ECON 002  Principles of Microeconomics

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

I. Multiple choice
(1)a. (2)a. (3)a. (4)c. (5)b. (6)d. (7)c. (8)b. (9)a. (10)b. (11)b. (12)b.
II. Problems
(1) [Calculating elasticities: 2 pts] Using arcelasticity formula: (ΔQ/Q_{avg}) / (ΔP/P_{avg}) = 3/4 = 0.75.
(2) [Using price elasticity of demand: 10 pts]
(3) [Using income elasticities: 10 pts]
(4) [Welfare effects of international trade: 18 pts]
(5) [Welfare effects of market controls: 18 pts] Price ceiling of $4.
(6) [Welfare effects of tax or subsidy: 18 pts] Tax of $3: in equilibrium, the demand curve must be higher than the supply curve by $3.
(7) [Taxes, Laffer curve: 9 pts]
Tax rate  Quantity  Tax revenue 

$1  5 million  $5 million 
$2  4 million  $8 million 
$3  3 million  $9 million 
III. Critical thinking [4 pts]
(1) We are given that the percent change in price is 10 percent and the percent change in spending is 6 percent. Now we know that percent change in spending (or revenue, from the seller's viewpoint) equals approximately the percent change in price plus the percent change in quantity. So the percent change in quantity must be approximately positive 4 percent. The definition of elasticity is percent change in quantity divided by percent change in price, so here the elasticity must be (+4 percent/10 percent) or 0.4.
(2) Welfare increases by $30 million. Graph should show domestic demand and domestic supply intersecting at a price of $10. At a price of $6, quantity demanded is 15 million more than quantity supplied; this difference is imported. The area of the triangle of welfare gain is therefore $30 million, assuming demand and supply approximately straight lines. [Note that with the information given, it is not possible to compute separately the gain in consumer surplus or the loss of producer surplus.]
I. Multiple choice
(1)b. (2)b. (3)b. (4)d. (5)d. (6)a. (7)d. (8)d. (9)b. (10)a. (11)c. (12)a.
II. Problems
(1) [Calculating elasticities: 2 pts] Using arcelasticity formula: (ΔQ/Q_{avg}) / (ΔP/P_{avg}) = 3/2 = 1.5.
(2) [Using price elasticity of demand: 10 pts]
(3) [Using income elasticities: 10 pts]
(4) [Welfare effects of international trade: 18 pts]
(5) [Welfare effects of market controls: 18 pts] Quota on sellers of $4.
(6) [Welfare effects of tax or subsidy: 18 pts] Subsidy of $3: in equilibrium, the demand curve must be lower than the supply curve by $3.
(7) [Taxes, Laffer curve: 9 pts]
Tax rate  Quantity  Tax revenue 

$1  4 million  $4 million 
$2  3 million  $6 million 
$3  2 million  $6 million 
III. Critical thinking
Same as Version A.
I. Multiple choice
(1)a. (2)b. (3)b. (4)e. (5)a. (6)b. (7)a. (8)d. (9)a. (10)b. (11)c. (12)b.
II. Problems
(1) [Calculating elasticities: 2 pts] Using arcelasticity formula: (ΔQ/Q_{avg}) / (ΔP/P_{avg}) = 6/5 = 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) [Welfare effects of market controls: 18 pts] Price floor of $7.
(6) [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.
(7) [Taxes, Laffer curve: 9 pts]
Tax rate  Quantity  Tax revenue 

$1  3 million  $3 million 
$2  2 million  $4 million 
$3  1 million  $3 million 
III. Critical thinking
Same as Version A.
[end of answer key]