Question 1

Which of the following is an example of an exogenous variable in the context of the corn-ethanol production model described in the study materials?

Accepted Answer

The price of corn, $$P_C$$

Question 2

Given the production function $$F(C, O) = C - a \ln(O)$$, where $$C is $$the quantity of corn used and $$O is $$the quantity of oil used, what does a higher value of the parameter $$a$$ represent?

Accepted Answer

Higher cost efficiency of oil relative to corn

Question 3

Suppose the demand for corn is given by $$C^d = \alpha + \beta P_C$$ and the supply by $$C^s = \gamma + \delta P_C. If$$ $$\alpha = 10$$, $$\beta = -2$$, $$\gamma = 4$$, and $$\delta = 3$$, what is the equilibrium price of corn, $$P_C^*$$?

Accepted Answer

$$P_C^* = 2$$

Question 4

If the price of oil, $$P_O$$, increases, what is the most likely effect on the equilibrium price and quantity of corn, assuming corn and oil are substitutes in ethanol production?

Accepted Answer

The equilibrium price and quantity of corn will both increase.

Question 5

Which of the following best describes the difference between direct and indirect effects in comparative statics analysis?

Accepted Answer

Direct effects are the immediate impact of a change in an exogenous variable, while indirect effects occur through changes in other endogenous variables.

Question 6

Given the system of equations for a competitive market for oil:

$$O^s = \alpha + \beta P_O - P_C$$

$$O^d = \mu + 
u P_O

At $$equilibrium, $$O^s = O^d. $$Which variable is endogenous in this system?

Accepted Answer

$$P_O ($$price of oil)

Question 7

Suppose a government subsidy reduces the cost of corn used in ethanol production. Using economic reasoning, what is the likely effect on the equilibrium price and quantity of oil?

Accepted Answer

The equilibrium price and quantity of oil will decrease.

Question 8

If the production budget constraint is given by $$P_C C + P_O O = B$$, where $$B is $$the budget, which of the following correctly solves for $$O in $$terms of $$B$$, $$P_C$$, $$C$$, and $$P_O$$?

Accepted Answer

$$O = \frac{B - P_C C}{P_O}$$

Question 9

Which of the following best explains why the price of corn enters the oil demand equation with a positive sign in the model described?

Accepted Answer

Because an increase in the price of corn makes oil a more attractive substitute, increasing oil demand.

Question 10

Suppose the elasticity of demand for corn with respect to its own price is $$-0.5. If $$the price of corn increases by 10%, what is the expected percentage change in the quantity demanded of corn?

Accepted Answer

-5%

Question 11

If the firm’s production function is $$F(C, O) = C - a \ln(O)$$ and the firm wants to maximize $$F$$ subject to a budget constraint $$P_C C + P_O O = B$$, which method would you use to solve for the optimal $$C$$ and $$O$$?

Accepted Answer

Set up the Lagrangian and solve the first-order conditions.

Question 12

Which of the following is a correct economic narrative for the indirect effect of a decrease in corn demand on the equilibrium price of oil?

Accepted Answer

A decrease in corn demand lowers the price of corn, making oil less attractive as a substitute, which reduces oil demand and lowers the equilibrium price of oil.

Question 13

If the supply of corn is perfectly inelastic, how would an increase in the demand for corn affect the equilibrium price and quantity of corn?

Accepted Answer

The equilibrium price of corn will increase, but the quantity will remain unchanged.

Question 14

Which of the following best describes the process of solving for the equilibrium in a two-market system (corn and oil) as described in the study materials?

Accepted Answer

Set the supply and demand equations equal for each market and solve the resulting system of equations for the endogenous variables.

Question 15

If the price of oil increases by 20% and the cross-price elasticity of demand for corn with respect to oil is 0.3, what is the expected percentage change in the quantity demanded of corn?

Accepted Answer

6%

Question 16

Which of the following is NOT a required background skill for analyzing the models in the study materials?

Accepted Answer

Ability to perform laboratory experiments to test economic theories

Question 17

Suppose the government imposes a price ceiling on corn below the equilibrium price. What is the most likely immediate effect in the corn market?

Accepted Answer

A shortage of corn, as quantity demanded exceeds quantity supplied.

Question 18

If the demand for oil is given by $$O^d = \mu + 
u P_O$$ and $$
u \u003c 0$$, what does this imply about the relationship between the price of oil and the quantity demanded?

Accepted Answer

As the price of oil increases, the quantity demanded decreases.

Comparative Statics and Market Equilibrium in Macroeconomics: Study Notes

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