ECON 002 - Principles of Microeconomics Drake University, Fall 2023 William M. Boal

### Version A

I. Multiple choice

(1)c. (2)c. (3)a. (4)b. (5)b. (6)a. (7)a. (8)b. (9)e. (10)b. (11)c. (12)b. (13)b.

II. Problems

(1) [Marginal cost: 2 pts] \$0.50

(2) [Percent change, midpoint formula: 2 pts] Δgallons = 2 and midpoint gallons = 8, so percent change is 2/8 = 25 percent.

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

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

(4) [Production functions: 4 pts]

1. Average product = total output / total input: 2, 3, 4.
2. Marginal product = Δ output / Δ input: 2, 4, 6.
3. Diminishing returns? NO because MP is not decreasing.

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

(6) [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 5 and quantity supplied is 6.
2. \$4.
3. 5 units.
4. \$20 (= price × quantity).
5. \$47. (Compute the surplus of each buyer and each seller and add them up.)

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

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

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

1. excess supply, because at this price, quantity supplied is 8 thousand while quantity demanded is 5 thousand.
2. 3 thousand (= 8 thousand - 5 thousand).
3. price will tend to fall.
4. \$5.
5. 6 thousand.
6. \$8 = height of demand curve.
7. \$3 = willingness-to-pay minus equilibrium price.
8. \$4 = height of supply curve.
9. \$1 = equilibrium price minus marginal cost.
10. \$18 thousand = area of triangle bounded by demand curve, vertical axis, and equilibrium price.
11. \$9 thousand = area of triangle bounded by supply curve, vertical axis, and equilibrium price.

III. Critical thinking [4 pts]

(1) Tomatoes in Iowa are expensive in winter because they must be grown in greenhouses or shipped to Iowa from far away. The cost of supplying tomatoes is high in winter. So the supply curve shifts left, which raises the equlibrium price. In summer, tomatoes can be grown outside locally, which lowers the cost of production. So the supply curve shifts right, which lowers the equilibrium price. (Full credit requires graph showing summer and winter supply curves and consequent difference in price.)

(2) Bird flu killed many chickens and so shifted the supply curve of eggs to the left. This shift may have initially created excess demand. However, in a free market, prices are flexible and they adjust to eliminate any excess demand or supply. In this case, the price of eggs rose to eliminate excess demand so there were no empty shelves. (Full credit requires graph showing leftward shift in supply caused by bird flu and consequent increase in price.)

### Version B

I. Multiple choice

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

II. Problems

(1) [Marginal cost: 2 pts] \$1.00

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

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

1. decrease.
2. 6 percent (= -10 per cent plus +4 per cent).

(4) [Production functions: 4 pts]

1. Average product = total output / total input: 10, 7, 5.
2. Marginal product = Δ output / Δ input: 10, 4, 1.
3. Diminishing returns? YES because MP is decreasing.

1. 1/2 units of wheat.
2. 2 units of wheat.
3. 2 units of corn.
4. 1/2 units of corn.
5. Farmer A, because has lower opportunity cost of producing corn.
6. Farmer B, because has lower opportunity cost of producing wheat.
7. Both farmers can consume combinations of products outside their individual production possibility curves if Farmer B sends two units of wheat to Farmer A, who sends 2 units of corn in return.
8. Plot should show each farmer's production before trade, and consumption after trade.

(6) [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 7 and quantity supplied is 4.
2. \$10.
3. 4 units.
4. \$40 (= price × quantity).
5. \$42. (Compute the surplus of each buyer and each seller and add them up.)
6. sellers.

(7) [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.

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

1. excess demand, because at this price, quantity supplied is 4 thousand while quantity demanded is 10 thousand.
2. 6 thousand (= 10 thousand - 4 thousand).
3. price will tend to rise.
4. \$6.
5. 8 thousand.
6. \$11 = height of demand curve.
7. \$5 = willingness-to-pay minus equilibrium price.
8. \$4 = height of supply curve.
9. \$2 = equilibrium price minus marginal cost.
10. \$32 thousand = area of triangle bounded by demand curve, vertical axis, and equilibrium price.
11. \$16 thousand = area of triangle bounded by supply curve, vertical axis, and equilibrium price.

III. Critical thinking [4 pts]

Same as Version A.