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Unformatted text preview: Practice Midterm Introductory Microeconomics Summer 2011: Session I Name: A HSWS Directions: Answer all questions. You must show your work (where applicable) to get full credit. 1) Suppose there are two goods in the economy, manufactured goods (M) and agricultural goods (A). Suppose as well that Country 1 can produce 20 units of manufactured goods per day or 10 units of agricultural goods per day, or any linear combination of the two. Country 2 can produce 4 units of manufactured goods per day or 8 units of agricultural goods per day, or any combination of the two. a) Which country has the absolute advanatage in producing agricultural goods? Which country has the comparative advantage in agricutural goods? A9914! Mwelmf =- 00 ’1. thp‘v“-'l\;¢ AA amt-:3; = Canal 3 '5’» b) Suppose Country 1 had spent two-fifths of its resources per day producing agricutural goods and three-fifths of its day producing manufacturing goods, while Country 2 split its daily resources between Agriculture and Manufacturing. If Country 1 and Country 2 decide to Speciallze and trade, what Willcbhe he Ems from trade? c%‘ 1.051 Pr: - ton-ll 5 '35»— A 5%: 3 fl» , 1.] 1'2. 'i ‘3 H o ' 7,0,!" . Posl' , M14 O LO 3 3 . .x'”: 5 ¢ («A if?) 0) Draw their daily joint-PFC and show previous daily aggregate consumption and current C70“ r“an" 15 daily aggregate consumption (i.e.u‘a’fjer trade). my)“ ’2le (prfiw‘l’h; Kai (II, _. 2,4 _ 4/ "" ’l ’ d) In a market economy, what determines who (i.e. which country) gets the gains from trade? . . f . l t“ ‘- W‘Tln a" 9-. 6- i5. my) e) Suppose the price of A is $1. Derive a price of M so that both countries are better off. Derive a price of M so that only one country benefits from trade. Derive a price so that trade breaks down between the two countries. (LEI) ‘9 «M ’ ”(£1 . LL M} 2 l 1"!" (cri‘o W “7“ '4“ “5*" phv 2 . LZXLO) (yak; bv cakj city-M 2) Suppose a consumer has the following utility function: U(X,Y) = X + Y a) Draw and label at least three indifference curves. \ '1— 3 K b) If the price of X is $1 and the consumer has $10, derive the demand curve for Y. ‘3 ¥oS° \o 10 \‘ c) What are the preferences inherent in the above utility function called? fpufiq} Stlosb i—ukS 3) Answer the following questions, parts (a) - ((1), about efficiency. a) What is it called when the production side of the economy is efficient? Tic“ «\ch E (146.1243 b) What is it called when the consumption side of the economy is efficient? ALLDCWH «c [afar La 11:} WK reanuIS in? (9(DA'H‘ NHL “rah l c) What condition must hold for the equilibrium in all markets to be efficient? F‘OI’N“ all; Y'u‘la‘ku.‘ 1: WILL 139101} l” i9 ”Atmaufaot WW5 “A Pl“; U 30? all; flcmés d) What is it about perfectly competitive markets that guarantees that the conditions in (a), (b), and (c) will all be met? Additionally show this IS true using the definitions o{ (a), (b), and(0)- ’1‘ 5 0M1“ kfltwswj +0 («\ka A54 *v-O on} 9(‘5‘1‘0’V‘3’l G] Elemwmi.utw =. “3%. films a“, 01’5”" 2"“ ' . . ,. .. N... we» r : PET-931. em .. WW3 C r 4““ ”93' , “U W3“! “J‘ (""5 i‘hlfc (”has a3 ‘fj'w-u CM'L M “A (“3‘ i804 w (I) kolclS, 4) Read the article "The Man Who Dared to Question Ethanol," which IS located at the back of the exam and answer the following questions. BTW, the article is from this Sunday's New York Times. Slaps- fl, MMiF be lit a) Using a simple supply and demand model, show what has happenned to the equilibrium price and quantity in the corn market. Explain why this change has happenned usin the tools we _ 1‘ "\ discussed in class and information from the article. m up; D ' cm I“ b) How has changes in the com market affected the wheat and soybean market (assuming farmers make growing decisions between the three crops)? Depict and explain why this change has ha penned using the tools we developed' In class and the justification-s 1n the $1.44 a“; 9.11 {man} s are “m femur AlLllfl-t {\wa WW. QM om (mu-l LkMHVr SL484 IL, m &lbk*’flm(;wtt C-tvt POL 0W Ln) {that-3h“. c) The article also suggests'that soybeans are also being used to satisfy federal ethanol requirements in gasoline. How would this further impact the markets for soybeans and wheat? Dem»! CW, Milli 8V1“ gulf entree RN“)! r (:0, 534M RDUSL‘v-Iw) ‘f (MES N W15) «ac—mic] (Tabb-<- 7% d‘lxlpv Laugh, (Luz-m 66-th A M , will QWK skCA—y .xl’ evcw (QW'W. i’w/S FM Mslhll (er (\Ml’l/ ‘0'\)t‘ 6% 0" fi‘M’hb m (Km/kiéwvl . d) If the demand for wheat is highly inelastic, will the above changes cause the price of wheat [to increase even more or less? Explain using a diagram. 5 ELK em Aw :5 act-at; gLiFH la n SW W“ [‘4 +° [WV " ' chad '.$ mama =4 arm-lb} 70H“ duck-q m... \i m _ On {I}! $115635 (LL) 0“ $113? 5) The following diagra epresents the short-run curves for {$1111 in a perfectly competitive market. Put your answers (where applicable) on this diagram. li a) Label all curves. A b) Label the equilibrium price (P*) and quantity (Q*) for this firm. c) Depict the firms profit as well as its total fixed costs and total variable costs on the diagram d) How do you know this is a short-run diagram? 1’st 7 0 e) Label the price that represents the long run equilibrium price (P,,). Also, what are the firm's profits in the long—run. prvrlj (a ”(Ll int-BID" :0 f) Explain how this market evolves from the short-run equilibrium to the long run equilibrium. A diagram will likely be helpfiil. 3 F i J Aged 5' w-Fii “? 0f 9".”“3 1" Ml h, ”PM! morn a - I can ‘3 ‘ N mqw (L0 Thu) 1" BIA" a“ CV“) "’ _ 3* which \uLS h) \Dmfil EMULL W‘i‘“ ?=~ IMO NYC This 15 m pawl ”It“ {NEH = 0 Q")- g) Profits in this diagram represent economic profits. Are the accounting profits greater than the economic profits or vice versa? News) M9 7, Ecmlc Nib RM min in: “firm W h) What is accounting profits minus economic profit? OWN-Maxi?) (csi («f aaviiui \nWSiv-J‘ i) Label (on the diagram) the lowest price that a firm would stay in business in the shirt run, call it Psd. | j) Why would the firm stay in business in the short run if the price was between P], and Psd? pi“ cmj (Vita «Low.» ?Sc\’ ”(LL «5“ )5 (0W WOT ‘in Vovt‘nbl/L msis Thus ““3 (CW/M. yaw w Slam/‘- «m um“ MP ‘1‘ Ed“ COW 0&3 QM C:::§’ : with ll cml 7/4 t‘w‘ W swt (w TM” w {P {t 3;,“ W3 a twp Mai-Mm, I \s (061%) ms mofiéfl ‘03 $015 M ”Magi 6) Suppose the NCAA (the National Collegiate Athletic Association) is a cartel just like OPEC (the Organization of Oil Exporting Countries), which it is. Essentially, the NCAA coordinates the supply of games both within and across conferences. There might be benefits of this coordination, but one effect is that it limits the total number of games. In the questions that follows, suppose the supply of games sanctioned by the NCAA is below the equilibrium level. a) What" Is the effect of the NCAA on the equilibrium ticket price fer Sporting contents? Please show your answer on a diagram. 5 8:3 Hath-VB ['14 s «fit I (mt-0L. “s ‘90 0“) W t l...“ W o J | l M | , (U DCM .LC A €1.13 1* :«t’ F‘m .\ s 5’ ‘1th but I . P 1’ alone if“ ‘ at; b) Will the equilibrium in these collegiate sporting markets be efficient? Why. or why not? If Q , the equilibrium' lS inefficient, please show the loss in total surplus resulting from the NCAA. | M0! W \t «ol’ LIN/21M Pd ans ?m¢ gel’W PM"; W‘ . .5 L... 1 MM » W“ 2 JJ Lrt M“U m fx{{—mm ewe} {1‘5 t W $45.41... $ bob“ 81-45. a} by»; (day-Ix L when}: n, _ .3 WW ,9”: a. Sweat rum :45 m at”. tam. 6.13,“. {admin (5 {Li Ac We “t Lhis (hwq “Ed '51:. {4-1413 V" (kl! 11‘meh a"), 0) Suppose the equilibrium is not efficient. How will this efficiency be affected by the elasticity of supply and demand? ”0% Dwi, WM bk swim Uwyr) r31 my; Mamba 0%ch .6 MM aflau) 0v .M» ., W"; W d) Besides the profit motive of its members, why might it be a good idea for the NCAA want to limit the number of games of college sports. mu A Raoul-1i of mus-w {1’ “W ,4; TM “(6 (mil) $35“: Jun-\WSIL) «'41 “#31:th SW “fikh’l‘g T“, W NCM "" “A“ I . 1“,; mm *9 wa fl}; ‘1%Lu\(gj$ (fem [90m 1": ”“3 ‘9'”; “\30 0M» 3 1 SAN hm h; (3120).) M miv obey/g), ...
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