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msx06_answers - AUSTRALIAN NATIONAL UNIVERSITY Mid-Semester...

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Unformatted text preview: AUSTRALIAN NATIONAL UNIVERSITY Mid-Semester Examination March 2006 MICROECONOMICS 1 (ECONl 101) Study Period: 15 minutes Writing Period: 90 minutes Permitted Materials: Non-programmable Calculators Answer all of the following questions in the script book. Each question is worth 10 marks. 1. You are just starting an Economics exam. Use the concepts of opportunity cost, marginal analysis and incentives to explain why you shouldn’t spend too long answering this question. Use the same concepts to explain why you should write more than five lines. 2. Consider a small economy with two people, Brooke and Ridge, who each produce silk and wine. If Brooke spends all day making silk, she can make 30 metres of silk, while if she spends all day making wine she can make 120 litres of wine. If Ridge spends all day making silk, he can make 60 metres, while if he spends all day making wine he can make 60 litres. Assume that both people have constant opportunity cost. a. Use this information to illustrate the daily production possibility frontiers for Brooke and Ridge, with the quantity of silk on the y—axis. b. What is the opportunity cost of producing a litre of wine for each individual? Who has the comparative advantage in producing wine? Explain your answer. . c. Suppose that when Brooke and Ridge are being self—sufficient, they each choose to consume as many metres of silk as litres of wine. Find this po'mt on each of their production possibility frontiers. What is the aggregate production of each good? d. If instead Brooke and Ridge specialise in production, what should they specialise in? Show that aggregate production is higher for both goods in this case compared with your answer in c. 3. Use standard supply—and-demand diagrams to explain what happens to the equilibrium price and quantity of pasta when: a. A new pasta—making machine is invented. b. The number of Italians in the population increases. c. Per capita income increases Ed the price of rice falls. Please turn over. ECON 1101, Page 1 of2 4. Assume that the demand and supply of mobile phones are respectively given by: Pd = 100 — 10Q PS 2 20 +10Q where Q is the quantity of mobile phones demanded and supplied (in millions) per year and Pd = P, = P is the equilibrium unit price of mobiles. a. Sketch the supply and demand fimctions and find the equilibrium values of P and Q. b. Now assume that supply is given by P, = 40 +10Q. Sketch this new supply curve and find the new equilibrium values of P and Q. c. Identify some of the factors that may have caused this shift in the supply curve. 5. Ed has fixed money income of $180 and purchases two goods, wine and cheese. Initially, when the price of a bottle of wine is $12 and the price of a block of cheese is $4, he buys 12 bottles of wine. 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