Intro Micro Exam 1, Fall 2008
Created by Eric Dodge NAME:______
Please use the space provided, or additional space on the back, to respond to the following. You may not attach additional paper to this exam. If something is unclear, please ask for clarification.
1. Suppose you find $60 folded up in your microeconomics book and you decide to spend it all in the Bookstore on Panther shirts at $12 per shirt and Panther caps at $6 each.
a. First write the equation for your budget constraint and then draw the budget constraint in a well-labeled graph with shirts on the x-axis. Explain the significance of the vertical and horizontal intercepts (8 points)
b. What is the slope of your budget constraint? Explain how the slope of your budget constraint reflects the opportunity costs of buying one more shirt. (6 points)
2. According to the article “As the Price of Grain Rises, Catfish Farms Dry Up” by David Streitfeld (New York Times, 7/18/2008), catfish producers have been hurt by rising grain prices. According to the article, “Corn and soybeans have nearly tripled in price in the last two years, for many reasons: harvest shortfalls, increasing demand by the Asian middle class, government mandates for corn to produce ethanol and, most recently, the flooding in the Midwest.” First explain how these factors could have combined to nearly triple the price of corn in the corn market. Then explain how this is creating hardship in the market for farm-raised catfish. In addition to your explanations, provide appropriate graphs and use arrows to indicate the direction of shifts and the changes in price and quantity. (14 points)
3. Suppose you have just entered the library to spend the evening studying for your microeconomics exam. What are the benefits of studying for the exam? What are the costs? Using marginal analysis, how many hours should you study? Explain how this decision is made. (10 points)
4. A small college wants to increase total revenue from students who pay tuition to attend. The President has proposed to increase tuition to increase total revenue and you are asked to provide economic advice. You estimate that the price elasticity of demand for this small college is 5. First, explain to the President exactly what this elasticity is telling her. Will the President’s proposal to increase total revenue succeed? Explain to her why or why not. (10 points)
5. Suppose the market for chicken is in equilibrium. Given the following scenarios, predict changes to the equilibrium price and quantity of chicken. A diagram is not required to answer these questions, but might be useful to you. Explain why these changes are occurring. (5 points each)
a. All else equal, the technology for processing chicken has improved.
b. All else equal, a weak economy decreases average household income in the U.S.
c. All else equal, the price of beef has increased.
d. Combine the effects of (a) and (b).
6. The market for rum is described by the linear functions below.
Market demand for rum: P = 500 – 3Qd where Qd is barrels per day and P is the price of a barrel.
Rum Market Supply: P = 100 + 2Qs
a. Draw this market, being sure to label everything, including slopes and intercepts. Solve for the equilibrium price and quantity of rum and identify in your diagram. (8 points)
b. At the price and quantity found in part (a), calculate the price elasticity of demand for rum. Interpret this value for someone completely unfamiliar with the concept. (8 points)
c. Suppose the government imposed a price control of $300 per barrel of rum. How would this affect the rum market? Please be specific. (6 points)
7a. What are the major determinants of price elasticity of demand? (4 points)
b. Use those determinants and your own reasoning in judging whether demand for each of these products is probably elastic or inelastic. (3 points each)
· Toothpaste
· Crest toothpaste
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