Intro Micro Exam 1, Fall 2003.doc
NAME:______
Please use the space provided to respond to the following. You may not attach additional paper to this exam, but you may use the back page. If something is unclear, please do not hesitate to ask for clarification.
1. Assume that full-time college students must allocate their waking hours between studying and socializing.
a. Draw a production possibilities frontier for this student. You will refer to this diagram throughout the rest of this problem. (5 points)
b. In this scenario, discuss how the shape of your PPF reflects the opportunity costs of engaging in either activity, and whether they are increasing, decreasing or constant. (8 points)
c. In the diagram above, show how a speed-reading course would affect your PPF. Discuss how this would change the opportunity cost of socializing. (10 points)
2. According to Paul Solman’s DVD that accompanies your text, during the unusually cold winter of 2000, the price of natural gas jumped from about $2 to $8, while consumption slightly increased.
a. Does this result disprove the “law of demand”? Why? (8 points)
b. Using supply and demand analysis, illustrate what was happening in this market. What roles did elasticity have in explaining the result? Explain. (12 points)
3. The market for cranberries is described by the linear functions below.
Market demand for cranberries: Qd = 500 – 4P where Qd is millions of barrels per year and P is the price of a barrel.
Cranberry Market Supply: Qs = -100 + 2P
a. Draw this market, being sure to label everything. Solve for the equilibrium price and quantity of cranberries and identify in your diagram. (8 points)
b. At the price and quantity found in part (a), calculate the price elasticity of demand for cranberries. Interpret this value for someone completely unfamiliar with the concept. (10 points)
4. Suppose the income elasticity for tickets to NASCAR races is EI = -2.5. Interpret this value for someone completely unfamiliar with the concept. (8 points)
5. Suppose you’re told that the cross price elasticity of marijuana consumption with respect to the price of beer is Em,b = -1.32. Interpret this value for someone completely unfamiliar with the concept. (8 points)
6. Some people would contend that the most formidable opponent to George Washington’s army during his winter at Valley Forge was not the British or the bitter weather, but price controls. The legislature of the Commonwealth of Pennsylvania in 1777 decided to try a period of price ceilings limited to those commodities needed for use (boots, blankets, food rations, e.g.) by Washington’s army. What are the results of such price controls? Why did this create a foe more challenging than the British or the weather? Include a clearly labeled diagram to make your argument. (15 points)
7. Your opinionated roommate exclaims that, “Because capitalism rests upon the foundations of private property and freedom, that I should be allowed to freely use my property in any way which I see fit, free of government interference.” Agree or disagree? Explain. (8 points)
Eric Dodge Page 3 9/25/2003