ECON 002 - Principles of Microeconomics Drake University, Spring 2014 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)b. (2)c. (3)d. (4)b. (5)a. (6)c. (7)c. (8)d. (9)c. (10)d. (11)b.

II. Problems

(1) [Production functions: 7 pts]

• Average product = output/input = 8 cars per worker, 7 cars per worker, 6 cars per worker.
• Marginal product = Δ output / Δ input = 8 cars per worker, 6 cars per worker, 4 cars per worker.
• YES diminishing returns.

1. 1 computer.
2. 2 computers.
3. 1 bicycle.
4. 1/2 bicycles.
5. Country A.
6. Country B.
7. Both countries can consume combinations of bicycles and computers outside their individual production possibility curves if Country A exports two million bicycles to Country B, which exports 3 million computers in return.
8. Plot should show each country's production before trade, and consumption after trade.

(3) [Market equilibrium: 12 pts]

1. excess demand.
2. \$12.
3. 6 units.
4. \$72 (= price times quantity).
5. \$55.
6. sellers.

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

1. right, unchanged, increase, increase.
2. unchanged, left, increase, decrease.
3. right, right, cannot be determined, increase.

(5) [Welfare effects of shifts in curves: 22 pts]

1. \$5.
2. \$8 = height of demand curve.
3. \$3 = willingness-to-pay minus price.
4. \$4 = height of supply curve.
5. \$1 = price minus marginal cost.
6. \$7.
7. decrease.
8. \$140 thousand = area of trapezoid bounded by new and old prices.
9. decrease.
10. \$20 thousand, because old PS was \$80 thousand and new PS is \$60 thousand.
11. consumers.

III. Critical thinking [4 pts]

(1) This argument does not make sense. If many hotels are being built, then supply of hotel rooms will shift right. This will lower, not raise, the equilibrium price of hotel rooms. Consumers will benefit, not suffer, from lower prices. (Full credit requires supply-and-demand graph showing supply shift and consequent decrease in price.)

(2) The prices of fuels like natural gas and propane tend to rise in very cold weather because demand for fuels shifts right. Supply slopes up (at least in the short run) so the price increases. (Full credit requires supply-and-demand graph showing demand shift and consequent increase in price.)

### Version B

I. Multiple choice

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

II. Problems

(1) [Production functions: 7 pts]

• Average product = output/input = 2 cars per worker, 3 cars per worker, 4 cars per worker.
• Marginal product = Δ output / Δ input = 2 cars per worker, 4 cars per worker, 6 cars per worker.
• NO diminishing returns.

1. 1/3 computer.
2. 1/2 computer.
3. 3 bicycles.
4. 2 bicycles.
5. Country A.
6. Country B.
7. Both countries can consume combinations of bicycles and computers outside their individual production possibility curves if Country A exports five million bicycles to Country B, which exports 2 million computers in return.
8. Plot should show each country's production before trade, and consumption after trade.

(3) [Market equilibrium: 12 pts]

1. excess demand or neither--question is ambiguous.
2. \$7.
3. 5 units.
4. \$35 (= price times quantity).
5. \$39.
6. sellers.

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

1. unchanged, left, increase, decrease.
2. right, unchanged, increase, increase.
3. right, left, increase, cannot be determined.

(5) [Welfare effects of shifts in curves: 22 pts]

1. \$7.
2. \$8 = height of demand curve.
3. \$1 = willingness-to-pay minus price.
4. \$5 = height of supply curve.
5. \$2 = price minus marginal cost.
6. \$5.
7. increase.
8. \$140 thousand = area of trapezoid bounded by new and old prices.
9. decrease.
10. \$20 thousand, because old PS was \$180 thousand and new PS is \$160 thousand.
11. consumers.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

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

II. Problems

(1) [Production functions: 7 pts]

• Average product = output/input = 6 cars per worker, 4 cars per worker, 3 cars per worker.
• Marginal product = Δ output / Δ input = 6 cars per worker, 2 cars per worker, 1 cars per worker.
• YES diminishing returns.

1. 1 computer.
2. 1/2 computer.
3. 1 bicycles.
4. 2 bicycles.
5. Country B.
6. Country A.
7. Both countries can consume combinations of bicycles and computers outside their individual production possibility curves if Country B exports four million bicycles to Country B, which exports 3 million computers in return.
8. Plot should show each country's production before trade, and consumption after trade.

(3) [Market equilibrium: 12 pts]

1. excess supply.
2. \$3.
3. 4 units.
4. \$12 (= price times quantity).
5. \$38.

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

1. left, unchanged, decrease, decrease.
2. unchanged, right, decrease, increase.
3. left, left, cannot be determined, decrease.

(5) [Welfare effects of shifts in curves: 22 pts]

1. \$9.
2. \$10 = height of demand curve.
3. \$1 = willingness-to-pay minus price.
4. \$8 = height of supply curve.
5. \$1 = price minus marginal cost.
6. \$7.
7. increase.
8. \$100 thousand = area of trapezoid bounded by new and old prices.
9. increase.
10. \$160 thousand, because old PS was \$180 thousand and new PS is \$20 thousand.
11. producers.

III. Critical thinking

Same as Version A.