ECON 002 - Principles of Microeconomics Drake University, Fall 2021 William M. Boal

### Version A

I. Multiple choice

(1)c. (2)d. (3)b. (4)c. (5)b. (6)b. (7)b. (8)e. (9)c. (10)a. (11)d. (12)b. (13)c. (14)a. (15)c. (16)c. (17)c. (18)c. (19)c. (20)b. (21)d. (22)a. (23)c. (24)d. (25)b. (26)b. (27)c. (28)c.

[Multiple-choice question (2) reads: "Aaron buys a ticket to a football game for \$50. When he arrives at the stadium, he discovers that scalpers are willing to pay \$150 for his ticket. His opportunity cost of attending the game is..."
To answer this question, imagine that Aaron initially has, say, \$1000 in his bank account. He buys a ticket for \$50, reducing his bank balance to \$950. If he attends the game, his bank balance stays at \$950. If he accepts the scalper's offer, his bank balance grows by \$150 to \$1100. So Aaron can either attend the game and have a bank balance of \$950, OR skip the game and have a bank balance of \$1100. So his opportunity cost of attending the game is the difference, \$150.]

II. Problems

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

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

1. increase.
2. 6 percent (= +8 per cent plus -2 per cent).

(3) [Production functions: 8 pts]

1. Average product = total output / total input = 10/10 = 1 chair per worker.
2. Average product = total output / total input = 90/30 = 3 chairs per worker.
3. Marginal product = Δ output / Δ input = (20-10)/(15-10) = 2 chairs per worker.
4. Marginal product = Δ output / Δ input = (70-40)/(25-20) = 6 chairs per worker.

1. 3 bicycles.
2. 1 bicycle.
3. 1/3 phones.
4. 1 phone.
5. Country Y, because it has lower opportunity cost of producing phones.
6. Country X, 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 X exports three bicycles to Country Y, which exports 2 phones in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [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.

(6) [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. \$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.

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. Country 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)d. (3)d. (4)b. (5)d. (6)a. (7)b. (8)d. (9)a. (10)c. (11)a. (12)c. (13)a. (14)b. (15)d. (16)d. (17)a. (18)d. (19)d. (20)a. (21)d. (22)c. (23)d. (24)d. (25)a. (26)b. (27)b. (28)a.

[Multiple-choice question (2) reads: "Brian buys a ticket to a concert for \$50. When he arrives at the venue, he discovers that scalpers are willing to pay \$75 for his ticket. His opportunity cost of attending the concert is..."
To answer this question, imagine that Brian initially has, say, \$1000 in his bank account. He buys a ticket for \$50, reducing his bank balance to \$950. If he attends the concert, his bank balance stays at \$950. If he accepts the scalper's offer, his bank balance grows by \$75 to \$1025. So Brian can either attend the concert and have a bank balance of \$950, OR skip the concert and have a bank balance of \$1025. So his opportunity cost of attending the concert is the difference, \$75.]

II. Problems

(1) [Percent change, midpoint formula: 2 pts] ΔP = \$4 and midpoint P = \$8, so percent change is \$4/\$8 = 50 percent.

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

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

(3) [Production functions: 8 pts]

1. Average product = total output / total input = 40/20 = 2 chairs per worker.
2. Average product = total output / total input = 10/10 = 1 chair per worker.
3. Marginal product = Δ output / Δ input = (40-20)/(20-15) = 4 chairs per worker.
4. Marginal product = Δ output / Δ input = (100-90)/(35-30) = 2 chairs per worker.

1. 1/2 bicycle.
2. 2 bicycles.
3. 2 phones.
4. 1/2 phone
5. Country X, because it has lower opportunity cost of producing phones.
6. Country Y, 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 Y exports two bicycles to Country X, which exports 2 phones in return (3 phones would also work).
8. Plot should show each country's production before trade, and consumption after trade.

(5) [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.

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

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

III. Critical thinking

Same as Version A.