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# exam1_ans - ECON 0100-FIRST MIDTERM EXAM-FALL 2081 NAME...

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ECON 0100--FIRST MIDTERM EXAM--FALL 2081 NAME__________________________________________ TA’s Name: (please circle) Gonzalez Mazraani Park Zhang Problems (25 points) 1. A swarm of locust destroys a major part of the corn crop. Use supply and demand diagrams to show the effect of this event on the equilibrium price and quantity in both the market for corn chips and the market for potato chips. In each case show both the initial equilibrium price and quantity ( LABEL them P 1 and Q 1 ), the shift in either the demand or supply curves, and the new equilibrium price and quantity ( LABEL them P 2 and Q 2 ). (4 points each) Provide a brief explanation for what has happened in these two markets and explain why there is a connection between the two markets. (2 points) The cost of producing corn chips increases, since the price of an input increased. Supply falls and the price of corn chips increases. This increases the demand for a substitute so price and quantity increase in the potato chip market. Market for corn chips Market for potato chips 2. Assume the market for gasoline is competitive. a. Draw a demand and supply graph and identify the equilibrium price (P*) and equilibrium quantity (Q*). Label all parts of your graph. (6 points) b. Suppose the government sets a binding (or effective) price ceiling in the gasoline market. Show on your graph the price ceiling (PC) and the quantity (QC) that would be sold with the price ceiling. (2 points) c. Also using your graph identify consumer surplus and producer surplus before and after the price ceiling is put in place. State in words whether each has increased or decreased. (6 points) CS before = A+B, CS after = A+C, PS before = C+D+E, PS after = E. PS fell and CS changed by +C-B, so direction of change depends on size of these two areas. d. Identify on you graph the deadweight loss caused by the price ceiling. (1 point) B+D Quantity P 2 P 1 D S1 Price Q 2 Q 1 S2 Quantity P 2 P 1 D1 S1 Price Q 2 Q 1 D2 PC P* D S Price QC Q* A B D C E

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ANSWERS: 1d2c3c4c5d6d7b8c9c10d11d12c13c14a15d16a17d18c19d20a21a22b23c24b25d Multiple Choice: (50 points, 2 points each)
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