Principles of Microeconomics (Econ 002) Drake University, Spring 2013 William M. Boal Course page: www.cbpa.drake.edu/econ/boal/002 Blackboard: bb.drake.edu william.boal@drake.edu

### Version A

I. Multiple choice

(1)a. (2)b. (3)a. (4)d. (5)c. (6)a. (7)a.

II. Problems

(1) [Calculating elasticities: 2 pts] Using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -1/2.

(2) [Using price elasticity of demand: 10 pts]

1. inelastic.
2. increase.
3. 25 percent.
4. increase.
5. 10 percent.

(3) [Using income elasticities: 10 pts]

1. luxury (or superior) good.
2. increase.
3. 6 percent.
4. increase.
5. 2 percent.

(4) [Arbitrage: 22 pts] Arbitrageurs will buy in the low-priced city, shifting its demand curve to the right. Then they will sell in the high-priced city, shifting its supply curve to the right by exactly the same amount. If there are no costs of arbitrage, curves will continue to shift until the final prices are identical in the two cities.

1. right.
2. unchanged.
3. unchanged.
4. right.
5. \$6.
6. \$6.

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

1. \$7.
2. export.
3. 8 million.
4. decrease.
5. \$12 million.
6. increase.
7. \$20 million.
8. increase.
9. \$8 million.

(6) [Welfare effects of price control or quotas: 18 pts] (Price ceiling of \$5.)

1. \$7.
2. 80 thousand pounds.
3. excess demand.
4. 60 thousand pounds.
5. decrease.
6. \$200 thousand.
7. increase.
8. \$80 thousand.
9. \$120 thousand.

(7) [Welfare effects of taxes or subsidies: 20 pts] Tax of \$3: in equilibrium, the demand curve must be higher than the supply curve by \$3.

1. \$6.
2. 8 thousand.
3. \$5 per cap.
4. \$8 per cap.
5. decrease.
6. \$9 thousand.
7. decrease.
8. \$18 thousand.
9. \$24 thousand.
10. \$3 thousand.

III. Critical thinking [3 pts]
Note: All information is needed to solve these problems is given. It is not necessary to make up numbers.

(1) Welfare decreases by \$6 million. Graph should show demand and supply intersecting at a quantity of 20 million. Demand is higher than supply by \$3 (the amount of the tax) at 16 million. The area of the deadweight loss triangle is therefore \$6 million. (With the information given, it is not possible to compute separately the loss of consumer surplus or the loss of producer surplus.)

(2) Welfare increases by \$30 million. Graph should show domestic demand and domestic supply intersecting at a price of \$10. At a price of \$6, quantity demanded is 15 million more than quantity supplied; this difference is imported. The area of the triangle of welfare gain is therefore \$30 million. (With the information given, it is not possible to compute separately the gain in consumer surplus or the loss of producer surplus.)

### Version B

I. Multiple choice

(1)b. (2)b. (3)b. (4)c. (5)d. (6)b. (7)b.

II. Problems

(1) [Calculating elasticities: 2 pts] Using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -2/3.

(2) [Using price elasticity of demand: 10 pts]

1. inelastic.
2. increase.
3. 15 percent.
4. increase.
5. 9 percent.

(3) [Using income elasticities: 10 pts]

1. luxury (or superior) good.
2. increase.
3. 8 percent.
4. increase.
5. 3 percent.

(4) [Arbitrage: 22 pts] Arbitrageurs will buy in the low-priced city, shifting its demand curve to the right, and selling in the high-priced city, shifting its supply curve to the right by exactly the same amount. If there are no costs of arbitrage, curves will continue to shift until the final prices are identical in the two cities.

1. right.
2. unchanged.
3. unchanged.
4. right.
5. \$5.
6. \$5.

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

1. \$7.
2. import.
3. 8 million.
4. increase.
5. \$20 million.
6. decrease.
7. \$12 million.
8. increase.
9. \$8 million.

(6) [Welfare effects of price control or quotas: 18 pts] Quota on sellers of 40 thousand pounds: The supply curve is bent up vertically at 40 thousand.

1. \$5.
2. \$9.
3. increase.
4. \$120 thousand.
5. decrease.
6. \$240 thousand.
7. \$120.
8. \$6.
9. \$240 thousand.

(7) [Welfare effects of taxes or subsidies: 20 pts] Subsidy of \$3: in equilibrium, the supply curve must be higher than the demand curve by \$3.

1. \$6.
2. 12 thousand.
3. \$7 per cap.
4. \$4 per cap.
5. increase.
6. \$11 thousand.
7. increase.
8. \$22 thousand.
9. \$36 thousand.
10. \$3 thousand.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

(1)b. (2)c. (3)a. (4)a. (5)a. (6)a. (7)b.

II. Problems

(1) [Calculating elasticities: 2 pts] Using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -3/4.

(2) [Using price elasticity of demand: 10 pts]

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

(3) [Using income elasticities: 10 pts]

1. necessary good.
2. increase.
3. 3 percent.
4. decrease.
5. 12 percent.

(4) [Arbitrage: 22 pts] Arbitrageurs will buy in the low-priced city, shifting its demand curve to the right. Then they will sell in the high-priced city, shifting its supply curve to the right by exactly the same amount. If there are no costs of arbitrage, curves will continue to shift until the final prices are identical in the two cities.

1. unchanged.
2. right.
3. right.
4. unchanged.
5. \$7.
6. \$7.

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

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

(6) [Welfare effects of price control or quotas: 18 pts] (Price floor of \$5.)

1. \$5.
2. 60 thousand pounds.
3. excess supply.
4. 60 thousand pounds.
5. increase.
6. \$110 thousand.
7. decrease.
8. \$140 thousand.
9. \$30 thousand.

(7) [Welfare effects of taxes or subsidies: 20 pts] Tax of \$6: in equilibrium, the demand curve must be higher than the supply curve by \$6.

1. \$6.
2. 6 thousand.
3. \$4 per cap.
4. \$10 per cap.
5. decrease.
6. \$16 thousand.
7. decrease.
8. \$32 thousand.
9. \$36 thousand.
10. \$12 thousand.

III. Critical thinking

Same as Version A.