Download Microeconomics Final Exam - Version B - Drake University, Summer 2001 - Prof. William M. B and more Exams Microeconomics in PDF only on Docsity!
Principles of Microeconomics Signature: (Econ 002) Printed name: Drake University, Summer 2001 William M. Boal ID number:
FINAL EXAMINATION: VERSION B
INSTRUCTIONS: This exam is closed-book, closed-notes, but calculators are permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 200.
I. Multiple choice: Circle the one best answer to each question. [2 pts each: 50 pts total]
(1) Rational behavior implies doing something up to the point where the opportunity cost of the last unit done a. is much more than its benefit. b. begins to exceed its benefit. c. begins to fall below its benefit. d. is much less than its benefit.
(2) According to the production function shown below, as more labor is applied, the marginal product of labor a. decreases. b. increases. c. first increases, then decreases. d. remains constant.
(3) In the production possibility curve shown below, as more of either good is produced, its opportunity cost a. decreases. b. increases. c. first increases, then decreases. d. remains constant.
(4) A fall in people’s incomes is likely to decrease purchases of European tour packages, assuming tour packages are a. a substitute good. b. a complementary good. c. a normal good. d. an inferior good.
(5) The last month has seen a drop in the price of watermelon and an increase in the amount of watermelon purchased. This could have been caused by a. a rightward shift in the demand for watermelon. b. a rightward shift in the supply of watermelon. c. a leftward shift in the demand for watermelon. d. a leftward shift in the supply of watermelon.
(6) Which good has less elastic demand?
a. grapefruit. b. lemons. c. Both goods have the same elasticity of demand. d. Cannot be determined from information given.
(7) Suppose the price elasticity of demand for air travel is –2. If the price of air travel is increased, then the amount of money that consumers spend on air travel a. decrease. b. remain constant. c. increase. d. fluctuate randomly.
education
Consumer goods p.p.curve
Number of workers
Number of packages shipped (^) P
Q
Demand for grapefruit
P
Q
Demand for lemons
Drake University, Summer 2001
Page 2 of 10
(8) Suppose the demand curve for petroleum in Europe shifts right. Since petroleum is traded internationally, the price of petroleum in the U.S. will a. decrease. b. remain constant. c. increase. d. fluctuate randomly.
(9) Suppose the price of peaches in Minneapolis is $ per pound and that the cost of shipping peaches between Minneapolis and Des Moines is $0.25 per pound. There are no potential gains from arbitrage if the price of peaches in Des Moines is a. $1.50 per pound. b. $1.95 per pound. c. $2.50 per pound. d. $3.00 per pound.
(10) Suppose the price of a share of stock in Whiz- Bang Corporation is $20 today. We know that speculators are active in the stock market. Assume that the market is in equilibrium. Then speculators must believe that the price of a share in Whiz-Bang Corporation tomorrow will be a. less than $20. b. about $20. c. greater than $20. d. Cannot be determined from information given.
(11) The quantity traded of a good decreases if the government imposes a a. price floor (or legal minimum price). b. tax. c. quota. d. all of the above.
(12) Suppose the price elasticity of demand for geodes is –1.5 and the price elasticity of supply of geodes is 0.4. If a tax is imposed on geodes, which side of the market effectively pays most of the tax? a. Sellers. b. Buyers. c. Sellers and buyers each pay half of the tax. d. Answer depends on which side is legally required to remit the tax to the government.
(13) Suppose the price of apples is $0.50 per pound and the price of pears is $2 per pound. The consumer’s opportunity cost of a pound of pears is a. 1/4 pound of apples. b. 1/2 pound of apples. c. 2 pounds of apples. d. 4 pounds of apples.
(14) If a consumer’s income decreases, then a. the slope of the budget line changes. b. the slope of the budget line does not change but the intercepts do. c. neither the slope of the budget line nor its intercepts change. d. Cannot be determined from information given.
(15) If the price of only one good increases, then a. the slope of the budget line changes. b. the slope of the budget line does not change but the intercepts do. c. neither the slope of the budget line nor its intercepts change. d. Cannot be determined from information given.
(16) The indifference curves below illustrate a. perfect substitutes. b. perfect complements. c. inferior goods. d. Giffen goods.
(17) In the short run, if a firm shuts down, its losses will equal a. its variable cost. b. its marginal cost. c. its fixed cost. d. zero.
(18) The present discounted value of a payment to be received in the future is larger a. the lower the interest rate (or discount rate). b. the later the payment is received. c. both (a) and (b). d. neither (a) nor (b).
(19) Deadweight loss occurs if the quantity produced in an industry is a. greater than the competitive equilibrium quantity. b. less than the competitive equilibrium quantity. c. neither (a) nor (b). d. either (a) or (b).
(20) When firms leave an industry, this a. drives the price of the good up. b. drives the price of the good down. c. has no effect on the price of the good. d. shifts the short-run supply curve to the right.
good #
good #
Drake University, Summer 2001
Page 4 of 10
(2) [Production possibility curves, opportunity costs, comparative advantage: 18 pts] Two countries, Northland and Southland, can each produce agricultural goods and manufactured goods. They each face a tradeoff between these two kinds of goods because their workforces are of limited size. Their production possibility curves are shown below.
0
1
2
3
4
5
6
7
8
9
10
11
12
0 1 2 3 4 5 6 7 8 9 10 11 12
Agriculture
Manfuacturing
Northland
Southland
a. [2 pts] Northland's opportunity cost of a unit of agricultural goods is how many units of manufactured goods?
units of manufactured goods b. [2 pts] Southland’s opportunity cost of a unit of agricultural goods is how many units of manufactured goods?
units of manufactured goods c. [2 pts] Northland's opportunity cost of a unit of manufactured goods is how many units of agricultural goods?
units of agricultural goods d. [2 pts] Southland’s opportunity cost of a unit of manufactured goods is how many units of agricultural goods?
units of agricultural goods e. [2 pts] Which country has a comparative advantage in agricultural goods?
f. [2 pts] Which country has a comparative advantage in manufactured goods?
g. [6 pts] Fill in the blanks: Both countries can have combinations of goods outside their individual production possibility curves if ___________________________ produces one unit of agricultural goods for___________________________, which produces ______________ unit(s) of manufactured goods in return.
Drake University, Summer 2001
Page 5 of 10
(3) [Market equilibrium: 12 pts] Suppose five buyers and five sellers engage in a market similar to the exercise we did in class. Each buyer may buy at most one unit and each seller may sell at most one unit, but no one is forced to trade. Assume that buyers and sellers are each trying to maximize their personal earnings (or “gains from trade”). Earnings for each buyer equal the buyer's value of the good minus the price paid. Earnings for each seller equal the price received minus the seller's cost of the good. Earnings of persons who do not trade are zero. Buyers’ values and sellers’ costs are given in the following table.
Buyer Value Seller Cost Aaron $14 Lauren $ 1 Barb $13 Mike $ 2 Caleb $12 Nina $ 3 Diane $11 Oscar $ 8 Evan $ 8 Penny $
Suppose with some experience, the market settles on a single price. All trades are made at that price. (You can use the graph at right for scratch work.)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0 1 2 3 4 5 6 7 8 Quantity
Price
a. What is that single price likely to be? Give an answer to the nearest whole dollar.
b. How many units of the good will be sold in this market? units
c. Compute the combined total earnings (or gains from trade) of all buyers and sellers. (Check your answer carefully!)
d. Who enjoys higher earnings in this particular market, the buyers or the sellers? Or are buyers’ total earnings equal to sellers’ total earnings?
(4) [12 pts] Suppose the water department lowers water rates by 4%. The elasticity of demand for water is known to be -0.25. Assume everything else affecting water demand remains constant. a. Will the quantity of water consumed increase or decrease?
b. ... by how much?
c. Will revenue received by the water department increase or decrease?
d. ... by approximately how much? %
Drake University, Summer 2001
Page 7 of 10
(6) [Short-run cost curves: 26 pts] Walker Cake Company operates a bakery whose daily cost is $240 whether the bakery is idle or running. In addition, the company has labor, energy, and materials costs that depend on the number of cakes made, as shown in the schedule below.
Number of cakes made per day
Cost of labor, energy, and materials
SAVC SAFC SATC SMC
a. [5 pts] Compute the company’s short-run average variable cost schedule (SAVC). Insert your answers in the third column above. b. [5 pts] Compute the company’s short-run average fixed cost schedule (SAFC). Insert your answers in the fourth column above. c. [5 pts] Compute the company’s short-run average total cost schedule (SATC). Insert your answers in the fifth column above. d. [5 pts] Compute the company’s short-run marginal cost schedule (SMC). Insert your answers in the sixth column above.
e. [2 pts] What is the lowest price at which this company can avoid losses? $
f. [2 pts] What is the lowest price at which the company will continue to operate in the short run?
g. [2 pts] How many cakes will this company make if the price is $20? Give an answer to the nearest 10 cakes.
cakes
Drake University, Summer 2001
Page 8 of 10
(7) [Welfare effects of subsidy: 26 pts] The graph below shows the market for umbrellas.
Quantity (thousands)
Price
Demand
Supply
First, consider the market without government intervention.
a. Find the equilibrium quantity. thousand
b. Find the equilibrium price. $
c. Compute total consumer surplus. $ thousand
d. Compute total producer surplus. $ thousand
Suppose the government offers a subsidy on umbrellas in the amount of $3 per umbrella.
e. Compute the quantity traded with the subsidy. thousand
f. Compute the net price paid by demanders, excluding the subsidy. $
g. Compute the total price received by suppliers, including the subsidy. $
h. Does producer surplus increase or decrease because of the subsidy?
i. By how much? $ thousand
j. Does consumer surplus increase or decrease because of the subsidy?
k. By how much? $ thousand
l. Compute the direct cost of the subsidy program to the government. $ thousand
m. Compute the deadweight social loss caused by the subsidy. $ thousand
Drake University, Summer 2001
Page 10 of 10
III. Critical thinking: Write a one-paragraph essay answering either question (1) or question (2) below, but
not both. Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [8 pts]
(1) Ethanol is a gasoline additive made from corn that reduces some kinds of air pollution and has recently been required for all cars in California. Ethanol is produced in the U.S. Midwest and in some other countries like Brazil. Several politicians have recently proposed that imported ethanol be banned. What would happen to the price of ethanol under this proposal? What would happen to the price of gasoline in California under this proposal? Who would win and who would lose in the U.S. from this proposal? Which would be larger: the gains to the winners or the losses to the losers? Justify your answer using a diagram of the domestic supply and demand for ethanol.
(2) In a certain town, all the barbershops are losing money. To remedy this problem, it is suggested that all the barbers in town be permitted to get together and vote on what prices to charge for haircuts. If this suggestion were implemented, what would be the consequences? Who would win and who would lose? Which would be larger: the gains to the winners or the losses to the losers? Justify your answer using a diagram.
Which question are you answering, (1) or (2)? _________. Please write your answer below.
[end of quiz]
