ECON 002 - Principles of Microeconomics
Drake University, Fall 2018
William M. Boal

EXAM 1 ANSWER KEY

Version A

I. Multiple choice

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

II. Problems

(1) [Marginal cost: 4 pts]

  1. $3.59.
  2. $1.00.
  3. $1.20.

(2) [Percent change, midpoint formula: 2 pts] ΔP = $2 and midpoint P = $5, so percent change is $2/$5 = 40 percent.

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

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

(4) [Production functions: 4 pts]

  1. 1.5 shirts per worker (because average product = total output / total input).
  2. 3 shirts per worker (because marginal product = Δ output / Δ input).

(4) [Comparative advantage, gains from trade: 17 pts]

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

(5) [Market equilibrium: 12 pts] First use the graph to draw demand and supply curves. The curves should have stairsteps, similar to those for the trading activity we did in class.

  1. excess demand.
  2. $9.
  3. 5 units.
  4. $45 (= price × quantity).
  5. $42.
  6. sellers.

(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, right, cannot be determined, increase.

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

  1. excess supply, because at this price, quantity supplied exceeds quantity demanded.
  2. 9 thousand.
  3. price will tend to fall.
  4. $5.
  5. 8 thousand.
  6. $10 = height of demand curve.
  7. $5 = willingness-to-pay minus price.
  8. $4 = height of supply curve.
  9. $1 = 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.

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 to the right. This shift will lower, not raise, the equilibrium price of hotel rooms. Consumers will benefit, not suffer, from lower prices. (Full credit requires graph showing supply shift and consequent decrease in price.)

(2) Bird flu killed many chickens and so shifted the supply curve of eggs to the left. This shift may have initially created excess demand, but in a free market, prices are flexible and they adjust to eliminate any excess demand or supply. In this case, the price of eggs rose to eliminate excess demand so there were no empty shelves. (Full credit requires graph showing supply shift and consequent increase in price.)

Version B

I. Multiple choice

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

II. Problems

(1) [Marginal cost: 4 pts]

  1. $2.89.
  2. $1.50.
  3. $1.30.

(2) [Percent change, midpoint formula: 2 pts] ΔP = $3 and midpoint P = $6, so percent change is $3/$6 = 50 percent.

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

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

(4) [Production functions: 4 pts]

  1. 2 shirts per worker (because average product = total output / total input).
  2. 1 shirt per worker (because marginal product = Δ output / Δ input).

(4) [Comparative advantage, gains from trade: 17 pts]

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

(5) [Market equilibrium: 12 pts] First use the graph to draw demand and supply curves. The curves should have stairsteps, similar to those for the trading activity we did in class.

  1. excess supply.
  2. $5.
  3. 6 units.
  4. $30 (= price × quantity).
  5. $48.
  6. buyers.

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

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

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

  1. excess demand, because at this price, quantity demanded exceeds quantity supplied.
  2. 6 thousand.
  3. price will tend to rise.
  4. $6.
  5. 10 thousand.
  6. $13 = height of demand curve.
  7. $7 = willingness-to-pay minus price.
  8. $4 = height of supply curve.
  9. $2 = price minus marginal cost.
  10. $50 thousand = area of triangle bounded by demand curve, vertical axis, and price.
  11. $25 thousand = area of triangle bounded by supply curve, vertical axis, and price.

III. Critical thinking

Same as Version A.

[end of answer key]