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)d. (4)b. (5)e. (6)b. (7)c. (8)c. (9)a. (10)c.
(11)d. (12)a. (13)f. (14)e. (15)d. (16)b. (17)c. (18)c. (19)b. (20)d.
(21)a. (22)a.

II. Problems

(1) [Production functions: 7 pts]

• Average product = 6, 5, 4.
• Marginal product = 6, 4, 2.
• Yes dimishing returns.

1. 2 units of agricultural goods.
2. 3 units of agricultural goods.
3. 1/2 unit of manufacturing goods.
4. 1/3 unit of manufacturing 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.

(3) [Shifts in demand and supply: 15 pts]

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

(4) [Calculating elasticities: 2 pts] -3/8 = -0.375.

(5) [Using price elasticities: 10 pts]

1. elastic.
2. decrease.
3. 6 percent.
4. decrease.
5. 1 percent.

(6) [Basic definitions, cost and revenue: 12 pts]

1. total cost.
2. marginal revenue.
3. marginal cost.
4. marginal cost.
5. marginal revenue.
6. average cost.

(7) [Welfare effects of international trade: 18 pts]

1. \$6.
2. import.
3. 8 million.
4. increase.
5. \$24 million.
6. decrease.
7. \$16 million.
8. increase.
9. \$8 million.

(8) [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. Budget line A has intercepts at energy=15 and other goods=10.
4. 9 units of energy.
5. Budget line B has intercepts at energy=5 and other goods=10.
6. 4 units of energy.
7. (Q,P) = (9,\$2), (4,\$6).

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

1. \$14 thousand (=SATC x 2000).
2. \$10 thousand (=SAVC x 2000).
3. \$4 thousand (=STC - SVC).
4. \$2 (=SMC).
5. \$6 (= minimum SATC).
6. \$3 (= minimum SAVC).
7. zero parts (shut down 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).

(10) [Economy-wide efficienty, PP curves: 10 pts]

1. 180 units of food. (Slope = Δ food / Δ shelter.)
2. 20 units of shelter.
3. -5.
4. 5.
5. (i) (Indifference curve's slope is greater, in absolute value, than production possibility curve's slope. So indifference curve through point A is steeper than production possibility curve.)

(11) [Monopoly price discrimination: 10 pts]

1. 6 percent.
2. 3 percent.
3. general public. (Market segment with less elastic demand always gets the higher price.)
4. \$7.50.
5. \$15.00.

(12) [Competition versus collusion: 16 pts]

1. 20 thousand.
2. \$6. (Marginal cost = height of supply curve.)
3. \$6.
4. MR has vertical intercept at \$16 and slope of -1/1 thousand. (If demand is straight line, MR must have same intercept as demand and twice the slope.)
5. 12 thousand. (Choose quantity where MR = MC.)
6. \$4. (Marginal cost = height of supply curve.)
7. \$10. (Set price according to demand curve.)
8. \$24 thousand. (Area of triangle.)

(13) [Externalities: 12 pts]

1. \$6 per liter.
2. 10 million liters.
3. 8 million liters.
4. \$6 million.
5. tax.
6. \$5 per liter.

(14) [Nonrival goods: 4 pts]

1. MSB = 500 (10-Q) = 5000 - 500 Q.
2. 8 movies.

III. Critical thinking [6 pts]

(1) Microsoft likely prices its products above marginal cost because it enjoys a monopoly on its Windows and Office software. Both products are protected by patents and no company produces close substitutes. Windows and Office are also natural monopolies, like most software, since average cost decreases as quantity decreases. A monopoly does not take price as given. To maximize profit, it sets price greater than marginal cost.

By contrast, Dell Computer does not enjoy a monopoly. Its computers compete with very close substitutes made by Hewlett-Packard, Gateway, Acer, Lenovo, Toshiba, etc. Therefore, Dell must take the market price of computers as given. To maximize profit, it chooses its quantity where price equals marginal cost.

(2) Marginal revenue is given as \$1000 and marginal cost is given as \$1200. Since marginal revenue is less than marginal cost, you should downsize (paint fewer houses). By painting one less house, your profit will increase by \$1200-\$1000=\$200.

### Version B

I. Multiple choice

(1)e. (2)a. (3)b. (4)a. (5)c. (6)a. (7)d. (8)a. (9)c. (10)f.
(11)b. (12)d. (13)e. (14)d. (15)a. (16)e. (17)b. (18)a. (19)c. (20)b.
(21)b. (22)d.

II. Problems

(1) [Production functions: 7 pts]

• Average product = 5, 4, 3.
• Marginal product = 5, 3, 1.
• Yes dimishing returns.

1. 1/2 units of agricultural goods.
2. 1 unit of agricultural goods.
3. 2 unit of manufacturing goods.
4. 1 unit of manufacturing 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.

(3) [Shifts in demand and supply: 15 pts]

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

(4) [Calculating elasticities: 2 pts] -2/3 = -0.667.

(5) [Using price elasticities: 10 pts]

1. inelastic.
2. decrease.
3. 6 percent.
4. increase.
5. 2 percent.

(6) [Basic definitions, cost and revenue: 12 pts]

1. marginal cost.
2. marginal cost.
3. marginal revenue.
4. average cost.
5. total cost.
6. marginal revenue.

(7) [Welfare effects of international trade: 18 pts]

1. \$6.
2. export.
3. 12 million.
4. decrease.
5. \$21 million.
6. increase.
7. \$39 million.
8. increase.
9. \$18 million.

(8) [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. Budget line A has intercepts at energy=16 and other goods=8.
4. 6 units of energy.
5. Budget line B has intercepts at energy=8 and other goods=8.
6. 3 units of energy.
7. (Q,P) = (6,\$5), (3,\$10).

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

1. \$5 thousand (=SATC x 500).
2. \$2 thousand (=SAVC x 500).
3. \$3 thousand (=STC - SVC).
4. \$8 (=SMC).
5. \$4 (= minimum SATC).
6. \$2 (= minimum SAVC).
7. zero parts (shut down 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).

(10) [Economy-wide efficienty, PP curves: 10 pts]

1. 120 units of food. (Slope = Δ food / Δ shelter.)
2. 30 units of shelter.
3. -4.
4. 4.
5. (i) (Indifference curve's slope is greater, in absolute value, than production possibility curve's slope. So indifference curve through point A is steeper than production possibility curve.)

(11) [Monopoly price discrimination: 10 pts]

1. 18 percent.
2. 4 percent.
3. general public. (Market segment with less elastic demand always gets the higher price.)
4. \$4.50.
5. \$8.00.

(12) [Competition versus collusion: 16 pts]

1. 10 thousand.
2. \$5. (Marginal cost = height of supply curve.)
3. \$5.
4. MR has vertical intercept at \$15 and slope of -2/1 thousand. (If demand is straight line, MR must have same intercept as demand and twice the slope.)
5. 6 thousand. (Choose quantity where MR = MC.)
6. \$3. (Marginal cost = height of supply curve.)
7. \$9. (Set price according to demand curve.)
8. \$12 thousand. (Area of triangle.)

(13) [Externalities: 12 pts]

1. \$4 per vaccination.
2. 6 million.
3. 8 million.
4. \$5 million.
5. subsidy.
6. \$3 per vaccination.

(14) [Nonrival goods: 4 pts]

1. MSB = 500 (8-Q) = 4000 - 500 Q.
2. 6 movies.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

(1)b. (2)b. (3)c. (4)b. (5)d. (6)d. (7)a. (8)b. (9)b. (10)a.
(11)a. (12)a. (13)e. (14)b. (15)c. (16)d. (17)b. (18)b. (19)d. (20)c.
(21)b. (22)b.

II. Problems

(1) [Production functions: 7 pts]

• Average product = 2, 3, 4.
• Marginal product = 2, 4, 6.
• No dimishing returns.

1. 2 units of agricultural goods.
2. 1 units of agricultural goods.
3. 1/2 unit of manufacturing goods.
4. 1 unit of manufacturing 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 A, which produces 3 units of agricultural goods in return.

(3) [Shifts in demand and supply: 15 pts]

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

(4) [Calculating elasticities: 2 pts] -1/4 = -0.25.

(5) [Using price elasticities: 10 pts]

1. inelastic.
2. increase.
3. 2 percent.
4. decrease.
5. 6 percent.

(6) [Basic definitions, cost and revenue: 12 pts]

1. marginal revenue.
2. marginal cost.
3. marginal cost.
4. marginal revenue.
5. average cost.
6. total cost.

(7) [Welfare effects of international trade: 18 pts]

1. \$6.
2. export.
3. 4 million.
4. decrease.
5. \$9 million.
6. increase.
7. \$11 million.
8. increase.
9. \$2 million.

(8) [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. Budget line A has intercepts at energy=5 and other goods=15.
4. 3 units of energy.
5. Budget line B has intercepts at energy=10 and other goods=15.
6. 4 units of energy.
7. (Q,P) = (3,\$6), (4,\$3).

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

1. \$9 thousand (=SATC x 1000).
2. \$4 thousand (=SAVC x 1000).
3. \$5 thousand (=STC - SVC).
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. zero parts (shut down because price < shutdown price).
12. loss (=SFC).

(10) [Economy-wide efficienty, PP curves: 10 pts]

1. 240 units of food. (Slope = Δ food / Δ shelter.)
2. 15 units of shelter.
3. -1/2.
4. 1/2.
5. (ii) (Indifference curve's slope is smaller, in absolute value, than production possibility curve's slope. So indifference curve through point A is flatter than production possibility curve.)

(11) [Monopoly price discrimination: 10 pts]

1. 14 percent.
2. 3 percent.
3. general public. (Market segment with less elastic demand always gets the higher price.)
4. \$3.50.
5. \$9.00.

(12) [Competition versus collusion: 16 pts]

1. 16 thousand.
2. \$8. (Marginal cost = height of supply curve.)
3. \$8.
4. MR has vertical intercept at \$16 and slope of -1/1 thousand. (If demand is straight line, MR must have same intercept as demand and twice the slope.)
5. 10 thousand. (Choose quantity where MR = MC.)
6. \$6. (Marginal cost = height of supply curve.)
7. \$11. (Set price according to demand curve.)
8. \$15 thousand. (Area of triangle.)

(13) [Externalities: 12 pts]

1. \$7 per liter.
2. 10 million liters.
3. 6 million liters.
4. \$12 million.
5. tax.
6. \$4 per liter.

(14) [Nonrival goods: 4 pts]

1. MSB = 200 (10-Q) = 2000 - 200 Q.
2. 5 movies.

III. Critical thinking

Same as Version A.