EXAM 1 ANSWER KEY
Version A
I. Multiple choice
(1)c. (2)b. (3)d. (4)b. (5)e. (6)c. (7)c. (8)a. (9)b. (10)c.
(11)c. (12)b. (13)b. (14)c.
II. Problems
(1) [Percent change of product: 4 pts]
- increase.
- 6 percent (= +10 percent - 6 percent).
(2) [Production functions: 7 pts] Recall that average product = total output / total input, and marginal product = Δ output / Δ input.
- 3 backpacks per worker.
- 5 backpacks per worker.
- 6 backpacks per worker.
- 4 backpacks per worker.
(3) [Comparative advantage, gains from trade: 17 pts]
- 1/2 units of corn.
- 1 unit of corn.
- 2 units of vegetables.
- 1 unit of vegetables.
- Farmer X.
- Farmer Y.
- Both farmers can consume combinations of vegetables and corn outside their individual production possibility curves if Farmer X gives three units of vegetables to Farmer Y, who gives 2 units of corn in return.
- Plot should show each farmer's production before trade, and consumption after trade.
(4) [Market equilibrium: 12 pts]
- excess supply.
- $5.
- 6 units.
- $30 (= price times quantity).
- $45.
- buyers.
(5) [Shifts in demand and supply: 15 pts]
Full credit requires accurate graphs.
- left, unchanged, decrease, decrease.
- unchanged, left, increase, decrease.
- left, left, cannot be determined, decrease.
(6) [Consumer surplus, producer surplus: 22 pts]
Full credit requires accurate graphs.
- excess supply.
- 9 thousand.
- price will tend to fall.
- $5.
- 8 thousand.
- $9 = height of demand curve..
- $4 = willingness-to-pay minus price.
- $2 = height of supply curve.
- $3 = price minus marginal cost.
- $32 thousand = area of triangle bounded by demand curve, vertical axis, and price.
- $16 thousand = area of triangle bounded by supply curve, vertical axis, and price.
(7) [Consumer surplus, producer surplus: 4 pts]
- better off, because price has increased.
- $16 million = Δ PS = area of trapezoid bounded by supply curve, vertical axis, old price, and new price.
III. Critical thinking [4 pts]
(1) Restaurant meals are expensive on Valentine's Day because demand shifts right, raising the equilibrium price (and quantity). Demand shifts right because in the US, Valentine's Day is a popular evening to eat out. The day after Valentine's Day, demand shifts back to the left, lowering the equilibrium price to its original level. (Full credit requires a supply-and-demand diagram showing the shift in demand and the change in equilibrium price.)
(2) Tomatoes in Iowa are expensive in winter because they must be grown in greenhouses or shipped to Iowa from far away. The cost of supplying tomatoes is high in winter. So the supply curve shifts left, which raises the equlibrium price. In summer, tomatoes can be grown outside locally, which lowers the cost of production. So the supply curve shifts right, which lowers the equilibrium price. (Full credit requires graph showing summer and winter supply curves and consequent difference in price.)
Version B
I. Multiple choice
(1)d. (2)c. (3)a. (4)c. (5)b. (6)a. (7)a. (8)b. (9)c. (10)d.
(11)d. (12)c. (13)b. (14)b.
II. Problems
(1) [Percent change of product: 4 pts]
- decrease.
- 1 percent (= +5 percent - 6 percent).
(2) [Production functions: 7 pts] Recall that average product = total output / total input, and marginal product = Δ output / Δ input.
- 4 backpacks per worker.
- 5 backpacks per worker.
- 8 backpacks per worker.
- 2 backpacks per worker.
(3) [Comparative advantage, gains from trade: 17 pts]
- 1 unit of corn.
- 2 units of corn.
- 1 unit of vegetables.
- 1/2 unit of vegetables.
- Farmer X.
- Farmer Y.
- Both farmers can consume combinations of vegetables and corn outside their individual production possibility curves if Farmer X gives two units of vegetables to Farmer Y, who gives 3 units of corn in return.
- Plot should show each farmer's production before trade, and consumption after trade.
(4) [Market equilibrium: 12 pts]
- excess demand.
- $6.
- 5 units.
- $30 (= price times quantity).
- $38.
- buyers.
(5) [Shifts in demand and supply: 15 pts]
Full credit requires accurate graphs.
- right, unchanged, increase, increase.
- unchanged, right, decrease, increase.
- right, left, increase, cannot be determined.
(6) [Consumer surplus, producer surplus: 22 pts]
Full credit requires accurate graphs.
- excess demand.
- 3 thousand.
- price will tend to rise.
- $6.
- 6 thousand.
- $9 = height of demand curve.
- $3 = willingness-to-pay minus price.
- $4 = height of supply curve.
- $2 = price minus marginal cost.
- $18 thousand = area of triangle bounded by demand curve, vertical axis, and price.
- $9 thousand = area of triangle bounded by supply curve, vertical axis, and price.
(7) [Consumer surplus, producer surplus: 4 pts]
- worse off, because price has decreased.
- $12 million = Δ PS = 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)a. (2)d. (3)b. (4)d. (5)d. (6)b. (7)b. (8)a. (9)d. (10)a.
(11)a. (12)d. (13)a. (14)a.
II. Problems
(1) [Percent change of product: 4 pts]
- increase.
- 2 percent (= +8 percent - 6 percent).
(2) [Production functions: 7 pts] Recall that average product = total output / total input, and marginal product = Δ output / Δ input.
- 2 backpacks per worker.
- 5 backpacks per worker.
- 4 backpacks per worker.
- 6 backpacks per worker.
(3) [Comparative advantage, gains from trade: 17 pts]
- 1/2 units of corn.
- 1/3 unit of corn.
- 2 units of vegetables.
- 3 unit of vegetables.
- Farmer Y.
- Farmer X.
- Both farmers can consume combinations of vegetables and corn outside their individual production possibility curves if Farmer Y gives five units of vegetables to Farmer X, who gives 2 units of corn in return.
- Plot should show each farmer's production before trade, and consumption after trade.
(4) [Market equilibrium: 12 pts]
- excess demand.
- $7.
- 4 units.
- $28 (= price times quantity).
- $32.
- sellers.
(5) [Shifts in demand and supply: 15 pts]
Full credit requires accurate graphs.
- unchanged, right, decrease, increase.
- left, unchanged, decrease, decrease.
- right, right, cannot be determined, increase.
(6) [Consumer surplus, producer surplus: 22 pts]
Full credit requires accurate graphs.
- excess demand.
- 6 thousand.
- price will tend to rise.
- $11.
- 10 thousand.
- $13 = height of demand curve.
- $2 = willingness-to-pay minus price.
- $3 = height of supply curve.
- $8 = price minus marginal cost.
- $25 thousand = area of triangle bounded by demand curve, vertical axis, and price.
- $50 thousand = area of triangle bounded by supply curve, vertical axis, and price.
(7) [Consumer surplus, producer surplus: 4 pts]
- better off, because price has increased.
- $10 million = Δ PS = area of trapezoid bounded by supply curve, vertical axis, old price, and new price.
III. Critical thinking
Same as Version A.
[end of answer key]