Eco 201 – Principles of Microeconomics Professor Wesley Pech
First Exam
September 30, 2015
Please show all your work.
(11 points) 1. Wesley has to decide whether to travel to Brazil or not during the Summer. His marginal benefit of seeing his family for a period of a month is equivalent to $5,000. If he stays in the US he will work on his research, which he values at $2,500. Here in the US he has to spend $500 in groceries and $500 in utilities. The mortgage of his house is $1,000, which he has to pay regardless of whether he travels or not. In Brazil he does not pay for either groceries or utilities, but his utilities bill in the US is only $200 when he spends the month in Brazil. Given this information, how much is Wesley willing to pay for a plane ticket to see his family?
(8 points) 2. Imagine that a new technological innovation is implemented in the healthcare sector.
a)What happens to the optimal amount of healthcare? Explain.
b)What happens to the optimal amount of education? Explain.
(18 points) 3. Toby can produce 10 gallons of apple cider or 10 ounces of feta cheese per day. Kyle can produce 5 gallons of apple cider or 2 ounces of feta cheese per day.
a)Show how specialization and trade allow both Toby and Kyle to have combinations of apple cider and feta cheese that would not have been possible for them to achieve without specialization and trade.
b)Draw the combined PPF.
c)Imagine now that Kyle has become better at producing apple cider and worse at producing feta cheese. Specifically, Kyle can produce now 6 gallons of apple cider or only 1 ounce of feta cheese per day. Is it now easier for Toby and Kyle to find an exchange rate that makes them better off, more difficult, or as difficult? Show your work.
(21 points) 4. The supply curve of a market is given by P=5+Q, and the demand curve is given by P=17-2Q.
a)Draw the two curves and find the equilibrium of this market.
b)Calculate consumer surplus, producer surplus, and total surplus.
c)How many units would be traded if a price floor of $11 were imposed?
d)How many units would be traded if a price ceiling of $4 were imposed?
e)Suppose a per-unit tax of $3, to be collected from sellers, is imposed in this market. Calculate the new price and quantity;
f)Calculate the new consumer surplus, the new producer surplus, government revenue, and the deadweight loss;
g)What fraction of the tax is being paid by consumers? What fraction is being paid by sellers?
(14 points) 5. Imagine that the federal government follows the initiatives of Colorado and Washington and decides to legalize marijuana and regulate its consumption by taxing marijuana producers. Would it be easier for the federal government to control the consumption of both alcohol and marijuana through taxes if the two substances are substitutes or if they are complements? Use the supply and demand model to answer this question.
(14 points) 6. Use the supply and demand model of the labor market to explain why, in the case of a minimum wage that is higher than the equilibrium wage, not only we have fewer people employed, but those people who end up employed will probably not be the ones who are in most need of a job.
(14 points) 7. Assume that apples and oranges are substitutes, and that a price ceiling below the equilibrium price was imposed in both markets. If apple producers face bad weather, answer the following questions:
a)What will happen to the price of apples and the number of apples sold? Explain.
b)What will happen to the price of oranges and the number of oranges sold? Explain.