1Answer the following parts..

Human lCapital Model: Fieinterpretthe human capital growth model as follows: Suppose there are two groups of people in a country, the lowskilled and the highskilled, where the lowskilled have less human capital per person initially than the highskilled. Each type of worker produces output independently from the other, using efficiency units of labor and total factor productivity, 2, which is assumed to be common across groups. Each individual in this economy accumulates human capital on their own,1 and each has one unit of time to split between human capital accumulation and work. Assume that the high skilled have initially higher efficiency of learning: bh :> bl , and that uh 6: ul . {a} In all developed countries, there has been an increase in the socailed skill premium, the gap between the wages of highskilled workers and lowskilled workers, over the last 3G years. Determine how this model can explain this observation. Exercise #1. Andy consumes two goods: food (measured in dollars) and other things (also measured in dollars). Let x1 be the amount that Andy spends on food in a given month and let *2 be the amount that Andy spends on other things in a given month. Andy's preferences over consumption bundles (X1,X2) are summarized by the utility function: U (X1,X2) = X1X2- Andy's monthly income is $400. (a) [10 pts.] What is Andy's optimal consumption bundle? Show your work. Illustrate your answer with a neat and clear diagram showing Andy's budget line and indifference curves. Label the points at which the budget line intersects the axes and identify the optimal bundle. (b) [10 pts.] Suppose now that the government implements a subsidy program for food. Specif- ically, for each dollar that Andy spends on food, the government will give Andy $0.50 in cash, with the restriction that the total amount of cash that Andy receives from the government cannot exceed $100. In a neat and clear diagram, graph Andy's budget line. Label the points at which the budget line intersects the axes and determine the coordinates of the kink point. Exercise #2. Barb's preferences over consumption bundles (x,y) are summarized by the following utility function: u (X1,X2) = 16x - 2x2 + 4y, where x is the amount of good x that Barb consumes and y is the amount of good y that Barb consumes. Let Px and Py be the prices of goods x and y, respectively. Let m be Barb's income. Barb's goal is to maximize her utility subject to her budget constraint. (a) [10 pts.] Find an algebraic expression for Barb's marginal rate of substitution between goods x and y. Show your work. In addition, give a coincise explanation of the meaning of the marginal rate of substitution. (b) [10 pts.] Suppose that Px = Py = 2 and m = 24. Use your answer from part (a) to determine Barb's optimal consumption bundle. Show your work. (c) [10 pts.] Suppose now that Px increases to 6, while Py and m remain the same. What are Barb's optinal choices for x and y in this case? Is Barb better or worse off than she was in part (b)? Explain. d) [10 pts.] How much extra income must Barb be given in order to compensate her for the increase in the price of good x in part (c)? Explain. Exercise # 3. Consider the following statements and say whether they are true or false and why. To get credit you should provide a clear justification for your answers. (a) [4 pts.] If two goods are perfect complements and the price of one of them increases, the quantity demanded of both goods decreases. (b) [4 pts.] A non-transitive preference relation > can be represented by some utility function. (c) [4 pts.] Consider two goods x and y. If preferences are strictly convex, the absolute value of the marginal rate of substitution between x and y is decreasing along an indifference curve as x increases. (d) [4 pts.] The following Cobb-Douglas utility functions represent two different preference relations: U1 (x,y) = 0.3 log(x) + 0.6 log(y) U2 (x,y) = 0.6 log(x) + 1.2log(y). (e) [4 pts.] If a consumer is making an optimal choice between two goods x and y, then, independently of his preferences, the following condition must always hold: Px = MRS (x,y) . Py (f) [4 pts.] If the following condition holds Px = MRS (x,y) Py then a consumer must be making the optimal choice between x and y, independently of his preferences. (g) [4 pts.] A cigar is a luxury good for a consumer that has Cobb-Douglas preferences over cigars and food. (h) [4 pts.] Consider two goods x and y, with prices Px and Py, respectively. A 0.07 percent value tax on these two goods does not affect the relative price of x in terms of y. (i) [4 pts.] The marginal rate of substitution measures the rate at which the market is willing to substitute one good for the other. (j) [4 pts.] An indifference curve represents the collection of all the bundles that a consumer can buy.1. Kennedy likes to sew. She faces a constant rate of tradeoff between sewing skirts and pants. In one day, she can sew either 2 pairs of pants or 3 skirts. Given this information, Kennedy's opportunity cost of sewing a skirt is _ a. 2 pairs of pants b. 2/3 pair of pants c. 3/2 pair of pants d. 3 pairs of pants - Mes (social) ---0--- MC Aprivate) - MC (social) Price per ounce Quantity (number of o 2. Suppose that the market for marijuana is shown in the graph above, where MC (private) represents the private supply curve and MC(social) represents the social supply curve that reflects the full social marginal costs of marijuana. MB(social) is the demand curve and represents the private and social marginal benefits of marijuana. To reach the socially optimal level of marijuana use, the government could a. Give consumers a subsidy of $500 per ounce b. Impose a tax of $500 per ounce C. Impose a tax of $250 per ounce d. Impose a tax of $750 per ounce e. Do nothing since the market will automatically generate the efficient amount of marijuana use ECNS 101 - Final Exam - Section 1 - Version 1 -Page 1 of 13 3. All else equal, an increase in the price of Pepsi Cola is expected to a. Increase the demand for Coca Cola b. Decrease the demand for Coca Cola C. Increase the demand for Pepsi Cola d. Decrease the demand for Pepsi Cola e. Answers a and d are both correct 4. All else equal, the demand for a normal good rises when a. the price of the good falls b. the costs of production of the good fall consumer incomes increase the price of a substitute good falls e. the price of a compliment good rises Marginal Cost of Pollution Reduction ($) Quantity of Pollution Reduction Mess it up Fancy (tons/day) Manufacturing Fabricators 0 100 25 150 50 200 75 250 5. The table above describes a local manufacturing industry made up of two firms. The manufacturing process used by the firms generates emissions of pollution into the local environment. The numbers in the table show the marginal cost of reducing each ton of pollution for each of the firms. If the EPA reduces total pollution emissions for the industry by 4 tons per day at the lowest possible cost, the cost of pollution reduction for the industry would be _per day. a. $75 b. $275 C. $150 d. $325 6. Beau and Buff are roommates who are deciding how to share cleaning tasks. Beau can wash 6 windows in an hour or vacuum 6 rooms in an hour. Buff can wash 10 windows in an hour or vacuum 8 rooms in an hour. In order to most efficiently use their hour of cleaning time, should clean windows and _ should vacuum rooms. a. Buff; Beau b. Beau; Buff c. both roommates; both roommates d. Buff; both roommates 7. With regard to pollution, from an economist's perspective a. we should strive to reduce pollution to the point where the marginal cost of pollution reduction equals the marginal benefit of pollution reduction b. reducing pollution is a waste of time since it is not counted as part of national income C. we should strive to reduce pollution as much as possible we should strive to reduce pollution as long as the marginal benefit of doing so is positive36. Santa Claus hires elves to produce toys according to the production function in the table above. Santa prices his toys at $10 each and elf wages are $75 per hour. Based on this information, how many toys can Santa produce when he hires 4 elves per hour? a. 10 toys per hour b. $100 per hour C. $1100 per hour d. 110 toys per hour e. Not enough information since we do not know the marginal product of labor for elves ECNS 101 - Final Exam - Section 1 - Version 1-Page 9 of 13 37. All else equal, a decrease in the supply of movies will the equilibrium price of movies and _ the equilibrium quantity of movies: a. increase; decrease b. increase; increase C. decrease; increase d. decrease; decrease 60 Price (Shour) 10 D 100 200 300 400 500 600 700 800 900 1000 Quantity (hours/ week) 38. The figure above illustrates the demand and supply of Economics 101 tutoring services at MSU during finals week. If MSU students begin to use online tutoring rather than MSU-based tutoring services, a possible new equilibrium would be a. P = $20, Q = 100 hours per week b. P = $20, Q = 500 hours per week C. P = $40, Q = 100 hours per week d. P = $40, Q = 500 hours per week e. not enough information 39. Suppose that when the price of salads increases, the demand for soup increases. This indicates that these two goods are: a. unrelated goods b. inferior goods C. substitute goods d. complement goods 40. Suppose the price elasticity of demand for computers is -2.5 and that the market is currently in equilibrium. If the price of computers is decreased by 1%, the quantity of computers demanded will: a. rise by 25% b. fall by 25% C. rise by 2.5% d. fall by 2.5% e. none of the above 41. In a market capitalist economy: a. resources are privately owned but government exercises broad power over their use b. resources are government owned but individuals make decisions over their use C. resources are government owned and government exercises broad power over their use d. resources are privately owned and individuals make decisions over their use none of the above6. Ten breakfast cereal producers operate in a market characterized by monopolistic competition. The demand, marginal revenue, and marginal cost curves faced by an individual breakfast cereal producer are shown below. MC D1 Price of Cereal MR, Quantity of Cereal Suppose that five new breakfast cereal producers enter the market. Show the new demand curve and the new marginal revenue curve that result on the graph above. Chapter 6-Market Structure 8 Self Test 1. Which of the following is not a condition of the model of perfect competition? a. Each individual buyer can affect the market price. b. Within a given market, only one kind of good or service is traded. c. Producers can freely enter the industry. d. Producers can freely exit the industry. e. Sellers all have perfect information. 2. The individual price-taking firm faces ... A perfectly inelastic demand curve. b. A horizontal demand curve. c. A perfectly elastic demand curve. d. A vertical demand curve. e. Both b and c are true. Questions #3 and #4 refer to the following graphs: MC Price of motorcycles Price of motorcycles IX Quantity of motorcycles Quantity of motorcycles 3. Suppose that at price P1, motorcycle manufacturers are making positive economic profits. Assuming the market in motorcycles is perfectly competitive, which of the following will occur in the long run? a. The supply curve will shift to the right. b. The demand curve will shift to the right. C. Price will rise. d. Price will remain constant. e. Marginal costs will increase