Dr. Eric Dodge Page 1 12/8/2008
Intro Micro Final Exam, Fall 2008
NAME:______
You may not attach additional paper to this exam. If something is unclear, please do not hesitate to ask for clarification.
1. Use marginal analysis to explain why it is possible to “have too much of a good thing”. Use a person’s decision to consume pizza, at $1 per slice, as an example. Include a diagram showing the consumption decision. (10 points)
2. The small nation of Grinchlandia uses its resources to produce two commodities, cans of Who Hash and Roast Beast.
a. Putting Roast Beast on the horizontal axis, illustrate a production possibility frontier (PPF) that reflects increasing opportunity costs. Does the shape of this PPF make economic sense? Explain. (7 points)
b. In the above diagram, show how your PPF would change if Grinchlandia experienced a permanent reduction in the harvest of Roast Beast. Explain the outcome. How did the opportunity cost of producing Who Hash change? (5 points)
c. In the above diagram, label a point “U” that reflects a combination that is no longer attainable. (3 points)
3. Suppose the market for molasses, is represented by:
P = 55 – Qd where Qd is the # of gallon jars demanded per hour and P is the price per gallon, and
P = 5 + 4Qs where Qs is the # of gallon jars supplied per hour.
a. Draw the market for molasses, being sure to label everything. (5 points)
b. Hired as a consultant for molasses producers, solve for equilibrium price and quantity. Show these on the above graph. (5 points)
c. At the point of equilibrium, calculate the price elasticity of demand. Thoroughly interpret this measure for the owners of molasses plants. (6 points)
d. The molasses producers come to you, proposing a price increase of 2%. Give them a specific prediction of how their customers would respond to this strategy and how it would affect their revenues. (6 points)
4a. The income elasticity for Spam has been estimated to be -2. Interpret this value. (6 points)
4b. The cross price elasticity of Doritos with respect to the price of marijuana is estimated to be -.75. Interpret this value. (6 points)
5. Mrs. Wilson buys loaves of bread and quarts of milk each week at prices of $1 and $2, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 40 “happy points”, respectively. Is she buying the utility-maximizing combination of bread and milk? If not, how should she reallocate her expenditures between the two goods? Explain how you know. (7 points)
6. You were provided an article that discussed the economy in North Dakota.
a. How did the economy in North Dakota compare with the economy in other states like Michigan? (4 points)
b. Draw side by side graphs that illustrate the labor market in North Dakota and the labor market in Michigan. Given the relative strength of these labor markets, would you expect any labor market mobility to occur? According to the article, is this mobility occurring in North Dakota? Explain. (8 points)
7. Suppose the market for candy is in equilibrium. Given the following scenarios, use a diagram to illustrate the changes in the market. Explain why these changes are occurring. Predict changes to the equilibrium price and quantity of candy. (4 points each)
a. The price of sugar falls.
b. A weak economy decreases average household income in the U.S.
c. Combine the effects of (a) and (c)
8. A price-taking firm has the following total cost data and demand schedule:
Output (units) / Total Variable Cost ($) / Total Fixed Cost ($)0 / 0 / 2
1 / 6 / 2
2 / 14 / 2
3 / 24 / 2
4 / 36 / 2
5 / 50 / 2
6 / 66 / 2
7 / 84 / 2
8 / 104 / 2
9 / 126 / 2
10 / 150 / 2
b. What will happen to price and output for this firm in the long run? Describe any adjustment process for both the industry and for this firm. Calculate the long run price and output. Be as specific as possible. (10 points)
9. How could the market for flu shots be an example of a market failure? In a clearly labeled diagram, show how the market fails to provide the socially optimal quantity of flu shots. How does this create a resource allocation problem? (10 points)
b. Describe how the government could create a policy to alleviate the market failure. Clearly show the impacts of this policy in your diagram. (6 points)
10. Explain the “Tragedy of the Commons” and why it occurs. Use an example. (5 points)
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