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Principles of Microeconomics Signature: (Econ 002) Printed name: Drake University, Summer 2001 William M. Boal ID number:
QUIZ #2: VERSION A
“Supply and Demand”
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 100.
I. Multiple choice: Circle the one best answer to each question. [4 pts each: 28 pts total]
(1) A rise in the price of cotton is likely to increase purchases of synthetic fabrics, because cotton and synthetic fabrics are a. substitute goods. b. complementary goods. c. normal goods. d. inferior goods.
(2) A fall in people’s incomes is likely to decrease purchases of jet-skis, assuming jet-skis are a. a substitute good. b. a complementary good. c. a normal good. d. an inferior good.
(3) If the wages of construction workers rise and the price of new houses does not, then the number of new houses constructed will a. rise. b. fall. c. remain constant. d. cannot be determined from the information given.
(4) If at the current price, the quantity demanded is less than the quantity supplied, a. the price will fall. b. the price will rise. c. the price will remain constant. d. cannot be determined from the information given.
(5) In June, the price of sunglasses rose and the quantity sold increased. This could only have been caused by a. a rightward shift in demand. b. a rightward shift in supply. c. a leftward shift in demand. d. a leftward shift in supply.
(6) In the late 1970s, the number of college graduates in the workforce increased sharply and their average salary fell (after adjusting for inflation). This could have been caused by a. a rightward shift in the demand for college- educated workers. b. a rightward shift in the supply of college- educated workers. c. a leftward shift in the demand for college- educated workers. d. a leftward shift in the supply of college-educated workers.
(7) News reports say that bad weather in China is hurting the corn crop there. Who will benefit from this? a. Corn consumers in the United States. b. Corn consumers in China. c. Corn producers in the United States. d. Cannot be determined from information given.
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II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for
scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section.
(1) [Market equilibrium: 20 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 $ 8 Oscar $ 4 Evan $ 4 Penny $ 6
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.)
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?
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0 1 2 3 4 5 6 7 8 Quantity
Price
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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) Consider this statement: “Opening up the Arctic Wildlife Refuge to oil drilling will not increase the amount of oil available. Sure, at first more oil will be produced, but the resulting oil glut will push down oil prices, and by the ‘Law of Supply’ less petroleum will then be produced.” Do you agree or disagree? Why?
(2) Why are tomatoes cheap in August and September in Iowa, but expensive in winter and spring? Support your answer with a supply-and-demand diagram.
Which question are you answering, (1) or (2)? _________. Please write your answer below.
[end of quiz]
