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e2prac - EXAM TWO PRACTICE Introduction to Microeconomics...

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EXAM TWO PRACTICE Introduction to Microeconomics ECO 304K Dr. Trinque spring 2007 Part One: Memorization 1. Define the equilibrium (market clearing) price. (2 points) 2. List the factors of production and state the contribution of each and the payment it receives. (12 points) 3. State the three interpretations of normal profit. (6 points)

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2 Part Two: Application 4. Suppose that 2,000 wristwatches per month had been sold at a price of \$40. Then, because people began carrying cell phones that include clocks, the demand for wristwatches declined so that only 1,500 are sold per month at a price of \$30. a) Show this on a demand and supply graph for wristwatches. Draw one graph only, on the axes below. Label the graph clearly and completely. Explain carefully in words each change you show on the graph. (10 points) b) Derive the supply equation. (5 points) c) The price elasticity of demand has changed. Is it now higher than at the original
3 equilibrium, or is the elasticity now lower? Circle your answer. (5 points) (There is not enough information to derive the demand equation nor to calculate the elasticity. However, there is plenty of information from which to infer with confidence whether the elasticity has increased or decreased. In any case, do not write your reasoning here; just circle your answer.) The price elasticity of demand at the new equilibrium is higher than it was at the original equilibrium. The price elasticity of demand at the new equilibrium is lower than it was at the original equilibrium. 5. Assume that the demand for luxury automobiles is given by the equation and the supply equation is . In both equations, price is in thousands and quantity is vehicles per month.

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