Version A

I. Multiple choice [1 pt each: 17 pts total]

(1)c. (2)d. (3)c. (4)b. (5)b. (6)c. (7)a. (8)d. (9)c. (10)b.
(11)c. (12)b. (13)c. (14)c. (15)c. (16)a. (17)a.

II. Problems

(1) [Using slopes: 2 pts]

1. increase.
2. 12 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 3 percent.

(3) [Percent change: 2 pts] $315 billion.

(4) [Economic capital: 6 pts] Economic capital includes factories, buildings, machinery, equipment, vehicles, computers, and software: goods that help produce more goods. Note that economic capital is NOT the same as financial capital.

1. Yes.
2. No.
3. Yes.
4. Yes.
5. Yes.
6. No.

(5) [Production functions: 7 pts]

• Average product = total output/total input = 2, 3, 4 cars per worker.
• Marginal product = Δ output/Δ input = 2, 4, 6 cars per worker.
• NO, because MP does not decrease as the number of workers increases.

(6) [Comparative advantage, gains from grade: 17 pts]

1. 1 bicycles.
2. 2 bicycles.
3. 1 televisions.
4. 1/3 televisions.
5. Country A (because it has the lower opportunity cost of producing televisions).
6. Country B (because it has the lower opportunity cost of producing bicycles).
7. ... if Country B produces and exports three bicycles to Country A, which produces and exports 2 televisions in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(7) [Market equilibrium: 12 pts] Recall that equilibrium occurs when the quantity demanded equals the quantity supplied. You should sketch the stairstep graphs of demand and supply curves before answering the questions.

1. excess supply (because quantity supplied is 6, while quantity demanded is 5).
2. $4.
3. 5 units.
4. $20 (equals price times quantity).
5. $47.
6. Buyers enjoy higher total earnings.

(8) [Shifts in demand and supply: 15 pts] Full credit requires graphs showing new demand or supply curve(s).

1. Demand shifts right, supply unchanged, equilibrium price increases, equilibrium quantity increases.
2. Demand unchanged, supply shifts left, equilibrium price increases, equilibrium quantity decreases.
3. Demand shifts right, supply shifts left, equilibrium price increases, equilibrium quantity cannot be determined.

(9) [Market equilibrium, price controls: 12 pts]

1. $12.
2. 60 million.
3. 40 million.
4. 70 million.
5. excess supply.
6. 30 million.

III. Critical thinking [4 pts]

(1) This argument does not make sense. If many hotels are being built, then supply of hotel rooms will shift to the right. This shift will lower, not raise, the equilibrium price of hotel rooms. Consumers will benefit, not suffer, from lower prices. (Full credit requires supply-and-demand graph showing rightward shift in supply and consequent decrease in price.)

(2) Disagree. Sellers can set any price they want, but if they set a price above the market equilibrium price, they risk not having buyers because the quantity sellers want to sell will exceed the quantity buyers want to buy. That is, there will be excess supply. Sellers excluded from the market will then undercut that price to gain buyers and the price will fall. Only a price at the market equilibrium--at the intersection of supply and demand curves--will there be no tendancy for the price to move further, because the quantity sellers want to sell will equal the quantity buyers want to buy. So buyers do influence the price set by sellers through their demand curve. (Full credit requires supply-and-demand graph showing that if price is above the equilibrium, there is excess supply and the price will tend to fall.) [Note: This argument assumes there are many sellers. If there were only one seller of a product, there would be no one left to undercut them on price. So price could remain above the intersection of supply and demand indefinitely.]

Version B

I. Multiple choice [1 pt each: 17 pts total]

(1)e. (2)d. (3)b. (4)d. (5)a. (6)a. (7)c. (8)c. (9)b. (10)a.
(11)a. (12)d. (13)a. (14)b. (15)a. (16)b. (17)c.

II. Problems

(1) [Using slopes: 2 pts]

1. decrease.
2. 15 units.

(2) [Percent changes: 2 pts]

1. decrease.
2. 1 percent.

(3) [Percent change: 2 pts] $212 billion.

(4) [Economic capital: 6 pts] Economic capital includes factories, buildings, machinery, equipment, vehicles, computers, and software: goods that help produce more goods. Note that economic capital is NOT the same as financial capital.

1. No.
2. Yes.
3. No.
4. Yes.
5. No.
6. Yes.

(5) [Production functions: 7 pts]

• Average product = total output/total input = 10, 7, 5 cars per worker.
• Marginal product = Δ output/Δ input = 10, 4, 1 cars per worker.
• YES, because MP decreases as the number of workers increases.

(6) [Comparative advantage, gains from grade: 17 pts]

1. 1 bicycles.
2. 1/2 bicycles.
3. 1 televisions.
4. 2 televisions.
5. Country B (because it has the lower opportunity cost of producing televisions).
6. Country A (because it has the lower opportunity cost of producing bicycles).
7. ... if Country A produces and exports three bicycles to Country B, which produces and exports 4 (or 5) televisions in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(7) [Market equilibrium: 12 pts] Recall that equilibrium occurs when the quantity demanded equals the quantity supplied. You should sketch the stairstep graphs of demand and supply curves before answering the questions.

1. excess demand (because quantity supplied is 3, while quantity demanded is 4).
2. $10.
3. 4 units.
4. $40 (equals price times quantity).
5. $35.
6. Sellers enjoy higher total earnings.

(8) [Shifts in demand and supply: 15 pts] Full credit requires graphs showing new demand or supply curve(s).

1. Demand unchanged, supply shifts left, equilibrium price increases, equilibrium quantity decreases.
2. Demand shifts right, supply unchanged, equilibrium price increases, equilibrium quantity increases.
3. Demand shifts left, supply shifts left, equilibrium price cannot be determined, equilibrium quantity decreases.

(9) [Market equilibrium, price controls: 12 pts]

1. 7 percent.
2. $80 billion.
3. $100 billion.
4. $60 billion.
5. excess demand.
6. $40 billion.

III. Critical thinking

Same as Version A.

[end of answer key]