Tag: Economics – Others

(i) Use OLS to estimate a model explaining colgpa using hsgpa, actmth, and acteng as independent variables. (Note: Use only observations where there is no missing data.)
The estimated equation is: colgpaˆ = β0 + β1 hsgpa + β2 actmth + β3 acteng
True or False: β1ˆ and β2ˆ are statistically significant at the 5% significance level against the two-sided alternative, but β3ˆ is not.
True
False
(ii) One standard deviation increase in hsgpa, that is about 0.343, (holding actmth and acteng fixed) the college GPA at the beginning of semester on average by approximately ____ points. The actmth would have to by approximately ____ standard deviations to change colgpaˆ by the same amount as one more standard deviation in hsgpa.
(iii) In terms of the parameters, which of the following is the null hypothesis in a test stating that actmth and acteng have the same effect (in the population) on colgpa?
H0: β2 ≠ β3
H0: β2 = β3
H0: β2 = 0, β3 = 0
H0: β2 ≠ 0, β3 ≠ 0
Suppose that θ = β2 − β3. Which of the following is the correct regression functional form that directly gives the t statistic for testing the null hypothesis that actmth and acteng have the same effect (in the population) on colgpa against a two-sided alternative?
colgpa = β0 + β1 hsgpa + θ actmth + β3 (actmth + acteng) + u
colgpa = β0 + β1 hsgpa + θ actmth + β3 actmth + acteng + u
colgpa = β0 + β1 hsgpa + β2 (actmth + acteng) + θ acteng + u
colgpa = β0 + β1 hsgpa + β2 actmth + acteng + θ acteng + u
colgpa = β0 + β1 hsgpa + θ actmth + β3 (actmth − acteng) + u
colgpa = β0 + β1 hsgpa + θ actmth + β3 actmth − acteng + u
colgpa = β0 + β1 hsgpa − θ actmth − β3 (actmth − acteng) + u
colgpa = β0 + β1 hsgpa − θ actmth − β3 actmth − acteng + u
Create a new variable actsm = actmth + acteng, and use OLS to estimate the following model:
colgpa = β0 + β1 hsgpa + θ actmth + β3 actsm + u
Estimated equation: colgpaˆ = β0ˆ + β1ˆ hsgpa + θˆ actmth + β3ˆ actsm
At the 5% significance level, you ____ the null hypothesis that actmth and acteng have the same effect (in the population) on colgpa against a two-sided alternative because the p-value of ____ is ____ than 0.05.
(iv) Suppose the college admissions officer wants you to use only the data from hsgpa, actmth, and acteng to develop a model that explains at least 50% of the variation in colgpa. It is enough to use only hsgpa, actmth, and acteng to obtain a model that explains more than 50% of the variation in colgpa.
True
False

5. The slope and position of the long-run aggregate supply curve
Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply.
The quantity of physical capital
The level of technological knowledge
The price level
The inflation rate
The size of the labor force
Suppose when unemployment is at its natural rate the economy produces a level of real GDP equal to $50 billion. Using the purple points (diamond symbol) plot the economy’s long-run aggregate supply (LRAS) curve on the graph.
Complete the following table by determining how each event impacts the position of the long-run aggregate supply (LRAS) curve.
Direction of LRAS Curve Shift
Event
[Right / Left / No Shift]
A government-sponsored training program increases the skill level of the workforce.
[Right / Left / No Shift]
Many workers leave to pursue more lucrative careers in foreign economies.
[Right / Left / No Shift]
A scientific breakthrough significantly increases food production per acre of farmland.
Suppose now the government passes a law that significantly increases the minimum wage. This change in policy will cause the natural rate of unemployment to —–, which will:
Shift the long-run aggregate supply curve to the right
Not impact the long-run aggregate supply curve
Shift the long-run aggregate supply curve to the left

4. Specialization and trade
When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods.
The following graphs show the production possibilities frontiers (PPFs) for Shenandoah and Congaree. Both countries produce corn and basil, each initially (i.e., before specialization and trade) producing 24 million pounds of corn and 12 million pounds of basil, as indicated by the grey stars marked with the letter A.
Shenandoah08162432404856646456484032241680BASIL (Millions of pounds)CORN (Millions of pounds)PPFA
Congaree08162432404856646456484032241680BASIL (Millions of pounds)CORN (Millions of pounds)PPFA
Shenandoah has a comparative advantage in the production of , while Congaree has a comparative advantage in the production of . Suppose that Shenandoah and Congaree specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total ofmillion pounds of basil andmillion pounds of corn.
Suppose that Shenandoah and Congaree agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 24 million pounds of corn for 24 million pounds of basil. This ratio of goods is known as the price of trade between Shenandoah and Congaree.
The following graph shows the same PPF for Shenandoah as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Shenandoah’s consumption after trade. Note: Dashed drop lines will automatically extend to both axes.
ShenandoahConsumption After Trade08162432404856646456484032241680BASIL (Millions of pounds)CORN (Millions of pounds)PPFA
The following graph shows the same PPF for Congaree as before, as well as its initial consumption at point A. As you did for Shenandoah, place a black point (plus symbol) on the following graph to indicate Congaree’s consumption after trade.
CongareeConsumption After Trade08162432404856646456484032241680BASIL (Millions of pounds)CORN (Millions of pounds)PPFA
40, 40
True or False: Without engaging in international trade, Shenandoah and Congaree would have been able to consume at the after-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.)
True
False

6. Calculating inflation using a simple price index Consider an imaginary price index, the Undergraduate Price Index (UPI), created to represent the annual purchases made by a typical undergradute. The following table contains information on the market basket for the UPI and the price of each good in 2020, 2021 , and 2022. The cost of each good in the basket as well as the basket’s total cost are given for 2020. Perform these same calculations for 2021 and 2022, and enter the results in the following table.
Quantity in Basket
2020
2021
2022
Item
Price (Dollars)
Cost (Dollars)
Price (Dollars)
Cost (Dollars)
Price (Dollars)
Cost (Dollars)
Streaming services
1
64
64
104
□
134
Iced coffees
150
2
300
2
□
2
Textbooks
10
80
800
85
□
105
Notebooks
8
2
16
2
4
□
Energy drinks
40
3
120
4
□
5
□
Total cost
1,300
□
□
Price index
100
Suppose this price index uses 2020 as the base year. In the last row of the table, calculate and enter the value of the UPI for the remaining years. Between 2020 and 2021, the UPI increased by . Between 2021 and 2022, the UPI increased by
Which of the following, if true, would illustrate why price indexes such as the UPI might overstate inflation in the cost of going to college? Check all that apply.
The quality of content provided by streaming services improved dramatically from 2020 to 2022.
Many companies invested heavily in the actors cast for their original series, but this quality change is hard to measure.
A natural dietary supplement is developed that is clinically proven to safely boost memory.
As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library.
Professors required each student to buy 10 textbooks, regardless of the price.

Individual Problems 16-1
Two equal-sized streaming services have an overlap circulation of (10%) (10% of the subscribers subscribe to both). Advertisers are willing to pay $17 to advertise in one service but only $32 to advertise in both, because they’re unwilling to pay twice to reach the same subscriber. Suppose the advertisers bargain by telling each service that they’re going to reach agreement with the other service, whereby they pay the other streamer $15 to advertise.
According to the nonstrategic view of bargaining, each streaming service would earn of the $15 in value added by reaching an agreement with the advertisers. The total gain for the two streaming services from reaching an agreement is
Suppose the two streaming services merge. As such, the advertisers can no longer bargain by telling each streaming service that they’re going to reach agreement with the other service. Thus, the total gains for the two parties (the advertisers and the merged streaming services) from reaching an agreement with the advertisers are $15.
According to the nonstrategic view of bargaining, each merged streaming service will earn in an agreement with the advertisers. This gain to the merged streaming service is than the total gains to the individual streaming services pre-merger.

The Virtual Monopoly of EpiPens
by the Aplia Economics Content Team
Read the following article, which introduces the concept of monopoly. Then answer the question that follows.
In 2007, as part of a $6.7 billion deal with Merck & Co., Inc., one of the largest pharmaceutical companies in the world, Mylan N.V., an American generic and specialty pharmaceuticals company, acquired the EpiPen, an epinephrine injection device used to treat the potentially fatal allergic reaction known as anaphylaxis. At the time, EpiPen was not a household brand that everyone knew, but efforts by Mylan’s CEO Heather Bresch changed the landscape for this device. According to Jen Wieczner, in an article in Fortune:
“She poured marketing resources into the product, and embarked on an awareness and political campaign to get more EpiPens into schools and other public institutions. Today, 47 states have laws about making epinephrine auto-injectors available at school in case of an anaphylaxis incident, largely as a result of Bresch’s efforts” (Jen Wieczner, “Mylan CEO Blamed Obama Care for EpiPen Sticker Shock,” Fortune, August 24, 2016).
The market for such devices was relatively competitive until EpiPen’s biggest competitor, Sanofi’s Auvi-Q, went off the market in 2015 due to recalls. Because of the severity of allergic reactions treated by the EpiPen, this kind of injection device is hardly optional for those patients who need it. This means that demand for this type of good is likely relatively inelastic; in other words, an increase in price of EpiPens would not have a large affect on the quantity demanded:
PRICE (Dollars per EpiPen)QUANTITY (EpiPens)DemandP1Q1P2Q2
In 2016, without major competition to keep prices in check, Mylan took advantage of its virtual monopoly on this life-saving allergy treatment by increasing its price to more than $600 compared to $100 in 2009. According to Wieczner’s follow-up article in Fortune:
“Public and Congressional outrage not only forced Mylan to pay a $465 million settlement and launch a cheaper, generic version of the injection device, but it also spurred rivals and regulators to speed competing epinephrine injectors to market to lower costs” (Jen Wieczner, “Mylan’s EpiPen Recall Couldn’t Come at a Worse Time,” Fortune, April 3, 2017).
How did Mylan achieve this kind of market power in the first place? There are many sources of monopoly power, but in this case, the lack of close substitutes, significant barriers to entry, and legal barriers such as patents are the most likely contributors. While today the cost of EpiPens seems to be back under control, what if this situation applied to other necessary goods, such as insulin?
In what year did Mylan acquire the EpiPen?
2005
2007
2015
2016

Welfare effects of free trade in an exporting country
The following problem analyzes the Ukrainian market for pumpkins. The graph below shows the domestic supply and demand curves for pumpkins in Ukraine. Assume that Ukraine’s government does not currently permit international trade in pumpkins.
Use the black point (plus symbol) to denote the equilibrium price of one ton of pumpkins and the equilibrium quantity of pumpkins in Ukraine without international trade. Next, use the green triangle (triangle symbol) to shade in the area that represents consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade in the area that represents producer surplus in equilibrium.
Based on the information from the previous graph, absent international trade total surplus is \( \square \).
The following graph shows the same domestic supply and demand curves for pumpkins in Ukraine. Now, suppose that the Ukrainian government changes its stance on international trade, deciding to allow free trade in pumpkins. The horizontal black line \(\left(P_{W}\right)\) represents the world price of pumpkins at \(\$ 1,000\) per ton. Assume that Ukraine’s entry into the world market for pumpkins has no effect on the world price and there are no transportation or transaction costs associated with international trade in pumpkins. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.
Use the green triangle (triangle symbol) to shade in the area representing consumer surplus, and then use the purple triangle (diamond symbol) to shade in the area representing producer surplus.
When Ukraine adjusts its trade policy to allow free trade of pumpkins, the price of one ton of pumpkins in Ukraine becomes \(\$ 1,000\). At this price, tons of pumpkins will be demanded in Ukraine, and tons will be supplied by domestic suppliers. Therefore, Ukraine will export tons of pumpkins.
Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.
With Free Trade
(Dollars)
Without Free Trade
(Dollars)
Consumer Surplus
\( \square \)
\( \square \)
Producer Surplus
\( \square \)
\( \square \)
When Ukraine allows free trade, the country’s producer surplus – by |, and consumer surplus by . Therefore, the net effect of allowing international trade on Ukraine’s total surplus is a of

Using the costs in the table above (question #1), what quantity should the firm produce at the following prices in the short-run? What will be the profits of the firm at each price? Briefly explain your answers and show your work.
Fill in the missing values in the table which represents the costs of a firm:
Quantity
TC
FC
VC
MC
ATC
AVC
0
20
20
0
–
1
40
20
20
20
40
40
2
56
20
36
16
28
18
3
69
20
49
13
23
16.34
4
84
20
64
15
21
16
5
105
20
85
21
21
17
6
132
20
112
27
22
18.67
7
161
20
141
29
23
20.14
8
200
20
180
39
25
22.50
Using the costs in the table above (question #1), what quantity should the firm produce at the following prices in the short-run? What will be the profits of the firm at each price? Briefly explain your answers and show your work.
P = 15
P = 19
P = 22

2. Calculating marginal revenue from a linear demand curve
The blue curve on the following graph represents the demand curve facing a firm that can set its own prices. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.
On the graph input tool, change the number found in the Quantity Demanded field to determine the prices that correspond to the production of 0, 2, 4, 5, 6, 8, and 10 units of output. Calculate the total revenue for each of these production levels. Then, on the following graph, use the green points (triangle symbol) to plot the results.
Total Revenue
Calculate the total revenue if the firm produces 2 versus 1 units. Then, calculate the marginal revenue of the second unit produced. The marginal revenue of the second unit produced is .
Calculate the total revenue if the firm produces 4 versus 3 units. Then, calculate the marginal revenue of the fourth unit produced. The marginal revenue of the fourth unit produced is .
Based on your answers from the previous question, and assuming that the marginal revenue curve is a straight line, use the black line (plus symbol) to plot the firm’s marginal revenue curve on the following graph.
Marginal Revenue
Comparing your total revenue graph to your marginal revenue graph, you can see that when total revenue is decreasing, marginal revenue is .
On the graph input tool, change the number found in the Quantity Demanded field to determine the prices that correspond to the production of 0, 2, 4, 5, 6, 8, and 10 units of output. Calculate the total revenue for each of these production levels. Then, on the following graph, use the green points (triangle symbol) to plot the results.

6. Who should pay the tax?
The following graph gives the labor market for laboratory aides in the imaginary country of Paideia. The equilibrium hourly wage is \( \$ 10 \), and the equilibrium number of laboratory aides is 300.
Suppose the federal government of Paideia has decided to institute an hourly payroll tax of \( \$ 2 \) on laboratory aides and wants to determine whether the tax should be levied on the workers, the employers, or both (in such a way that half the tax is collected from each party). Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Levied on Employers field (initially set at zero dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Levied on Workers field (initially set at zero dollars per hour) shifts the supply curve up by the amount you enter. To determine the before-tax wage for each tax proposal, adjust the amount in the Wage field until the quantity of labor supplied equals the quantity of labor demanded. You will not be graded on any changes you make to this graph!
Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.
Graph Input Tool
Field
Value / Units
Wage
(Dollars per hour)
Labor Demanded
(Number of workers)
Labor Supplied
(Number of workers)
Tax Levied on Employers
(Dollars per hour)
Tax Levied on Workers
(Dollars per hour)
For each of the proposals, use the previous graph to determine the new number of laboratory aides hired. Then compute the after-tax amount paid by employers (that is, the wage paid to workers plus any taxes collected from the employers) and the after-tax amount earned by laboratory aides (that is, the wage received by workers minus any taxes collected from the workers).
After-Tax Outcomes
After-Tax Wage Paid by Employers
After-Tax Wage Received by Workers
Levied on Employers
Levied on Workers
Number of workers
(Dollars per hour)
(Dollars per hour)
(Dollars per hour)
(Dollars per hour)
(Number of workers)
Suppose the government is concerned that laboratory aides already make too little money and, to minimize the share of the tax paid by employees, of the three tax proposals, which is best for accomplishing this goal?
The proposal in which the entire tax is collected from workers
The proposal in which the tax is collected from each side evenly
The proposal in which the tax is collected from employers
None of the proposals is better than the others