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Exam #1, Version #1, SCHNEIDER, Microeconomic Principles ANSWERS
1. The graph to the right displays a production possibilities curve for the World, which must choose between allocating resources towards Machinery (M) or Food (F).
a. (1) What is the opportunity cost of moving from point D to point A? 1500 units of Food.
b. (1) Show what will happen to the graph if climate change reduces the productivity land used to grow food.
c. (1) Circle the letter associated with each point on the graph that cannot be reached given existing resources and technology. a. A b. B c. C d. D e. E f. F g. G
d. (2) Circle all of the following statements that are true.
a. Point A will result in the most economic growth. b. Point E is inefficient. c. One possible reason for the economy to be at Point E would be if the economy is in a recession. d. The opportunity cost of 1 unit of Food increases as the economy moves from Point A to Point E.
2. (2) List the major economics systems that have existed in human history, in the order in which they appeared. Primitive communism (traditional) Slave-based empires Feudalism Mercantilism Laissez-Faire Capitalism Mixed-Market Capitalism
- On each of the graphs, show how the supply and demand curves for Apple Laptop Computers will be affected by specific events, and show what happens to equilibrium price and quantity. No explanation is necessary.
a. (3) A shortage of computer chips used in Apple Laptop Computers develops due to pandemic disruptions.
Q (millions)
S
P
D
a. Apple Laptop Computers
Food
Machinery
A
D
E
C
World PPC
F
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G
b. (3) Intel undertakes a massive advertising campaign to convince people to buy laptops not made by Apple. The campaign is so bad that it actually increases Apple’s brand-name identification.
c. (3) Apple starts to make more money selling iPhones than it does selling laptop computers.
d. (3) Wages of workers all around the world rise due to the end of the global COVID-19 pandemic.
- Suppose that the Pennsylvania State Legislature legalizes recreational marijuana, creating the market depicted in the graph to the right with an equilibrium price of $100 per unit and an equilibrium quantity of 500 units. a. (1) On the graph to the right, a $60 per unit excise tax on marijuana would result in a new equilibrium price of
$_____________. Show on the graph.
b. (1) The total tax revenue from the $60 excise tax received by the government would be
$________________. (show your work)
c. (1) Producers’ total revenue after the excise tax is imposed would be $________________. (show your work)
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- On each of the graphs, show how the supply and demand curves for unskilled labor will be affected by specific events, and show what happens to (a) the wage rate, (b) the number of workers employed, and (c) the surplus of laborers. Assume that each problem starts with a minimum wage of W (^) Min in place. No explanation is necessary. a. (3) Due to another COVID outbreak, a lot of workers decide to quit their jobs and live off of their savings.
b. (3) (i) The government decreases the minimum wage to a level below WMin but above W (^) E. (ii) This causes a decrease in workers’ productivity.
c. (3) The government decides to hire all unemployed workers to do useful work in their communities.
10. Essay (50)
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W (wage)
QLabor
DL
Q E
WE
WMin
Q D1 Q S
9a
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W (wage)
QLabor
DL
Q E
WE
WMin
Q D1 Q S
9c
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W (wage)
QLabor
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QE
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9b.
Exam #1, Version #2 ANSWERS
- The graph to the right displays a production possibilities curve for the US, which must choose between allocating resources towards Consumer Goods (C) or Public Health (P).
a. (1) What is the opportunity cost of moving from point E to point C? 40 C (40 units of consumer goods).
b. (1) If the economy is currently at point C, what will happen on the graph if the government decides to reduce spending on public health so that they can give people tax cuts so they can purchase more consumer goods?
This would mean moving along the PPC from point C toward point D or point E.
c. (1) Which point on the graph will result in the most economic growth? Point B
- (2) Which of the following statements about the PPC above are true (select one or more)?
a. Resources are not specialized on this PPC. b. The opportunity cost of one unit of public health increases as the economy moves toward point B. c. The US economy has enough resources to reach all points on the graph except point G. d. Point E represents an inefficient use of resources.
3. (2) List the major economics systems that utilized markets as their primary means for obtaining essential goods and services. Mercantilism, Laissez-Faire Capitalism, Mixed Market Capitalism. No other systems used markets for essential goods like food.
- On each of the graphs, show how the supply and demand curves for Google Pixel SmartPhones will be affected by specific events, and show what happens to equilibrium price and quantity. No explanation is necessary.
a. (3) Apple lowers the price of its new model of the iPhone.
b. (3) Google undertakes a massive advertising campaign to increase its market share above its current level of 2%. The campaign targets diverse communities usually ignored by advertisers, and is very successful in creating brand name identity.
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P
D
a. Google Pixel SmartPhone
Public Health
Consumer Goods
E
D
B
A
US PPC
F
C
Q (millions)
S
P
D
b. Google Pixel SmartPhone
G
- (2) In 2022 the price of natural gas in Europe increased by 700%. As a result, the quantity of solar panels demanded increased by 100% and the quantity of stoves demanded decreased by 200%. This means (circle all of the following that are TRUE): a. Natural gas has an inelastic demand curve. b. Natural gas is a normal good. c. Solar panels are a substitute good for natural gas. d. Solar panels are complementary good for natural gas. e. Stoves are a substitute good for natural gas. f. Stoves are a complementary good for natural gas.
- (1) The most important factors that led to major shifts in economic systems (from one type of system to another) were (circle one or more) a. Conflicts between different social classes. b. Changes in key technologies. c. Changes in religious or cultural views. d. Changes in the allocation of surplus. e. Changes in property rights.
- Determine which economic thinker is most closely associated with the following ideas. a. (1) Surplus Value. Karl Marx b. (1) Sticky Wages. John Maynard Keynes c. (1) Moral Sentiments. Adam Smith d. (1) Pecuniary Emulation. Thorstein Veblen
- (1) Modern, Market-dominated economies (circle one or more) a. Are predominant in English-speaking countries. b. Tend to have a much higher growth rate than social market economies. c. Tend to have a lower poverty rate than social market economies. d. Use little or no government intervention. e. Have much higher inequality than social market economics.
- The government of the state of Pennsylvania wants to discourage hard liquor (vodka, whiskey, etc.) consumption, which has increased significantly in recent years. Currently, the equilibrium price of a 0.75 liter bottle of hard liquor in Pennsylvania is $20, and the equilibrium quantity of hard liquor sold is 100 thousand bottles per month. The price elasticity of the demand for hard liquor is extremely inelastic (𝑒ௗ ൌ െ0.1ሻ, and the price elasticity of the supply of Pennsylvania hard liquor is elastic (𝑒௦ ൌ 4 ሻ. The government is considering (a) a price floor of $30 (where they will not buy any surplus created), and (b) a per-unit excise tax of $10 per bottle. a. (6) Draw a graph of the market for hard liquor in Pennsylvania. Show as accurately as possible how it will be affected by a price floor of $30 per bottle. Determine the total revenue that Pennsylvania hard liquor sellers get after that price floor is installed.
b. (6) Draw another graph of the market for hard liquor in Pennsylvania in equilibrium. Show how it will be affected by a per-unit excise tax of $10 per bottle. Be as accurate as possible. Determine government’s revenue from the tax, and the total revenue that Pennsylvania sellers of hard liquor will receive after the excise tax is established.
c. (4) Given that the goal is to discourage hard liquor consumption in the most cost effective way for the government, which policy is most effective, and why?
Quantity is slightly less with the price floor of $30 (95 thousand vs. 96 thousand) so the price floor discourages consumption the most. The price floor costs nothing but also does not bring in revenue. The excise tax brings in $960,000 for the government making the excise tax better from a government budgetary perspective.
- On each of the graphs, show how the supply and demand curves for unskilled labor will be affected by specific events, and show what happens to (a) the wage rate, (b) the number of workers employed, and (c) the surplus of laborers. Assume that each problem starts with a minimum wage of W (^) Min in place. No explanation is necessary. a. (3) The U.S. economy enters a recession due to the Fed’s recent increases in interest rates.
b. (3) (i) The government increases the minimum wage to a level above W (^) MIN. (ii) This causes an increase in workers’ productivity.
c. (3) The government decides to provide free child care for all families, as many social democracies do.
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QLabor
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Q E
WE
WMin
Q D1 Q S
9a
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QLabo
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WMin
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9b.
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- (2) As more of one input is used, holding other inputs constant, (select one or more) a. Marginal costs will decrease at first due to specialization. b. Output will eventually decrease due to diminishing returns. c. Productivity of the variable input will eventually decrease due to diminishing returns. d. Total Fixed Costs will eventually decrease due to diminishing returns. 8. (1) Based on the data, if Merck wishes to maximize profits, how many units per day should they produce? 50 9. (2) Merck’s maximum (total) economic profits per day are $45000‐35000=$10, 10. (2) If the government decided to institute average total cost pricing, then Merck would produce a quantity of 90 units, and would earn an economic profit of $45000‐45000=$. 11. (2) If the government decided to institute marginal cost pricing, then Merck would produce a quantity of 120 units, and would earn an economic profit of $24000‐49500= $‐25,
- (2) Is Merck a Natural Monopoly when it comes to the market for Molnupiravir (select one)? a. Yes. b. No. c. Impossible to verify from the information given. d. True up to a quantity of 90. e. True up to a quantity of 70.
- (4) If the U.S. government wants to regulate Molnupiravir, what would the most appropriate option be? Explain.
Marginal Cost Pricing is the best option due to the external benefits (better health, more productivity, more profitable businesses, more economic growth) that stem from this drug. Antitrust is not appropriate in the case of a natural monopoly, nor is a profits tax that would discourage consumption. Average Cost Pricing would lower the prices some, but not as much as MCP so it is not as effective.
Daily cost & revenue information for Merck, a monopoly providing the anti‐
Covid‐ 19 pill Molnupiravir
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Total Cost
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Cost
Long Run
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Total Cost
Price
Total
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Revenue
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- (1) The profit maximizing quantity for Bechtel’s ice cream parlor above is ___5_______.
- (2) Bechtel’s ice cream parlor will make a total economic profit of $_________. (show your work)
- (8) What can we expect to happen to Bechtel’s Ice Cream Parlor in the long run? Explain carefully, and show your answer on the graph. Losses cause firms to exit. There are then fewer substitutes, so demand increases and gets steeper until firms earn a normal profit at P2 and Q2.
- (1) What is the main difference between oligopoly and monopolistic competition? (Select one) a. Oligopoly has a large number of small firms while monopolistic competition does not. b. In oligopoly, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods. c. Oligopoly firms do not tend to advertise, while monopolistic competition firms do. d. Oligopoly has barriers to entry while monopolistic competition does not.
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- In the perfectly competitive wheat market, there is a high price of wheat due to the war between Russian and Ukraine. The equilibrium price of wheat is $10 per bushel, and the equilibrium quantity of wheat is 4 billion bushels. Jen, a typical wheat farmer, currently produces 8 thousand bushels of wheat per year, while incurring average total costs of $9 and average variable costs of $7. a) (14) Draw a graph of the wheat market, and next to it draw a graph of Jen’s wheat farm. Show how both graphs will be affected if the war ends and the equilibrium price of wheat falls to $7 due^ to^ an^ increase^ in^ the^ supply^ of^ wheat.
b) (7) What do you expect to happen in the long run to Jen and to the Wheat Market in the long run (assuming that the war is permanently over)? Explain very carefully, and refer to the graphs in your answer.
Losses cause firms to exit. The market supply decreases, and the market price increases until firms can earn a normal profit. A normal profit would occur at a price just below $9 (perhaps $8.80)
- (2) To internalize a positive externality generated by a product, economists suggest (select one or more) a. Subsidizing the product. b. Having the government provide the product. c. Taxing the product. d. Eliminating government regulations related to the product.
- (1) According to the Piketty thesis, (select one or more) a. Inequality tends to increase when growth rates are slow. b. Inequality tends to increase when growth rates are fast. c. Inequality tends to increase when government policies favor unions. d. Inequality tends to increase when governments engage in supply‐side policies.
- (1) Which of the following are major reasons economists have identified for why U.S. inequality is worse than that of other developed countries. (Select one) a. Lower taxes on the wealthy. b. A less generous safety net. c. An unequal educational system. d. Less support for unions. e. All of the above.
- (30) Essay. One of the following 2 essay questions will be randomly selected at the exam for you to write about.
ECON101, Exam #2, Fall 2022, Professor Schneider ANSWERS
- (2) If the price of soybeans is $6, then farmer Don should produce 8 units of soybeans.
- (2) If the price of soybeans is $6, farmer Don will make a total economic profit (or loss) of $(6-13)*8= $-56.
- (2) At the profit maximizing level of output, Don will incur average fixed costs of (ATC-AVC)= $13 – 5 = 8.
- (2) If the price of soybeans is $6 per bag then, assuming Don is typical of other soybean farmers and that the cost curves are long run cost curves, in the long run we would expect which of the following things to happen (select one or more): a. Firms will enter the market. b. The market supply will decrease. c. The market price will decrease to the minimum AVC. d. Firms will earn an economic loss. e. The market price will increase to $12. Normal profit f. The market price will decrease to $5.
- (2) In the graph above of Don’s Soybean farm, (select one or more) a. Specialization occurs up until a quantity of 11. b. Diminishing returns set in after a quantity of 5. (min. MC) c. Average fixed costs continually decrease. (always true) d. The firm should shut down in the short run if the price falls below $1. $5 is the short run shut down point.
Price ($)
Quantity
MC
ATC
AVC
Don, a perfectly competitive soybean farmer
D
- (2) Using the kinked demand curve model for Ford, which operates in the Oligopolistic automobile market, if Ford increases its prices then we can expect (select one or more) a. No other firms will match their prices. b. All other firms will match their prices. c. A large increase in the quantity demanded for Ford cars. d. A large decrease in the quantity demanded for Ford cars. e. No change in the quantity demanded for Ford cars.
- (2) Which market structure best characterizes physicians services (doctors)? a. Perfect competition. b. Monopolistic competition. c. Oligopoly. d. Monopoly. e. Monopolistic oligopoly.
- (2) According to the payoff matrix below, which of the following statements accurately describes Pepsi’s best strategy (select one): a. Pepsi has a dominant strategy: choosing large ad expenditures. b. Pepsi has a dominant strategy: choosing small ad expenditures. c. Pepsi will always match whatever Coca-Cola does. d. Pepsi will never match whatever Coca-Cola does. e. None of the above. Coca-Cola’s Advertising Strategies Large Ad Expenditures Small Ad Expenditures
Pepsi’s Advertising Strategies
Large Ad Expenditures
Coca-Cola earns $70 million Pepsi earns $50 million
Coca-Cola earns $80 million Pepsi earns $40 million
Small Ad Expenditures Coca-Cola earns $90 million Pepsi earns $60 million
Coca-Cola earns $100 million Pepsi earns $30 million
- (2) In the payoff matrix above, where is the Nash equilibrium? Select one of the options below. a. In the top left box, with both firms choosing large ad expenditures. b. In the bottom right box, with both firms choosing small ad expenditures. c. In the top right box, with Pepsi choosing large ad expenditures and Coca-Cola choosing small ad expenditures. d. In the bottom left box, with Pepsi choosing small ad expenditures and Coca-Cola choosing large ad expenditures. e. There is no Nash equilibrium in this payoff matrix.
- (2) In a cap-and-trade market for carbon permits, (select one) a. Companies are taxed for each unit of carbon dioxide they produce. b. Companies can sell permits if they pollute above the number of permits they receive from the government. c. Companies do not attempt to manipulate the permitting process. d. Companies must buy permits if they pollute above the number of permits they receive from the government. e. Companies must buy permits for each unit of carbon dioxide they produce.
- (2) Which of the following statements about Public Goods is true (select one)? a. Markets are able to provide most public goods effectively. b. People cannot use a public good unless they pay for it. c. When one person uses a public good, others cannot use it. d. People are generally willing to pay for public goods voluntarily. e. None of the above.
- (2) With a negative externality, the unregulated market equilibrium is associated with a (select one) a. Lower price and a higher quantity compared with the efficient equilibrium. b. Higher price and a lower quantity compared with the efficient equilibrium. c. Lower price and a lower quantity compared with the efficient equilibrium. d. Higher price and a higher quantity compared with the efficient equilibrium.
- (2) According to the Piketty thesis, (select one or more) a. Inequality tends to increase when growth rates are slow. b. Inequality tends to increase when growth rates are fast. c. Inequality tends to increase when government policies favor unions. d. Inequality tends to increase when governments engage in supply-side policies.
- (2) Which of the following are major reasons economists have identified for why U.S. inequality is worse than that of other developed countries. (Select one) a. Lower taxes on the wealthy. b. A less generous safety net. c. An unequal educational system. d. Less support for unions. e. All of the above.
- In the perfectly competitive apple market, there is a price floor of $50 per bushel. At that price, consumers buy 20 million bushels and the government buys 5 million bushels. The equilibrium price of apples is $40. Schlegel’s, a local apple producer, currently experiences Average Total Costs of $40 and Average Variable Costs of $30 while producing 2000 bushels per year. a) (18) Draw a graph of Schlegel’s apple farm. Include, D, MC, AVC, ATC and show any profit or loss. Also draw a graph of the apple market. Show how both graphs will be affected if the price floor is eliminated. Show any profit or loss at the new price on your graph of Schlegel’s farm.
b) (8) What do you expect to happen in the long run to Schlegel’s and to the Apple Market in the long run? Explain very carefully, and refer to the graphs in your answer. Assume that Schlegel’s is typical of other apple producers and that short run and long run costs curves are the same.
Schlegel’s is still earning a tiny economic profit at a price of $40. This will encourage new firms to enter, causing the market supply to increase and the market price to decrease until all firms are earning a normal profit. This will occur at a price of just less than $40, and just less than ATC2 and quantity Q2. The new quantity will also be just less than Q2.
Exam Questions, Schneider, Chapter 24, International Microeconomics ANSWERS
- (3) The U.S. Fed just raised interest rates. Show on a graph of the market for British Pounds to the right what effect higher interest rates in the US will have on the value of the British Pound (₤) and the quantity of pounds exchanged for dollars.
Q of £ exchanged for $ will _______________________.
P£ (in $) will __________________________.
- (3) In 2008, incomes decreased rapidly in both Europe and in the US due to the recession. Using the graph of the market for Euros below , show how decreasing European and US incomes will affect the value of the Euro (€) and the quantity of Euros exchanged for Dollars.
Q of € exchanged for $ will __________________.
P€ (in $) will ________________________.
- (3) If the prices of Japanese goods decline, what will happen to the value of the Japanese Yen (¥) relative to the Euro (€) and the amount of Yen exchanged for Euros? Show on the graph of the market for Yen below.
Q of ¥ exchanged for € will __________________.
P¥ (in €) will ________________________.
- The graphs to the right show production possibilities curves (PPCs) for Germany and China using an identical amount of resources for one month.
Electronics
Germany
China
Cars Cars
Electronics
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S£
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Market for British
Pounds (£)
P€ (in $)
S€
D€
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Market for Euros (€)
Market for Yen (¥)
a. (1) The opportunity cost of 1 unit of Electronics in China is:
_______________________________
b. (1) Which of the answers below is correct, given the graphs? (Circle the correct answer)
a. Germany has a comparative advantage in both goods. b. Germany has a comparative advantage in Cars, and China has a comparative advantage in Electronics. c. China has a comparative advantage in both goods. d. Germany has a comparative advantage in Electronics, and China has a comparative advantage in Cars. e. China has an absolute advantage in both goods.
c. (1) Draw consumption possibilities curves on the graphs above. Assume that the international terms of trade are 1 car for 2 units of electronics.
