Practice Midterm

Sample answer:

What changed: the price of gasoline (a complement to SUVs) rose, making the bundled cost of owning an SUV higher. The price of SUVs themselves did not change first. Who is affected: buyers. Direction: at every SUV price, fewer buyers want an SUV, because the cost of operating one has gone up. Equilibrium: with demand for SUVs lower at every price and supply unchanged, the new equilibrium has a lower price and a lower quantity. Dealers cut SUV prices (or offer larger incentives) and sell fewer units.

Key points an answer must hit:

• What changed: price of complement rose, not the price of SUVs
• Who is affected: buyers (demand side)
• Direction: fewer wanted at every price
• Equilibrium: lower P, lower Q

Grading notes:

1 pt for noting the price of SUVs itself did not change first; 1 pt for identifying the demand side via complement reasoning; 2 pts for the direction (less demanded at every price); 2 pts for the equilibrium prediction (lower P, lower Q).

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.

Sample answer:

On the A-to-B segment, the unit gains 8 heart surgeries (from 0 to 8) and gives up 40 tonsillectomies (from 100 to 60), so the opportunity cost per heart surgery is 40 / 8 = 5 tonsillectomies. On the B-to-C segment, the unit gains 4 heart surgeries (from 8 to 12) and gives up 60 tonsillectomies (from 60 to 0), so the opportunity cost is 60 / 4 = 15 tonsillectomies per heart surgery. The opportunity cost of heart surgeries rises because the resources reallocated first are the ones most suited to the new task. Later, to produce yet more heart surgeries, the unit has to reassign general surgeons and operating rooms that were really good at producing tonsillectomies, so the tonsillectomy count falls faster per added heart surgery. That rising opportunity cost is exactly what bows the PPF outward.

Key points an answer must hit:

• A-to-B OC = 5 tonsillectomies per heart surgery
• B-to-C OC = 15 tonsillectomies per heart surgery
• opportunity cost rises identified
• reason tied to resource reallocation (best-suited resources reassigned first)

Grading notes:

1 pt each for the two correct opportunity costs (2 pts); 2 pts for identifying that opportunity cost rises; 2 pts for the resource-reallocation explanation.

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.

Sample answer:

(a) Domestic price up; consumer quantity down; producer quantity up. (b) Paid by U.S. sugar consumers and U.S. sugar-using industries (candy, food); benefits U.S. sugar producers.

Key points an answer must hit:

• price direction correct
• consumer quantity direction correct
• producer quantity direction correct
• identifies at least two losers
• identifies at least one winner

Grading notes:

2 pts price/quantity predictions; 2 pts losers identified; 2 pts winners identified.

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.

Sample answer:

Two secondary effects of a binding gasoline price cap. First, nonprice rationing: with the legal price below the market-clearing price, the shortage is not eliminated, just relocated to a different rationing mechanism. Lines form at stations. Drivers waste hours in queues. First-come-first-served replaces willingness-to-pay as the way the limited gasoline gets allocated, and the time spent in line is a real cost the price tag no longer captures. Second, quality degradation and complement-good gouging: stations cannot legally raise the posted gasoline price, so they push margin elsewhere. Service deteriorates (fewer attendants, shorter hours, broken pumps left unfixed). The price of complements that the cap does not cover rises sharply (premium tier upgrades, car washes, oil changes, snacks at the convenience window). A black market in unmetered gasoline often emerges where enforcement is weak. The total cost to drivers does not fall by the amount the cap suggests; it just moves into forms the price cap cannot reach.

Key points an answer must hit:

• names two distinct secondary effects (not just two phrasings of the same one)
• explains the nonprice-rationing mechanism (queues, time cost, first-come-first-served)
• explains a margin-relocation mechanism (quality degradation, complement gouging, or black market)
• connects each effect to the cap-distorts-prices logic

Grading notes:

2 pts each for naming and briefly explaining a valid secondary effect. Acceptable answers: nonprice rationing / queues, quality degradation, complement-good price gouging, black markets, search costs.

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.

Sample answer:

The tax raises the cost of selling soda in the city. The supply curve for in-city soda shifts up by the tax. The new equilibrium has a higher in-city price (but rising by less than the full $0.02 per ounce, because sellers absorb some of it) and a lower quantity sold (some buyers exit at the higher price, and some shift to cross-border purchases at stores just outside the city). One positive claim: sales of taxed beverages in the city's chain stores fell by 12 percent in the first year following the tax. One normative claim: the tax is justified because the health benefits of reduced sugar consumption outweigh the consumer-surplus loss to buyers. The positive claim is testable against data; the normative claim depends on a value judgment about which losses and gains matter.

Key points an answer must hit:

• identifies the tax as a seller-side input-cost shock (not a demand-side preference shift)
• states price rises by less than the full tax
• states quantity falls
• notes the substitution / cross-border channel (or some demand-side adjustment)
• gives a positive claim that is testable against data
• gives a normative claim that rests on a value judgment
• distinguishes the two cleanly

Grading notes:

3 pts: correct U2+U4 prediction (1 each for input-cost framing, price up, quantity down). 1 pt for noting substitution / cross-border shopping. 1 pt: valid positive claim. 1 pt: valid normative claim.

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.

Sample answer:

Bastiat's central move in the broken-window essay is that policy analysis must count not just what is visible but what is not. A broken window enriches the glazier (seen), but the shopkeeper now cannot buy the shoes he would have bought (unseen). The glazier's gain has a face; the shoemaker's loss does not. Take the 2018 U.S. tariffs on imported washing machines. What is seen: Whirlpool added production at its Clyde, Ohio plant; specific workers were hired; the company could be photographed at a ribbon-cutting. The visible benefit was concentrated and identifiable. What is not seen: U.S. consumers paid well above the wage premium captured by the new domestic workers, an outcome documented by Flaaen, Hortacsu, and Tintelnot's 2019 study of the tariffs. The aggregate consumer cost ran into the billions per year, spread across millions of washing-machine and dryer buyers who did not connect the price increase to the tariff. Dryer prices also rose because they tend to be bought as a pair. Foreign retaliation hit downstream U.S. industries with no connection to washing machines. Why does the seen dominate the debate? Because the seen has a constituency. Whirlpool employees and the Clyde plant management can show up at hearings, write op-eds, and be the subject of news features. The washing-machine buyer who paid $80 more does not organize, does not write op-eds, and may not even know the tariff is the cause. The unseen is statistical: a small loss distributed across many people, often invisible to the people bearing it. This asymmetry is structural, not contingent. It is why bad policies persist even when the unseen costs exceed the seen benefits by a wide margin, and why economists since Bastiat have argued that the discipline's main contribution to policy debate is making the unseen visible.

Key points an answer must hit:

• Bastiat framework identified (count what is not seen)
• Specific policy named with specific seen beneficiaries
• Specific unseen costs named (diffuse, downstream, statistical)
• Concrete numbers or studies where possible
• Explanation of why the seen dominates (concentration, organization, identifiability)
• Writing quality: organized, no hand-waving

Grading notes:

3 pts for Bastiat framework correctly explained; 3 pts for specific policy plus seen beneficiaries; 4 pts for specific unseen costs; 2 pts for concrete supporting evidence; 2 pts for explanation of asymmetry in debate; 1 pt for writing quality.

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.

Sample answer:

Tariff prediction. A 20 percent tariff on imported autos raises the price of imported cars in the U.S. by roughly that amount, less whatever foreign producers absorb. Domestic producers face less competition at the new price, so their output and price both rise. Total quantity of cars sold in the U.S. falls, because some buyers are pushed out at the higher price. Winners: U.S. auto producers (higher prices, larger market share) and U.S. workers at U.S.-located plants. Losers: U.S. car buyers (higher prices on imports and on domestic cars that follow imports up), foreign producers and their workers, and downstream U.S. industries that use vehicles as inputs (delivery, rentals, ride-share). If the trading partners retaliate (a near-certain outcome historically), losses spread to U.S. export sectors as well. Comparative-advantage connection. Auto production migrated partly because other countries developed real cost advantages: Japan's lean-manufacturing methods, Korea's labor and capital structure, Mexico's lower labor costs combined with proximity to U.S. consumers. These are opportunity-cost facts about where each kind of vehicle (entry-level sedan, light truck, premium SUV) is cheapest to build. A tariff does not change the underlying comparative advantage. It changes what U.S. buyers pay relative to what production actually costs. Some marginal production may shift back to the U.S., but the world-price gap that drove the migration in the first place still exists. The tariff is a tax on U.S. buyers funneled to U.S. producers, not a productivity gain. Positive vs normative. The positive claim in the senator's framing: a tariff will protect American auto jobs. This is empirical (and partly true: some U.S. auto-assembly jobs would be preserved or added, though net of downstream losses the picture is mixed). The normative claim: protecting auto jobs is worth the cost to car buyers and to downstream industries. That depends on values, on whose welfare counts and how much. Recommendation. I would oppose the tariff. Two reasons. First, the consumer-cost-per-job-preserved math is poor in past episodes of auto and similar tariffs. Headline studies of recent trade actions have found consumer costs per saved job that run into hundreds of thousands of dollars per year, well above the wage premium captured by the new domestic workers. Second, retaliation by trading partners is the rule rather than the exception, and U.S. export industries (agriculture, aerospace, services) bear costs that the auto tariff was not designed to consider. A direct wage subsidy or retraining program targeted at displaced auto workers achieves the announced goal at lower cost.

Key points an answer must hit:

• Full 300-450 word essay hitting U5 prediction, comparative-advantage connection, positive/normative distinction with quoted examples, and a recommendation with two reasons. A defensible recommendation can go either way.

Grading notes:

4 pts: tariff prediction (price up, quantity imports down, gainers and losers identified). 3 pts: comparative-advantage connection. 3 pts: positive vs normative distinction with examples. 3 pts: recommendation with two reasons. 2 pts: writing quality and structure.

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.

Sample answer:

Policy A is a price ceiling set 25 percent below market rent. It works on the price side directly. In the short run, the existing stock of rental housing is roughly fixed, so quantity supplied stays close to current levels and the rent caps below market. Quantity demanded jumps at the lower price, producing a shortage that is rationed by queue, social connections, or under-the-table payments. In the long run, developers facing a 25 percent rent haircut build less. The supply curve contracts. Equilibrium quantity of housing falls below the no-policy counterfactual, and the implicit market-clearing rent for whatever exists rises, even though the controlled rent is held down. Existing tenants in controlled units gain (rent below market). Prospective tenants lose: fewer units to rent into. Landlords lose: rents below cost-recovery for marginal units. Total surplus falls: trades that would have happened do not, search and queueing costs rise, units get misallocated to incumbents whose households have changed. Policy B is a supply-side reform. Allowing denser construction in single-family neighborhoods raises the long-run quantity of housing the city can produce at any given price. Supply curve shifts rightward. In the short run, little changes (construction is slow). In the long run, equilibrium quantity rises and equilibrium rent falls. Renters as a whole gain (lower rents, more units). Owners of existing single-family lots near transit gain (their land becomes more valuable as denser uses are allowed). Owners of existing rental buildings face more competition (rents on their units may fall). On balance, total surplus rises: more trades happen, and the surplus is captured by a broad group of renters rather than concentrated in any one constituency. Positive claim: "rent ceilings reduce long-run housing supply." This is empirical and consistent with the cross-city evidence. Normative claim: "the city has a duty to protect current tenants from rent increases even at the cost of reducing future housing supply." Value-laden. Recommendation: I would choose Policy B. Two reasons. First, B addresses the underlying scarcity that drives high rents in the first place, while A holds rent down on a stock of units that will shrink. Second, B's distributional effects are broader and forward-looking: it helps current renters and future renters, rather than transferring surplus from landlords and prospective renters to incumbent tenants. A targeted rent-assistance program for low-income tenants can sit alongside B without recreating the supply contraction.

Key points an answer must hit:

• Full essay covering both policies with U2 + U4 analysis, positive/normative ID, and a defensible recommendation.

Grading notes:

4 pts: predictions for both policies (2 each). 3 pts: distributional analysis for both policies (gainers and losers under each). 3 pts: positive vs normative claims. 3 pts: recommendation with two reasons. 2 pts: writing.

The sample is not the only acceptable answer. What matters is hitting the load-bearing moves in the key points.