Principles of Microeconomics (Econ 002) Drake University, Spring 2012 William M. Boal Course page: www.drake.edu/cbpa/econ/boal/002 Blackboard: bb.drake.edu william.boal@drake.edu

Version A

I. Multiple choice

(1)c. (2)a. (3)b. (4)c. (5)a. (6)c. (7)c. (8)b. (9)c. (10)b.
(11)a. (12)b.

II. Problems

(1) [Production functions: 7 pts]
Average product = 2, 3, 4.
Marginal product = 2, 4, 6.
Diminishing returns: NO.

(2) [Production possibility curve: 6 pts] PP curve is a straight line with intercepts at 5 pots and 10 plates.

1. 1/2 unit of agricultural goods.
2. 1 units of agricultural goods.
3. 2 unit of manufactured goods.
4. 1 units of manufactured goods.
5. Country A.
6. Country B.
7. Both countries can consume combinations of manufactured goods and agricultural goods outside their individual production possibility curves if Country A produces and exports three units of manufactured goods for Country B, which produces 2 units of agricultural goods in return.
8. Plot should show each country's production before trade, and consumption after trade.

(4) [Market equilibrium: 12 pts]

1. excess demand.
2. \$12.
3. 5 units.
4. \$60 (= price times quantity).
5. \$54.
6. sellers.

(5) [Shifts in demand and supply: 15 pts] Full credit requires accurate graphs.

1. right, no change, increase, increase.
2. no change, left, increase, decrease.
3. left, left, cannot be determined, increase.

(6) [Consumer surplus, producer surplus: 22 pts]

1. excess supply.
2. 3 million (equals quantity supplied minus quantity demanded).
3. fall.
4. \$5.
5. 4 million.
6. \$8.
7. \$3.
8. \$4.
9. \$1.
10. \$8 million.
11. \$4 million.

(7) [Consumer surplus, producer surplus: 4 pts]

1. better off.
2. \$16 thousand.

III. Critical thinking [4 pts]

(1) Disagree. If every trade is voluntary, then both parties expect to benefit. In that sense, there is no "loser," only winners. For example, in a monetary transaction, the buyer only agrees to buy if the price is less than or equal to the value the buyer is willing to pay, and the seller only agrees to sell if the price is greater than or equal to the seller's marginal cost. The buyer's benefit, or consumer surplus is the difference between the value that the buyer is willing to pay and the price. The seller's benefit, or producer surplus is the difference between the price and the seller's marginal cost.

(2) Yes. With decreasing opportunity cost (that is, bowed-in production-possibility curves) both parties can enjoy gains from trade even if their curves are identical. Each must specialize in one good and trade for the other. In this example, Country A could produce 10 units of electronics and export 5 units, while Country B could produce 10 units of cars and export 5 units. Each country would then enjoy 5 units of electronics and 5 units of cars, a combination outside their individual PP curves. [Paul Krugman received the Nobel Prize in Economics in 2008 for developing the theory of international trade with decreasing opportunity cost.]

Version B

I. Multiple choice

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

II. Problems

(1) [Production functions: 7 pts]
Average product = 5, 4, 3.
Marginal product = 5, 3, 1.
Diminishing returns: YES.

(2) [Production possibility curve: 6 pts] PP curve is a straight line with intercepts at 5 pots and 15 plates.

1. 2 unit of agricultural goods.
2. 1 units of agricultural goods.
3. 1/2 unit of manufactured goods.
4. 1 units of manufactured goods.
5. Country B.
6. Country A.
7. Both countries can consume combinations of manufactured goods and agricultural goods outside their individual production possibility curves if Country B produces and exports two units of manufactured goods for Country B, which produces 3 units of agricultural goods in return.
8. Plot should show each country's production before trade, and consumption after trade.

(4) [Market equilibrium: 12 pts]

1. excess supply.
2. \$4.
3. 4 units.
4. \$16 (= price times quantity).
5. \$43.

(5) [Shifts in demand and supply: 15 pts] Full credit requires accurate graphs.

1. left, no change, decrease, decrease.
2. no change, right, decrease, increase.
3. right, left, increase, cannot be determined.

(6) [Consumer surplus, producer surplus: 22 pts]

1. excess demand.
2. 9 million (equals quantity demanded minus quantity supplied).
3. rise.
4. \$7.
5. 6 million.
6. \$9.
7. \$2.
8. \$4.
9. \$3.
10. \$9 million.
11. \$18 million.

(7) [Consumer surplus, producer surplus: 4 pts]

1. better off.
2. \$14 thousand.

III. Critical thinking

Same as Version A.

Version C

I. Multiple choice

(1)b. (2)a. (3)b. (4)d. (5)b. (6)a. (7)b. (8)a. (9)b. (10)c.
(11)c. (12)d.

II. Problems

(1) [Production functions: 7 pts]
Average product = 6, 5, 4.
Marginal product = 6, 4, 2.
Diminishing returns: YES.

(2) [Production possibility curve: 6 pts] PP curve is a straight line with intercepts at 10 pots and 15 plates.

1. 2 unit of agricultural goods.
2. 3 units of agricultural goods.
3. 1/2 unit of manufactured goods.
4. 1/3 units of manufactured goods.
5. Country A.
6. Country B.
7. Both countries can consume combinations of manufactured goods and agricultural goods outside their individual production possibility curves if Country A produces and exports two units of manufactured goods for Country B, which produces 5 units of agricultural goods in return.
8. Plot should show each country's production before trade, and consumption after trade.

(4) [Market equilibrium: 12 pts]

1. excess supply.
2. \$8.
3. 3 units.
4. \$24 (= price times quantity).
5. \$27.
6. sellers.

(5) [Shifts in demand and supply: 15 pts] Full credit requires accurate graphs.

1. no change, left, increase, decrease.
2. right, no change, increase, increase.
3. right, left, increase, cannot be determined.

(6) [Consumer surplus, producer surplus: 22 pts]

1. excess demand.
2. 6 million (equals quantity demanded minus quantity supplied).
3. rise.
4. \$4.
5. 6 million.
6. \$7.
7. \$3.
8. \$2.
9. \$2.
10. \$18 million.
11. \$9 million.

(7) [Consumer surplus, producer surplus: 4 pts]

1. worse off.
2. \$21 thousand.

III. Critical thinking

Same as Version A.