ECON 002 - Principles of Microeconomics Drake University, Spring 2024 William M. Boal

Version A

I. Multiple choice

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

II. Problems

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

(2) [Percent change, midpoint formula: 2 pts] Δelectricity = 4 and midpoint electricity = 10, so percent change is 4/10 = 40 percent.

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

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

(4) [Production functions: 4 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. 1/2 car.
2. 1 car.
3. 2 motorcycles.
4. 1 motorcycle.
5. Country X, because it has lower opportunity cost of producing motorcycles
6. Country Y, because it has lower opportunity cost of producing cars.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country Y exports three cars to Country X, which exports 4 (or 5) motorcyles 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 demand, because quantity demanded is 5 and quantity supplied is 3.
2. \$10.
3. 4 units.
4. \$40 (= price × quantity).
5. \$37. (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. unchanged, left, increase, decrease.
2. right, unchanged, increase, increase.
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. \$7.
5. 8 thousand.
6. \$12 = 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]

(1) One should disagree with this statement. The United States may have an absolute advantage in both cars and corn, but it logically cannot have a comparative advantage in both goods. A country has a comparative advantage over another country in producing a good if its opportunity cost of the good is lower than the other country's. If the United States and Mexico each specialize in producing the good in which it has a comparative advantage, and trade for the other good, both countries can benefit by enjoying combinations of goods outside their respective production possibility curves. (No graph needed.)

(2) Blueberries are cheap in summer but expensive in winter because they are easy to grow locally in summer but must be shipped from far away in winter. So the supply curve shifts right in summer and shifts left in winter and the equilibrium price moves down and up as a result. (Full credit requires supply-and-demand graph with summer and winter supply curves, and summer and winter prices. Note that only the supply curve shifts. The demand curve does NOT shift because there is no change in the factors that shift demand--income, prices of related goods, etc.)

Version B

I. Multiple choice

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

II. Problems

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

(2) [Percent change, midpoint formula: 2 pts] Δprice = \$6 and midpoint price = \$12, so percent change is 6/12 = 50 percent.

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

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

(4) [Production functions: 4 pts]

1. Average product = total output / total input: 1, 2, 3.
2. Marginal product = Δ output / Δ input: 1, 3, 5.
3. Diminishing returns? NO because MP is not decreasing.

1. 1 unit of wheat.
2. 1/2 unit of wheat.
3. 1 unit of corn.
4. 2 units of corn.
5. Farmer B, because has lower opportunity cost of producing corn.
6. Farmer A, because has lower opportunity cost of producing wheat.
7. Both farmers can consume combinations of products outside their individual production possibility curves if Farmer A sends two units of wheat to Farmer B, who sends 3 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 supply, because quantity demanded is 3 and quantity supplied is 6.
2. \$5.
3. 5 units.
4. \$25 (= price × quantity).
5. \$36. (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. left, unchanged, decrease, decrease.
2. unchanged, right, decrease, increase.
3. right, right, cannot be determined, increase.

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

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

III. Critical thinking [4 pts]

Same as Version A.