ECON 002 - Principles of Microeconomics Drake University, Fall 2022 William M. Boal

### Version A

I. Multiple choice

(1)b. (2)c. (3)d. (4)c. (5)b. (6)b. (7)a. (8)c. (9)b. (10)b. (11)c. (12)c. (13)c. (14)d. (15)b. (16)a. (17)b. (18)a. (19)c. (20)b. (21)c. (22)a. (23)d. (24)b. (25)d. (26)c. (27)c. (28)b. (29)b. (30)b. (31)d. (32)b. (33)c.

[Multiple-choice question (3) 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 now..."
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 = \$10, so percent change is \$2/\$10 = 20 percent.

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

1. increases.
2. 6 percent (= +9 per cent plus -3 per cent).

(3) [Production functions: 7 pts]

1. Average product = total output / total input: 6, 5, 4.
2. Marginal product = Δ output / Δ input: 6, 4, 2.
3. Diminishing returns? YES because MP is decreasing.

1. 1 bicycles.
2. 2 bicycle.
3. 1 television.
4. 1/2 television.
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 A, which exports 2 televisions 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. 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 demand, because at this price, quantity demanded exceeds quantity supplied.
2. 4 thousand.
3. price will tend to rise.
4. \$4.
5. 9 thousand.
6. \$10 = height of demand curve.
7. \$6 = willingness-to-pay minus price.
8. \$3 = height of supply curve.
9. \$1 = price minus marginal cost.
10. \$40.5 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$13.5 thousand = area of triangle bounded by supply curve, vertical axis, and price.

### Version B

I. Multiple choice

(1)c. (2)e. (3)c. (4)b. (5)c. (6)a. (7)b. (8)b. (9)a. (10)e. (11)d. (12)b. (13)b. (14)a. (15)c. (16)b. (17)a. (18)b. (19)d. (20)c. (21)d. (22)b. (23)d. (24)b. (25)d. (26)d. (27)d. (28)c. (29)b. (30)c. (31)c. (32)b. (33)d.

[Multiple-choice question (3) reads: "Briana buys a ticket to a concert for \$20. When she arrives at the venue, she discovers that scalpers are willing to pay \$80 for her ticket. Her opportunity cost of attending the concert is now..."
To answer this question, imagine that Briana initially has, say, \$1000 in her bank account. She buys a ticket for \$20, reducing her bank balance to \$980. If she attends the concert, her bank balance stays at \$980. If she accepts the scalper's offer, her bank balance grows by \$80 to \$1060. So Briana can either attend the concert and have a bank balance of \$980, OR skip the concert and have a bank balance of \$1060. So her opportunity cost of attending the concert is the difference, \$80.]

II. Problems

(1) [Percent change, midpoint formula: 2 pts] ΔP = \$1 and midpoint P = \$2.50, so percent change is \$1/\$2.50 = 40 percent.

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

1. decreases.
2. 3 percent (= +5 per cent plus -8 per cent).

(3) [Production functions: 7 pts]

1. Average product = total output / total input: 3, 4, 5.
2. Marginal product = Δ output / Δ input: 3, 5, 7.
3. Diminishing returns? NO because MP is increasing.

1. 1 bicycle.
2. 1/2 bicycle.
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 three bicycles to Country B, which exports 4 televisions in return. (5 televisions 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. left, left, cannot be determined, decrease.

(6) [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. \$6.
5. 10 thousand.
6. \$9 = height of demand curve.
7. \$3 = 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.

### Version C

I. Multiple choice

(1)c. (2)e. (3)c. (4)a. (5)d. (6)b. (7)c. (8)d. (9)b. (10)d. (11)a. (12)a. (13)a. (14)b. (15)a. (16)b. (17)a. (18)a. (19)a. (20)d. (21)a. (22)c. (23)b. (24)c. (25)d. (26)a. (27)d. (28)d. (29)b. (30)a. (31)c. (32)e. (33)a.

[Multiple-choice question (3) reads: "Carl buys a ticket to a baseball game for \$30. When he arrives at the ball park, he discovers that scalpers are willing to pay \$70 for his ticket. His opportunity cost of attending the game is now..."
To answer this question, imagine that Carl initially has, say, \$1000 in his bank account. He buys a ticket for \$30, reducing his bank balance to \$970. If he attends the game, his bank balance stays at \$970. If he accepts the scalper's offer, his bank balance grows by \$70 to \$1040. So Carl can either attend the game and have a bank balance of \$970, OR skip the game and have a bank balance of \$1040. So his opportunity cost of attending the game is the difference, \$70.]

II. Problems

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

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

1. increases.
2. 5 percent (= +7 per cent plus -2 per cent).

(3) [Production functions: 7 pts]

1. Average product = total output / total input: 5, 4, 3.
2. Marginal product = Δ output / Δ input: 5, 3, 1.
3. Diminishing returns? YES because MP is decreasing.

1. 1/3 bicycle.
2. 1/2 bicycle.
3. 3 televisions.
4. 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 A, which exports 7 televisions in return. (8 televisions 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. unchanged, left, increase, decrease.
2. left, unchanged, decrease, decrease.
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. 3 thousand.
3. price will tend to rise.
4. \$5.
5. 8 thousand.
6. \$9 = height of demand curve.
7. \$4 = 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.