ECON 002 - Principles of Microeconomics Drake University, Fall 2016 William M. Boal

### Version A

I. Multiple choice

(1)c. (2)d. (3)b. (4)b. (5)b. (6)d. (7)b. (8)b. (9)b. (10)b. (11)c. (12)c.

II. Problems

(1) [Percent change, midpoint formula: 2 pts] 40 percent.

(2) [Percent change of product: 4 pts]

1. increase.
2. 2 percent (= +6 percent -4 percent).

(3) [Production functions: 8 pts] Recall that average product = total output / total input. Marginal product = Δ output / Δ input .

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

1. 3 refrigerators.
2. 1 refrigerator.
3. 1/3 car.
4. 1 car.
5. Country Y, because it has lower opportunity cost of producing cars.
6. Country X, because it has lower opportunity cost of producing refrigerators.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country X exports three refrigerators to Country Y, which exports 2 cars in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [Market equilibrium: 12 pts]

1. excess supply.
2. \$5.
3. 4 units.
4. \$20 (= price × quantity).
5. \$30.

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

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

(7) [Consumer surplus, producer surplus: 22 pts]

1. excess demand, because at this price, quantity demanded exceeds quantity supplied.
2. 3 thousand.
3. price will tend to rise.
4. \$5.
5. 8 thousand.
6. \$10 = height of demand curve.
7. \$5 = willingness-to-pay minus price.
8. \$3 = height of supply curve.
9. \$2 = price minus marginal cost.
10. \$32 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$16 thousand = area of triangle bounded by supply curve, vertical axis, and price.

(8) [Consumer surplus, producer surplus: 4 pts]

1. Consumers are better off, because price has decreased.
2. \$18 million = Δ CS = area of trapezoid bounded by demand curve, vertical axis, old price, and new price.

III. Critical thinking [4 pts]

YES, both countries can enjoy combination of goods outside their individual PP curves through specialization and trade. Here is an example. Country A produces 10 units of electronics and no cars. Country B produces 10 units of cars and no electronics. A then exports 5 units of electronics to Country B. In return, Country B exports 5 units of cars to Country A. Both countries then can consume 5 units of electronics and 5 units of cars, a combination that is clearly outside their individual PP curves. (Full credit requires that this trade be plotted on the graphs.)

[Paul Krugman won the Nobel prize in 2008 for developing the theory of international trade when countries have decreasing opportunity costs. He was motivated by rapid postwar expansion of international trade between similar countries--like France and Germany.]

### Version B

I. Multiple choice

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

II. Problems

(1) [Percent change, midpoint formula: 2 pts] 10 percent.

(2) [Percent change of product: 4 pts]

1. decrease.
2. 5 percent (= +6 percent -4 percent).

(3) [Production functions: 8 pts] Recall that average product = total output / total input. Marginal product = Δ output / Δ input .

1. 2 chairs per worker
2. 3 chairs per worker
3. 6 chairs per worker
4. 4 chairs per worker

1. 1/2 refrigerator.
2. 1 refrigerator.
3. 2 cars.
4. 1 car.
5. Country X, because it has lower opportunity cost of producing cars.
6. Country Y, because it has lower opportunity cost of producing refrigerators.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country Y exports two refrigerators to Country X, which exports 3 cars in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [Market equilibrium: 12 pts]

1. excess demand.
2. \$9.
3. 6 units.
4. \$54 (= price × quantity).
5. \$40.
6. sellers.

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

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

(7) [Consumer surplus, producer surplus: 22 pts]

1. excess supply, because at this price, quantity supplied exceeds quantity demanded.
2. 6 thousand.
3. price will tend to fall.
4. \$5.
5. 8 thousand.
6. \$7 = height of demand curve.
7. \$2 = willingness-to-pay minus price.
8. \$2 = height of supply curve.
9. \$3 = price minus marginal cost.
10. \$32 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$16 thousand = area of triangle bounded by supply curve, vertical axis, and price.

(8) [Consumer surplus, producer surplus: 4 pts]

1. Producers are worse off, because price has decreased.
2. \$7 million = Δ CS = area of trapezoid bounded by supply curve, vertical axis, old price, and new price.

III. Critical thinking

Same as Version A.