Dr. Eric Dodge Page 5 4/20/2010
Intro Micro Final Exam, Winter 2010
NAME:______
You may not attach additional paper to this exam. If something is unclear, please do not hesitate to ask for clarification.
1. Use marginal analysis to explain why it is possible to “have too much of a good thing”. Use a person’s decision to consume soda, at $1 per can, as an example. Include a diagram showing the consumption decision. (10 points)
2. The small nation of Grinchlandia uses its resources to produce two commodities, cans of Who Hash and Roast Beast.
a. Putting Roast Beast on the horizontal axis, illustrate a production possibility frontier (PPF) that reflects increasing 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 Grinchlandia experienced technological progress that allowed for a permanent increase in production of cans of Who Hash. Explain the outcome. How did the opportunity cost of producing Who Hash change? (5 points)
c. In the above diagram, label a point “U” that reflects a combination that is currently unattainable. (3 points)
3. Suppose the market for molasses, is represented by:
P = 85 – Qd where Qd is the # of gallon jars demanded per hour and P is the price per gallon, and
P = 5 + 3Qs 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. (4 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 6%. Give them a specific prediction of how their customers would respond to this strategy and how it would affect their revenues. (5 points)
4a. The income elasticity for Disney cruises has been estimated to be 2.5. Interpret this value. (5 points)
4b. The cross price elasticity of SUVs with respect to the price of gasoline is estimated to be -1.25. Interpret this value. (5 points)
5. Find the flaws in reasoning in the following statement, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually happens in the situation. (10 points)
· “A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end.
6. The market for rum is described by the linear functions below.
Market demand for rum: P = 57 – 2Qd where Qd is units per day and P is the price of a gallon of rum.
Rum Market Supply: P = 9 + Qs
NOTE: show your work for partial credit. A graph is not necessary, but may help in your computations.
a. Solve for the equilibrium price and quantity of rum. (2 points)
b. Compute CS and PS at the equilibrium price and quantity. (2 points)
c. Suppose that a $3 excise tax is levied on suppliers of rum. Compute the following: (2 points each)
· The new price of rum paid by consumers.
· The price received by suppliers after paying the tax.
· The burden of the tax paid by consumers and the burden paid by producers.
· The government revenue collected from the tax.
· The deadweight loss created by the tax.
7. Suppose the market for sports utility vehicles (SUVs) is in equilibrium. Given the following scenarios, use a diagram to illustrate the changes in the market. Explain why these changes are occurring. Predict changes to the equilibrium price and quantity of SUVs. (5 points each)
a. All else equal, the government doubles the excise tax on gasoline.
b. All else equal, a stronger economy increases average household income in the U.S.
c. Combine the effects of (a) and (b)
8. A price-taking firm has the following total cost data and demand schedule:
Output (units) / Total Variable Cost ($) / Total Fixed Cost ($)0 / 0 / 2
1 / 6 / 2
2 / 14 / 2
3 / 24 / 2
4 / 36 / 2
5 / 50 / 2
6 / 66 / 2
7 / 84 / 2
8 / 104 / 2
9 / 126 / 2
10 / 150 / 2
b. In the long run, this perfectly competitive market will adjust to the level of economic profits found in part (a) above. Describe this long-run adjustment process. Be sure to explain what happens in the market and what happens for the typical firm. Graphs are unnecessary. (6 points)
c. Using the information in the table, what is the long-run price and quantity in this perfectly competitive market? (3 points)
9. How could the market for flu shots be an example of a market failure? In a clearly labeled diagram, show how the market fails to provide the socially optimal quantity of flu shots. (7 points)
b. Describe how the government could create a policy to alleviate the market failure. Clearly show the impacts of this policy in your diagram. (6 points)
10. Explain the “Tragedy of the Commons” and why it occurs. Use an example. (6 points)
5