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

### Version A

I. Multiple choice

(1)c. (2)c. (3)b. (4)c. (5)a. (6)b. (7)c. (8)e. (9)b. (10)a. (11)b. (12)d. (13)c. (14)b. (15)d. (16)b. (17)a.

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

(3) [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. 1 calculators.
2. 1/2 calculators.
3. 1 umbrella.
4. 2 umbrellas.
5. Country Y, because it has lower opportunity cost of producing umbrellas.
6. Country X, because it has lower opportunity cost of producing calculators.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country Y exports four umbrellas to Country X, which exports 3 calculators in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [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 5 and quantity supplied is 1-2.
2. \$10.
3. 5 units.
4. \$50 (= price × quantity).
5. \$43.
6. sellers.

(6) [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.

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

1. excess supply, because at this price, quantity supplied exceeds quantity demanded.
2. 3 thousand, because quantity supplied is 10 thousand and quantity demanded is 7 thousand.
3. price will tend to fall.
4. \$5.
5. 8 thousand.
6. \$10 = height of demand curve.
7. \$5 = willingness-to-pay minus equilibrium price.
8. \$3 = 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]

(1) Restaurant meals are expensive on Valentine's Day because demand shifts right, raising the equilibrium price (and quantity). Demand shifts right because in the US, Valentine's Day is a popular evening to eat out. The day after Valentine's Day, demand shifts back to the left, lowering the equilibrium price to its original level. (Full credit requires supply-and-demand graph showing rightward shift in demand on Valentine's Day and consequent increase in price.)

(2) This argument does not make sense. If many hotels are being built, then supply of hotel rooms will shift to the right. This shift will lower, not raise, the equilibrium price of hotel rooms. Consumers will benefit, not suffer, from lower prices. (Full credit requires supply-and-demand graph showing rightward shift in supply and consequent decrease in price.)

### Version B

I. Multiple choice

(1)e. (2)c. (3)a. (4)b. (5)b. (6)c. (7)b. (8)d. (9)a. (10)a. (11)a. (12)a. (13)b. (14)b. (15)d. (16)a. (17)d.

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. decrease.
2. 3 percent (= -5 per cent plus 2 per cent).

(3) [Production functions: 4 pts]

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

1. 1 calculator.
2. 2 calculators.
3. 1 umbrella.
4. 1/2 umbrella.
5. Country X, because it has lower opportunity cost of producing umbrellas.
6. Country Y, because it has lower opportunity cost of producing calculators.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country X exports two umbrellas to Country Y, which exports 3 calculators in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [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 2-3 and quantity supplied is 5.
2. \$5.
3. 4 units.
4. \$20 (= price × quantity).
5. \$40.

(6) [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.

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

1. excess demand, because at this price, quantity demanded exceeds quantity supplied.
2. 9 thousand, because quantity supplied is 2 thousand and quantity demanded is 11 thousand.
3. price will tend to rise.
4. \$5.
5. 8 thousand.
6. \$9 = height of demand curve.
7. \$4 = willingness-to-pay minus equilibrium price.
8. \$2 = height of supply curve.
9. \$3 = 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.