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Unformatted text preview: s the choice of either studying one hour or studying for four hours, and these are the only two options. Which should she pick? a. 1 hour b. 4 hours c. She would be exactly indifferent between these two options d. Depending on her preferences, she might sensibly select either e. None of the above 7. The elasticity of demand for cigarettes is ‐.30, therefore, a 50% increase in the price of cigarettes will cause a a. A 1.5% decrease in the quantity of cigarettes consumed b. A 15% increase in the quantity of cigarettes consumed c. A 150% decrease in the quantity of cigarettes demanded d. A 15% decrease in the quantity of cigarettes demanded e. A –1.5% change in the quantity of cigarettes consumed 2 8. An increase in the marginal costs of producing grommets will cause a. An decrease in the supply of grommets and an increase in the quantity of grommets demanded b. An increase in the supply of grommets and a decrease in the quantity of grommets demanded c. An increase in the supply and demand for grommets d. Both (b) and (c) are correct e. None of the above 9. The summer drought substantially reduced the barley crop this year. What is the change in price, quantity, and consumer surplus, respectively of beer? a. increase, increase; increase b. decrease, decrease; decrease c. decrease, uncertain; increase d. uncertain, decrease; decrease e. increase, decrease; decrease 10. Assume that widgets are an inferior good, and that their key ingredient is gadgets. Suppose that a major flood causes (i) a sharp rise in gadget prices, and simultaneously (ii) reduces the income of widget consumers. As a result, the equilibrium price and quantity of widgets, respectively, will a. rise, fall b. fall, rise c. move in an uncertain direction, fall d. rise, move in an uncertain direction e. none of the above 3 Long Questions 1 is based on the following information. Please show your work for partial credit. 1. Below are the values given to each buyer and seller in a double oral auction experiment. Each buyer could buy at most one widget and each seller could sell at most one widget. No fractional units could be traded. Experiment Data Values for Buyers and Sellers Buyer's ID Number B1 B2 B3 B4 B5 B6 B7 B8 B9 B10 B11 Buyer's consumption value ($) $54.00 $60.00 $42.00 $48.00 $18.00 $24.00 $6.00 $30.00 $36.00 $66.00 $12.00 Seller's ID SA SB SC SD SE SF SG SH SI SJ SK Seller's cost of production ($) $12.00 $21.00 $36.00 $39.00 $18.00 $24.00 $42.00 $27.00 $33.00 $30.00 $15.00 A. Using economic theory, graph and estimate the expected price of a widget? How many widgets do you expect will be sold? (13 points) B. Using the triangle method, what is the maximum potential consumer surplus (i.e. what would theory predict)? What is the maximum potential producer surplus? Show your work for full‐credit. (13 points) 4 Questions 2 is based on the following information: The Law of Demand and Law of Supply both apply to peanut butter. You also know this about peanut butter: Demand: (i)
The price of peanut butter is initially $4.00 per 12 oz. jar; (ii)
The price of jelly is initially $2.00 per 12 oz. jar; (iii)
The income elasticity of demand for Peanut butter is 2; (iv)
The cross price elasticity of demand for peanut butter and the price of jelly is ‐1.5; (v)
The cross price elasticity of demand for peanut butter and the price of Tofu is 2.2; and (vi)
The elasticity of demand for peanut butter is ‐0.6 Supply: (i) Salt and workers are inputs in the production of peanut butter; and (ii) Peanut butter is made with the aid of giant peanut crushing machines. A. Given this information, suppose the price of jelly increases by 20%. i.
Show what will happen to the equilibrium price and quantity of peanut butter? (10 points) ii.
What is the new price of jelly? What is the new price of peanut butter? (6 points) iii.
How will this affect the total expenditures (or total revenue) on peanut butter? Support your answer. (8 points) 5 3. The price of kumquats decreases by 60% at the same time the demand for rambutan increases by 40%. A. What is the cross price elasticity? (4 points) B. Are kumquats and rambutan compliments or substitutes? (6 points) 4. (The Price of Everything): Briefly explain what Professor Lieber means when she quotes Hayek’s line: “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” (10 points) [Auf Wiedersehen] 6...
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- Fall '12