Answers to more 2009 practice exam questions

# Answers to more 2009 practice exam questions - ARE100A...

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ARE100A INTERMEDIATE MICROECONOMICS: THEORY OF PRODUCTION AND CONSUMPTION FALL QUARTER 2009 Additional Practice Questions December 1, 2009 For all of these questions you should explain your answers. Answer Sketches 1. Consider the demand for wine from France. There are 1000 wine producers and sellers of French wine competing with each other. Half the French wine, 10 million bottles, is sold in France, where there are few substitutes. One third of the French wine is sold in the rest of the EU, where there are some substitutes, but French wine is considered special. One sixth of the French wine is sold in the rest of the world where wine from other places, is considered a perfect substitute for French wine. The French wine is only 5% of the total wine in the global market. a. Illustrate in a standard diagram the total demand curve facing the French wine supply paying attention to the elasticity of demand in each market that you must add up to get to total demand. Total demand slopes down with an initial very inelastic segment, a fairly inelastic segment and then a horizontal segment. The quantities for each segment should correspond to the quantities in the problem. b. If the marginal cost curve of wine produced in the rest of the world is constant at \$5 per bottle, what is the price of French wine? The price will be \$5 per bottle and the marginal cost c. If the marginal cost of producing wine in the rest of the world falls to \$4 per bottle, but some French wine continues to be sold in the world market, what is the effect on consumer surplus for buyers of French wine in France (I want a number and explanation). Consumer surplus rises by \$1 per bottle for 10 million bottles (the amount of initial French consumption). If the French demand is perfectly inelastic the gain in PS is just \$10 mil, but if they buy a bit more with a lower price the gain is \$10 million + ½(\$1 time the added quantity). 2. Your income is \$400,000 per year.

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Answers to more 2009 practice exam questions - ARE100A...

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