Intro Micro Exam 1, Fall 2006

Created by Eric Dodge

## NAME:______

Please use the space provided to respond to the following. You may not attach additional paper to this exam. If something is unclear, please do not hesitate to ask for clarification.

1. Assume that full-time college students must allocate their waking hours between studying and socializing.

a. Draw a well-labeled production possibilities frontier for a student. You will refer to this diagram throughout the rest of this problem. (5 points)

b. Discuss how the shape of your PPF reflects the opportunity costs of engaging in either activity, and whether they are increasing, decreasing or constant. Does the shape of your PPF make sense? (8 points)

c. In the diagram above, show how a speed-reading course would affect your PPF. Discuss how this would change the opportunity cost of socializing. (10 points)

2. Some Revolutionary War historians would contend that the most formidable opponent to George Washington’s army during his winter at Valley Forge was not the British or the bitter weather, but price controls. The legislature of the Commonwealth of Pennsylvania in 1777 decided to try a period of price ceilings limited to those commodities needed for use (boots, blankets, food rations, e.g.) by Washington’s army. What are the results of such price controls? Why did this create a foe more challenging than the British or the weather? Include a clearly labeled diagram to make your argument. (15 points)
According to the article “Painting is Getting Pricier” by Annie Groer (Washington Post, 8/3/2006), the price of a gallon of house paint has been increasing for the last couple of years.

3. Suppose that the U.S. market for house paint is currently in a state of equilibrium. In the questions below, explain how the markets will be affected by these events. Explain why a curve (or curves) will shift. Predict changes in equilibrium price and quantity from the events. Diagrams are a necessary component of your response. Please use arrows to indicate the direction of shifts and the changes in price and quantity. (6 points each)

a. According to Groer’s article, “The chief culprit is petroleum, its byproducts and other raw and manufactured materials critical to the paint industry.” Holding all else constant, how will the higher price of petroleum affect the U.S. market for house paint?

b. Holding all else constant, how will the U.S. market for paint brushes be affected by the changes described in the article?

c. Holding all else constant, how will the U.S. market for wallpaper be affected by the changes described in the article?

d. Now suppose that the supply of wallpaper is perfectly inelastic. How would this change your response to part (c)?

4. You are a consultant to house paint retailers like Home Depot. The article indicates that retailers of house paint have been reluctant to increase the price to the consumers. Explain how Home Depot’s reluctance to raise prices relates to the price elasticity of demand and the total revenue test. (12 points)

5. The market for cranberries is described by the linear functions below.

Market demand for cranberries: P = 500 – 3Qd where Qd is millions of barrels per year and P is the price of a barrel.

Cranberry 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 cranberries and identify in your diagram. (8 points)

b. At the price and quantity found in part (a), calculate the price elasticity of demand for cranberries. Interpret this value for someone completely unfamiliar with the concept. (10 points)

6. Your opinionated roommate exclaims that,“We live in a country that embraces capitalism. That meansthat I should be allowed to freely use my own computer to access (or provide) music, porn or anything else,in any way that I see fit, free of government interference.” Agree or disagree? Discuss the roles of private property and freedom to explain your reasoning. (8 points)

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