Midterm II Solutions.pdf - MIDTERM II SOLUTIONS There are...

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MIDTERM II SOLUTIONS There are four versions of Midterm II: K, L, M & N. To find your version, look at the top right hand corner of the first page of your exam. Make sure you refer to the relevant version when reviewing the solutions. You may have received a mark for a question followed by a “–” sign. This indicates that you received a higher mark than I believe you deserved for the question. The average mark on the exam is 59.5%. Most of the questions in the exam are similar to questions found in the overheads, MyEconLab assignments, exercises in D2L, self- tests in D2L, and the Study Guide. Part A (Average = 53.4%) 1. Answer: the quantity supplied. A price ceiling is a maximum allowable price; it is illegal to charge more than the price ceiling. To be effective or binding, a price ceiling must be set below the equilibrium price. The following graph shows a market with a price ceiling (P 1 ) set below the equilibrium price. A shortage exists the current price since the quantity demanded (Q D ) is greater than the quantity supplied (Q S ). The quantity bought and sold is equal to Q S because buyers can only purchase the quantity that sellers make available for sale. 2. Answer: floor; above An agricultural price support makes it illegal to pay less than the support price. Therefore, it is also a price floor, which is effective or binding only when set above the equilibrium price. 3. Answer: an increase in quantity demanded, an increase in quantity demanded. When the price of a product decreases, that product becomes relatively less expensive (ie its relative price decreases) and buyers would purchase more due to the substitution effect. When the price of a product decreases, buyers have more real income since they can buy more than before and would purchase more of normal products due to the income effect. 4. Answer: decreases continuously. The economic surplus (ES) of one additional unit of output is the difference between the marginal value (MV) of that unit measured from the demand and the marginal cost (MC) of that unit measured from the supply: ES = MV MC. Since MV decreases and MC increases as output increases, ES decreases continuously. In the following graph, the ES of the100 th unit is $10 (or $25 $15) and is less than the ES of the 50 th unit. When output increases beyond the equilibrium quantity, ES becomes more and more negative.
5. Answer: the new quantity supplied minus the new quantity demanded. The following graph shows the impact of a minimum wage (w min ) on a labour market. Unemployment is measured by the difference between the new quantity supplied and the new quantity demanded. 6. Answer: less; price to increase Supply is less elastic in the short run because sellers have less time to respond to a change in price. Therefore, the short-run supply curve is steeper than the long-run supply curve as shown in the following graph. When demand increases, the equilibrium price increases more in the short run (from P* 1 to P* 2 ) than in the long run (from P* 1 to P* 3 ). 7.

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