ECON 002 - Principles of Microeconomics Drake University, Fall 2015 William M. Boal Course page: faculty.cbpa.drake.edu/econ/boal/002 Blackboard: drake.blackboard.com william.boal@drake.edu

### Version A

I. Multiple choice

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

II. Problems

(1) [Percent change, midpoint formula: 2 pts] 25 percent.

(2) [Percent change of product: 4 pts]

1. increase.
2. 2 percent (= -3 percent +5 percent).

(3) [Production functions: 7 pts]

• Average product = total output / total input: 5, 4, 3.
• Marginal product = Δ output / Δ input: 5, 3, 1.
• Diminishing returns? YES because MP is decreasing.

1. 1/3 units of petroleum.
2. 1 unit of petroleum.
3. 3 units of wheat.
4. 1 unit of wheat.
5. Country A, because it has lower opportunity cost of producing wheat.
6. Country B, because it has lower opportunity cost of producing petroleum.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country A exports three units of wheat to Country B, which exports 2 units of petroleum in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [Market equilibrium: 12 pts]

1. excess supply.
2. \$5.
3. 6 units.
4. \$30 (= price × quantity).
5. \$57.

(6) [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.

(7) [Consumer surplus, producer surplus: 22 pts]

1. excess demand, because at this price, quantity demanded exceeds quantity supplied.
2. 6 thousand.
3. price will tend to rise.
4. \$6.
5. 10 thousand.
6. \$12 = height of demand curve.
7. \$6 = willingness-to-pay minus price.
8. \$2 = height of supply curve.
9. \$4 = price minus marginal cost.
10. \$50 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$25 thousand = area of triangle bounded by supply curve, vertical axis, and price.

(8) [Consumer surplus, producer surplus: 4 pts]

1. Consumers are worse off, because price has increased.
2. \$18 million = Δ CS = area of trapezoid bounded by demand curve, vertical axis, old price, and new price.

III. Critical thinking [4 pts]

(1) One should disagree with this statement. The United States may have an absolute advantage in both cars and corn, but it cannot logically have a comparative advantage in both goods. A country has a comparative advantage over another country in producing a good if its opportunity cost of the good is lower than the other country's. If the United States and Mexico each specialize in producing the good in which it has a comparative advantage, and trade for the other good, both countries can benefit by enjoying combinations of goods outside their respective production possibility curves.

(2) Bird flu killed many chickens. This shifted the supply curve of eggs to the left. This shift may have initially created excess demand, but in a free market, prices are flexible and they adjust to eliminate any excess demand or supply. In this case, the price of eggs rose to eliminate excess demand so there were no empty shelves.

### Version B

I. Multiple choice

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

II. Problems

p>(1) [Percent change, midpoint formula: 2 pts] 30 percent.

(2) [Percent change of product: 4 pts]

1. decrease.
2. 3 percent (= -3 percent +5 percent).

(3) [Production functions: 7 pts]

• Average product = total output / total input: 3, 4, 5.
• Marginal product = Δ output / Δ input: 3, 5, 7.
• Diminishing returns? NO because MP is increasing.

1. 1 unit of petroleum.
2. 2 units of petroleum.
3. unit of wheat.
4. 1/2 units of wheat.
5. Country A, because it has lower opportunity cost of producing wheat.
6. Country B, because it has lower opportunity cost of producing petroleum.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country A exports two units of wheat to Country B, which exports 3 units of petroleum in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [Market equilibrium: 12 pts]

1. excess demand.
2. \$7.
3. 5 units.
4. \$35 (= price × quantity).
5. \$45.
6. sellers.

(6) [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.

(7) [Consumer surplus, producer surplus: 22 pts]

1. excess supply, because at this price, quantity supplied exceeds quantity demanded.
2. 6 thousand.
3. price will tend to fall.
4. \$8.
5. 8 thousand.
6. \$12 = height of demand curve.
7. \$4 = willingness-to-pay minus price.
8. \$7 = height of supply curve.
9. \$1 = price minus marginal cost.
10. \$32 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$16 thousand = area of triangle bounded by supply curve, vertical axis, and price.

(8) [Consumer surplus, producer surplus: 4 pts]

1. Producers are better off, because price has increased.
2. \$16 million = Δ CS = area of trapezoid bounded by supply curve, vertical axis, old price, and new price.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

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

II. Problems

p>(1) [Percent change, midpoint formula: 2 pts] 50 percent.

(2) [Percent change of product: 4 pts]

1. decrease.
2. 1 percent (= -3 percent +2 percent).

(3) [Production functions: 7 pts]

• Average product = total output / total input: 10, 8, 6.
• Marginal product = Δ output / Δ input: 10, 6, 2.
• Diminishing returns? YES because MP is decreasing.

1. 2 units of petroleum.
2. 4 units of petroleum.
3. 1/2 units of wheat.
4. 1/4 units of wheat.
5. Country A, because it has lower opportunity cost of producing wheat.
6. Country B, because it has lower opportunity cost of producing petroleum.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country B exports six units of petroleum to Country B, which exports 2 units of wheat in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [Market equilibrium: 12 pts]

1. excess supply.
2. \$9.
3. 4 units.
4. \$36 (= price × quantity).
5. \$43.
6. sellers.

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

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

(7) [Consumer surplus, producer surplus: 22 pts]

1. excess supply, because at this price, quantity supplied exceeds quantity supplied.
2. 9 thousand.
3. price will tend to fall.
4. \$7.
5. 6 thousand.
6. \$8 = height of demand curve.
7. \$1 = willingness-to-pay minus price.
8. \$5 = height of supply curve.
9. \$2 = price minus marginal cost.
10. \$18 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$9 thousand = area of triangle bounded by supply curve, vertical axis, and price.

(8) [Consumer surplus, producer surplus: 4 pts]

1. Consumers are better off, because price has decreased.
2. \$14 million = Δ CS = area of trapezoid bounded by demand curve, vertical axis, old price, and new price.

III. Critical thinking

Same as Version A.