Version A

I. Multiple choice

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

II. Problems

(1) [Marginal cost: 2 pts] $5, because two shirts cost $20 but three shirts cost $25.

(2) [Percent change, midpoint formula: 2 pts] Δprice = 2 and midpoint price = 4, so percent change using midpoint formula = 2/4 = 50 percent.

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

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

(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.

(5) [Comparative advantage, gains from trade: 17 pts]

1. 1 bicycle.
2. 2 bicycles.
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.

(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 at this price, quantity demanded is 7 and quantity supplied is 4.
2. $10.
3. 5 units.
4. $50 (= price × quantity).
5. $45. (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. right, left, increase, cannot be determined.

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

1. excess supply, because at this price, quantity supplied is 5 thousand while quantity demanded is 8 thousand.
2. 3 thousand (= 8 thousand - 5 thousand).
3. price will tend to fall.
4. $5.
5. 6 thousand.
6. $7 = height of demand curve.
7. $2 = 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 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.)

(2) The prices of fuels tend to rise in very cold weather because demand increases then. That is, the demand curve shifts right in very cold weather and the equilibrium price moves up as a result. (Full credit requires supply-and-demand graph with two demand curves:one for ordinary weather and one for very cold weather. It should show that the equilibrium price is higher in very cold weather. Note that only the demand curve shifts. The supply curve does NOT shift because there is no change in the factors that shift supply--cost of inputs, technology, government regulation, etc.)

Version B

I. Multiple choice

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

II. Problems

(1) [Marginal cost: 2 pts] $2.00, because 2 tacos cost $10 but three tacos cost $12.

(2) [Percent change, midpoint formula: 2 pts] Δsize = 200 square feet and midpoint size = 2000 square feet, so percent change using midpoint formula = 200/2000 = 10 percent.

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

1. increase.
2. 2 percent (= -5 per cent plus +7 per cent).

(4) [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.

(5) [Comparative advantage, gains from trade: 17 pts]

1. 1 bicycle.
2. 1/2 bicycle.
3. 1 television.
4. 2 televisions.
5. Country B, because has lower opportunity cost of producing televisions.
6. Country A, because 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.

(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 at this price, quantity demanded is 4 and quantity supplied is 7.
2. $4.
3. 6 units.
4. $24 (= price × quantity).
5. $50. (Compute the surplus of each buyer and each seller and add them up.)
6. buyers.

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

1. left, unchanged, decrease, decrease.
2. unchanged, right, decrease, 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 9 thousand.
2. 5 thousand (= 9 thousand - 4 thousand).
3. price will tend to rise.
4. $6.
5. 8 thousand.
6. $10 = height of demand curve.
7. $4 = willingness-to-pay minus equilibrium price.
8. $5 = height of supply curve.
9. $1 = equilibrium price minus marginal cost.
10. $32 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.

[end of answer key]