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Unformatted text preview: C :\docume~l\wissink\appl lc~ l \qualcomm\eudora\altach\EXAMSOLUTION . doc WM" Econ 1110 - Wissink - 809 if; ‘ PRELIM #1 \ E\ J. WISSINK February 26, 2009 YOUR NAME: Your C.U. Netid: YOUR C.U. STUDENT NUMBER: Check YOUR TA’s NAME: J inYoung (Tuesdays am) Qingqing (Thursdays am) Jonathan (Tuesdays pm) Jingxian (Thursdays pm) Lee (Fridays) INSTRUCTIONS: There are three sections in this exam: I» Part I: 13 multiple choice questions (3 points each) I Part II: 2 problems (20.5 points each) a Part III: 2 problems (10 points each) ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes HINTS: o Read all questions carefully. 0 Write legibly and remember to label all graphs and axes in diagrams. NO QUESTIONS CAN BE ASKED DURING THE EXAM: If you need to use the restroom, quietly bring your exam papers up to the TA proctoring and they will hold your materials while you are out at the restroom. NO CELL PHONES. NO GRAPHING CALCULATORS. NO BOOKS. NO NOTES. NO HELP SHEETS. NO TALKING TO EACH OTHER. NO ASKING THE PROCTORS ANY QUESTIONS. GOOD LUCK! GFC‘JclV‘C QQrméka'Qm WWW as) it Au 6) Show 901(9)“: (“9) /L3 mm m A? UK" ® cllOulo\t? - (to un\‘ Wedmfia Ulle {3*- w‘~¢“‘O‘N\CW--wflntMlM“ We Omsk mezng \Vlm Qx“\x-....«Ll....r..mn"19M W W» me‘ri 4 .i Wo‘xlch (TA \JWQ f'fiafim‘efi-Wrmm :3; A? SW)" "a" “6M a..—\’\~~..-3.«~.. Corveczplm ' 1 mm: .m- C:\docume~l\wissink\applic~]\qualcomm\eudoralattachlEXAMSOLUTION.rIoc Part I: Multiple Choice: Circle the best answer. Do them ALL. 1. Which one of the events below is most likely to cause a shift in the demand curve for Diet Coke? A; An increase in the price of the sweetener used to make Diet Coke. . A new study that shows the adverse health effects of consuming soft drinks like Diet Coke. . The producers of Diet Coke purchase new computer software that makes Diet Coke production a lot more efficient. D. A new company learns the secret formula for Diet Coke and starts producing it. E. The government imposes a binding price floor on Diet Coke. 2. Which one of the following will unambiguously occur in a market when there is a simultaneous increase in demand and an increase in supply? A. A decrease in equilibrium price. B. A decrease in equilibrium quantity. C. An increase in equilibrium price. An increase in equilibrium quantity. E. An increase in both equilibrium quantity and equilibrium price. 3. The chart below gives maximum production levels for three people, Abe Betty and Charlie who can produce only two goods, pens and rings. Each person can produce the indicated maximum level, or any combination that lies on a straight line between the two maximum levels. Each person has 1,000 hours of labor. Suppose these three are practicing efficient production in a mini—economy and that among themselves they are making 200 pens in total. If production is efficient, how many pens are produced by Abe? Maximum Pens output by person Abe C. 0 D. 90 E. 75 C:\(locume~l \wissinldappliw ] \qualcomm\cudora\atlacb\EXAMSOLUTION. doc 4. The data points below reflect three possible combinations of corn and rice that can be produced by using a given set of resources; that is, they represent three different points on the production possibilities frontier. If the PPF has its usual bowed-out shape, then ??? will be (in thousands of bushels) Corn 0 50 ?‘?‘? Rice 100 50 0 A. 100 bushels of corn. B. More than 100 bushels of corn. @ Less than 100 bushels of corn. D. 150 bushels of corn. E. Cannot be determined from the data. 5. Suppose that the demand function for cans of tennis balls is typical and is written as follows: QD = 400 - 2F + 3J — 4G. Which one of the following statements is most true? is. J could be the price of a can of tennis balls. J could be the price of a baseball. C. J could be the price of a tennis racquet. D. F could be the price of rubber used to make tennis balls. E. F could be the average income level of people between the ages of 14 and 65. 6. When the supply curve is a horizontal line, supply is said to be A. perfectly inelastic. B. unit—elastic. C. relatively elastic. @ perfectly elastic. E. cross-elastic. 7. Four buyers are in the market for new cars. Suppose Abe is willing to pay $20,000, Betty is willing to pay $56,000, Charlie is willing to pay $34,000, and Daniel is willing to pay $18,000. If the current market price for new cars is $25,000, what is the total consumers” surplus in this situation? A. $12,000 . $28,000 @$40,000 D. $90,000 E. $0 C :\docume~ l \wissinldappl lc~ I \qua]comm\eudora\attach\EXAMSOLUTlON .doc 20 Market for Coffee ‘ E —-?_-____ _- - Price Quantity mm 8. Using the graph for the Coffee Market above, at the market equilibrium, the consumers’ surplus plus the producers’ surplus in the coffee market is A. $8 B. $18 . $36 D $54 E. The answer cannot be determined from the information given. 9. Suppose you are given that the demand. function for sunglasses is: Q” = 165 — 2P5g + .051 + 4Ph where Q is the quantity of sunglasses, P5ig is the price of sunglasses, I is income and Ph is the price of a baseball hat. Suppose Psg:$5, I=$100, Ph=10. From this information, the cross~price elasticity of demand is A. -0.05. B. 0.05. 0.025. D. 0.2. E. 4.0 C:\tloeume~ l \wissinlt\app]ic~l \qualcomm\eudora\attacl1\EXAMSOLU'l"lON.doc 10. Which one of the following statements is true? A. If the income elasticity of demand for lapt0ps is -2, then laptops are considered to be a normal good. B. If coffee and tea are substitutes in consumption, then a rise in the price of tea will cause a fall in the demand for coffee. C. A rise in the price of inputs to make pizza pies causes nothing more than a movement along the pizza supply urve. The higher the number of good substitutes available in consumption, the higher is the own—price elasticity of emand for a particular good. E. The flatter the demand curve for widgets, the less price elastic widget demand is. l l. The supply function for shamrocks is QS = -5 + 4F - 1G. If this is a valid supply function obeying the “law of supply”, then most likely A. F = the price of Shamrocks and G : the number of shamrock producers. . F : the wage rate of leprechauns (who make the Shamrocks) and G = the price of Shamrocks. @ F = the price of Shamrocks and G = the wage rate of lepre‘chauns (who make the shamrocks). D. F = the wage rate of leprechauns (who make the Shamrocks) and G : the price of land to grow the Shamrocks. E. F = the price of Shamrocks and G = tastes and preferences. 12. The market for scooters is unregulated and is presently characterized by excess supply. You accurately predict that the A. price of scooters will increase, the quantity supplied will. fall, and the quantity demanded will rise. . price of scooters will increase, the quantity supplied will rise, and the quantity demanded will fall. @price of scooters will decrease, the quantity supplied will fall, and the quantity demanded will rise. D. price of scooters will decrease, the quantity supplied will rise, and the quantity demanded will fall. E. price of scooters will decrease, the supply will fall, and demand will rise 13. Consider the table of data below. From this data we can conclude that the cross-price elasticity of demand between oranges demanded and the price of apples: A. can be calculated using Date 1 and Date 2 OR Date 2 and Date 3. . can be calculated using Date 1 and Date 3 écan be calculated using Date 1 and. Date 2 only. D. will be a negative number B. will be zero. quantity of oranges — C:\dooume~1\wissink\applic~l\qualcomm\eudora\altach\EXAMSOLUTION.doc YOUR NAME: Your C.U. N etid: YOUR CU STUDENT NUMBER: Check YOUR TA’s NAME: J inYoung (Tuesdays am) Qingqing (Thursdays am) Jonathan (Tuesdays pm) J ingxiau (Thursdays pm) Lee (Fridays) t II: Problems 1 and 2 et’s model the market for digital cameras and assume the market is perfectly competitive and is best described using the typical demand and supply model. Suppose the market demand for digital cameras is given by: QD = 100,000 — 40P. Suppose the market supply for digital cameras is given by: Q5 = 77,500 + 50P. L,\ 5a) Carefully graph and label the supply and demand curves. box; it neflci Van iPS ‘hf‘i n‘h‘anrr e CF ‘ JON guPP\~\ (arose: r151 Cortecfil'hLé-K b) Find the equilibrium quantity (Q*) and price (13*) values in the digital camera market, and indicate them on your (0' graph. g__ “.1. EL (A) K/ Market for Digital Cameras 2500 f D?) . .. i Price Floor W3. 77. l l 90 10 C(in thousands) 87 88 88.8 (B) Set QD=QS to find Pom. 100,000 — 4000* = 77,500 + 5000“ Solving for 130*, we find that @2250. To find (20*, we plug Poi into the equation for either QD or Q3. I will use QD here. o*=100,000—40P0* QJ: l 00,000-40*250 95:90 000. C :\docume~ ] \wissink\app| ic~ l \qua]comm\eudora\attach\EXAMSOLUTION . doc C) Suppose there is a drop in digital camera supply because internal memory becomes much more expensive for camera . manufacturers to buy. Assume the supply is now QS = 73,000 + 501’. Find the new equilibrium quantity (0*) and price (P*) values in the digital camera market, and indicate them on yourI graph. i l (C) The supply curve shifts while the demand curve does not. Denote the new supply curve as Q18, and denote the resulting equilibrium price & quantity P1!“ and Q3. Set QD=Q15to find PC. 100,000 _— 40P.* = 73,000 + 5013." Solving for Pf, we find that £13300. To find Qll, we plug Pf into the equation for either QD or Q's. Q,*=100,000-40PI* Q1*:100,000—40*300 95:88 000. d) Suppose the government thinks this price (the new equilibrium price) is way too high and decides to step in and put a Li“ price ceiling of $280 on the sale ofdigital cameras. What will be the effect ofthis price ceiling on the digital camera market? Be specific with numbers and show on your graph. (D) To find this we must find QD and QIS at P2280. QD = 100,000 a 40p QD : 100,000 — 40*280 Q”: 88,800. Q15: = 73,000 + 50p Qfij = 73,000 + 50*280 Qfi : 37,000. SO there Will 87,000 transacted in the market. There is a shorta e of 1,800. W Jr 5;“ - i "t a: a g}, . figgg’ \ :2 gdwg \P , %\C'L}i~ MM ‘1’“ Qrkll (~13 5 LM 0 ‘4“ "mini: 3 an.) e) Without doing all the calculations and with reference to the original OR the new supply curve, suppose the government imposes a tax of $10 per Linit on digital cameras traded. Whom do you predict will bear relatively more ofthe economic price incidence of this tax, demanders or suppliers? Briefly defend your position. (Note: DO NOT fully solve for all the values, but defend your conclusion with as few words and computations as possible! Be convincing, but at the same time, brief.) (E) The side of the market that is more inelastic has a higher economic price incidence of the tax. |dQD/dPl=40 and lleS/clPl=50. Thus around the point of equilibrium price and quantity, the demand curve is more inelastic. Thus the demand side of the market would be expected to have a higher economic price incidence ofthis tax. C;\docume~1\wissink\app]ic~l‘iqualcomm\eudora\auach\EXAMSOLUTION.doc Dug , . . . Abe and Betty are the only producers/consumers in a small sports lovm g economy. Abe and Betty produce and a) fig. consume only l'WO things: Olympic logo Tshirts and pins. Given 60 hours of work in a week, Abe can produce a maximum of3 Tshirts or 15 pins, or any combination along a straight line PPF between the two. Given 60 hours ofwork in a week, Betty can produce a maximum of 5 Tshirts or 20 pins, or any combination along a straight line PPF between the two. Fill in the missing numbers in the table below: Hours Required for One Unit of Output Person Tshiits 2 bus 4 hours mm. ' 3 hou . .2 It (A) The number ofhours required to make aTshirt is 60/5. The number of hours required to make a pin is 60/20. b) ‘30 ‘1’ ‘ . Who has the comparative advantage in Tshirt production? Who has the comparatiVe advantage in pin productidn? Who has the absolute advantage in Tshirt production? '2'; ~ (B) Marginal opportunity cost of one Tshirt to Abe is 5 pins. Marginal opportunity cost of one Tshirt to Betty is 4 pins. Thus Betty has a comparative advantage in Tshirt production. Marginal opportunity cost of one pin to Abe is 1/5 Tshiit. Marginal opportunity cost of one pin to Betty is 1/4 Tshirt. Thus Abe has a comparative advantage in pin production. Since Betty can produce more Tshirts (5) than Abe (3), Betty has the absolute advantage in Tshirt production. Assume that Abe and Betty have not taken Econ 1 1 1.0, and hence don‘t know the wonders of trade. That is, they insist on self—producing everythin g they consume. If Abe wants to consume 2 Tshirts, how many pins, at most, can Abe have per week? If Betty wants to consume 16 pins, how many Tshirts, at most, can she consume per week? \ sumes 2 Tshirts, ' en he spe ds 40 hours producing them. He then has 20 hours left to devote to pin -‘ .‘ ction, and can produc 5 pins. (2 hours/ 4 hours per pin) lTMBettyiwlyints to consume 16 pins then she must spend 48 hours prodgingwthemvmfiwpours per pin*16 pins). 1 sen-telnet as 12 hours left to produce Tshirts. Thus she can produce 11 y one Tshirt. 1‘ ‘w-mwwx C‘ l\LlUCllmC" l \wissinlc\applic~ | \qualcomm\eudora\altach\EXAMSOLU'I‘ION ‘ doc 0) Putting PINS ON THE HORIZONTAL and TSHIRTS ON THE VERTICAL, illustrate the efficient combined (a, production possibility frontier. (C) Tshirts d) If Abe and Betty specialize and trade with each other, what would be the bounds of an “international” exchange rate between Tshirts and Pins? (D) Marginal opportunity cost of one Tshirt to Abe is 5 pins. Marginal opportunity cost of one Tsliirt to Betty is 4 pins. Q" L o the exchange rate would be bounded between 4 pins and 5 pins per Tshirt. \\.l0'\“€,.‘1 NEE-«m “l WE,me Clio W \ODUWLC MM (09* :1) £330.?) Liv»! ‘lfirmg désl/fir’lrs. 6:30" \nfjl’vdflww- l j liq mfih‘l‘“ '- «fl PM reelfir k1: <3: C:\docume~l \wissiu|(\applic~l\qualcomm\eudora\attach\EXAMSOLUTlON.doc YOUR NAME: Your C.U. Netid: YOUR CU STUDENT NUMBER: Check YOUR TA’S NAME: JinYoung (Tuesdays am) Qingqing (Thursdays am) Jonathan (Tuesdays pm) J ingxian (Thursdays pm) Lee (Fridays) Part III: Problems 3 and 4 The laWS of supply and demand may hold for most product markets, but they definitely do not for premium coffee and New“, personal lap top computers here in Ithaca. Analyzing market data it is easy to see that prices of premium coffee have been sky—rocketing, but people are buying more coffee than ever. And even though computer lap top prices have been falling, manufacturers are producing more and more. Do you agree or disagree? Defend your position. (Hint: use a separate diagram for each market.) P Market for Coffee Q0* Q1 Q As more students come to Ithaca, the demand for premium coffee has increased from Do to D], thus leading to a higher quantity demanded and a higher price for premium coffee. 6w. P Market for‘Laptop Computers S ._ 0 81 PG” PH“ (20* Q1”: Q 0 i l ' . .- - “L ,V '!:w r; I' -m‘ N fumwm“ (fraying? . «Theatrianx 13w \.r“{:,_ «size Mle \ I . ‘ \‘5 ff} femur $311" firm (MN-"Ml Cw. f “is x r K.ng ‘ C:ldocume~l \wiss ink\applic~ I \qualcomm\euclora\attach\EXAMSOLUTIONdnc An increase in the supply of laptop computers from So to S has caused an increase in the quantity supplied of laptop computers and has also led to a reduction in the price of laptop computers. Several years ago the New York City Opera. cut its ticket prices in an attempt to increase operating revenues. At almost the same time, the New York City water board raised water prices in an attempt to increase their operating revenues. An editorial writer for the New York Observer comments: "Obviously, the water board and the Opera company can‘t both be right. Somebody goofed." Do you agree or disagree? Defend your position. We must disagree with this position. For a good with an own~price elasticity of demand which is inelastic, ifthe price 5 increases revenue will increase, and if the price decreases then revenue will decrease. Thus, the water board believes that water in NYC is a good which has an own—price elasticity of demand which is inelastic. /However, for a good with an own—price elasticity of demand which is elastic, if the price increases revenue will L3 decrease, and if the price decreases revenue will increase. Thus, the NYC Opera believes that opera in New York City is a good with an own—price elasticity of demand which is elastic. % ‘I u h MW~HQ.,..£/\ O. \CHB:| ( '\“B lMWfi-‘V’m WS‘hA'WOV“) iv) 0;} ' 11 C‘:\documc~ I \wissinldapplic~1 \qualconinneudora\attach\EXAMSOLUTION.doc ANSWERS TO ALL THE MULTIPLE CHOICE QUESTIONS 2 UI I0 [1 l2 I3 B. Except for part B. all the events listed influence the supply side ot'the market, and will shift the supply, not the demand curve. D. An increase in demand increases P* and Q*. An increase in supply will decrease P* and increase 0*. So 0* definitely increases. The change in P* is ambiguous. B. To answer this question, we first need to find the comparative advantages. Abe’s opportunity cost ofproducing l pen is 1 ring. Betty‘s opportunity cost of producing I pen is 1/3 ring. Charlie’s opportunity cost ot‘produeing I pen is 2 rings. Therefore, it is most efficient for Betty to produce the first I50 pens, Abe the next 100 pens, and for Charlie to produce the last 90 pens. Then if 200 pens are produced in this economy efficiently, we know that Betty produces 150 ol’these 200 pens, and Abe produced 50 pens. Hence, part 50 is the correct answer. C. Since we are given that the PPF‘ takes its usual bowed-out shape, it must be the case that when we produce no rice that we produce less than 100,000 bushels oi‘corn. If we produced exactly 100,000 bushels ofcorn, the PPF would be linear. If we produced more than I00.000 bushels ofeorn then the PPF would be bowed-inward. Hence, C is the correct answer. B. Choice A is wrong since the “law ot‘demand” means that .I cannot be the price ofrides, since it has a positive number in front of it. B is correct since l'un houses are substitutes for rides so you would expect the +sign in front ofits coefficient. C is wrong since ifl is a life jacket (a complement) you expect a 7 sign, D is wrong since advertising would increase demand. E is wrong since one would expect rides to be a normal good so you would want a + sign. D, This is the definition of perfectly elastic supply. C is correct. Buyers 2 and 3 will purchase a car. The difference between what they are willing to pay and the market price is their individual consumer surplus. Totaling these up gives the answer. Total consumer surplus equals ($56,000 — $25,000) + ($34,000 — $25,000) : $31,000 -I- $9,000 : $40,000. Answer A is wrong because it incorrectly treats the buyers as sellers and calculates the producer surplus from Buyer I and Buyer 4 as ii‘they were sellers. Answer B is wrong because it subtracts the (negative) surplus from Buyers I anti 4 as if they actually purchased the car at $25,000 even though the market price was below their buyer value, Answer D is wrong because it is the sum ofthc buyer values for Buyers 2 and 3. not their consumer surpluses. D is correct. The total surplus the area ofthe triangle with base 6 and height 18 = (20-2). So, 54 : 0.5 x 18 x 6. See the table below. Answer A is wrong because it is the equilibrium price. Answer B is wrong because it is the only the producer surplus. Answer C is wrong because it is on} the consumer surplus. Answer E is wrong because answer D is correct. D. The point formula. for cross~price elasticity of demand is (dQEB/d'l’h)*(Ph/Q,g). Evaluating this expression at the point where Psg=$5, I=$100, 13.310. we find that [3515200. Phili). and leig/CIPIHI. Thus the cross-price elasticity of demand between sunglasses and the price of hats is 0.2. The correct answer is D. D. This is the only correct statement. For A, a negative income elasticity means that the good is inferior. For B, the quantity ot‘coft‘ee demanded would rise as a result oi‘a rise in the price ot‘tea. For C, arise in the price ofinputs is one of the shift factors ofthe supply curve. For IS, a flatter demand curve means more price elastic demand. C‘. The quantity supplied must increase with the number ol’producers, hence part A must be wrong. Part B is wrong for two reasons: the quantity supplied must decrease with the price of the input (the wage rate), and must increase with the price. Hence, part C is correct and part D is incorrect. Part E is incorrect because the quantity supplied (the supply function) should not depend on tastes and preferences — these are determinants of the demand function. C. Excess supply means we have more quantity supplied than quantity demanded. This happens in the upper portion of the demand-supply "scissors", where the price is above the equilibrium level. The invisible hand will ensure that the market worlts its way to an equilibrium. which means price will decrease until it reaches the equilibrium level. As a result of that, quantity supplied will decrease and quantity demanded will increase. C. The cross~price elasticity ofdemand between oranges demanded and the price ofapples shows how a change in the price of apples affects the quantity oi‘oranges demanded holding all else constant. In order to calculate the cross-price elasticity of demand between oranges demanded and the price of apples, we must observe a change in the price oi" apples holding income and the price of oranges constant. A. is 13 C:\(Iceume~]\wissin|(\app]ic~1\qua|comm\eudora\at1ach\EXAMSOLUTlON.doc incorrect because the price of oranges changes from Dale 2 to Date 3. B. is Date 3. Furthermore, D. and E. are wrong because the cross- positive number. Hence C. is the correct answer. incorrect because the price ofapples is the same at Date I and price elasticity of demand between oranges demanded and the price ot‘ apples is a 14 ...
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This note was uploaded on 09/19/2010 for the course ECON 1101 taught by Professor Evans during the Fall '08 term at Cornell.

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