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

### Version A

I. Multiple choice

(1)b. (2)a. (3)c (4)b. (5)c. (6)d. (7)b. (8)a. (9)b. (10)c.
(11)b. (12)b. (13)c. (14)a. (15)a. (16)b. (17)b. (18)a. (19)e. (20)a.
(21)d. (22)c. (23)a. (24)d. (25)a. (26)b. (27)c. (28)c. (29)d. (30)b.
(31)a. (32)c. ((33)b. (34)b. (35)c.

II. Problems

(1) [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.

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.

(3) [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.

(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) [Consumer choice and demand: 14 pts]

1. 10 pizza slices and 3 milkshakes.
2. 5 pizza slices and 5 milkshakes.
3. Budget line A is a straight line with intercepts at 10 pizza slices and at 10 milkshakes.
4. 5 pizza slices, the tangency point.
5. Budget line B is a straight line with intercepts at 5 pizza slices and at 10 milkshakes.
6. 3 pizza slices, the tangency point.
7. (P,Q) = (\$3,5), (\$6,3).

(6) [Short-run cost curves and supply: 20 pts]

1. \$6 thousand (= 500 × SATC).
2. \$2 thousand (= 500 × SAVC).
3. \$4 thousand (= STC - SVC).
4. \$7 (= SMC).
5. \$5 (= minimum SATC).
6. \$2 (= minimum SAVC).
7. 1800 parts, using the rule P=MC.
8. profit, because P is greater than breakeven price.
9. 0 parts, because price is less than the shutdown price.
10. loss, because price is less than breakeven price (profit = -SFC).

(7) [Economy-wide efficiency: 16 pts]

1. 2 units of clothing.
2. 1/2 units of food.
3. \$8, because in competitive equilibrium, prices reflect opportunity costs for the economy as a whole: if the opportunity cost of a unit of food is 2 units of clothing, then the price of a unit of food must be 2 times the price of a unit of clothing.
4. Austin's budget line should have intercepts at 40/8=5 units of food and 40/4=10 units of clothing.
5. 2 units of clothing, same as PP curve.
6. 1/2 units of food, same as PP curve.
7. 3 units of food, at tangency between budget line and highest indifference curve that Austin can reach.
8. 2, because at a tangency the slope of his indifference curve (MRS) must equal the slope of his budget line.

(8) [Monopoly: 12 pts]

1. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$12 on price axis, and slope = -1/2 thousand.
2. 12 thousand, where MR=MC.
3. \$9, on demand curve.
4. \$72 thousand = TR - TC = (price × quantity) - (AC × quantity).
5. \$18 thousand = area of triangle between monopoly price (\$9), demand curve, and vertical axis.
6. \$6 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (12 thousand).

(9) [Nonrival goods: 4 pts]

1. Zero concerts, because MC > MB for all positive values of Q.
2. MSB = 1000 (20-2Q) = 20,000 - 2000 Q.
3. 8 concerts (found by setting MSB = MC and solving for Q).

(10) [Common property resources: 6 pts]

1. 800 cars, where marginal private benefit equals zero.
2. 400 cars, where marginal social benefit equals zero.
3. \$4, the dollar equivalent of marginal private benefit (20 minutes), at the socially optimal number of cars.

(11) [Externalities: 12 pts]

1. \$4, at intersection of demand and supply.
2. 7 million, at intersection of demand and supply.
3. 5 million, at intersection of marginal social cost and demand.
4. \$4 million, the area of the triangle between marginal social cost, demand, and a vertical line at 7 million, the unregulated quantity. Deadweight loss is the gap between the benefit to consumers and the cost to society of all those units that should not have been produced.
5. tax, to decrease the quantity to the social optimum.
6. \$3 per liter, which equals the vertical gap between demand and supply and the socially-optimal quantity.

(12) [Regulating pollution: 20 pts]

1. Factories A, B, C, and E, the factories with the lowest clean-up costs.
2. \$80.
3. Each factory's willingness-to-pay for a permit equals its annual cost of cleanup. Graph should show five downward-sloping stairsteps.
4. Factory D, which has the highest clean-up cost and are therefore willing to pay the most for a permit.
5. \$40, between the price that Factory D is willing to pay and the next-highest willingness to pay.
6. \$80.
7. \$40. Every factory except D would rather clean up than pay the fee.
8. \$80.

### Version B

I. Multiple choice

(1)c. (2)c. (3)d. (4)e. (5)a. 6)d. (7)c. (8)a. (9)b. (10)a.
(11)a. (12)a. (13)d. (14)b. (15)d. (16)a. (17)d. (18)b. (19)a. (20)b.
(21)d. (22)d. (23)d. (24)b. (25)b. (26)b. (27)b. (28)d. (29)c. (30)d.
(31)b. (32)a. (33)a. (34)c. (35)d.

II. Problems

(1) [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.

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.

(3) [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.

(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) [Consumer choice and demand: 14 pts]

1. 6 pizza slices and 6 milkshakes.
2. 4 pizza slices and 5 milkshakes.
3. Budget line A is a straight line with intercepts at 10 pizza slices and at 15 milkshakes.
4. 6 pizza slices, the tangency point.
5. Budget line B is a straight line with intercepts at 6 pizza slices and at 15 milkshakes.
6. 4 pizza slices, the tangency point.
7. (P,Q) = (\$6,6), (\$10,4).

(6) [Short-run cost curves and supply: 20 pts]

1. \$20 thousand (= 2000 × SATC).
2. \$18 thousand (= 2000 × SAVC).
3. \$2 thousand (= STC - SVC).
4. \$6 (= SMC).
5. \$7 (= minimum SATC).
6. \$5 (= minimum SAVC).
7. 1200 parts, using the rule P=MC.
8. profit, because P is greater than breakeven price.
9. 1000 parts, using the rule P=MC.
10. loss, because price is less than breakeven price.

(7) [Economy-wide efficiency: 16 pts]

1. 1/2 units of clothing.
2. 2 units of food.
3. \$3, because in competitive equilibrium, prices reflect opportunity costs for the economy as a whole: if the opportunity cost of a unit of food is 1/2 units of clothing, then the price of a unit of food must be 1/2 times the price of a unit of clothing.
4. Becky's budget line should have intercepts at 30/3=10 units of food and 30/6=5 units of clothing.
5. 1/2 units of clothing, same as PP curve.
6. 2 units of food, same as PP curve.
7. 2 units of clothing, at tangency between budget line and highest indifference curve that Becky can reach.
8. 1/2, because at a tangency the slope of her indifference curve (MRS) must equal the slope of her budget line.

(8) [Monopoly: 12 pts]

1. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$14 on price axis, and slope = -1/1 thousand.
2. 8 thousand, where MR=MC.
3. \$10, on demand curve.
4. \$48 thousand = TR - TC = (price × quantity) - (AC × quantity).
5. \$16 thousand = area of triangle between monopoly price (\$10), demand curve, and vertical axis.
6. \$8 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (8 thousand).

(9) [Nonrival goods: 4 pts]

1. Zero concerts, because MC > MB for all positive values of Q.
2. MSB = 1000 (10-2Q) = 10,000 - 2000 Q.
3. 3 concerts (found by setting MSB = MC and solving for Q).

(10) [Common property resources: 6 pts]

1. 1200 cars, where marginal private benefit equals zero.
2. 600 cars, where marginal social benefit equals zero.
3. \$3, the dollar equivalent of marginal private benefit (15 minutes), at the socially optimal number of cars.

(11) [Externalities: 12 pts]

1. \$4, at intersection of demand and supply.
2. 6 million, at intersection of demand and supply.
3. 12 million, at intersection of marginal social benefit and supply.
4. \$12 million, the area of the triangle between marginal social benefit, supply, and a vertical line at 6 million, the unregulated quantity. Deadweight loss is the gap between the benefit to society and the cost to sellers of all those units that should have been produced.
5. subsidy, to increase the quantity to the social optimum.
6. \$3 per vaccination, which equals the vertical gap between demand and supply and the socially-optimal quantity.

(12) [Regulating pollution: 20 pts]

1. Factories A, C, and E, the factories with the lowest clean-up costs.
2. \$45.
3. Each factory's willingness-to-pay for a permit equals its annual cost of cleanup. Graph should show five downward-sloping stairsteps.
4. Factories B and D, which have the highest clean-up cost and therefore are willing to pay the most for a permit.
5. \$30, between the price that Factory B is willing to pay and the next-highest willingness to pay.
6. \$45.
7. \$30. Every factory except B and D would rather clean up than pay the fee.
8. \$45.

### Version C

I. Multiple choice

(1)c. (2)b. (3)b. (4)d. (5)b. (6)d. (7)a. (8)b (9)a. (10)e.
(11)c. (12)a. (13)e. (14)a. (15)b. (16)c. (17)d. (18)c. (19)d. (20)a.
(21)b. (22)b. (23)b. (24)a. (25)d. (26)c. (27)c. (28)b. (29)a. (30)c.
(31)d. (32)b. (33)a. (34)d. (35)a.

II. Problems

(1) [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.

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.

(3) [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.

(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) [Consumer choice and demand: 14 pts]

1. 7 pizza slices and 5 milkshakes.
2. 6 pizza slices and 6 milkshakes.
3. Budget line A is a straight line with intercepts at 10 pizza slices and at 15 milkshakes.
4. 6 milkshakes, the tangency point.
5. Budget line B is a straight line with intercepts at 10 pizza slices and at 6 milkshakes.
6. 3 milkshakes, the tangency point.
7. (P,Q) = (\$4,6), (\$10,3).

(6) [Short-run cost curves and supply: 20 pts]

1. \$18 thousand (= 1500 × SATC).
2. \$12 thousand (= 1500 × SAVC).
3. \$6 thousand (= STC - SVC).
4. \$2 (= SMC).
5. \$9 (= minimum SATC).
6. \$2 (= minimum SAVC).
7. 700 parts, using the rule P=MC.
8. loss, because price is less than breakeven price.
9. 1100 parts, using the rule P=MC.
10. profit, because P is greater than breakeven price.

(7) [Economy-wide efficiency: 16 pts]

1. 1/3 units of clothing.
2. 3 units of food.
3. \$2, because in competitive equilibrium, prices reflect opportunity costs for the economy as a whole: if the opportunity cost of a unit of food is 1/3 units of clothing, then the price of a unit of food must be 1/3 times the price of a unit of clothing.
4. Carla's budget line should have intercepts at 30/6=5 units of clothing and 30/2=15 units of food.
5. 1/3 units of clothing, same as PP curve.
6. 3 units of food, same as PP curve.
7. 3 units of clothing, at tangency between budget line and highest indifference curve that Carla can reach.
8. 1/3, because at a tangency the slope of her indifference curve (MRS) must equal the slope of her budget line.

(8) [Monopoly: 12 pts]

1. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$14 on price axis, and slope = -1/1 thousand.
2. 6 thousand, where MR=MC.
3. \$11, on demand curve.
4. \$36 thousand = TR - TC = (price × quantity) - (AC × quantity).
5. \$9 thousand = area of triangle between monopoly price (\$11), demand curve, and vertical axis.
6. \$3 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (6 thousand).

(9) [Nonrival goods: 4 pts]

1. Zero concerts, because MC > MB for all positive values of Q.
2. MSB = 2000 (10-2Q) = 20,000 - 4000 Q.
3. 4 concerts (found by setting MSB = MC and solving for Q).

(10) [Common property resources: 6 pts]

1. 800 cars, where marginal private benefit equals zero.
2. 400 cars, where marginal social benefit equals zero.
3. \$2, the dollar equivalent of marginal private benefit (10 minutes), at the socially optimal number of cars.

(11) [Externalities: 12 pts]

1. \$6, at intersection of demand and supply.
2. 8 million, at intersection of demand and supply.
3. 4 million, at intersection of marginal social cost and demand.
4. \$4 million, the area of the triangle between marginal social cost, demand, and a vertical line at 8 million, the unregulated quantity. Deadweight loss is the gap between the benefit to consumers and the cost to society of all those units that should not have been produced.
5. tax, to decrease the quantity to the social optimum.
6. \$3 per liter, which equals the vertical gap between demand and supply and the socially-optimal quantity.

(12) [Regulating pollution: 20 pts]

1. Factories A and E, the factories with the lowest clean-up costs.
2. \$20.
3. Each factory's willingness-to-pay for a permit equals its annual cost of cleanup. Graph should show five downward-sloping stairsteps.
4. Factories b, C, and D, which have the highest clean-up cost and are therefore willing to pay the most for a permit.
5. \$20, between the price that Factory C is willing to pay and the next-highest willingness to pay.
6. \$20.
7. \$20. Factories A and E would rather clean up than pay the fee.
8. \$20.