Intro Micro Exam 1, Fall 2012

Intro Micro Exam 1, Fall 2012

Dr. 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.

1. In each of the following situations, identify and explain which of the 12 principles is at work. (5 points each)

a.You need to decide how many hours to spend chatting with your friends on Facebook rather than studying for an exam.

b. Because there is a shortage of parking spots on a college campus, the college charges faculty and students $200 for a parking sticker that allows the student to legally park on campus.

2. Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for potatoproduction, there are fewer resources available for catching fish.

a. Can Atlantis produce a combination of 500 pounds of fish and 500 pounds of potatoes? Where would this point lie relative to the production possibility frontier? Explain.(5 points)

b. What does the table above imply about the slope of the production possibility frontier? Does this shape make economic sense? Why or why not? (12 points)
3. Suppose the 2012market for corn tortillas is in equilibrium. Given the following scenarios, predict changes to the equilibrium price and quantity of corn tortillas. 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 price of farmland has increased.

b. All else equal, the price of flour tortillas has decreased.

c. All else equal, the government announces that the price of corn tortillas will be much higher in 2013.

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

4. Suppose a price floor is imposed on the market for milk.

a. Draw a graph of the market for milk. Identify the equilibrium price and quantity and then identify the price floor. (4 points)

b. Discuss the expected inefficiencies of such a policy. (10 points)

5a. Suppose that we discover that the income elasticity of demand for sushi is equal to 1.5. What does this value tell us about the demand for sushi? Interpret this value for someone who is unfamiliar with the concept of income elasticity. (5 points)

5b. Suppose that we discover that the cross-price elasticity of demand for beer with respect to the price of wine is equal to .75. What does this value tell us about the relationship between beer and wine? Interpret this value for someone who is unfamiliar with the concept of cross-price elasticity. (5 points)
6. The market for textbooks is described by the linear functions below.

Market demand for Textbooks: P = 470 – 2Qd where Qd is units per day and P is the price of a textbook.

Textbooks Market Supply: P = 20 + Qs

a. Draw this market, being sure to label everything, including curves and vertical intercepts. Solve for the equilibrium price and quantity of textbooks and identify in your diagram. (9 points)

b. At the price and quantity found in part (a), calculate consumer and producer surplus. (6 points)

c. At the price and quantity found in part (a), calculate the price elasticity of demand. Carefully interpret this value for someone who is unfamiliar with the concept of price elasticity. (5 points)

d. Suppose the government passed a law that sets a minimum price of a textbook at $100. Show this price control in the graph. How would the law affect total surplus in the market? Please be specific. (5 points)

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