PRINCIPLES OF MICROECONOMIC – ECON-202-01
PRINCIPLES OF MICROECONOMIC – ECON-202-01
EXAMINATION NO. 1
SUMMER 2013
Name__________________________________
Instructions:
You will be given until Monday, July 19th at noon to complete this examination.
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Part I. Short Answer (5 Points Each) ________ Points
Carefully define, explain the usage, and an example of the following concepts:
Distinguish between demand and quantity demanded. Do the same for supply and quantity supplied.
Demand refers to the amount of good a consumer is willing to buy at given price, income and price of related good and tastes. When non price factors are constant, then we are left with a relation between price and amount that consumer wants to buy. This quantity that depends only on price is called quantity demanded.
supply refers to the amount of good a producer is willing to produce at given price, input prices and technology. When non price factors are constant, then we are left with a relation between price and amount that producer wants to produce. This quantity that depends only on price is called quantity supplied.
Describe the field of economics known as microeconomics.
As the name suggests, Microeconomics deals with the economy at a ‘micro’ level. It deals with a single economic agent- so its covers consumer theory, producer theory, theory of a firm. Each of these looks at ‘one’ agent as the unit of analysis. Each model looks at a agent and her decisions in a given setting. Microeconomics includes other topics like cost theory, Game theory, Welfare economics, and general equilibrium.
What is the cost-benefit principle?
This principle tells us that each decision involves costs and benefits that need to be compared. An economic agent must take decisions where benefits outweigh the costs. For example a firm must consider expanding output after it compares marginal costs with marginal benefits ( in terms of marginal revenues). If MR > MC it must expand, otherwise it need not increase output level.
Part II. Fully Explain in Essay Format (20 Points) ________ Points
Graphically prove or disprove the following statement. Explain your reasoning.
After last year’s strike, baseball has experienced a severe drop in attendance even though the owners have reduced ticket prices and have held special events. Similarly players have made themselves more available in the hopes of boosting attendance. So far nothing has worked. In economic terms the law of demand does not hold since attendance at the major league parks has dropped while at the same time ticket prices have fallen.
The strike caused supply to shift up and price to rise from P2 to P1. This is left movement of the supply curve and quantity fell.
Now the owners have reduced prices and we show this as movement along the demand curve from 1 to 2 (red arrow). As result quantity must rise. However, if demand does not pick up even after prices are lowered then law of demand is violated. Law of demand holds when only price changes and, quantity demanded changes as a consequence. It is shown as a movement along demand curve. In this case law is not adhered to.
Part III. Matching (30 Points). ________ Points
_____Market Demand
_____Graphs
_____Negative
_____Positive
_____Supply Side
_____Vertical
_____Variable
_____Resources
_____Opportunity Cost
_____Necessity
The ____MARKET DEMAND____curve shows the relationship between the price and the quantity demanded by all consumers, everything else being equal.
On the __________SUPPLY SIDE________ of a market, producers indicate to consumers what they are willing to sell, in what quantity and at what price.
C.Inputs in production processes are called Economic ______RESOURCES________.
D.Toothpaste is likely to be a __NECESSITY__________ product.
A line that falls from left to right has a __NEGATIVE_______________ slope.
In the Marshallian diagram, the _____VERTICAL____ axis denotes Price.
The _____________OPPORTUNITY COST__ of any decision is the forgone value of the next best alternative that is not chosen.
There is a __POSITIVE_________________ relationship between two variables if they move in the same direction.
______GRAPHS___________ are valuable because they facilitate interpretation of data.
A ________VARAIBLE_______ measures something that can take on different values.
Part IV. Complete the following (20 Points)
Suppose the total demand for alfalfa and the total supply of alfalfa per month in the Dallas grain market are as follows:
ThousandsThousandsAmount of Surplus (+)
of BushelsPrice perof Bushelsor
DemandedBushelSuppliedShortage (-)
85$3.4072-13
80 3.7073-7
75 4.00750
70 4.30777
65 4.607914
60 4.908121
(a)What will be the market equilibrium price? =4 AS DEMAND = SUPPLY ATTHIS PRICE
What is the equilibrium quantity? = 75
Using the surplus-shortage column, explain in words why your answer is valid.
Above P= 4, there is a shortage so that price will rise. Below P= 4 there is a surplus that lowers price.
(b)What is the surplus or shortage at the price of $3.40? = 72-85= -13-shortage
What is the surplus or shortage at the price $4.90.= 81-60= +21 ( surplus)
Part V. Assume that the demand for a commodity is represented by the equation P=10-.2Qd and supply by the equation P=2+.2Qs, where Qd and Qs are the quantity demanded and quantity supplied, respectively, and P is the price. Using the equilibrium condition Qs=Qd. (Hint Set two equations equal to Each other and solve.) (15 Points)
(a)Solve the equations simultaneously to determine the equilibrium price. Replace the equilibrium price back into either of the two equations and determine equilibrium quantity.
2+.2Q= 10-.2Q
8=.4Q
Q= 8/.4= 20
P= 2+.2*20=6
(b)Describe the graph the two equations, including equilibrium price and quantity, to substantiate your answer.
P Qd Qs
2 40 0
3 35 5
4 30 10
5 25 15
6 20 20
7 15 25
8 10 30
9 5 35
10 0 40
Part VI. Multiple Choice (5 Points Each)
Exhibit 5-2
Refer to Exhibit 5-2. The market for good X is initially in equilibrium at $5. The government then places a tax on the producers of good X-in effect, taxing them on each unit of good X they sell. As a result, the supply curve
a. shifts (down and) rightward from S2 to S1.
b. shifts (up and) leftward from S1 to S2.
c. does not shift from S1.
d. There is not enough information to answer the question.
Exhibit 5-4
Refer to Exhibit 5-4. As a consequence of the depicted change in the supply of X, the demand curve for Y shifted from D1 to D2. It follows that
a. X and Y are substitutes.
b. X and Y are complements.
c. X and Y are inferior goods.
d. demand for Y is price elastic.
Exhibit 4-2
Refer to Exhibit 4-2, which shows supply and demand for freeway space at both 8 a.m. and 11 p.m. At a zero money price, there is a ________ of freeway space at 8 a.m. and ________ at 11 p.m.
a. shortage; a surplus
b. surplus; a shortage
c. surplus; equilibrium
d. shortage; equilibrium
Exhibit 4-4
Refer to Exhibit 4-4. At a wage of $7, there will be a __________ of unskilled workers equal to __________ thousand.
a. shortage; 10
b. surplus; 20
c. surplus; 10
d. shortage; 20
e. none of the above
Refer to Exhibit 4-4. Suppose the minimum wage is set at $5. The result will be
a. unemployment.
b. labor shortage.
c. no effect on the labor market.
d. none of the above
If variable X goes up as variable Y goes down, then X and Y are
a. directly related.
b. inversely related.
c. independent.
d. positively related.
The concept that relates how much one variable changes as another variable changes is
a. slope.
b. line.
c. curve.
d. graph.
The coordinates of point 1 are 50 units of X and 40 units of Y. The coordinates of point 2 are 60 units of X and 45 units of Y. The slope of the line between points 1 and 2 is
a. + 2.00
b. + 0.50
c. – 0.25
d. – 0.50
e. none of the above
When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes: A. the cost effect.B. the inflationary effect.C. the income effect.D. the substitution effect.
When product prices change, consumers are inclined to purchase larger amounts of the now cheaper products and less of the now more expensive products. This describes: A. the cost effect.B. the price effect.C. the income effect.D. the substitution effect.
Table 2
QD = 189 – 2.25P
QS = 124 + 1.5P
Using Table 2, the equilibrium price is:
___a.$84
___b.$82.67
___c.$17.33
___d.150
Using Table 2, the equilibrium quantity sold is:
___a.65
___b.150
___c.313
___d.84
___e.0
Economic efficiency would be primarily discussed in response to which of the fundamental questions about a competitive market economy? A. What goods and services will be produced?B. How will the goods and services be produced?C. How will the system promote progress?D. Who will get the goods and services?
In the circular flow model, households: A. buy products and resources.B. sell products and resources.C. buy products and sell resources.D. sell products and buy resources.
The basic economic problem is essentially one of deciding how to make the best use of: A. limited resources to satisfy limited economic wants.B. limited resources to satisfy unlimited economic wants.C. unlimited resources to satisfy unlimited economic wants.D. unlimited resources to satisfy limited economic wants.
From an economic perspective, when a student decides to attend another year of college, the student has concluded that the marginal: A. costs of attending college has decreased that year.B. benefits of attending college has increased that year.C. benefits of attending college are greater than the marginal costs.D. costs of attending college will be subsidized by someone else such as parents or the government.
If both demand and supply increase, the equilibrium quantity
___a.increases and the price falls.
___b.decreases and the effect on price is indeterminate.
___c.decreases and the price rises.
___d.increases and the effect on price is indeterminate.
The price ratio of the two products is the: A. marginal rate of substitution.B. slope of the budget line.C. point of tangency for equilibrium.D. demand for the two products.
Use the graph below to complete the following question(s).
Refer to the above graph. The total opportunity cost of nine drill presses is: A. 1 unit of bread.B. 2 units of bread.C. 3 units of bread.D. 4 units of bread.
Refer to the above graph. The marginal opportunity cost of the fourth unit of bread is: A. 1 unit of drill presses.B. 2 units of drill presses.C. 3 units of drill presses.D. 4 units of drill presses.
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