1a) Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the dresses for $1,200 to kids attending the prom. Determine the GDP in two ways; the value-added method, by computing value added at each stage of production, and the final sales value method.







1b) Why might the GDP be a poor measure of production in an economy? Fully detail 3 reasons.







1c) Why might the CPI index be a preferred measure of price movements compared to the GDP deflator?







1d) Why might the PCE index be a preferred measure of price movements compared to the CPI index?

Maria consumes only two goods: pens and notebooks. Currently, pens cost $1 each and notebooks cost $3 each. Maria’s income is $15. The tables below show the total utility Maria receives from consuming various quantities of each of the goods. calculate the optimal consumption bundle for Maria. (Note: for full credit you must provide the correct quantities of pens and notebooks AND fill in as much of Table 3 as was necessary to arrive at your answer.)

#of Notebooks Total Utility # of Pens Total Utility

0    0 0 0

1    75 1 40

2    135 2 60

3      185 3 75   

4 230     4 87

5 . 270 5 97

6 300 6 105

7 320 7 111

PART I: • You live on the outskirts of a small town, and are considering investing in one of three different apple orchards, as a way to supplement your income and help pay for your college tuition. You are presented with the following four scenarios, and must discern the type of good involved in each, as well as the incentives associated with the use of each orchard. • Orchard A: You would be the sole owner of Orchard A. There is a fence around the orchard which restricts access, and you could pick the apples to keep for yourself or to sell to others. The apples would be of very high quality, since you would would wait to pick the apples at their ideal ripeness, and may be willing to invest in fertilizing and trimming the apple trees to promote healthier growth. 1. What type of Orchard is Orchard A? (a) Public Good (b) Private Good (c) Club Good (d) Common-resource Good 1 • Orchard B: Orchard B is managed by a restricted group of owners in a Cooperative. Access to the Cooperative is limited to only 20 members who join and pay dues. Members are free to pick as many apples as they would like at any time, as there are many more apples than the limited number of members would ever want to pick to sell or consume. Non-members are not allowed access to the orchard. 2. What type of Orchard is Orchard B? (a) Public Good (b) Private Good (c) Club Good (d) Common-resource Good • Orchard C: Orchard C is available for anyone in town to access. There are no fences or barriers, and fruit may be picked by anyone at any time. You are free to sell or consume any apples you pick. Due to the unlimited access and large number of patrons, each apple you pick means fewer apples for other citizens to enjoy. The orchard is funded by tax revenue from the city. 3. What type of Orchard is Orchard C? (a) Public Good (b) Private Good (c) Club Good (d) Common-resource Good • Now consider all 3 orchards to answer the following questions: 4. Which Orchard is least likely to have apples left on the trees in the last week of the apple-picking season? (a) Orchard A (b) Orchard B (c) Orchard C (d) All are equally likely 5. If the costs of maintaining an orchard are prohibitively expensive for a single-owner, which orchard may provide a way for you to enjoy the fruits of Orchard ownership while maintaining a sustainable orchard that can produce high-quality fruit for years to come? (a) Orchard A (b) Orchard B (c) Orchard C (d) All are equally likely

Think of various indicators of development that you would like to see in your concept of “economic development.” Think about why per capita income, as measured, may or may not be a good proxy for these indicators. Can you suggest a better alternative?

Discussion: "Is America to Blame for the Drug Wars in Mexico?"

From 2007 to 2009, nearly 10,000 people in Mexico died in drug-related violence. Who or what caused this? Some argue that it is Americans' insatiable demand for illicit drugs and the constant flow of guns from the United States, which arms the drug cartels. Others blame Mexico’s own government, which, they claim, is so corrupt that it cannot clamp down on the cartels. Unable to ignore the rising violence spilling over the border, Congress approved $700 million in security aid for Mexico and promised to increase the number of federal agents and intelligence analysts. Officials on both sides wonder whether this will make a dent in the problem.

1. Should Mexico’s government take full responsibility for what goes on within its own borders? Or should the US Government take some of the responsibility for the flow of Drugs into the USA and the drug war violence inside Mexico?

Suppose that two players are playing the following game. Player 1 can choose either Top or Bottom, and Player 2 can choose either Left or Right. The payoffs are given in the following table

where the number on the left is the payoff to Player A, and the number on the right is the payoff to Player B.

A) (4 points) Does player 1 have a dominant strategy, and if so what is it?

B) (4 points) Does player 2 have a dominant strategy and if so what is it?

C) (4 points each) For each of the following strategy combinations, write TRUE if it is a Nash Equilibrium, and FALSE if it is not:

i) Top/Left

ii) Top/Right

iii) Bottom/Left

iv) Bottom Right

D) (4 points) What is Player 1’s maximin strategy?

E) (4 points) What is player 2’s maximin strategy?

F) (4 points) If the game were played with Player 1 moving first and player 2 moving second, using the backward induction method discussed in the class notes, what strategy will each player choose?

Can you think of both equity and efficiency arguments supporting the special treatment of capital gains?

Why did industries become so much larger after the US Civil War, and how did this lead to abusive practices? What role did politics play in creating US laws fostering competition?

We have discussed 5 different types of economic value in class. Please give a personal example of each type of value based on your life experiences over winter holidays. Which of the 5 values can be observed in markets? How can we reflect our values for the things you listed that are not observed in markets?

1. Suppose the data for a hypothetical economy is given above. This economy produces only 3 things, pizzas, haircuts and tanks. The base year is 2019.

a. Calculate GDP deflator in 2020. Based on GDP deflator, what is the inflation rate from 2019 to 2020?

b. Suppose a representative consumer basket consists of 10 pizzas and 20 haircuts. Using this consumer basket, calculate CPI in 2020 (again, assuming 2019 is the base year). Based on CPI, what is inflation rate

c. Why do you think there is such a dramatic difference in the inflation rates from parts a and b?

Licensure of physicians means that to some extent, the supply of physicians can be viewed as a vertical line. Explain what this means for the price of physician services. Which factors might change the shape and position of the supply curve for physicians over time? What is the difference between a doctor, a physician’s assistant, a nurse practitioner and an RN? How has the creation of these new healthcare providers affected the demand and supply for health care?

4. Explain what is MEDICARE.

5. Identify the 15 health dimensions of the Health–Related Quality of Life Index. No need to explain.

6. Differentiate Mortality Rate vs. Morbidity Rate.