Economics 2010 (Accelerated)

Dr. Alston

Economics 2010 (Accelerated)

First Midterm

Spring Semester, 2002

Problems:

1.Given the following equations for demand and supply:

DEMAND: Qx = 4,000 - 200 PxSUPPLY: Qx = -1000 + 425 Px

a.In the expression above we have Qx = f(Px). For both demand and supply, write an alternative formulation for the equation in the form Px = f(Qx). Show your work.

DEMAND:

SUPPLY:

b.Fill in the following table:

c.Graph the supply and demand curves in the space below (properly label your axes).

d.Use the initial equations for supply and demand (as given on the second line of problem

#1) to solve for the equilibrium price (show your work.).

e.Use the (reformulated) equations for supply and demand in 1(a) to solve for the

equilibrium quantity (show your work). (No credit will be given for simply plugging the Px found in (d) into the initial equations (you will do that later in part (f(2))).

f.Verify your calculations in 1(d) and 1(e) by:

(1) illustrating the equilibrium price and quantity in the graph you drew for 1(c) on the

previous page (use lines or dotted lines to indicate equilibrium price and

quantity).

(2) Plugging the equilibrium quantity into the price equations in 1(a) [where Px =f(Qx)] and the equilibrium price into the initial quantity equations [where Qx = f(Px)]. (There are four separate calculations required here! Do them all!)

2.For questions 2(a) and 2(b), use the arc price elasticity of demand formula to calculate the price elasticity of demand for the demand curve in (1) over the following prices (show your work).

a.Between Px = $14.50 and Px = $15.50 (show your work)

b.Between Px = $4.50 and Px = $5.50 (Show your work)

c.For the demand curve in question (1), at what price is the price elasticity of demand

= 1.0? Explain how you arrived at your answer.

d.Use the "point elasticity demand formula" developed in class to calculate the elasticity of demand when Px= $15.00. (Show your work)

e.Use the "point elasticity demand formula" developed in class to calculate the elasticity of demand when Px= $5.00. (Show your work)

(THERE IS ANOTHER QUESTION ON THE NEXT PAGE; YOU MAY USE THE BACK OF THIS PAGE AND THE BACK OF THE LAST PAGE FOR SCRATCH PAPER)
3. a.Suppose Country A can produce two goods, calculators and snowboards. If it devotes all its resources to calculator production, it can produce 400 per month. If it devotes all its resources to snowboards, it can produce 200 per month. Or, it could produce any combination of calculators and snowboards lying on a straight line between these two extremes. Draw a production possibilities curve for Country A (with calculators on the vertical axis). Label your graph.

What is the opportunity cost of producing an additional snowboard in Country A?

b.Suppose Country B can produce two goods, calculators and snowboards. If it devotes all its resources to calculator production, it can produce 400 per month. If it devotes all its resources to snowboards, it can produce 400 per month. Or, it could produce any combination of calculators and snowboards lying on a straight line between these two extremes. Draw a production possibilities curve for Country B (with calculators on the vertical axis). Label your graph.

What is the opportunity cost of producing an additional snowboard in Country B?

c. Suppose Country A and Country B choose not to trade. Suppose further, that each country wants (and actually gets) 100 snowboards and as many calculators as they can get. How many calculators and snowboards will each country produce?

Country A: calculators = ______snowboards = ______

Country B: calculators =______snowboards = ______

d. Now suppose Country A and Country B decide to specialize according to their comparative advantage and they engage in mutually beneficial trade. Suppose further, that each country wants (and actually gets) 100 snowboards and as many calculators as they can get. How many calculators and snowboards will each country produce?

Country A: calculators = ______snowboards = ______

Country B: calculators =______snowboards = ______

e.Give an example of at least one final outcome in terms of the actual amount each country might end up with after trade. Use the concepts of opportunity cost and the benefits of trade to explain why! That is, why did the production outcome in 3d occur? Which country, if any, benefited? Which country, if any, lost? (Use the back of this page for your explanation if you need extra space.)