e2,304kf06key - EXAM TWO PRACTICE KEY Introduction to...

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EXAM TWO PRACTICE KEY Introduction to Microeconomics ECO 304K Dr. Trinque spring 2007 Part One: Memorization 1. Define the equilibrium (market clearing) price. (2 points) the price at which the quantity demanded equals the quantity supplied 2. List the factors of production and state the contribution of each and the payment it receives. (12 points) factor name contribution payment 1. entrepreneurs innovation and responsibility normal profit (dividends) 2. laborers physical or mental exertion wages 3. rentiers legal rights (permission to use and abuse) rent 4. capitalists delayed consumption interest 3. State the three interpretations of normal profit. (6 points) a) that which is necessary to entice entrepreneurs. b) that which owners can extract from workers. c) a legally protected return to ownership.
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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) GRAPH   OMITTED quantity of substitute good [ # of buyers;  taste for watches]    ⇒↓ X D   surplus of watches (at P = $40)      X D X S , until P = $30. b) Derive the supply equation. (5 points) X = 50 P c) The price elasticity of demand has changed. Is it now higher than at the original 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
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This note was uploaded on 03/24/2008 for the course ECON 304K taught by Professor Ledyard during the Spring '08 term at University of Texas.

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e2,304kf06key - EXAM TWO PRACTICE KEY Introduction to...

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