ECON 002 - Principles of Microeconomics Drake University, Fall 2019 William M. Boal

EXAM 1 ANSWER KEY

Version A

I. Multiple choice

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

II. Problems

(1) [Percent change, midpoint formula: 2 pts] ΔP = \$800 and midpoint P = \$1000, so percent change is \$800/\$1000 = 80 percent.

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

1. increase.
2. 2 percent (= +5 per cent plus -3 per cent).

(3) [Production functions: 4 pts]

1. Average product = total output / total input: 6, 4, 3.
2. Marginal product = Δ output / Δ input: 6, 2, 1.
3. Diminishing returns? YES because MP is decreasing.

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

1. 1/2 scooter.
2. 2 scooters.
3. 2 tables.
4. 1/2 table.
5. Country X, because it has lower opportunity cost of producing tables.
6. Country Y, because it has lower opportunity cost of producing scooters.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country X exports two tables to Country Y, which exports 2 scooters in return (3 scooters also works).
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, because quantity demanded is 6-7 and quantity supplied is 2-3.
2. \$7.
3. 6 units.
4. \$42 (= price × quantity).
5. \$47.

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

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

(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. \$4.
5. 6 thousand.
6. \$7 = height of demand curve.
7. \$3 = willingness-to-pay minus price.
8. \$3 = height of supply curve.
9. \$1 = price minus marginal cost.
10. \$18 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$9 thousand = area of triangle bounded by supply curve, vertical axis, and price.

III. Critical thinking [4 pts]

(1) If there is a freeze in Florida that ruins part of the orange crop, orange juice does not disappear from the shelves of grocery stores because in a free market, the price adjusts to eliminate excess demand or supply. A freeze in Florida would raise the price of oranges and shift the supply of orange juice to the left. If the price of orange juice could not adjust, this would result in excess demand for orange juice and it would disappear from grocery shelves. But in a free market, the price of orange juice rises to eliminate the excess demand. (Full credit requires graph showing leftward shift in supply due to freeze, and consequent increase in price. Note that the freeze does NOT shift the demand curve because there is no change in the factors that shift demand--income, prices of related goods, etc.)

(2) Blueberries are cheap in summer but expensive in winter because they are easy to grow locally in summer but must be shipped from far away in winter. So the supply curve shifts right in summer and shifts left in winter and the equilibrium price moves down and up as a result. (Full credit requires graph showing summer and winter supply curves, and summer and winter prices. Note that the demand curve does NOT shift because there is no change in the factors that shift demand--income, prices of related goods, etc.)

Version B

I. Multiple choice

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

II. Problems

(1) [Percent change, midpoint formula: 2 pts] ΔP = \$300 and midpoint P = \$1200, so percent change is \$300/\$1200 = 25 percent.

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

1. decrease.
2. 3 percent (= -5 per cent plus 2 per cent).

(3) [Production functions: 4 pts]

1. Average product = total output / total input: 1, 2, 3.
2. Marginal product = Δ output / Δ input: 1, 3, 5.
3. Diminishing returns? NO because MP is increasing.

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

1. 1 scooter.
2. 1/2 scooters.
3. 1 table.
4. 2 tables.
5. Country Y, because it has lower opportunity cost of producing tables.
6. Country X, because it has lower opportunity cost of producing scooters.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country Y exports three tables to Country X, which exports 2 scooters 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, because quantity demanded is 2-3 and quantity supplied is 6-7.
2. \$9.
3. 5 units.
4. \$45 (= price × quantity).
5. \$39.
6. sellers.

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

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

(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. \$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.

III. Critical thinking

Same as Version A.

[end of answer key]