ECON 002 - Principles of Microeconomics 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)c. (2)c. (3)c. (4)b. (5)b. (6)c. (7)c. (8)b. (9)d. (10)b. (11)a. (12)d.

II. Problems

(1) [Budget line: 14 pts]

1. Not affordable.
2. Affordable with money left over.
3. Exactly affordable.
4. 1/2 units of clothing.
5. 1/2.
6. \$5.
7. \$10.

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

1. 6 units of food and 6 units of other goods.
2. 7 units of food and 7 units of other goods.
3. Budget line A has an intercept on the "other goods" axis at 10, and an intercept on the "food" axis at 15.
4. 6 units of food.
5. Budget line B has an intercept on the "other goods" axis at 10, and an intercept on the "food" axis at 5.
6. 3 units of food.
7. (Q,P) = (6,\$2), (3,\$6).

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

1. Marginal cost.
2. Marginal cost.
3. Total cost.
4. Marginal revenue.
5. Marginal revenue.
6. Average cost.

(4) [Discounting: 4 pts]

1. \$367.
2. \$300 million.

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

1. \$9 thousand (= 1300 × SATC, rounded).
2. \$5 thousand (= 1300 × SAVC, rounded).
3. \$4 thousand (= STC - SVC).
4. \$4 (= SMC).
5. \$7 (= minimum SATC).
6. \$4 (= minimum SAVC).
7. 1300 parts, using the rule P=MC.
8. loss, because price is less than breakeven price.
9. 1600 parts, using the rule P=MC.
10. profit, because price is greater than breakeven price.
11. zero parts, because price is less than shutdown price.
12. loss, equal to short-run fixed cost.

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

1. \$5.
2. 4 million.
3. \$5, because price = average cost in long-run equilibrium.
4. \$11.
5. 10 million.
6. profits, because market is above long-run supply curve.
7. enter, in search of profits.
8. \$5.
9. 13 million.
10. \$5, because price = average cost in long-run equilibrium.
11. increased, due to entry of new firms.
12. constant-cost industry, because long-run supply curve is horizontal.

### Version B

I. Multiple choice

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

II. Problems

(1) [Budget line: 14 pts]

1. Affordable with money left over.
2. Exactly affordable.
3. Not affordable.
4. 1/3 units of clothing.
5. 1/3.
6. \$5.
7. \$15.

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

1. 7 units of food and 5 units of other goods.
2. 6 units of food and 6 units of other goods.
3. Budget line A has an intercept on the "other goods" axis at 15, and an intercept on the "food" axis at 6.
4. 4 units of food.
5. Budget line B has an intercept on the "other goods" axis at 15, and an intercept on the "food" axis at 10.
6. 6 units of food.
7. (Q,P) = (4,\$5), (6,\$3).

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

1. Marginal revenue.
2. Average cost.
3. Marginal cost.
4. Marginal cost.
5. Total cost.
6. Marginal revenue.

(4) [Discounting: 4 pts]

1. \$336.
2. \$240 million.

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

1. \$17 thousand (= 1400 × SATC, rounded).
2. \$11 thousand (= 1400 × SAVC, rounded).
3. \$6 thousand (= STC - SVC).
4. \$7 (= SMC).
5. \$10 (= minimum SATC).
6. \$3 (= minimum SAVC).
7. zero parts, because price is less than shutdown price.
8. loss, equal to short-run fixed cost.
9. 800 parts, using the rule P=MC.
10. loss, because price is less than breakeven price.
11. 1100 parts, using the rule P=MC.
12. profit, because price is greater than breakeven price.

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

1. \$6.
2. 12 million.
3. \$6, because price = average cost in long-run equilibrium.
4. \$2.
5. 7 million.
6. losses, because market is below long-run supply curve.
7. exit, to escape losses.
8. \$4.
9. 6 million.
10. \$4, because price = average cost in long-run equilibrium.
11. decreased, due to exit of firms.
12. increasing-cost industry, because long-run supply curve slopes upward.

### Version C

I. Multiple choice

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

II. Problems

(1) [Budget line: 14 pts]

1. Affordable with money left over.
2. Not affordable.
3. Exactly affordable.
4. 1/4 units of clothing.
5. 1/4.
6. \$2.
7. \$8.

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

1. 8 units of food and 6 units of other goods.
2. 4 units of food and 5 units of other goods.
3. Budget line A has an intercept on the "other goods" axis at 12, and an intercept on the "food" axis at 6.
4. 3 units of food.
5. Budget line B has an intercept on the "other goods" axis at 12, and an intercept on the "food" axis at 12.
6. 5 units of food.
7. (Q,P) = (3,\$10), (5,\$5).

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

1. Total cost.
2. Marginal revenue.
3. Marginal revenue.
4. Average cost.
5. Marginal cost.
6. Marginal cost.

(4) [Discounting: 4 pts]

1. \$305.
2. \$200 million.

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

1. \$11 thousand (= 1200 × SATC, rounded).
2. \$6 thousand (= 1200 × SAVC, rounded).
3. \$5 thousand (= STC - SVC).
4. \$7 (= SMC).
5. \$8 (= minimum SATC).
6. \$5 (= minimum SAVC).
7. 1800 parts, using the rule P=MC.
8. profit, because price is greater than breakeven price.
9. 1600 parts, using the rule P=MC.
10. loss, because price is less than breakeven price.
11. zero parts, because price is less than shutdown price.
12. loss, equal to short-run fixed cost.

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

1. \$3.
2. 4 million.
3. \$3, because price = average cost in long-run equilibrium.
4. \$11.
5. 9 million.
6. profits, because market is above long-run supply curve.
7. enter, in search of profits.
8. \$5.
9. 12 million.
10. \$5, because price = average cost in long-run equilibrium.
11. increased, due to entry of new firms.
12. increasing-cost industry, because long-run supply curve slopes upward.