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)c. (2)b. (3)d. (4)c. (5)a. (6)a. (7)b. (8)e. (9)a. (10)b. (11)a. (12)c. (13)a. (14)b. (15)c. (16)d. (17)b.

II. Problems

(1) [Production functions: 7 pts] Recall that average product = total output / total input, and marginal product = Δ output / Δ input.

1. 3 backpacks per worker.
2. 5 backpacks per worker.
3. 6 backpacks per worker.
4. 4 backpacks per worker.

1. 1/2 units of corn.
2. 1/3 units of corn.
3. 2 units of vegetables.
4. 3 unit of vegetables.
5. Farmer Y.
6. Farmer X.
7. Both farmers can consume combinations of vegetables and corn outside their individual production possibility curves if Farmer Y gives three units of vegetables to Farmer X, who gives 2 units of corn in return.
8. Plot should show each farmer's production before trade, and consumption after trade.

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

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

(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) [Consumer choice and demand: 16 pts]

1. 7 units of food and 9 units of other goods, because this bundle is on the higher indifference curve.
2. 6 units of food and 6 units of other goods, because this bundle is on the higher indifference curve.
3. Budget line A has intercepts at 10 units of other goods and 15 units of food.
4. 6 units of food.
5. Budget line B has intercepts at 10 units of other goods and 5 units of food.
6. 3 units of food.
7. (P,Q) = (\$2,6), (\$6,3).

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

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

(7) [Basic definitions, cost and revenue: 3 pts]

1. marginal cost.
2. total revenue.
3. marginal revenue.

(8) [Short-run cost curves and supply: 20 pts]

1. \$7 thousand (= 500 × SATC, rounded).
2. \$3 thousand (= 500 × SAVC, rounded).
3. \$4 thousand (= STC - SVC).
4. \$5 (= SMC).
5. \$7 (= minimum SATC).
6. \$4 (= minimum SAVC).
7. zero parts, because price is less than shutdown price.
8. loss, equal to short-run fixed cost.
9. 1300 parts, using the rule P=MC.
10. loss, because price is less than breakeven price.

(9) [Economy-wide efficiency: 20 pts]

1. 3 pounds of food.
2. 1/3 garments.
3. \$4, because in competitive equilibrium, price equals marginal cost.
4. \$12, because in competitive equilibrium, prices reflect the slope of the production possibility curve for the economy as a whole: if the opportunity cost of a unit of clothing is 3 pounds of food, then a unit of clothing must be 3 times as expensive as a pound of food.
5. \$12, because in competitive equilibrium, price equals marginal cost.
6. Adam's budget line should have intercept at 30 on food axis and intercept of 10 on clothing axis.
7. -3.
8. 3 pounds of food.
9. 1/3 garments.
10. 3, because Adam's preferred bundle is at a tangency between his budget line and the highest indifference curve he can reach, and at a tangency the slope of the indifference curve must equal the slope of the budget line.

(10) [Competition versus collusion: 16 pts]

1. 16 million.
2. \$7 (= marginal cost).
3. \$7.
4. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$15 on price axis, and slope = -1/1 million.
5. 10 million, where MR = MC.
6. \$5 (= marginal cost).
7. \$10, on demand curve.
8. \$15 million.

(11) [Externalities: 12 pts]

1. \$5, at intersection of demand and supply.
2. 8 million, at intersection of demand and supply.
3. 6 million, at intersection of demand and marginal social cost.
4. \$6 million, the area of the triangle between marginal social cost, demand, and a vertical line at 8 million liters.
5. Tax, to decrease the quantity to the social optimum.
6. \$5 per liter, which equals the vertical gap between demand and supply and the socially-optimal quantity.

(12) [Nonrival goods: 4 pts]

1. MSB = 1000 (40-10Q) = 40,000 - 10,000 Q.
2. 2 miles (found by setting MSB = MC and solving for Q).

(13) [Regulating pollution: 20 pts]

1. Factories A, B, C, D, and E.
2. \$34 thousand.
3. Factories F and G.
4. \$12 thousand.
5. \$34 thousand.
6. Factories F and G.
7. \$12 thousand.
8. \$34 thousand.
9. \$12 thousand.
10. \$34 thousand.

III. Critical thinking [4 pts]

(1) This argument does not make sense. If many hotels are being built, then supply of hotel rooms will shift right. This will lower, not raise, the equilibrium price of hotel rooms. Consumers will benefit, not suffer, from lower prices. (Full credit requires supply-and-demand graph showing rightward supply shift and consequent decrease in price.)

(1) A maximum price on children's vitamins would decrease the amount of vitamins sold and decrease the number of children who take vitamins. A maximum price, or price ceiling, pushes price below the equilibrium price. The quantity demanded increases and the quantity supplied decreases, causing excess demand (a shortage). Because the quantity supplied decreases, the quantity actually sold decreases. (Full credit requires a graph showing demand, supply, and a horizontal line at the price ceiling, below the equilibrium price. The quantity sold before and after the price ceiling should be marked.)

### Version B

I. Multiple choice

(1)d. (2)e. (3)a. (4)d. (5)b. (6)b. (7)a. (8)b. (9)c. (10)c. (11)a. (12)a. (13)a. (14)b. (15)c. (16)a. (17)d.

II. Problems

(1) [Production functions: 7 pts] Recall that average product = total output / total input, and marginal product = Δ output / Δ input.

1. 4 backpacks per worker.
2. 5 backpacks per worker.
3. 8 backpacks per worker.
4. 2 backpacks per worker.

1. 1/2 units of corn.
2. 1 units of corn.
3. 2 units of vegetables.
4. 1 unit of vegetables.
5. Farmer X.
6. Farmer Y.
7. 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.
8. Plot should show each farmer's production before trade, and consumption after trade.

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

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

(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) [Consumer choice and demand: 16 pts]

1. 7 units of food and 7 units of other goods, because this bundle is on the higher indifference curve.
2. 3 units of food and 11 units of other goods, because this bundle is on the higher indifference curve.
3. Budget line A has intercepts at 15 units of other goods and 3 units of food.
4. 2 units of food.
5. Budget line B has intercepts at 15 units of other goods and 10 units of food.
6. 6 units of food.
7. (P,Q) = (\$10,1), (\$3,6).

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

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

(7) [Basic definitions, cost and revenue: 3 pts]

1. marginal revenue.
2. average cost.
3. marginal cost.

(8) [Short-run cost curves and supply: 20 pts]

1. \$7 thousand (= 500 × SATC, rounded).
2. \$4 thousand (= 500 × SAVC, rounded).
3. \$3 thousand (= STC - SVC).
4. \$7 (= SMC).
5. \$7 (= minimum SATC).
6. \$5 (= minimum SAVC).
7. 1700 parts, using the rule P=MC.
8. profit, because price is greater than breakeven price.
9. zero parts, because price is less than shutdown price.
10. loss, equal to short-run fixed cost.

(9) [Economy-wide efficiency: 20 pts]

1. 2 pounds of food.
2. 1/2 garments.
3. \$4, because in competitive equilibrium, price equals marginal cost.
4. \$8, because in competitive equilibrium, prices reflect the slope of the production possibility curve for the economy as a whole: if the opportunity cost of a unit of clothing is 2 pounds of food, then a unit of clothing must be 2 times as expensive as a pound of food.
5. \$8, because in competitive equilibrium, price equals marginal cost.
6. Adam's budget line should have intercept at 30 on food axis and intercept of 15 on clothing axis.
7. -2.
8. 2 pounds of food.
9. 1/2 garments.
10. 2, because Adam's preferred bundle is at a tangency between his budget line and the highest indifference curve he can reach, and at a tangency the slope of the indifference curve must equal the slope of the budget line.

(10) [Competition versus collusion: 16 pts]

1. 14 million.
2. \$6 (= marginal cost).
3. \$6.
4. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$13 on price axis, and slope = -1/1 million.
5. 8 million, where MR = MC.
6. \$5 (= marginal cost).
7. \$9, on demand curve.
8. \$12 million.

(11) [Externalities: 12 pts]

1. \$4, at intersection of demand and supply.
2. 8 million, at intersection of demand and supply.
3. 12 million, at intersection of marginal social benefit and supply.
4. \$10 million, the area of the triangle between marginal social benefit, supply, and a vertical line at 8 million vaccinations.
5. Subsidy, to increase the quantity to the social optimum.
6. \$3 per vaccination, which equals the vertical gap between demand and supply and the socially-optimal quantity.

(12) [Nonrival goods: 4 pts]

1. MSB = 1000 (40-10Q) = 40,000 - 5,000 Q.
2. 4 miles (found by setting MSB = MC and solving for Q).

(13) [Regulating pollution: 20 pts]

1. Factories A, B, C, and D.
2. \$23 thousand.
3. Factories E, F and G.
4. \$10 thousand.
5. \$23 thousand.
6. Factories E, F and G.
7. \$10 thousand.
8. \$23 thousand.
9. \$10 thousand.
10. \$23 thousand.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

(1)a. (2)a. (3)d. (4)e. (5)d. (6)b. (7)d. (8)b. (9)c. (10)d. (11)d. (12)b. (13)b. (14)a. (15)b. (16)b. (17)d.

II. Problems

(1) [Production functions: 7 pts] Recall that average product = total output / total input, and marginal product = Δ output / Δ input.

1. 2 backpacks per worker.
2. 5 backpacks per worker.
3. 4 backpacks per worker.
4. 6 backpacks per worker.

1. 1 units of corn.
2. 2 units of corn.
3. 1 units of vegetables.
4. 1/2 unit of vegetables.
5. Farmer X.
6. Farmer Y.
7. 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 3 units of corn in return.
8. Plot should show each farmer's production before trade, and consumption after trade.

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

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

(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) [Consumer choice and demand: 16 pts]

1. 8 units of food and 6 units of other goods, because this bundle is on the higher indifference curve.
2. 4 units of food and 5 units of other goods, because this bundle is on the higher indifference curve.
3. Budget line A has intercepts at 12 units of other goods and 6 units of food.
4. 3 units of food.
5. Budget line B has intercepts at 12 units of other goods and 12 units of food.
6. 5 units of food.
7. (P,Q) = (\$10,3), (\$5,5).

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

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

(7) [Basic definitions, cost and revenue: 3 pts]

1. marginal cost.
2. total cost.
3. marginal revenue.

(8) [Short-run cost curves and supply: 20 pts]

1. \$18 thousand (= 1500 × SATC, rounded).
2. \$12 thousand (= 1500 × SAVC, rounded).
3. \$6 thousand (= STC - SVC).
4. \$5 (= SMC).
5. \$10 (= minimum SATC).
6. \$4 (= minimum SAVC).
7. 1000 parts, using the rule P=MC.
8. loss, because price is less than breakeven price.
9. 1200 parts, using the rule P=MC.
10. profit, because price is greater than breakeven price.

(9) [Economy-wide efficiency: 20 pts]

1. 3/2 pounds of food.
2. 1/3 garments.
3. \$4, because in competitive equilibrium, price equals marginal cost.
4. \$6, because in competitive equilibrium, prices reflect the slope of the production possibility curve for the economy as a whole: if the opportunity cost of a unit of clothing is 3/2 pounds of food, then a unit of clothing must be 3/2 times as expensive as a pound of food.
5. \$6, because in competitive equilibrium, price equals marginal cost.
6. Adam's budget line should have intercept at 15 on food axis and intercept of 10 on clothing axis.
7. -3/2.
8. 3/2 pounds of food.
9. 2/3 garments.
10. 3/2, because Adam's preferred bundle is at a tangency between his budget line and the highest indifference curve he can reach, and at a tangency the slope of the indifference curve must equal the slope of the budget line.

(10) [Competition versus collusion: 16 pts]

1. 7 million.
2. \$5 (= marginal cost).
3. \$5.
4. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$12 on price axis, and slope = -2/1 million.
5. 4 million, where MR = MC.
6. \$4 (= marginal cost).
7. \$8, on demand curve.
8. \$6 million.

(11) [Externalities: 12 pts]

1. \$4, at intersection of demand and supply.
2. 12 million, at intersection of demand and supply.
3. 8 million, at intersection of demand and marginal social cost.
4. \$8 million, the area of the triangle between marginal social cost, demand, and a vertical line at 8 million liters.
5. Tax, to decrease the quantity to the social optimum.
6. \$3 per liter, which equals the vertical gap between demand and supply and the socially-optimal quantity.

(12) [Nonrival goods: 4 pts]

1. MSB = 1000 (40-4Q) = 40,000 - 4,000 Q.
2. 5 miles (found by setting MSB = MC and solving for Q).

(13) [Regulating pollution: 20 pts]

1. Factories A, B, and C.
2. \$14 thousand.
3. Factories D, E, F and G.
4. \$8 thousand.
5. \$14 thousand.
6. Factories D, E, F and G.
7. \$8 thousand.
8. \$14 thousand.
9. \$8 thousand.
10. \$14 thousand.

III. Critical thinking

Same as Version A.