Exam 1_Foundations_Fall2013

Dr. Eric R. DodgeNAME:______

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. In one of your classes, you are assigned a 10 page paper. What are the four economic resources that you will use in the production of this assignment? Be sure to explain each of the four resources and how it is used to produce this assignment. (12 points)

2. The nation of Cincinasti produces only two things with its economic resources: beer and chili.

a. Draw a production possibilities frontier (PPF) for Cincinasti that demonstrates increasing opportunity costs. (5 points)

b. What is the economic rationale for drawing the PPF with increasing opportunity costs? (6 points)

c. In the PPF you have drawn above, identify a point “U” that is currently unattainable and a point “I” that is currently inefficient. (4 points)

3. Explain the difference between positive and normative economic analysis. Provide an example of each to assist your explanation. (8 points)

4. Suppose the 2013 market for pumpkin pie is in equilibrium. Given the following scenarios, predict changes to the equilibrium price and quantity of pumpkin pie. Explain why these changes are occurring. A diagram is not required, but might be useful to you. (6 points each)

a. All else equal, the wages paid to farm laborers has decreased.

b. All else equal, the price of pecan pies has increased.

c. All else equal, the government announces that eating pumpkin pie increases the risk of leprosy.

d. All else equal, combine the events from (a) and (b).

5. A local cabinet maker can employ carpenters, and a fixed amount of capital equipment, to assist him in building cabinets for kitchens and bathrooms. The table below gives some information on his monthly short run production function.

# of
carpenters / Total Product
(# of cabinets per month) / Marginal Product
0 / 0
1 / 7
2 / 6
3 / 5
4 / 22
5 / 25
6 / 3
7 / 28
8 / -1

b. At what quantity of labor is the point of diminishing returns? (2 points all or nothing)

c. Ignoring for now the cost of employing carpenters, how many carpenters should this owner hire? Explain. (4 points)

6. Suppose the market for vodka, is represented by:

P = 40 – Qd where Qd is the # of gallon jugs demanded per hour and P is the price per gallon, and

P = 4 + 2Qs where Qs is the # of gallon jugs supplied per hour.

a.Draw the market for vodka, being sure to label curves, axes and intercepts. (5 points)

b. Hired as a consultant for vodka producers, solve for equilibrium price and quantity. Show these on the above graph. (5 points)

c. Compute consumer surplus enjoyed by vodka consumers and producer surplus enjoyed by vodka producers. (6 points)

d. Suppose that you have determined that the price elasticity demand is equal to 0.75. Explain what this price elasticity means to someone unfamiliar with the concept. (5 points)

e. If a tax was imposed on vodka that increased the price by 6%, would total dollars spent on vodka rise, fall, or stay the same? Explain your reasoning. (5 points)

7. Liz’s Lemons is an organic lemon orchard that operates in a competitive market. The table below shows the total cost of growing bushels of lemons. If the market price of a bushel of lemons is $18, how many bushels will Liz’s Lemons produce and how much profit does the firm earn? (6 points)

Quantity of Lemons
(bushels) / Total Cost (TC)
0 / $14
1 / 30
2 / 36
3 / 44
4 / 56
5 / 72
6 / 92
7 / 116

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