pm in DAC 310. Since this is the final exam, Dr440 will accept NO late exams. Dr440 accepts NO exams by email. Any questions, email Dr440 ASAP. Otherwise, Good Luck!

1. (40 points) Read Experts Warn of Backlash in Donald Trump’s China Trade Policies. If elected President, Donald Trump would ask Congress to levy a tariff of up to 45% on certain goods coming into the U.S. from China (imports).
   1. Assume that these certain goods are sold in competitive markets. Diagram the market (supply and demand curves) for one of the goods. Show the equilibrium price and quantity. Identify and expain the Consumer’s Surplus. Identify and expain the Producer’s Surplus. What is true of the general welfare of Americans?
   2. Assume that Congress enacts a 45% tariff against the good and levies it on the seller’s side of the market. Diagram the market (supply and demand curves) for the good. Show the equilibrium price and quantity. Add the tariff to the diagram. Show the new equilibrium price and quantity. What happens to the buyer’s price? What happens to the seller’s price? Identify and expain the Consumer’s Surplus. Identify and expain the Producer’s Surplus. What happens to the welfare of Americans as a result of the tariff? Explain the advantages and disadvantages of this tariff.
   3. Assume that, instead of a tariff, Congress enacts a quota against the good which achieves the same market price and quantity. Diagram the market (supply and demand curves) for a good with the quota. Show the equilibrium price and quantity. Identify and explain the Consumer’s Surplus. Identify and explain the Producer’s Surplus. What happens to the general welfare of Americans as a result of the quota? Explain the advantages and disadvantages of a quota.
   4. Assume that the Chinese government is unhappy with both the tariff and the quota because they negatively impact employment in China. What exchange rate policy can the Chinese government adopt to neutralize the negative impact of a tariff on its goods on Chinese employment? How would it effect its policy?
2. (10 points) On November 5, 2014, Congresswoman Nita Lowey implored the House Republicans to raise the federal minimum wage to $10.10 per hour. In support, she argued, “Raising the minimum wage to $10.10 would take 1.7 million workers off public assistance and reduce government expenditures on current income-support programs by $7.6 billion per year.”
   1. Assume that public assistance is tied to a measure of absolute poverty. What is absolute poverty? Analyze whether Ms. Lowey’s statement is correct if poverty is measured absolutely.
   2. Assume that public assistance is tied to a measure of relative poverty. What is relative poverty? Analyze whether Ms. Lowey’s statement is correct if poverty is measured relatively.
3. (10 points) In an introductory paragraph, explain what a patent is and the rationale for patents. Then, read: Lifting the Patent Barrier to New Drugs and Energy Sources. Identify advantages of patents (in one paragraph) and disadvantages of patents (in another paragraph). In a fourth paragraph, logically deduce whether or not governments should sponsor patents or not.
4. (10 points) Answer ONE (1) of the following two questions:
   1. (10 points) The small upstate town of Geneva, NY, has 10 firms that make watches. The firms’ respective output levels are 30 watches per year, 20 watches per year, 10 watches per year, 10 watches per year, 10 watches per year, 10 watches per year, 5 watches per year, and 5 watches per year. Calculate the four-firm concentration ratio for the town’s watch-making industry. Calculate the Hirschman-Herfindahl Index (HHI) for the town’s watch-making industry. SHOW ALL WORK! Based upon your calculation of the four-firm concentration ratio and the HHI, into which market model would you classify Geneva’s watch-making industry? Explain. Based upon your classification of the market structure of the watch-making industry in Geneva, how would you predict that these companies will behave (compete)? What kind of price competition might you observe from these firms? What kind of non-price competition might you observe from these firms?
   2. (10 points) The small upstate town of Geneva also has 10 burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 20%, 18%, 14%, 9%, 8%, 7%, 6%, 6%, 6%, 6%. What is the four-firm concentration ratio of the hamburger industry in this town? What is the Hirschman-Herfindahl Index (HHI) for the hamburger industry in this town? If the second and third largest hamburger shops merged to form a single firm, what would happen to the four-firm concentration ratio and to the HHI? If you were a prosecutor in the Antitrust Divison of New York State Attorney General’s Office, would you ignore or prosecute said merger? Explain.
5. (10 points) Define and explain each of the performance criteria: allocative efficiency, productive efficiency, x-efficiency, profitability, redistribution of income, and dynamic efficiency. Now, diagram the long-run position of a firm in monopolistic competition and explain how well the firm stacks up against the ideal performance criteria.
6. (10 points) Diagram and explain why Maria Sharapova, a white Russian tennis player, might earn nearly twice as much in endorsements as Serena Williams, an African-American with a much better win-loss record. What factors other than race might explain the difference in endorsement income?
7. (10 points) Suppose that you hear two people arguing about energy. One says that we are running out of energy. The other counters that we are running out of cheap energy. Diagram and explain which person is correct and why. In class, Dr. Furfero intimated that neither person might be correct and that not only are we not running our of energy, but we are not running out of cheap energy. Why?

The campus section of ECO 1302 Principles of Microeconomics has TWO (2) exams — a Midterm Exam and a Final Exam. They are take-home exams. Each will be posted here approximately one week before it is due. Late Midterm Exams are subject to the 20% per late day grade reduction. No excuses are necessary. After 5 days, a Midterm Exam has no value. Final exams are due in class on the sceduled date. NO late Final Exams are accepted. Each exam must be typed in 12-point Times New Roman font, single spaced, with a space between paragraphs. You may hand draw diagrams and scan them in as pdf files. Dr440 accepts NO exams by email.