Midterm Practice1

Midterm Practice1 - Econ 1 Winter 2008 Dr. Narag 1...

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Unformatted text preview: Econ 1 Winter 2008 Dr. Narag 1 Additional Practice Questions: Chapter 1-4 (1) You have recently purchased a large estate in Napa valley and are deciding how to use your land. You can either grow grapes or raise llamas (both of which are actually done in Napa.) Your land includes flat, loamy areas which are excellent for grapes, as well as more rocky, hilly areas which are less good for grapes. Llamas can be grazed on any of the land equally well. You know that you can produce the following combinations of grapes and llamas, depending on how much land you use for grapes and how much for llamas. Llamas 0 200 400 600 800 1000 Grapes (bushels) 125,000 115,000 95,000 70,000 40,000 0 a) Draw the production possibility frontier that you face for grapes and llamas. b) You decide to raise 200 llamas and grow 115,000 bushels of grapes. What is the opportunity cost of these 200 llamas? c) Explain why the ppf is bowed outward. d) You plan to sell the wool from the llamas as well as all the grapes that you grow. The wool from each llama can be sold for $120 apiece and grapes can be sold for $1 per bushel. Could you make more revenue by shifting your production toward more llamas and less grapes, or vice versa? Explain. (Recall that you are now producing 200 llamas and 115,000 bushels of grapes.) e) You read an article that describes a way to grow grapes more effectively on any land. The method increases grape output per acre by 10%. Draw the new ppf that you would face if you implemented this method. (2) Robinson Crusoe lives happily on a little island eating fish and coconuts. He is able to catch one fish for each hour he spends fishing, and he could collect 10 coconuts per hour. These rates are the same no matter how much time he spends in each activity. He refuses to work more than 6 hours each day. a) Draw Robinson's production possibility frontier. Be sure to show the units on the axes. b) What is the opportunity cost of one fish? Econ 1 Winter 2008 Dr. Narag economy that explains this shape? 2 c) What accounts for the shape of the ppf? That is: what it atypical of this island (3) Use the following information to answer the next two questions. Suppose that the number of bicycles demanded in the United States at various prices is as follows: Prices of a bicycle dollars) 80 100 120 Quantity demanded per year (millions of bicycles) 20 18 16 Suppose that the relationship between the quantity of bicycles supplied per year in the United States and the price per bicycle is as follows: Prices of a bicycle (dollars) 60 80 100 120 150 Quantity supplied per year (millions of bicycles) 14 16 18 19 20 a) Based on the data above, what is the equilibrium price of a bicycle in the United States? i) ii) iii) iv) v) 60 80 100 120 150 b) If the price is $80, i) ii) iii) iv) v) There is an excess demand of 4 million bicycles There is an excess supply of 4 million bicycles There is an excess demand of 2 million bicycles There is an excess supply of 2 million bicycles None of these (4) Suppose the government imposed an excise tax of $1 per pack of cigarettes and the entire tax burden fell on producers. Which of the following is the correct explanation about the possible combinations of supply and demand curves? Econ 1 Winter 2008 Dr. Narag i) Regular downward sloping demand curve and regular upward sloping supply curve. 3 ii) Perfectly inelastic demand curve and regular upward sloping supply curve. iii) Regular downward sloping demand curve and perfectly elastic supply curve. iv) Regular downward sloping demand curve and perfectly inelastic supply curve. v) Perfectly inelastic demand curve and perfectly elastic supply curve. (5) If the supply of a good increases and the demand for the good decreases, then we can definitively say that: i) ii) iii) iv) v) The equilibrium price will decrease The equilibrium quantity will increase The equilibrium quantity will decrease Both (i) and (ii) Both (i) and (iii) (6) Suppose that the equilibrium price of a gallon of gas is $1.40 per gallon. The government decides to place a price ceiling on gasoline and will not allow sellers to charge more than $1.50 per gallon. Draw this situation using a graph. Make sure that you show the original equilibrium and the effect of the price ceiling on the market. What will happen in this market? (Hint: Make sure you understand what a price ceiling is.) ...
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This note was uploaded on 04/16/2008 for the course ECON 1 taught by Professor Nagata during the Winter '08 term at UCLA.

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