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)a. (2)a. (3)a. (4)b. (5)b. (6)a. (7)b.

II. Problems

(1) [Calculating elasticities: 2 pts] Using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -2 .

(2) [Using price elasticity of demand: 10 pts]

1. inelastic.
2. increase.
3. 50 percent.
4. increase.
5. 35 percent.

(3) [Using income elasticities: 10 pts]

1. necessary good.
2. increase.
3. 2 percent.
4. decrease.
5. 3 percent.

(4) [Effects of international trade: 14 pts] To solve this problem, first compute a table of the combined demand and supply curves. Equilibrium under free international trade occurs where the combined quantity demanded equals the combined quantity supplied.

1. \$80.
2. \$20.
3. \$40.
4. Country Y.
5. 8.
6. better off.
7. worse off.
8. worse off.
9. better off.

(5) [Welfare effects of international trade: 18 pts]

1. \$6.
2. import.
3. 6 million.
4. increase.
5. \$22 million.
6. decrease.
7. \$16 million.
8. increase.
9. \$6 million.

(6) [Welfare effects of market controls: 18 pts] Quota on sellers = 30 thousand pounds. Therefore the supply curve bends up vertically at 30 thousand pounds.

1. \$4.
2. increase.
3. \$8 per pound.
4. increase.
5. \$80 thousand.
6. decrease.
7. \$200 thousand.
8. \$6 per permit.
9. \$120 thousand.

(7) [Welfare effects of tax or subsidy: 18 pts] Tax = \$3: at equilibrium, the demand curve must be higher than the supply curve by \$3. Both consumers and producers lose from the tax, but the government gains revenue.

1. 8 million gallons.
2. \$5 per gallon.
3. \$8 per gallon.
4. decrease.
5. \$9 million.
6. decrease.
7. \$18 million.
8. \$24 million.
9. \$3 million.

III. Critical thinking [3 pts]

(1) If the elasticity of demand is -1.5, then percent changes in quantity are greater (in absolute value) than percent changes in price by a factor of 1.5. An increase in price would cause an even larger decrease in quantity demanded, resulting in a decrease in revenue. So Marketing Consultant A is incorrect. By the same reasoning, a decrease in price would cause an even larger increase in quantity demanded, resulting in an increase in revenue. So Marketing Consultant B is correct. If you want to increase revenue, you must cut price, because demand is elastic.

(2) One should disagree with this statement. If America trades with a country whose price is lower than ours, the increase in consumer surplus exceeds the decrease in producer surplus. So, although American producers lose from international trade in this case, the country as a whole enjoys an increase in social welfare. (Full credit requires a supply-and-demand graph showing the welfare gain from the price fall.)

### Version B

I. Multiple choice

(1)b. (2)a. (3)c. (4)c. (5)d. (6)b. (7)b.

II. Problems

(1) [Calculating elasticities: 2 pts] Using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -1.25 .

(2) [Using price elasticity of demand: 10 pts]

1. inelastic.
2. increase.
3. 25 percent.
4. increase.
5. 15 percent.

(3) [Using income elasticities: 10 pts]

1. luxury (or superior) good.
2. increase.
3. 6 percent.
4. increase.
5. 1 percent.

(4) [Effects of international trade: 14 pts] To solve this problem, first compute a table of the combined demand and supply curves. Equilibrium under free international trade occurs where the combined quantity demanded equals the combined quantity supplied.

1. \$20.
2. \$80.
3. \$70.
4. Country X.
5. 10.
6. worse off.
7. better off.
8. better off.
9. worse off.

(5) [Welfare effects of international trade: 18 pts]

1. \$6.
2. export.
3. 6 million.
4. decrease.
5. \$18 million.
6. increase.
7. \$24 million.
8. increase.
9. \$6 million.

(6) [Welfare effects of market controls: 18 pts] Price ceiling = \$3 per pound.

1. \$4 per pound.
2. 50 thousand pounds.
3. excess demand.
4. 30 thousand pounds.
5. decrease.
6. \$60 thousand.
7. increase.
8. \$30 thousand.
9. \$30 thousand.

(7) [Welfare effects of tax or subsidy: 18 pts] Subsidy of \$3: at equilibrium, the supply curve must be higher than the demand curve by \$3. Both consumers and producers gain from the subsidy, but the government loses.

1. 12 million gallons.
2. \$4 per gallon.
3. \$7 per gallon.
4. increase.
5. \$11 million.
6. increase.
7. \$22 million.
8. \$36 million.
9. \$3 million.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

(1)a. (2)b. (3)d. (4)a. (5)c. (6)c. (7)a.

II. Problems

(1) [Calculating elasticities: 2 pts] Using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -3/2 = -1.5.

(2) [Using price elasticity of demand: 10 pts]

1. inelastic.
2. increase.
3. 20 percent.
4. increase.
5. 2 percent.

(3) [Using income elasticities: 10 pts]

1. necessary good.
2. increase.
3. 3 percent.
4. decrease.
5. 2 percent.

(4) [Effects of international trade: 14 pts] To solve this problem, first compute a table of the combined demand and supply curves. Equilibrium under free international trade occurs where the combined quantity demanded equals the combined quantity supplied.

1. \$20.
2. \$70.
3. \$30.
4. Country X.
5. 8.
6. worse off.
7. better off.
8. better off.
9. worse off.

(5) [Welfare effects of international trade: 18 pts]

1. \$6.
2. export.
3. 12 million.
4. decrease.
5. \$32 million.
6. increase.
7. \$56 million.
8. increase.
9. \$24 million.

(6) [Welfare effects of market controls: 18 pts] Price ceiling = \$3 per pound.

1. \$4 per pound.
2. 50 thousand pounds.
3. excess supply.
4. 60 thousand pounds.
5. increase.
6. \$90 thousand.
7. decrease.
8. \$120 thousand.
9. \$30 thousand.

(7) [Welfare effects of tax or subsidy: 18 pts] Subsidy of \$6: at equilibrium, the supply curve must be higher than the demand curve by \$6. Both consumers and producers gain from the subsidy, but the government loses.

1. 14 million gallons.
2. \$2 per gallon.
3. \$8 per gallon.
4. increase.
5. \$24 million.
6. increase.
7. \$48 million.
8. \$84 million.
9. \$12 million.

III. Critical thinking

Same as Version A.