e1_1110_f2014

Econ 1110-INTRODUCTORY MICROECONOMICS

PRELIM #1-Wissink-F2014-October 9

PRINT YOUR NAME: _______________________________________________________________

YOUR NetId:______________________ YOUR STUDENT NUMBER:________________________________

INSTRUCTIONS and EXAM TAKING POLICY:

There are two sections in this exam. Answer all questions.

Part I: 16 multiple choice questions @ 3.5 points each

Part II: 2 problem @ 22 points each

TOTAL POINTS = 100, TOTAL TIME = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you

need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have,

raise your hand and wait for the proctor to come to you. Only one person can be out of the examination

room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR APPS. NO GRAPHING CALCULATORS.

NO BOOKS. NO NOTES. NO HELP SHEETS.

NO TALKING TO EACH OTHER.

X the SECTION you regularly attend (that is where you will pick up your prelim):

Lamichhane, Sujan (sl2563) ____ DIS 230 M 10:10AM - 11:00AM GSH G22

____ DIS 231 M 11:15AM - 12:05PM GSH G22

____ DIS 232 M 12:20PM - 01:10PM GSH G22

Hu, Malin (mh975) ____ DIS 233 M 11:15AM - 12:05PM RCK 112

____ DIS 234 M 12:20PM - 01:10PM RCK 112

____ DIS 235 M 01:25PM - 02:15PM RCK 112

Walker, Caroline (cmw258) ____ DIS 236 T 10:10AM - 11:00AM RCK 122

____ DIS 237 T 11:15AM - 12:05PM RCK 122

____ DIS 238 T 12:20PM - 01:10PM RCK 122

Wang, Xiaolu (xw377) ____ DIS 239 W 10:10AM - 11:00AM MRL 107

____ DIS 240 W 11:15AM - 12:05PM MRL 107

____ DIS 241 W 12:20PM - 01:10PM MRL 107

Fieldhouse, Andrew (ajf263) ____ DIS 242 W 11:15AM - 12:05PM URH 202

____ DIS 243 W 12:20PM - 01:10PM URH 202

____ DIS 244 W 01:25PM - 02:15PM URH 202

One more time, please

PRINT YOUR NAME: ____________________________________

YOUR NetId: _____________

YOUR STUDENT NUMBER: ____________________________

GRADING

MC (out 56 points)=___________________

Q1 (out of 22 points)=_________________

Q2 (out of 22 points)=_________________

TOTAL SCORE: _____________________

e1_1110_f2014

Part I: Multiple Choice. Do them ALL.

CIRCLE the letter for your answer.

_____________________________________________

1. Two friends, Eli and Peyton, decide to open up a football store.

They both work eight hours per day. It takes Eli 30 minutes to

make a helmet, and 6 minutes to make a football. It takes Peyton

10 minutes to make a helmet, and 12 minutes to make a football.

Which one of the following statements is TRUE?

A. Eli has a comparative advantage in the production of helmets. B. Eli has an absolute advantage in the production of both goods. C. Peyton has a comparative advantage in the production of

helmets.

D. Peyton has an absolute advantage in the production of footballs.

E. Eli and Peyton would be unable to mutually benefit based on the theory of comparative advantage.

2. Abe, Betty, Chris and Dave work for Ed and make only mugs

and hats. Ed, the boss, came up with the data in the table. It

reports the maximum number of mugs and hats that each worker

can make. Workers can produce any linear combination of their

extreme values. Ed forgot to record how many hours each worker

actually worked. Given this information, which one of the

following statements is TRUE?

A. Chris has the absolute advantage in Mugs and the absolute advantage in Hats.

B. Abe has the comparative advantage over everyone in Hats. C. Abe has the comparative advantage over everyone in Mugs. D. Chris has the comparative advantage over Dave in Hats. E. Betty has the comparative advantage over Abe in Mugs.

Mugs Hats

Abe 30 10

Betty 20 30

Chris 40 40

Dave 15 20

3. The market for roller-blades is unregulated and is presently

characterized by excess supply. You accurately predict that the

A. price of roller-blades will increase, the quantity supplied will fall, and the quantity demanded will rise.

B. price of roller-blades will increase, the quantity supplied will rise, and the quantity demanded will fall.

C. price of roller-blades will decrease, the quantity supplied will fall, and the quantity demanded will rise.

D. price of roller-blades will decrease, the quantity supplied will rise, and the quantity demanded will fall.

E. price of roller-blades will decrease, the supply will fall, and demand will rise

4. A careless research assistant has presented his professor with

the following unlabeled equation representing the market demand

function for Halloween candy bars: QD = 300 - 4F + 2J + 17G.

Which one of the following is the most plausible statement?

A. The variable F represents the price of Halloween candy bars, J represents the number of firms in the market and G is income.

B. The variable F represents the price of apples (a substitute for candy), J is income and G is the price of Halloween candy bars.

C. The variable F represents the price of price of sugar used to make candy bars, J represents the price of Halloween costumes

and G is the price of Halloween candy bars.

D. The variable F represents the price of Halloween candy bars, J represents the number of kids in the market and G is the price

of peanuts (a substitute for candy).

E. The variable F represents the price of apples; J the price of Halloween candy bars and G the price of peanuts.

5. Drinking tea is a popular every-morning activity in London.

Which one of the following will decrease the demand for tea in

London, assuming that tea is a normal good?

A. A rise in the price of coffee, a popular substitute for tea. B. An increase in magazine pictures showing a popular musician

like Adele drinking tea.

C. A natural disaster destroys half of the tea crop. D. An increase in income of the average Londoner. E. A rise in the price of honey, a popular complement with tea.

6. Consider the market for pumpkins. Recent TV advertisements

for everything Fall and pumpkin flavored have been very successful in making people flock towards pumpkin flavored this and pumpkin flavored that. At the same time an early frost has killed off 17% of the pumpkin crop. Which one of the following

statements is TRUE concerning the pumpkin market this fall?

A. Both equilibrium price and equilibrium quantity will increase as a consequence of these events.

B. Both equilibrium price and equilibrium quantity will decrease as a consequence of these events.

C. Equilibrium price will increase and equilibrium quantity will decrease as a consequence of these events.

D. Equilibrium price might increase or might decrease and equilibrium quantity might also increase or decrease as a

consequence of these events.

E. Equilibrium price will definitely increase but we dont know what will happen to equilibrium quantity as a consequence of

these events.

7. The table below shows the daily demand and supply

information for coffee at Rustys in the lobby of Uris Hall. At the market equilibrium, use the POINT formula to calculate the exact

own price elasticity of demand at the market equilibrium. It is

equal to

Price ($/cup)

Quantity Demanded

(cups)

Quantity Supplied

(cups)

$0.50 400 25

$1.00 350 50

$1.50 300 75

$2.00 250 100

$2.50 200 125

$3.00 150 150

$3.50 100 175

$4.00 50 200

$4.50 0 225

A. -1 B. -2 C. -5,000 D. -0.0002 E. -2,500

8. The table below shows weekly demand and supply information

for the takeaway pizza market in Denver. Denvers city council wants to support the incomes of its local takeaway pizza suppliers.

They ask for your advice. Which one of the suggestions below is

the right advice for Denvers goal?

Price ($/Pizza)

Quantity Demanded

(Pizza)

Quantity Supplied (Pizza)

$25 300 0

$35 240 10

$45 200 40

$55 180 80

$65 140 140

$75 110 160

$85 70 190

$95 30 210

$105 0 240

A. Impose a price floor of $85 per pizza. This action creates excess supply of 120 pizzas which the Denver government will

have to buy.

B. Impose a price floor of $85 per pizza. This action creates excess demand of 120 pizzas.

C. Imposes a price ceiling of $85 per pizza. This action has no effect since the price ceiling is not binding.

D. Impose a price ceiling of $85 per pizza. This action creates excess supply of 120 pizzas which the Denver government will

have to buy.

E. Impose a price floor of $45 per pizza. This action creates excess demand of 60 pizzas.

9. Which one of the following statements related to the question

above would be considered NORMATIVE?

A. The supply curve for takeaway pizza in Denver is upward sloping.

B. Takeaway pizza makers should be subsidized so everybody, even the poor pizza maker, can earn a living income.

C. A binding price ceiling in the takeaway pizza market will generate black-market pricing.

D. The market for takeaway pizza is perfectly competitive. E. Some people will win and others will lose if we place a price

floor on the takeaway pizza market.

10. Mary knows she faces a linear and downward sloping demand

curve for pottery she makes. She wishes to maximize the revenue

she makes from selling her pottery at the Ithaca Farmers Market.

She correctly estimates that the own-price elasticity of demand for

her pottery is currently -1.2. She is thinking about raising her

prices by 1%. She asks for your advice. If you are correct, you tell

her,

A. Sorry, you have not given me enough information to know how to help you.

B. Yes, increasing your price by 1% from the current price will increase your revenue.

C. Look, youre thinking about this incorrectly. In order to increase revenues, you must first focus on costs.

D. Look, youre already maximizing revenue so do not change a thing.

E. No, decrease your price because then you will sell more and your revenues will increase!

11. Three buyers are in the market willing to pay the following for

tickets to the first hockey game of the winter. Suppose the

following marginal-willingness-to-pay figures: Odies=$1,000, Rhyss=$550 and Bryns=$890. If the current market price is $650, what is the total consumers surplus over these three people in this market situation?

A. $590

B. $490

C. $350

D. -$590

E. $615

12. In terms of absolute value, the own price elasticity of demand

is smaller,

A. the more narrowly we define the market.

B. the longer the time frame used for the market period.

C. the more substitutes in consumption available.

D. the fewer substitutes in consumption available.

E. the flatter the slope of the demand curve as graphed.

13. You work at a fruit stand that sells apples, oranges and grapes.

The unit of measurement is pounds. You track the sales for three

weeks along with the corresponding prices. Assume nothing else

is changing in the markets aside from what you see in the chart.

From only this data, which one of the following is TRUE?

Quantity

demanded

of Apples

Price of

Apples

Price of

Oranges

Price of

Grapes

Week 1 20 $8 $2 $1

Week 2 40 $4 $2 $1

Week 3 60 $8 $2 $5

A. Both C and D are true. B. Both C and E are true. C. The cross price elasticity of demand for apples with respect to

grapes equaled 0.75.

D. The own price elasticity of demand for apples equaled -0.6 E. The own price elasticity of demand for apples equaled -1.

14. A 5 percent increase in the price of peanut butter causes the

quantity of bread demanded to decrease from 5,000 to 4,000

loaves. Which one of the following statements is TRUE?

A. Buyers are using bread and peanut butters as substitutes in consumption.

B. The cross price elasticity of demand for bread with respect to the price of peanut butter is about equal to +4.4.

C. The cross price elasticity of demand for bread with respect to the price of peanut butter is about equal to +0.23

D. Peanut butter is an inferior good. E. None of the above statements are true.

15. Suppose a per-unit tax has just been placed on the market for

carbonated soft drinks (also known as soda or pop). Demand and

supply are typically shaped in this market. Which one of the

following statements is TRUE?

A. The dead weight loss from the soda tax will be zero since the sum of lost producers surplus and lost consumers surplus will go to the government as revenue.

B. If we collect the tax revenue from suppliers there will be no dead weight loss.

C. If we collect the tax revenue from the suppliers there will be no loss of consumers surplus due to the tax.

D. Dead weight loss will equal the sum of lost consumers and lost producers surplus.

E. None of the above are true.

16. Which of the areas in the figure

above represent the change in

consumers surplus as a result of an increase in supply?

A. 1 B. 1 + 2 + 3 + 4 C. 2 + 3 + 4 D. 3 + 4 + 5 + 6 E. Cannot be determined from the

information given.

e1_1110_f2014

Part II: Make sure you read and do ALL parts of each question. Show as much work as

possible. TRY to get started on every question. Show us something. Write legibly and

remember to label all graphs and axes in diagrams.

1. Suppose there are 80,000 seats available for sale for the BARCLAYS ATP WORLD TOUR

FINALS in The O2 Arena, LONDON in November. Since the number of seats in the arena can't

easily be expanded at short notice, the supply curve for tickets is characterized by perfect inelasticity.

Assume the market for tickets is perfectly competitive and that all 80,000 seats are in circulation.

The demand function for tickets is best characterized by: PD=1,000- (Q/128)

a. Carefully graph and label the supply and demand curves. Please indicate values at endpoints. b. Find the equilibrium quantity (Q*) and price (P*) values and indicate them on your graph. c. What is the value of consumers' surplus at the equilibrium? Illustrate consumers' surplus on your

graph. Do exactly the same for producers' surplus.

d. Suppose there is an exogenous decrease in market supply. Describe one scenario that would result in this happening and suggest a reformulation of the model's equation or equations that

would plausibly represent this exogenous event.

e. Using the original supply and demand curves, suppose the government imposes a price floor of $500 on this market. Assume no black market or after-market activity. That is to say if there is a

shortage or surplus created by the policy it just sits there, untraded. Would this price floor be

binding, explain? What quantity of tickets will actually be traded in this regulated market?

Illustrate on your graph.

f. Compare and contrast consumers, producers and net social surplus before and after the price floor. Either show on your graph with comment OR calculate the values and comment.

ANSWERS

ANSWERS

2. Angelina and Brad both produce movies and TV interviews with their time. The time input is

measured in person-hours, movies are measured in units and TV interviews are measured in number

of shows. The table shows time requirements to produce a movie and TV interviews by Angelina

and Brad. (It is assumed that the time requirements per movie or TV interview remain the same

regardless of the total time spent on the production of each). Both Angelina and Brad have 100 hours

of time available, which can be allocated between the two activities.

FOR ALL GRAPHS PLEASE PUT MOVIES ON THE VERTICAL AND INTERVIEWS ON

THE HORIZONTAL.

Angelina Brad

1 movie 20 hours 25 hours

1 TV interview 15 hours 10 hours

a. Graph the production possibilities frontier (PPF) for both Angelina and Brad (separately) clearly labeling the axes. Indicate the numerical value of endpoints. (Note: The time requirements

remain constant irrespective of the quantity produced.)

b. What is Angelina's marginal opportunity cost of producing an extra movie? What is Brad's? c. What is Angelina's marginal opportunity cost of giving an extra TV interview? And for Brad? d. Who has the comparative advantage in interviews? Defend your position. e. Diagrammatically illustrate the Joint PPF for Brad and Angelina assuming they allocate time

based on the principle of comparative advantage. Indicate the numerical value of endpoints.

f. If the total number of movies is 7 and the total number of interviews is 5, who is doing how many of each?

ANSWERS

ANSWERS

ECON 1110 F2014 PRELIM 1 Answers to multiple choice questions

1 C

Based on the information given, Eli has to give up 5 footballs to make a helmet. Peyton gives up 5/6 a football to make a

helmet. Since 5/6 is less than 5 Peyton has the comparative advantage in making helmets while Eli has the comparative

advantage in making footballs. Eli has the absolute advantage in footballs and Peyton has the a.a. in helmets.

2 C

The MOC for making hats for each is: Abe=3, Betty=.67, Chris=1 and Dave=.75. Use this information to rule out B, D

and E. You dont have enough information to be able to assess absolute advantage so cant know if A is true or not.

3 C

Excess supply means we have more quantity supplied than quantity demanded. This happens in the upper portion of the

demand-supply "scissors", where the price is above the equilibrium level. The invisible hand will ensure that the market

works its way to an equilibrium, which means price will decrease until it reaches the equilibrium level. As a result of

that, quantity supplied will decrease and quantity demanded will increase.

4 D

Look carefully at sign convention. And make sure supply variables are not in the demand function. Only D is right for

all three variables.

5 E

If the price of honey increases, then the demand for tea falls since now there is a smaller quantity demanded of its

complement. A, B and D are not correct because these all lead to an increase in demand. C is not correct because a natural

disaster would decrease supply, not demand.

6 E

This is an increase in demand (P*up Q*up) and a decrease in supply (P* up Q* down) so we know P* up but dont know what happens to Q*.

7 B

Equilibrium price and quantity are $3 and 150. Slope of the demand curve is (dQD/dP)=100. So elasticity is

100*(3/150)=2.

8 A

The equilibrium price is $65. Therefore, a price floor of $85 is binding, which causes excess supply. The quantity

demanded is 70 while the quantity supplied is 190. This means that excess supply is 190-70=120.

9 B

Positive (aka descriptive) economics is an approach to economics that seeks to understand behavior and the operation of

systems without making judgments. Normative economics is an approach that analyzes outcomes of economic systems

and behavior and evaluates them with some judgmental or ethical component as to whether they are good/just or

bad/unjust. Certainly, only B involves judgment of this type. The rest are descriptive statements about the nature of the

pizza market.

10 E

From the information we are given, we know that the demand is currently price elastic. This means that an increase in the

price will cause a decrease in the total revenue (% change in quantity outweighs % change in price remember that revenue = p*q). This also means that a decrease in the price will cause an increase in the total revenue (% change in

quantity outweighs % change in price remember that revenue = p*q). So in order to increase revenues from the status quo the storeowner needs to drop the price.

11 A

Sort the willingness-to-pay numbers from highest to lowest. Note that only Odie and Bryn buy. So total benefit is

1,000+890=1,890 and what they pay is 650 each = 1,300, so CS=1,890-1,300=$590.

12 D

When there are few substitutes in consumption available for a good, consumers are less able to switch to other goods

when the price of the good itself increases. Therefore, demand is more inelastic, closer to zero, the fewer substitutes in

consumption available.

13 B

Use weeks 1 and 2 to get (-20/30)/(4/6)=-1 and weeks 1 and 3 to get (40/80)/(4/6)=0.75. Cant use weeks 2 and 3 (choice D) since both apple price AND grape price changes.

14 E

The cross price elasticity would be: negative 4.4 indicating that peanut butter and bread are complements in

consumption.

15 E.

There is something flawed in A-D, one way or the other.

16 C

The area (1) represents the consumer surplus in the original case (Q0,P0).The area (1 + 2 + 3 + 4) represents the

consumer surplus in the new case (Q1,P1). So, the change in consumer surplus is shown by the area (2 + 3 + 4). The area

(3 + 4 + 5 + 6) doesnt represent anything related to consumer surplus.