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

II. Problems

(1) [Budget line: 14 pts]

1. affordable with money left over.
2. not affordable.
3. exactly affordable.
4. 1.5 units of entertainment.
5. 1.5.
6. \$4 = price of entertainment.
7. \$6 = price of food.

(2) [Consumer choice and demand: 14 pts]

1. 10 units of food and 6 units of other goods, because this bundle is on the higher indifference curve.
2. 7 units of food and 4 units of other goods, because this bundle is on the higher indifference curve.
3. Budget line A has intercepts at 20 units of food and 12 units of other goods.
4. 10 units of food.
5. Budget line B has intercepts at 10 units of food and 12 units of other goods.
6. 6 units of food.
7. (P,Q) = (\$3,10), (\$6,6).

(3) [Rational choice: 10 pts]

1. MC = Δ TC / Δ q = \$10 million, \$6 million, \$4 million, \$4 million.
2. MB = Δ TB / Δ q = \$20 million, \$10 million, \$6 million, \$2 million.
3. 6 lanes, where MB = MC.

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

1. average cost.
2. marginal revenue.
3. marginal cost.

(5) [Discounting: 4 pts]

1. \$805.
2. \$600 million.

(6) [Short-run cost curves and supply: 16 pts]

1. \$8 = minimum SATC.
2. \$4 = minimum SAVC.
3. 1900 parts (where price = SMC).
4. \$15200 = SATC × 1900.
5. \$9500 = SAVC × 1900.
6. \$5700 = STC - SVC.
7. \$24700 = 1900 × price.
8. profit, because price > breakeven price.
9. \$9500 = revenue - STC.

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

1. \$8.
2. 12 million.
3. \$8, because price = AC in long-run equilibrium.
4. \$2.
5. 8 million.
6. losses, because below long-run supply curve.
7. exit.
8. \$6.
9. 6 million.
10. \$6, because price = AC in long-run equilibrium.
11. decreased.
12. increasing-cost industry, because long-run supply curve slopes up.

III. Critical thinking [3 pts]

(1) The \$200 nonrefundable deposit is a sunk cost that cannot be recovered no matter what choice you make. So it should not affect your decision. Instead, you should compare the remaining \$300 cost at Store A with the \$350 total cost at Store B. Therefore you will buy your computer from Store A, although you may choose to mutter unpleasant things under your breath while you are so doing.

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

II. Problems

(1) [Budget line: 14 pts]

1. exactly affordable.
2. not affordable.
3. affordable with money left over.
4. 0.5 units of entertainment.
5. 0.5.
6. \$10 = price of entertainment.
7. \$5 = price of food.

(2) [Consumer choice and demand: 14 pts]

1. 9 units of food and 5 units of other goods, because this bundle is on the higher indifference curve.
2. 10 units of food and 6 units of other goods, because this bundle is on the higher indifference curve.
3. Budget line A has intercepts at 15 units of food and 12 units of other goods.
4. 8 units of food.
5. Budget line B has intercepts at 6 units of food and 12 units of other goods.
6. 4 units of food.
7. (P,Q) = (\$4,8), (\$10,4).

(3) [Rational choice: 10 pts]

1. MC = Δ TC / Δ q = \$10 million, \$9 million, \$9 million, \$8 million.
2. MB = Δ TB / Δ q = \$20 million, \$7 million, \$5 million, \$3 million.
3. 2 lanes, where MB = MC.

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

1. marginal cost.
2. marginal revenue.
3. average cost.

(5) [Discounting: 4 pts]

1. \$442.
2. \$240 million.

(6) [Short-run cost curves and supply: 16 pts]

1. \$8 = minimum SATC.
2. \$3 = minimum SAVC.
3. 1500 parts (where price = SMC).
4. \$12000 = SATC × 1500.
5. \$6000 = SAVC × 1500.
6. \$6000 = STC - SVC.
7. \$16500 = 1500 × price.
8. profit, because price > breakeven price.
9. \$4500 = revenue - STC.

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

1. \$4.
2. 3 million.
3. \$4, because price = AC in long-run equilibrium.
4. \$10.
5. 9 million.
6. profits, because below long-run supply curve.
7. enter.
8. \$4.
9. 12 million.
10. \$4, because price = AC in long-run equilibrium.
11. increased.
12. constant-cost industry, because long-run supply curve is perfectly elastic (horizontal).

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

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

II. Problems

(1) [Budget line: 14 pts]

1. not affordable.
2. exactly affordable.
3. affordable with money left over.
4. 2/3 units of entertainment.
5. 2/3.
6. \$6 = price of entertainment.
7. \$4 = price of food.

(2) [Consumer choice and demand: 14 pts]

1. 8 units of food and 12 units of other goods, because this bundle is on the higher indifference curve.
2. 4 units of food and 6 units of other goods, because this bundle is on the higher indifference curve.
3. Budget line A has intercepts at 10 units of food and 16 units of other goods.
4. 5 units of food.
5. Budget line B has intercepts at 4 units of food and 16 units of other goods.
6. 3 units of food.
7. (P,Q) = (\$8,5), (\$20,3).

(3) [Rational choice: 10 pts]

1. MC = Δ TC / Δ q = \$10 million, \$7 million, \$8 million, \$9 million.
2. MB = Δ TB / Δ q = \$20 million, \$9 million, \$3 million, \$3 million.
3. 4 lanes, where MB = MC.

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

1. marginal revenue.
2. total cost.
3. marginal cost.

(5) [Discounting: 4 pts]

1. \$281.
2. \$150 million.

(6) [Short-run cost curves and supply: 16 pts]

1. \$3 = minimum SAVC.
2. \$10 = minimum SATC.
3. 1000 parts (where price = SMC).
4. \$11000 = SATC × 1000.
5. \$3000 = SAVC × 1000.
6. \$8000 = STC - SVC.
7. \$4000 = 1000 × price.
8. loss, because price < breakeven price.
9. \$7000 = revenue - STC.

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

1. \$3.
2. 4 million.
3. \$3, because price = AC in long-run equilibrium.
4. \$9.
5. 10 million.
6. profits, because above long-run supply curve.
7. enter.
8. \$5.
9. 12 million.
10. \$5, because price = AC in long-run equilibrium.
11. increased.
12. increasing-cost industry, because long-run supply curve slopes up.

III. Critical thinking

Same as Version A.