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

### Version A

I. Multiple choice

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

II. Problems

(1) [Calculating elasticities: 2 pts]

• -0.667 = -2/3, using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) .

(2) [Cross-price elasticity of demand: 4 pts]

1. substitutes.
2. 8 percent / 20 percent = 2/5 = 0.4.

(3) [Using price elasticity of demand: 10 pts]

1. inelastic.
2. decrease.
3. 4 percent, using definition: elasticity = percent change quantity divided by percent change price.
4. increase, because the increase in price is greater than the decrease in quantity.
5. 1 percent, using approximation formula: percent change in revenue = percent change in price + percent change in quantity.

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

1. \$5.
2. export, because quantity supplied is now greater than quantity demanded.
3. 8 thousand = quantity supplied minus quantity demanded.
4. decrease, because price rose.
5. \$12 thousand = area of trapezoid bounded by new and old prices and demand curve.
6. increase, because price rose.
7. \$20 thousand = area of trapezoid bounded by new and old prices and supply curve.
8. increase, because producers gain more than consumers lose.
9. \$8 thousand = increase in producer surplus minus decrease in consumer surplus.

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

1. \$5.
2. 6 million. That is all that sellers are willing to sell.
3. excess demand, because quantity demanded is greater than quantity supplied at this price.
4. 3 million.
5. decrease, because producers face a lower price.
6. 7 million = area of trapezoid bounded by new and old prices and supply curve.
7. increase.
8. \$4 million. Consumers enjoy an increase due to the lower price (a rectangle below \$5) but a decrease due to fewer units sold (a small triangle above \$5).
9. \$3 million = decrease in producer surplus minus increase in consumer surplus = area of triangle. Note that producer's loss is greater than consumers' gain, so this price ceiling does not pass the compensation test.

(6) [Welfare analysis of tax or subsidy: 18 pts] Tax = \$3. Under this tax, PD = PS + \$3, so at the new equilibrium quantity, the demand curve must be higher than the supply curve by \$3. Both consumers and producers lose from a tax, but government gains tax revenue.

1. 6 thousand.
2. \$4 per pumpkin, on the supply curve.
3. \$7 per pumpkin, on the demand curve.
4. decrease, because the sellers' price fell.
5. \$7 thousand = area of trapezoid bounded by new and old prices for sellers and supply curve.
6. decrease, because the buyers' price rose.
7. \$14 thousand = area of trapezoid bounded by new and old prices for buyers and demand curve.
8. \$18 thousand = new quantity times tax rate (\$3).
9. \$3 thousand = area of triangle.

### Version B

I. Multiple choice

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

II. Problems

(1) [Calculating elasticities: 2 pts]

• -0.5 = -1/2, using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) .

(2) [Cross-price elasticity of demand: 4 pts]

1. complements.
2. -4 percent / 20 percent = -1/5 = -0.2.

(3) [Using price elasticity of demand: 10 pts]

1. inelastic.
2. increase.
3. 6 percent, using definition: elasticity = percent change quantity divided by percent change price.
4. decrease, because the decrease in price is greater than the increase in quantity.
5. 4 percent, using approximation formula: percent change in revenue = percent change in price + percent change in quantity.

(4) [Welfare analysis of international trade: 18 pts] International price = \$4.

1. \$5.
2. import, because quantity demanded is now greater than quantity supplied.
3. 4 thousand = quantity demanded minus quantity supplied.
4. increase, because price fell.
5. \$9 thousand = area of trapezoid bounded by new and old prices and demand curve.
6. decrease because price fell.
7. \$7 thousand = area of trapezoid bounded by new and old prices and supply curve.
8. increase, because consumers gain more than producers lose.
9. \$2 thousand = increase in consumer surplus minus decrease in producer surplus.

(5) [Welfare analysis of market controls: 18 pts] Price floor = \$7.

1. \$5.
2. 6 million. That is all that consumers are willing to buy.
3. excess supply, because quantity supplied is greater than quantity demanded at this price.
4. 6 million.
5. increase.
6. \$11 million. Producers enjoy an increase due to the higher price (a rectangle above \$5) but a decrease due to fewer units purchased (a small triangle below \$5).
7. decrease, because consumers face a higher price.
8. \$14 million = area of trapezoid bounded by new and old prices and demand curve.
9. decrease, because consumers lose more than producers gain.
10. \$3 million = decrease in consumer surplus minus increase in producer surplus = area of triangle. Note that producer's gain is less than consumers' loss, so this price floor does not pass the compensation test.

(6) [Welfare analysis of tax or subsidy: 18 pts] Tax = \$6. Under this tax, PD = PS + \$6, so at the new equilibrium quantity, the demand curve must be higher than the supply curve by \$6. Both consumers and producers lose from a tax, but government gains tax revenue.

1. 4 thousand.
2. \$3 per pumpkin, on supply curve.
3. \$9 per pumpkin, on demand curve.
4. decrease, because sellers' price fell.
5. \$12 thousand = area of trapezoid bounded by new and old prices for sellers and supply curve.
6. decrease, because buyers' price rose.
7. \$24 thousand = area of trapezoid bounded by new and old prices for buyers and demand curve.
8. \$24 thousand = new quantity times tax rate (\$6).
9. \$12 thousand = area of triangle.

### Version C

I. Multiple choice

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

II. Problems

(1) [Calculating elasticities: 2 pts]

• -0.8 = -4/5, using arc-elasticity formula: (ΔQ/Qavg) / (ΔP/Pavg) .

(2) [Cross-price elasticity of demand: 4 pts]

1. substitutes.
2. -15 percent / 20 percent = 3/4 = 0.75.

(3) [Using price elasticity of demand: 10 pts]

1. elastic.
2. decrease.
3. 6 percent, using definition: elasticity = percent change quantity divided by percent change price.
4. decrease, because the increase in price is less than the decrease in quantity.
5. 2 percent, using approximation formula: percent change in revenue = percent change in price + percent change in quantity.

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

1. \$5.
2. import, because quantity demanded is now greater than quantity supplied.
3. 8 thousand = quantity demanded than quantity supplied.
4. increase, because price fell.
5. \$20 thousand = area of trapezoid bounded by new and old prices and demand curve.
6. decrease, because price fell.
7. \$12 thousand = area of trapezoid bounded by new and old prices and supply curve.
8. increase, because consumers gain more than producers lose.
9. \$8 thousand = increase in consumer surplus minus decrease in producer surplus.

(5) [Welfare analysis of market controls: 18 pts] Quota on sellers = 6 million.

1. \$5.
2. supply. Sellers are prohibited from selling more than 6 million, so the supply curve bends up vertically at 6 million.
3. increase. Supply now intersects the demand curve higher up, at a quantity of 6 million and a price of \$7.
4. \$7.
5. increase.
6. \$11 million. Producers enjoy an increase due to the higher price (a rectangle above \$5) but a decrease due to fewer units purchased (a small triangle below \$5).
7. decrease, because consumers face a higher price.
8. \$14 million = area of trapezoid bounded by new and old prices and demand curve.
9. \$3 million = decrease in consumer surplus minus increase in producer surplus = area of triangle. Note that producer's gain is less than consumers' loss, so this quota on sellers does not pass the compensation test.

(6) [Welfare analysis of tax or subsidy: 18 pts] Subsidy = \$3. Under this subsidy, PD + 3 = PS, so at the new equilibrium quantity, the supply curve must be higher than the demand curve by \$3. Both consumers and producers gain from a subsidy, but government pays.

1. 10 thousand.
2. \$6 per pumpkin, on supply curve.
3. \$3 per pumpkin, on demand curve.
4. increase because sellers' price rose.
5. \$9 thousand = area of trapezoid bounded by new and old prices for sellers and supply curve.
6. increase because buyer's price fell.
7. \$18 thousand = area of trapezoid bounded by new and old prices for buyers and demand curve.
8. \$30 thousand = new quantity times substidy rate (\$3).
9. \$3 thousand = area of triangle.