Midterm exam summary of results, and some answers

The overall performance on the midterm exam was an average score of 7.4 with a median of 7.8. I was generally pleased. Some of you put a lot of thought into your answers and the examples you chose. Answers that introduced more elements to consider and more compelling examples received higher grades.

 

Students also got more credit for answers that were well expressed with good grammar and spelling.

For each question below, I have included a student answer that I thought deserved full credit. However, these were not the only acceptable answers.

Q1. President orders that the price of eggs will be half the current market price. A good student answer is below.

If the sale price of eggs gets cut by half, egg producers will not have any motivation to produce eggs anymore.They will begin to look for alternative revenues as their margins will get cut off.
If egg producers start to look for alternative revenues because of egg prices dropping, this will lead to a shortage of eggs.Egg consumers would most probably purchase more eggs, which would potentially cause a shortage in supply.
It is likely that store owners run out of eggs and stop making a profit as high as they could make before because producers could charge the same cost for the eggs as before this price cut.If the sale of the eggs from egg producers to supermarket increase this would contribute to the shortage.
In conclusion,if the eggs' prices would get cut in half by law,this would most probably lead to an egg shortage,causing eggs to get sold at a higher price on the black market.

The best answers to this question pointed out that this situation leads to shortages and a black market.

Points were reduced for answers that suggested producers will produce more eggs, consumers get more eggs, making everyone happy.

 

 

Q2. Impact of a monopoly. A good student answer is below.

In Ecuador, there is a public company called Petroecuador, a precise example of a monopoly. Petroecuador is the only company in Ecuador that is allowed to import fuel. The monopoly that this government company manages affects the country in different ways. In regards to consumers, they are affected because gasoline or diesel prices are very high, and they do not have different price options in the market. Petroecuador also affects the businesses (or companies) that distribute gasoline. Multinationals such as Terpel or Primax do not have the option to grow in quality, product line, (etc.) because they can only distribute the one and only product Petroecuador provides them. Society as a whole is also affected, because Petroecuador imports a type fuel with a high sulfur content, which pollutes the air we breathe more than other fuels, for example, natural gas or fossil fuel.

 

The best answers to this question had examples for how each stakeholder was affected.

Points were reduced for answers that said Renfe has no competitors. This is true for railways, but they have many competitors from auto, bus, and air transportation.

 

 

Q3. What are three positive and three negative externalities of marketing/advertising. A good student answer is below.

The marketing/advertising industry has proven to be beneficial as detrimental. A positive externality is how marketing is reducing the expense of media. You often find yourself not buying said product but still rejoicing in the benefits. Another positive externality is the massification that results in marketing. Everything from social media to on paper branding creates specter for your brand. The industry also incites healthy competition. With marketing, you can spend the money on quality improvement, advertise, and then other firms will be forced to match your quality or charge lower prices. On the other hand, some negative externalities may vary from promoting consumers' dependency on their technological device to the spreading of false information to lure clientele. Another negative externality can be the fact that negative ads can lead to biases about brands by everyday people.

The best answers to this question had specific examples.

Points were reduced for answers that had too few examples of externalities.

 

 

Q4. Why do black markets emerge so often in socialist and communist countries. A good student answer is below.

Black markets emerge from a market distortion, which is caused by an excess of demand. They are very common in socialist or communist economic systems, since the moto for these economies is “social equality”, so governments take control of the market and demand lower prices than the equilibrium price, which results in less supply and more demand. Consumers in these economic systems most of the time are forced to purchase their goods from black markets, because the products are too limited in the market. An example to explain this could be sugar in Venezuela back in 2015, the government took control over the supermarkets and demanded the price lower than the equilibrium price, driving suppliers to not be able to supply almost at all. This led to a black market on which they would sell the sugar for almost 5 time more of its original cost.

The best answers to this question had specific examples. 

Points were reduced for answers lacking specific examples.

 

Q5. What are three economic principles of Adam Smith embraced by capitalists today. A good student answer is below.

In a free market there is no limit to sell or produce. Sellers are free to sell what they want and consumers to choose who they will buy from. The equilibrium price is the result of the supply and demand intersection. For example, if a t-shirt is cheaper in primark than in zara, we would buy it in primark. Free trade area , group of countries that sign a free trade agreement. The aim is to increase trade in the area and the free movement of goods between them. They impose barriers or tariffs on third countries that are not integrated into the treaty.For example: Mercosur , Southern Common Market including Argentina, Brazil, Paraguay and Uruguay.Lastly, consumption is the sole end and purpose of all production; and the interest of the producer for promoting what consumer needs. If we notice every product has been made for us, they know what we need.

The best answers to this question had specific examples at work today.

Points were reduced for answers that did not connect Smith's ideas to today's economic situation. 

 

 

 

Q6. What are three economic principles of Karl Marx embraced by socialists today. A good student answer is below.

Karl Marx believed that the individuals living in a capitalist society are not free. Three of the economic principles of Karl Marx that are still embraced by socialists today are: "Capitalism tends toward concentration of wealth, monopolies", "Capitalists keep workers´ wages low" so they can get more money or profit from them” and "Capitalists monopolies exploit consumers and workers". He believed that the more the worker produce the less he has for himself, since the product of his work will be taken away from him. An example for the economic principles mentioned above is Venezuela, they voted for the communist because they promised to distribute the property and businesses and now they don´t have food, even though they work they are not benefited. Another example could be North Korea where they don´t have freedom.

The best answers to this question had specific examples at work today.

Points were reduced for answers that did not connect Marx's ideas to today's economic situation. 

 

Q7. What's wrong with capitalism and socialism. A good student answer is below.

Capitalism is an economic system based on free markets and limited government intervention, capitalism can cause market failure and inequality because it relies on financial markets that have clearly been volatile these past years, Capitalism can damage the environment via excess materialism through over consumption and over production to maintain it's economic cycles. Capitalism clearly encourages greed/materialism due to its strong reward to 'profit'. Socialism promotes social equality in earnings, and decision making and ownership of productive resources whether natural or capital. Socialism can easily bring slow economic growth if used because no one is earning more than the other thus, spending patterns will stabilize and growth will be very slow. Adding onto the 'growth' people will be far less motivated to improve when everyone are simply the same and earnings are equal.

The best answers to this question had specific examples at work today.

Points were reduced for answers lacking specific examples. 

 

 

Q8. Bank interest rates. A good student answer is below.

The highest rates in banks are credit card rates. This is because there are more risks, people are more likely to not pay their credit card and banks cannot recover from that money. These rates can go all the way up to 20%, usually varying from 24 to 18%.
The middle rates are mortgage rates, the reason is that the risk is a lot lower, banks can take away the house and sell it to recover the money not paid.
The lower rates are deposits, these rates are from savings accounts and are paid to the client. Deposit rates are usually less than 1% but a small number of banks have higher rates. In the US the annual percentage rate of deposit interest rates is 0.9%. The reason that these rates are very low is that banks profit by giving their clients low interest rates and charging them high rates.

The best answers to this question connected the level of interest rates charged to the bank's perceived risk, in other words risk vs return.

Points were reduced for answers that ranked the three improperly or explained poorly why deposits have the lowest rates. 

 

Q9. Richard Thaler, behavioral economics. A good student answer is below.

Nudges: Shows that people are willing to penalize unfair behavior even if such penalty does not benefit them, or that people choose not to make choices because they are afraid of the consequence. Thaler proposed that governments should utilize nudges. The intrinsic idea of nudge is to help people make good decisions without coercing them to make any particular choice
Bounded rationality: Economic theory was largely based on the assumption that people behave rationally. He offered many examples showing that human irrational behavior is systematic. Thaler suggested irrational behavior can be anticipated and controlled.
Lack of self control: The classical example is could be described as the dilemma of Odysseus’ which permeates every single aspect of our life: we are tempted to dive into the pleasures of consumption here and now rather than saving for more exciting experiences in the future

 

The best answers to this question captured several of Thaler's concepts in compelling examples.

Points reduced for answers lacking specific examples. 

 

 

 

Q10. Draw a graphic showing supply and demand for Spanish wine in the US. Now the US president puts a ban on products from Europe. Draw a new supply curve. Describe how the price and supply of Spanish wine in the US are affected. A good student answer is below.

 

The best answers to this question made it clear that the quantity supplied and the quantity demanded both decreased and suggested how consumers and sellers might seek new options.

Points reduced for answers that said demand for Spanish wine increased; clearly Q2 shows that the quantity demanded AND supplied is reduced. Also, some showed the supply curve shifting to the right rather than the left.