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

EXAM 2 ANSWER KEY

### Version A

I. Multiple choice

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

II. Problems

(1) [Computing price elasticity of demand: 2 pts]

• -0.6 (using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) ).

(2) [Price elasticity of demand: 10 pts]

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

(3) [Income elasticity of demand: 8 pts]

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

(4) [Effects of international trade: 6 pts]

1. \$4 per bushel.
2. Country A.
3. 8 million bushels.

(5) [Welfare effects of international trade: 18 pts] International price = \$7.

1. \$5.
2. export.
3. 6 million.
4. decrease.
5. \$14 million.
6. increase.
7. \$20 million.
8. increase.
9. \$6 million.

(6) [Welfare effects of market controls: 18 pts] Price floor = \$8.

1. \$6.
2. 80 thousand.
3. excess supply.
4. 60 thousand.
5. increase.
6. \$150 thousand.
7. decrease.
8. \$180 thousand.
9. \$30 thousand.

(7) [Welfare effects of tax or subsidy: 18 pts] Tax = \$5. Since PD = PS + 5, in equilibrium, the demand curve must be higher than the supply curve by \$5. Both consumers and producers lose from the tax, but government gains tax revenue.

1. 4 thousand rakes.
2. \$4 per rake.
3. \$9 per rake.
4. decrease.
5. \$6 thousand.
6. decrease.
7. \$24 thousand.
8. \$20 thousand.
9. \$10 thousand.

III. Critical thinking [4 pts]

(1) These quotas on sellers increased the price of Japanese-made cars in the United States. The winners were the Japanese car companies that received quotas. The losers were U.S. buyers of Japanese cars and any Japanese car company that did not receive quotas. The rise in the price of Japanese-made cars also affected the market for a substitute: American-made cars. The demand for American-made cars shifted right because the price of a substitute rose. This caused an increase in the price of American-made cars. American car companies were therefore also winners, and buyers of American cars were also losers. [Full credit requires a supply-and-demand graph showing the effects of a quota on sellers.]

(2) It does not matter who pays the tax. A tax increases the total price paid by demanders and decreases the net price paid by suppliers. The side with the less elastic curve bears more of the tax burden. It does not matter whether the law requires demanders or suppliers to pay the tax money to the government--this has no effect on the relative tax burden.

### Version B

I. Multiple choice

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

II. Problems

(1) [Computing price elasticity of demand: 2 pts]

• -2.0 (using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) ).

(2) [Price elasticity of demand: 10 pts]

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

(3) [Income elasticity of demand: 8 pts]

1. necessary good.
2. increase.
3. 8 percent.
4. decrease.

(4) [Effects of international trade: 6 pts]

1. \$50 per barrel.
2. Country Y.
3. 6 million barrels.

(5) [Welfare effects of international trade: 18 pts] International price = \$3.

1. \$5.
2. import.
3. 6 million.
4. increase.
5. \$18 million.
6. decrease.
7. \$12 million.
8. increase.
9. \$6 million.

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

1. \$6.
2. 60 thousand.
3. excess demand.
4. 60 thousand.
5. decrease.
6. \$160 thousand.
7. increase.
8. \$40 thousand.
9. \$120 thousand.

(7) [Welfare effects of tax or subsidy: 18 pts] Subsidy = \$5. Since PS = PD + 5, in equilibrium, the supply curve must be higher than the demand curve by \$5. Both consumers and producers gain from the subsidy, but government loses.

1. 12 thousand rakes.
2. \$6 per rake.
3. \$1 per rake.
4. increase.
5. \$10 thousand.
6. increase.
7. \$40 thousand.
8. \$60 thousand.
9. \$10 thousand.

III. Critical thinking

Same as Version A.

[end of answer key]