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

II. Problems

(1) [Rational choice: 12 pts]

1. \$1.5 million, \$2 million, \$2.5 million, \$3.5 million, \$5 million.
2. \$3 million, \$4 million, \$3.5 million, \$2.5 million, \$1.5 million.
3. 6 miles (using the rule MC=MB).

(2) [Consumer choice and demand: 16 pts]

1. 9 units of energy and 4 units of other goods.
2. 7 units of energy and 3 units of other goods.
3. "Other goods" intercept at 10, "energy" intercept at 15.
4. 9 units of energy.
5. "Other goods" intercept at 10, "energy" intercept at 5.
6. 4 units of energy.
7. (Q,P) = (9,\$2), (4,\$6).

(3) [Short-run cost curves and supply: 24 pts]

1. \$9 thousand (= SATC x q).
2. \$4 thousand (= SAVC x q).
3. \$5 thousand (= SATC - SAVC).
4. \$13 (= SMC).
5. \$8 (= minimum SATC).
6. \$4 (= minimum SAVC).
7. 1600 parts.
8. profit (because price > breakeven price).
9. 1200 parts.
10. loss (because price < breakeven price).
11. 0 parts (because price < shutdown price).
12. loss (= SFC).

(4) [Long-run competitive equilibrium: 24 pts]

1. \$8.
2. 11 thousand.
3. \$8 (= price in long-run equilibrium).
4. \$2.
5. 5 thousand.
6. losses (because below long-run supply curve).
7. exit (to avoid losses).
8. \$6.
9. 3 thousand.
10. \$6 (= price in long-run equilibrium).
11. decreased.
12. increasing-cost industry (because long-run supply slopes up).

(5) [Discounting: 4 pts]

1. \$2865.
2. \$600 million.

III. Critical thinking [4 pts]

(1) Graph should plot all three bundles. Since bundle A and bundle B are equally preferred, they should be connected by an indifference curve. However, bundles A and B are more preferred than bundle C, so the curve that passes through bundles A and B must pass above bundle C. By the same reasoning, the indifference curve that passes through bundle C must pass below bundles A and B.

(2) You should not switch to Vendor B's system. You should stay with Vendor A's system. The \$100,000 you paid to install Vendor A's system is a sunk cost because the money cannot be recovered. It must be paid whether or not you switch, so you should compare the other costs. Excluding sunk costs, Vendor A's system will cost only \$50,000, which is less than the \$75,000 total you must pay for Vendor B's system. Therefore you should stay with Vendor A's system.

### Version B

I. Multiple choice

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

II. Problems

(1) [Rational choice: 12 pts]

1. \$1 million, \$1.5 million, \$1.5 million, \$2 million, \$3 million.
2. \$3 million, \$4 million, \$2 million, \$3 million, \$2 million.
3. 8 miles (using the rule MC=MB).

(2) [Consumer choice and demand: 16 pts]

1. 6 units of energy and 5 units of other goods.
2. 9 units of energy and 6 units of other goods.
3. "Other goods" intercept at 8, "energy" intercept at 16.
4. 6 units of energy.
5. "Other goods" intercept at 8, "energy" intercept at 8.
6. 3 units of energy.
7. (Q,P) = (6,\$5), (3,\$10).

(3) [Short-run cost curves and supply: 24 pts]

1. \$14 thousand (= SATC x q).
2. \$10 thousand (= SAVC x q).
3. \$4 thousand (= SATC - SAVC).
4. \$2 (= SMC).
5. \$6 (= minimum SATC).
6. \$3 (= minimum SAVC).
7. 0 parts (because price < shutdown price).
8. loss (= SFC).
9. 1400 parts.
10. loss (because price < breakeven price).
11. 1800 parts.
12. profit (because price > breakeven price).

(4) [Long-run competitive equilibrium: 24 pts]

1. \$4.
2. 7 thousand.
3. \$4 (= price in long-run equilibrium).
4. \$10.
5. 13 thousand.
6. profits (because above long-run supply curve).
7. enter (to get profits).
8. \$4.
9. 16 thousand.
10. \$4 (= price in long-run equilibrium).
11. increased.
12. constant-cost industry (because long-run supply is perfectly elastic).

(5) [Discounting: 4 pts]

1. \$2801.
2. \$400 million.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

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

II. Problems

(1) [Rational choice: 12 pts]

1. \$2 million, \$3 million, \$4 million, \$5 million, \$6 million.
2. \$3 million, \$4 million, \$3 million, \$2 million, \$1 million.
3. 4 miles (using the rule MC=MB).

(2) [Consumer choice and demand: 16 pts]

1. 5 units of energy and 10 units of other goods.
2. 5 units of energy and 12 units of other goods.
3. "Other goods" intercept at 15, "energy" intercept at 5.
4. 3 units of energy.
5. "Other goods" intercept at 15, "energy" intercept at 10.
6. 4 units of energy.
7. (Q,P) = (3,\$6), (4,\$3).

(3) [Short-run cost curves and supply: 24 pts]

1. \$5 thousand (= SATC x q).
2. \$2 thousand (= SAVC x q).
3. \$3 thousand (= SATC - SAVC).
4. \$8 (= SMC).
5. \$4 (= minimum SATC).
6. \$2 (= minimum SAVC).
7. 0 parts (because price < shutdown price).
8. loss (= SFC).
9. 1600 parts.
10. profit (because price > breakeven price).
11. 1400 parts.
12. loss (because price < breakeven price).

(4) [Long-run competitive equilibrium: 24 pts]

1. \$5.
2. 8 thousand.
3. \$5 (= price in long-run equilibrium).
4. \$11.
5. 14 thousand.
6. profit (because above long-run supply curve).
7. entry (to get profits).
8. \$7.
9. 16 thousand.
10. \$7 (= price in long-run equilibrium).
11. increased.
12. increasing-cost industry (because long-run supply slopes up).

(5) [Discounting: 4 pts]

1. \$2739.
2. \$300 million.

III. Critical thinking

Same as Version A.