ECON 002 - Principles of Microeconomics Drake University, Spring 2015 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)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 arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -3/4 = -0.75.

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

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

(3) [Using income elasticities: 10 pts]

1. luxury or superior good.
2. increase.
3. 8 percent.
4. increase.
5. 3 percent.

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

1. \$50.
2. import.
3. 8 million.
4. increase.
5. \$200 million.
6. decrease.
7. \$120 million.
8. increase.
9. \$80 million.

(5) [Welfare effects of market controls: 18 pts] Price ceiling of \$4.

1. \$5.
2. 60 million pounds.
3. excess demand.
4. 30 million pounds.
5. decrease.
6. \$70 million.
7. increase.
8. \$40 million.
9. \$30 thousand.

(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.

1. 10 thousand.
2. \$6 per meal.
3. \$9 per meal.
4. decrease.
5. \$11 thousand.
6. decrease.
7. \$22 thousand.
8. \$30 thousand.
9. \$3 thousand.

(7) [Taxes, Laffer curve: 9 pts]

1. Tax rateQuantityTax revenue
\$15 million\$5 million
\$24 million\$8 million
\$33 million\$9 million
2. Must plot points clearly.

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.]

### Version B

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 arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -3/2 = -1.5.

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

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

(3) [Using income elasticities: 10 pts]

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

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

1. \$50.
2. export.
3. 4 million.
4. decrease.
5. \$85 million.
6. increase.
7. \$105 million.
8. increase.
9. \$20 million.

(5) [Welfare effects of market controls: 18 pts] Quota on sellers of \$4.

1. \$5.
2. increase.
3. \$9.
4. increase.
5. \$120 million.
6. decrease.
7. \$240 million.
8. \$6.
9. \$120 thousand.

(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.

1. 14 thousand.
2. \$5 per meal.
3. \$8 per meal.
4. increase.
5. \$13 thousand.
6. increase.
7. \$26 thousand.
8. \$42 thousand.
9. \$3 thousand.

(7) [Taxes, Laffer curve: 9 pts]

1. Tax rateQuantityTax revenue
\$14 million\$4 million
\$23 million\$6 million
\$32 million\$6 million
2. Must plot points clearly.

III. Critical thinking

Same as Version A.

### Version C

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 arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) = -6/5 = -1.2.

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

1. elastic.
2. decrease.
3. 7 percent.
4. decrease.
5. 2 percent.

(3) [Using income elasticities: 10 pts]

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

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

1. \$50.
2. import.
3. 4 million.
4. increase.
5. \$95 million.
6. decrease.
7. \$75 million.
8. increase.
9. \$20 million.

(5) [Welfare effects of market controls: 18 pts] Price floor of \$7.

1. \$5.
2. 60 million pounds.
3. excess supply.
4. 60 million pounds.
5. increase.
6. \$110 million.
7. decrease.
8. \$140 million.
9. \$30 thousand.

(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.

1. 8 thousand.
2. \$5 per meal.
3. \$11 per meal.
4. decrease.
5. \$20 thousand.
6. decrease.
7. \$40 thousand.
8. \$48 thousand.
9. \$12 thousand.

(7) [Taxes, Laffer curve: 9 pts]

1. Tax rateQuantityTax revenue
\$13 million\$3 million
\$22 million\$4 million
\$31 million\$3 million
2. Must plot points clearly.

III. Critical thinking

Same as Version A.