Dr. Eric Dodge Page 2 12/12/2006
Intro Micro Final Exam, F2006
NAME:______
You may not attach additional paper to this exam. If something is unclear, please do not hesitate to ask for clarification.
1. Use the economic perspective, rationality and marginal analysis to explain why it is possible to “have too much of a good thing”. Use a person’s decision to consume candy canes, at $1 per cane, as an example. Include a diagram showing the consumption decision. (10 points)
2. The small Baltic state of Kreblakistan uses its resources to produce two commodities, turnips and bullets.
a. Illustrate a production possibility frontier (PPF) that reflects constant opportunity costs. Does the shape of this PPF make economic sense? Explain. (7 points)
b. In the above diagram, show how your PPF would change if Kreblakistan experienced a spring and summer with almost no rainfall. Explain the outcome. How did the opportunity cost of producing bullets change? (5 points)
c. In the above diagram, label a point “U” that reflects many idle and unemployed resources in the nation. (3 points)
3. Suppose the market for molasses, is represented by:
P = 45 – Qd where Qd is the # of gallon jars demanded per hour and P is the price per gallon, and
P = 5 + 7Qs where Qs is the # of gallon jars supplied per hour.
a. Draw the market for molasses, being sure to label everything. (5 points)
b. Hired as a consultant for molasses producers, solve for equilibrium price and quantity. Show these on the above graph. (5 points)
c. At the point of equilibrium, calculate the price elasticity of demand. Thoroughly interpret this measure for the owners of molasses plants. (6 points)
d. The molasses producers come to you, proposing a price increase of 2%. Give them a brief, yet specific prediction of how their customers would respond to this strategy and how it would affect their revenues. (6 points)
4a. The income elasticity for paperback romance novels has been estimated to be -1. Interpret this value. (6 points)
4b. The cross price elasticity of butter with respect to the price of margarine is estimated to be .5. Interpret this value. (6 points)
5. Mrs. Wilson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 “happy points”, respectively. Is she buying the utility-maximizing combination of bread and milk? If not, how should she reallocate her expenditures between the two goods? Explain how you know. (8 points)
6. What is a “sunk cost”? Explain this statement: “In economic decision-making, sunk costs are irrelevant and should not be considered.” Give an example to make your point. (8 points)
7. Suppose the market for candy is in equilibrium. Given the following scenarios, use a diagram to illustrate the changes in the market. Explain why these changes are occurring. Predict changes to the equilibrium price and quantity of candy. (5 points each)
a. The price of sugar falls.
b. A strong economy increases average household income in the U.S.
c. The U.S. Surgeon General declares that unhealthy diets contribute to obesity and the odds of an early death.
d. Combine the effects of (a) and (c)
8. A monopolist has the following total cost data and demand schedule:
Output (units) / Price ($) / Total Variable Cost ($) / Total Fixed Cost ($)0 / 20 / 0 / 2
1 / 18 / 6 / 2
2 / 16 / 14 / 2
3 / 14 / 24 / 2
4 / 12 / 36 / 2
5 / 10 / 50 / 2
6 / 8 / 66 / 2
7 / 6 / 84 / 2
8 / 4 / 104 / 2
9 / 2 / 126 / 2
10 / 0 / 150 / 2
b. Now suppose the government wishes to regulate this monopolist to produce at the socially optimal level of output. How will this affect the output, price, and profit realized by the monopolist? Be specific. (6 points)
9. How could the market for Thneeds from “The Lorax”, be an example of a market failure? In a clearly labeled diagram, show how the market fails to provide the socially optimal quantity of Thneeds. How does this create a resource allocation problem? (12 points)
b. Describe how the government could create a policy to alleviate the market failure. Show the impacts of this policy in your diagram. (6 points)
Have a great holiday break!!