The following is an answer key, provided by an anonymous source, for a midterm in Economics 1500: Applied Economics, an honors course at Harvard. Answers are in red. The exam is set to take place tomorrow. The Harvard Political Review does not take responsibility for the accuracy of the material.
Ec 1500: Applied Economics
Harvard University
Ec 1500 (Godfrey Morone) Fall 2011, Midterm 2
1. You are currently considering job offers from various firms. Goldman Sachs, a Wall Street bank, offers you a wage of $5,000 an hour. Save the World For Africa, a NGO that deals with social justice issues, offers you $100 an hour. Men’s Magazine Inc, a publishing company specializing in workouts, does not offer you a monetary wage, but promises a lifetime subscription of Men’s Health magazine.
a) What is the marginal wage paid by each of these companies? Which is the highest?
Goldman Sachs = $5000, Save the World = $100, Men’s Magazine = $0, but great abs.
b) Which should you join?
Since 5000 > 100 > 0, I should join Goldman Sacks and work on Wall Street.
Partial credit: Men’s Magazine, because great abs are priceless.
c) Save the World for Africa, the NGO described above, decides to offer a more competitive salary and raise the hourly wage to $6000. Will your choice change?
No, I want to work at the Goldman Sachs. (see extended answer)
2. John Stone, a Harvard student, has to budget between profits and people. He has a utility function of U(π,ρ) = 100 π + ρ, where profits = π and people = ρ. Both profits and people cost $1 each, and Stone has a budget of $100.
a) If Stone wants to maximize utility, how many units of profit should he buy? How many units of people should he buy?
The goods are perfect substitutes, so Stone should either buy profits or people.
Given that profits and people cost the same, and profits give a higher utility, Stone should then purchase 100 units of profits, and 0 units of people.
b) Is there any situation where Stone should choose people rather than profits?
No. Since Stone is a Harvard student and a selfish utility-maximizer, he should choose profits over people all the time.
c) If you answered “no” in part (b): Are you sure? You can’t think of any situation where Stone might get a higher marginal utility from people rather than from profits?
This was the hardest question on the exam. Full credit was given to anyone who did not equivocate from his position in part (b).
3. In December 2011, stock markets crash and Short-Term Capital Management, a high-powered hedge fund, declares bankruptcy. It costs $100 billion to bail out the fund, which would have otherwise gone to public goods like better-paved roads. However, the CEOs of Short-Term Capital Management, Fischer White 84’ and Larry Winters 87’ are Harvard alumni who have donated $150 billion to fund Harvard programs. What is the best course of action? Why?
Short-Term Capital Management should be bailed out, because Harvard people never leave Harvard people behind. Furthermore, $150 billion – $100 billion = $50 billion, which represents a net gain to Harvard. Go Crimson!