Version A

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

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

II. Problems

(1) [Using slopes: 2 pts]

1. decrease.
2. 6 units.

(2) [Percent changes: 2 pts]

1. increase.
2. 3 percent.

(3) [Percent change: 2 pts] $525 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. No.
4. Yes.
5. Yes.
6. Yes.

(5) [Production functions: 7 pts]

• Average product = total output/total input = 5, 4, 3 trees per worker.
• Marginal product = Δ output/Δ input = 5, 3, 1 trees per worker.
• YES diminishing returns, because MP does decreases as the number of workers increases.

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

1. 1 unit of wheat.
2. 1/2 units of wheat.
3. 1 unit of corn.
4. 2 units of corn.
5. Farmer B (because it has the lower opportunity cost of producing corn).
6. Farmer A (because it has the lower opportunity cost of producing wheat).
7. ... if Farmer A sends two units of wheat to Farmer B, who sends 3 units of corn 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 farmer.

(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 at this price, quantity supplied is 3, while quantity demanded is 5).
2. $10.
3. 4 units.
4. $40 (equals price times quantity).
5. $37.
6. Sellers enjoy higher total surplus.

(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 left, supply shifts left, equilibrium price cannot be determined, equilibrium quantity decreases.

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

1. 8 percent.
2. $120 billion.
3. $150 billion.
4. $90 billion.
5. excess demand.
6. 60 billion.

III. Critical thinking [4 pts]

(1) It is not true that every trade has a winner and a loser. In fact, if trade is voluntary, both parties expect to gain. For example, in problem (6) above, both parties were able to consume combinations of goods that were outside their respective production possibility curves--that is, combinations that they could never have produced independently. Similarly, in problem (7) above, all persons who actually traded enjoyed a surplus--buyers paid less than their value of the good and sellers received more than their cost of the good.

(2) A price ceiling would not ensure that more babies had access to infant formula. A price ceiling, or maximum price, pushes price below the equilibrium price. The quantity demanded increases and the quantity supplied decreases, causing excess demand (a shortage). Because the quantity supplied decreases, the quantity actually purchased decreases. Those buyers who can actually get the infant formula will enjoy a lower price, but less formula will be produced and sold.
(Full credit requires a graph showing demand, supply, and a horizontal line at the price ceiling, below the equilibrium price. To justify your answer, the quantity sold before and after the price ceiling should be marked.)

Version B

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

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

II. Problems

(1) [Using slopes: 2 pts]

1. increase.
2. 20 units.

(2) [Percent changes: 2 pts]

1. decrease.
2. 2 percent.

(3) [Percent change: 2 pts] $312 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. Yes.
3. Yes.
4. No.
5. Yes.
6. No.

(5) [Production functions: 7 pts]

• Average product = total output/total input = 1, 2, 3 trees per worker.
• Marginal product = Δ output/Δ input = 1, 3, 5 trees per worker.
• NO diminishing returns, because MP does not decrease as the number of workers increases.

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

1. 1/2 car.
2. 1 car.
3. 2 motorcycles.
4. 1 motorcycle.
5. Country X (because it has the lower opportunity cost of producing motorcycles).
6. Country Y (because it has the lower opportunity cost of producing cars).
7. ... if Country Y produces and exports three cars to Country X, which produces and exports 4 (or 5) motorcycles 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 3).
2. $5.
3. 5 units.
4. $25 (equals price times quantity).
5. $36.
6. Buyers enjoy higher total surplus.

(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 left, supply unchanged, equilibrium price decreases, equilibrium quantity decreases.
3. Demand shifts left, supply shifts left, equilibrium price cannot be determined, equilibrium quantity decreases.

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

1. $10.
2. 120 million.
3. 100 million.
4. 130 million.
5. excess supply.
6. 30 million.

III. Critical thinking

Same as Version A.

[end of answer key]