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C:\Users\Wissink\Dropbox\1110 fall 20! ]\exams 1110 £20] l\e2_] l 10Hf11_endnotes completeddoc \ \ \O E 2,0 ii \ ANSWERS TO ALL THE MULTIPLE CHOICE QUESTIONS 10 ll 12 13. 14 15. l6.
l7. 18. D. Use the formula that elasticity = (dQs/dI’XP/Q), where P=(6+8)/2:7 and Q=(200+300)/2=250.
B. Set demand equal to supply to get that P*=30 and Q*=40 and dQS/dP24, just use the formula that elasticity = (dQS/dPXP/Q)
A. Less elastic supply means that the quantity supplied doesn‘t change much while the price does as you move along the curve. B. The cross price elasticity would be: negative 4.4 indicating that peanut butter and bread are complements in consumption. D. Use the formula that elasticity =(dQ5/d1)(I/Q) = 3.5. If dI=0.04, dQs has to be 0.14.
C. The income elasticity is 30/20 which is positive AND greater than 1, so We have a luxury good. C. Think about a pair of shoes. Say X represents a unit number of left shoes, and Y represents right shoes. No matter how many right (left)
shoes you have, if you have only one left (right) shoe, your utility will be the same with having one pair of shoes (45 degree line in the graph.) C. All of the other statements about a household's indifference curve map are correct BUT C. C. To maximize utility Peter needs to have his (MUcb/Pch):(MUbg/Pbg). Given his income of $7.50, this happens when he consumes 5
chocolate bars and 5 bubble gLuns. B. By the law of demand, a decrease in the price of beer causes an increase in its quantity demanded. Since it is also a normal good, the
positive income effect associated with the price decrease reinforces the substitution effect. Thus the quantity demanded of beer must rise. As a
result of the substitution effect, less pizza is consumed as the mice of beer decreases. As a result of the positive income effect, the quantity
demanded of pizza decreases, since it is an inferior good. Altogether, the quantity demanded ofpizza decreases, and the quantity demanded of
beer increases. C. A is the statement of the law of demand — it is true. B is true since if X is normal the income and substitution effect work together
according to the law of demand. C is FALSE since an inferior good can satisfy the law of demand provided the substitution effect is larger
titan the income effect which is usually is. D is true since it is possible for an inferior good’s income effect to swap the substitution effect
thereby violating the iaw of demand. E is true: Giffen goods violate the law of demand and only inferior good can do that. A. The substitution effect associated with an increase in the price of books. Correct. The point A is on the original budget line in this case, the
point C is on the new budget line (note the lower consumption possibilities for books along the books axis). The point B is on the original
indifference curve and a budget line parallel to the new one. Thus, the movement item A to B is the substitution effect associated with an
increase in the price of books. B. the income effect associated with an increase in the price of books. No, the income effect associated with an
increase in the price of books is the movement 13 to C. C. the substitution effect associated with a decrease in the price of books. No, the
substitution effect associated with a decrease in the price of books would be shown on the same indiﬁ‘erence curve as point C, the point
illustrated at the higher book price. D. the substitution effect associated with an increase in the price ofmovies. No, as one can tell from the
budget lines containing the points A and C, the price of movies has not changed. E. the total effect is ﬁ'om A to C. A. Observe two parallel budget lines which are respectively tangent to points B and C. When the income increases with unchanged prices, the
optimal number of movies increases. Therefore the movie is a normal good. B. A is just wrong. B is correct because the Paupers might be able to be on the same indifference curve with $400 in food stamps or with less
than $400 in cash. C is wrong since they would never prefer the food stamps to cash. I) is wrong since the budget line is only ﬂatter for a
while. Once they spend some of their own $2400 on food the budget line has the same slope it had originally. C. EriCorp’s implicit costs are the opportunity costs of the salary given up and the opportunity cost of interest earned on the mutual fund. This
is equal to $55,000  (0.l*$20,000) = $55,000 + $2,000 = $57,000. The explicit costs are cost of wages + cost of office supplies + cost of food
+ rent for the space + cost of utilities = $92,000. ' C. 90,00050,000=40,000 C. Even if his marginal product curve is falling, then marginal product may currently be greater than average product. It depends on the form
of production function. ' D. Michael should use inputs so that the marginal product of labor divided by the price of labor is equal to the marginal product of capital
divided by the price of capital. Since the MP/P= 7 for labor, and the MP/P=5 for capital, Michael should simultaneously hire more labor and
less capital which will bring down the marginal product of labor increase the marginal product of capital. l5 C;\LJser5\Wissink\Druphnx\1 [10 fall 201 I\cxams I £10 {2011\62_111(‘!_fl l.d0c E":
All parts 0f the question should be addressed in this one graph, below. I 7.1 (a 0650 Smoneyleft over 9\ QOO ?)< : Li' QKA :"\
\/ ewU‘JS‘ xepjﬂaoo 3C« Tax Fevemue. \S (4 (a Y3003 :; a 0 ‘H ’90 O
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Poundsofﬁ s
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>4n Verbal explanations can be written here: C:\Users\Wissink\Drnpbox\l l 10 fall 2011\exalus 1110 i201 i\c27l110_l'i Ldoc
2 Fred 0Perates Fred’s Fudge Shoppe out of his garage. His garage has zero value for any other use. All information is for a typical month. Fred hires labor and buys sugar and chocolate in local markets. The going,
wage rate for hired labor is $4/hour, sugar sells for $4/bag and chocolate sells for $ l/bar. Fred also uses his
own time to run the ﬁtdge operations. Was he not using his own time in his fudge enterprise, he could sell his
hours in the labor market at $20/hour. Fred takes money out of his banking account, where he was earning 1%
interest a mouth, to buy an oven. The oven costs $5.000 and does not depreciate. Fred also rents trucks at the
local UHaul to deliver his fudge products to various retailers. Trucks rent for $100 per truck each month. The
table below represents all the relevant information about Fred’s production function for making fudge. Quantity (1,3 £595 ( $0 ((3)) of Fudge Hired Labor Labor Sugar Chocolate Rented .' ounds hours hours (he  5 bars Oven Trucks
0 e .. 0: Q ago0:0 4M 020 ii (3er x1" room: a
2 15¢st isrdﬁ i1: 932:; \L 2 .
4 53;? :Q‘B 647,?) i 2» ; 41L \t 2
6 i Sin 8 :35; : sag?) ' 3=2,  6%; EL 2
a SLiw28=llll i 123240 ‘ 446 _.. 85& st“ 2 l
10 t» 156 2 at i/ 155300 . 5920 10am m 2 . l
12 shi.110=~ib}0 18:39:) anal—l W 1232 L 2 "‘ Quantity of \ \ \ L”
Fudae (ounds Fixed Cost Variable Cost Total Cost Mar inal Cost £0 0 R E; 0 XXX
3.25:0 ‘8 Co ”93% Ce HO C:\UserS\WissinleropboxH l 10 fall 2015\exams ] 110 1‘20! l\e2_l [1071‘] l.doc a. Fill in the cost table. For marginal cost, use the “larger delta” midpoint method. Show some work.
b. Which input variable or variables exhibit the law of diminishing marginal productivity? Brieﬂy defend YOUI‘
answer with data from the question.
(a. Suppose Fred sells his fudge for $85/pound and that he sells eight(8) pounds of fudge at this price. What are
Fred’s accounting proﬁts? What are Fred‘s economic proﬁts? Show some work.
d. Sketch “The Graph" (as we called it in class) of cost curves for Fred‘s Fudge Shoppe. It is safe to assume
3 (without grinding through all the numbers) that his curves are all typically shaped. Make sure you clearly label
each item in your graph.
e. Suppose that Fred’s oven actually depreciates by a ﬁxed. amount of $24 each month. Where would that enter
7the analysis of Fred’s costs?
f. Suppose UHaul increases the rental price on trucks. Without re—doing all the numbers in the tables, indicate
how “The Graph” would be impacted by this event. Verbal explanations can be written below on this page.
Illustrate “The Graph” in the space provided on the NEXT page: .. l w... ‘ , taw— We.
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“wwmwwM— um“ LDMR "to Labor“ made cabs. . Wi‘l/l/x W eWaWde
"QumA‘im We e'WlMﬁt” “Oi/12.0% (NME 1C5 or“ we ML l3 C:\Uscrs\Wissink\Dropbox\1110 fall 2011\exams 1110 f201 l\cl_11107fl 11100 c5. S Pounds of fudge M.WCJAJ\ (ﬁr“w \IJG‘MGL M1 #1121014 awe; 0% c1 .. m WVWN
efwvm &% a LA w ﬁ , 41. _
or. Quawcg l:\’““§‘“ﬂ“3mi.,..5mrﬁ A” “$14, 1”" ‘3‘ (LnQ. {batman W?" .1 y. , . t v _
EN L W WW (1, gr"'ca*‘\‘”c:..., UJ 6“wa 0L 5 Lw ”P ‘
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 Spring '08
 Evans
 Microeconomics

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