ECON 002  Principles of Microeconomics

Course page:
www.cbpa.drake.edu/econ/boal/002

I. Multiple choice
(1)d. (2)a. (3)b. (4)a. (5)a. (6)b. (7)b. (8)b. (9)a. (10)b. (11)a. (12)b. (13)c.
II. Problems
(1) [Calculating elasticities: 2 pts] Using arcelasticity formula: (ΔQ/Q_{avg}) / (ΔP/P_{avg}) = 1/3.
(2) [Using price elasticity of demand: 10 pts]
(3) [Using income elasticities: 10 pts]
(4) [Welfare effects of international trade: 18 pts]
(5) [Arbitrage: 22 pts] Arbitrageurs will buy in the lowpriced city, shifting its demand curve to the right. Then they will sell in the highpriced 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 prices are identical in the two cities.
(6) [Welfare effects of market controls: 18 pts] Price floor of $8.
(7) [Welfare effects of tax or subsidy: 18 pts] Tax of $6: in equilibrium, the demand curve must be higher than the supply curve by $6.
III. Critical thinking [3 pts]
(1) The study indicates that marijuana and tobacco cigarettes are complements for young people because the price of tobacco cigarettes is negatively related to the quantity of marijuana. The crossprice elasticity is defined as percent change in quantity of one good divided by the percent change in the price of the other good. Therefore the crossprice elasticity is 1.2 for young people, according to this study. Complements always have a negative crossprice elasticity.
(2) A price ceiling would not ensure tha more babies had access to infant formula. A price ceiling, or maximum price, pushes price below the equilibrium price. The quantity demanded increases and the quantity supplied decreases, causing excess demand (a shortage). Because the quantity supplied decreases, the quantity actually sold decreases. (Full credit requires a graph showing demand, supply, and a horizontal line at the price ceiling, below the equilibrium price. The quantity sold before and after the price ceiling should be marked.)
I. Multiple choice
(1)a. (2)b. (3)a. (4)b. (5)b. (6)c. (7)c. (8)c. (9)c. (10)c. (11)b. (12)a. (13)d.
II. Problems
(1) [Calculating elasticities: 2 pts] Using arcelasticity formula: (ΔQ/Q_{avg}) / (ΔP/P_{avg}) = 1/2.
(2) [Using price elasticity of demand: 10 pts]
(3) [Using income elasticities: 10 pts]
(4) [Welfare effects of international trade: 18 pts]
(5) [Arbitrage: 22 pts] Arbitrageurs will buy in the lowpriced city, shifting its demand curve to the right. Then they will sell in the highpriced 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 prices are identical in the two cities.
(6) [Welfare effects of market controls: 18 pts] Price ceiling of $4.
(7) [Welfare effects of tax or subsidy: 18 pts] Subsidy of $4: in equilibrium, the demand curve must be lower than the supply curve by $4.
III. Critical thinking
Same as Version A.
I. Multiple choice
(1)c. (2)a. (3)a. (4)a. (5)c. (6)d. (7)d. (8)d. (9)a. (10)a. (11)a. (12)b. (13)e.
II. Problems
(1) [Calculating elasticities: 2 pts] Using arcelasticity formula: (ΔQ/Q_{avg}) / (ΔP/P_{avg}) = 2/3.
(2) [Using price elasticity of demand: 10 pts]
(3) [Using income elasticities: 10 pts]
(4) [Welfare effects of international trade: 18 pts]
(5) [Arbitrage: 22 pts] Arbitrageurs will buy in the lowpriced city, shifting its demand curve to the right. Then they will sell in the highpriced 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 prices are identical in the two cities.
(6) [Welfare effects of market controls: 18 pts] Quota on sellers of 40 million pounds.
(7) [Welfare effects of tax or subsidy: 18 pts] Tax of $3: in equilibrium, the demand curve must be higher than the supply curve by $6.
III. Critical thinking
Same as Version A.
[end of answer key]