Temple College
ECON 2302
NAME:______________
Fall 1998
1st EXAM – Take Home Portion
Please read and follow the instructions carefully for each
item on this exam. This take-home portion of the exam is
an individual assignment; that is, you may NOT
receive assistance from another person on any of the
problems. You MAY use your homework assignments
and lab reports, textbook, class notes, or any other source
to complete the exam (so long as you are working alone).
Each student will be held to the highest standards of
personal honesty and integrity.
NOTE: In answering all questions, it is better to provide
more explanation rather than less. In deciding how much
to write in response to any item, do NOT assume that the
instructor will “know what you mean.” Your work is due
AT THE BEGINNING OF CLASS on Tuesday, October
12, 1998.
PART II. GRAPHING PROBLEMS.
Provide the requested information for each
of the problems below. Use the back of the appropriate page to continue your
answer for any of the following items. 35 points total/15% of overall exam score.
1. Plot points for the ordered pairs given below. [Be NEAT!! Use the graphing paper
provided on the following page.] [5 points]
X
0
10
20
30
40
50
Y
10
30
50
70
90
110
2. Is the relationship between X and Y direct or inverse? [2 points]
3. Write an equation in the form Y = a + bX that describes the relationship between
X and Y. Show ALL of your math!! [8 points]
4. Interpret the slope coefficient. [What information does the slope in this example
provide?] [5 points]
5. Interpret the Y-intercept. [What information does the Y-intercept in this example
provide?] [5 points]
graphing paper here!!
6. The value of the vertical intercept is $100 and the slope is -15 in a linear equation
for price and quantity demanded. If price is $3.00, what is the quantity
demanded? Write the linear equation and explain how you found the answer. [10
points]
PART III. SUPPLY AND DEMAND PROBLEMS.
Provide the requested
information for each of the problems below. Use the back of the appropriate page to
continue your answer for any of the following items. 114 points/40% of overall exam
score.
Hasbro, Inc. makes BATMAN Action Figures. These 3-inch likenesses of DC
Comics’ the Dark Night and related characters are marketed at young boys
aged 4-9. Dave is an economist working for the company. He has been
asked by his superiors to conduct an analysis to determine why the
company’s new line of these Action Figures does not seem to be selling very
well [that is, the company has large inventories to be shipped, but the product
is not selling as well as hoped in retail stores]. He decides to begin with an
analysis of supply and demand. However, Dave is really a poorly trained
economist and he is having some trouble deciding how to proceed. He has
started by gathering some data on prices of the figures and the quantities
demanded and supplied at each price. His data provided in the table below.
Price
$10
9
8
7
6
5
4
Quantity Demanded
(x 1,000)
0
25
50
75
100
125
150
Quantity Supplied
(x 1,000)
200
175
150
125
100
75
50
Help Dave complete his analysis by completing the following items.
1. Plot the demand curve and supply curve on the graphing paper provided.
Label and scale the axes appropriately. Label your demand and supply
curves. Be neat!! [10 points]
2. Identify on the graph the equilibrium price and quantity. [Draw a broken
line from the vertical axis to the point that indicates the equilibrium price
and a second broken line from the horizontal axis to indicate the
equilibrium quantity.] [2 points]
The equilibrium price is ____________________.
The equilibrium quantity is ____________________.
3. Write an equation in the form indicated below to represent the demand
function for BATMAN Action Figures. Show all of your work below!! [6
points]
P = a + Qd
4. Express demand as a function of price. Show all of your work below!! [6
points]
5. Write an equation in the form indicated below to represent the supply
function for BATMAN Action Figures. Show all of your work below!! [6
points]
P = a + Qs
6. Express supply as a function of price. Show all of your work below!! [6
points]
7. Show mathematically that the equilibrium price and quantity that you
identified in #2 is correct. Recall the equilibrium condition (Qs = Qd). Show
all of your work below!! [10 points]
8. Calculate the company’s TOTAL REVENUE [a.k.a., TOTAL SPENDING of
consumers] at the equilibrium price and quantity. Show your math below!
[Circle your answer so I can easily find it.] Lightly shade in with a pencil
the area on your graph that represents the total revenue of owners. Be
neat!! [10 points]
9. Calculate the company’s TOTAL PROFITS at the equilibrium price and
quantity. Show your math below! [Circle your answer so I can easily find
it.] Draw diagonal lines in the area on your graph that represents the
company’s total profits. Be neat!! [10 points]
10. Calculate the CONSUMERS’ SURPLUS of customers at the equilibrium price
and quantity. Show your math below! [Circle your answer so I can easily
find it.] Draw opposite-slanting diagonal lines in the area on your graph
that represents consumers’ surplus. Be neat!! [10 points]
11. Assume that the current price that retailers charge for the new line of
BATMAN Action Figures is $8. Explain below why Hasbro, Inc. is
having trouble moving this new product line. Write an explanation that
Dave can understand (recall he is a poor economist) and can relay to
his superiors. Explain the problem to Dave graphically [indicate on your
previous graph]. Should Dave advise his superiors to raise or lower
their price for Batman figures? [10 points]
12. Suppose that Martin, who is Dave’s immediate supervisor, argues that
the company’s fiscal condition requires that they retain the current price
[$8] for the time being. Martin’s position is that if the company follows
Dave’s advice [from the previous question], it will decrease the
company’s revenue. Help Dave straighten Martin out. At the current
price of $8, what is the company’s TOTAL REVENUE from sales of
Batman figures. Show your math below. How does that compare to
the company’s total revenue at the equilibrium price? [10 points]
13. Calculate the PRICE ELASTICITY OF DEMAND between the equilibrium price
and the current price [where Martin wants it to stay]. Show all of your
math!! Is demand between these two price points relatively elastic, unit
elastic, or relatively inelastic? Briefly explain. [10 points]
14. Now, using the concept of price elasticity of demand, help Dave explain to
Martin why his suggestion to retain the current price [$8 ] is a bad idea.
[What is the connection between the elasticity coefficient you calculated in
the previous question and the company’s total revenue?] [8 points]
PART IV. THEORY OF CONSUMER CHOICE PROBLEMS.
Provide the
requested information for each of the problems below. Use the back of the
appropriate page to continue your answer for any of the following items. 76
points/20% of overall exam score.
1. Recall from our class discussions the slide below indicating individual demand
curves for Betty and Bob and a market demand curve for both consumers.
Suppose that Dale, whose demand curve is identical to Betty’s demand curve,
joins the market. Draw a new market demand curve. You may draw the new
curve on the existing graph. [5 points]
Market Demand Curve with Two Consumers
Market demand
curve
g
3.00
Price of burgers ($)
To determine the
market demand at a
given price, we add
the quantities
demanded by all
consumers. For
example, at a price of
$3, Betty consumes 4
burgers (point g) and
Bob consumes 8
burgers (point b), so
the total quantity
demanded is 12
(point j).
b
j
2.00
Betty’s demand
Bob’s demand
curve
curve
4
8
12
Burgers per month
2. Suppose a consumer has a daily income of $48 and purchases just two goods, A
and B. The price of A is $8 and the price of B is $6. On the graphing paper
provided, draw the budget line for this consumer. With a colored pencil, shade
the area on the graph that is attainable for this consumer. With a different colored
pencil, shade the area on the graph that is unattainable for this consumer. [10
points]
3. Explain two important characteristics of indifference curves for two goods. [6
points]
4. Why can’t indifference curves intersect? [4 points]
5. The data presented below indicates Cletus Ogle’s willingness to trade units of
good A for units of good B.
POINT
UNITS OF
GOOD A
UNITS OF
GOOD B
S
T
U
V
4
2
1
0
1
2
3
5
W
X
Y
7
2
1
1
3
5
Z
3
4
 Plot these combinations on the graphing paper provided. Draw three separate
indifference curves [I1: points S, T, U, V; I2: points W, X, Y; I3: point Z] to indicate
Cletus’ willingness to trade good A for good B. Place good A on the vertical axis
and good B on the horizontal axis. BE NEAT! [10 points]
 Suppose: [1] the price per unit of good A = $50, [2] the price per unit of good B =
$50, and [3] Cletus has $250 in his budget to spend on goods A and B. Indicate
his budget constraint on the graph. [8 points]
 Which combinations are attainable for Cletus given his budget? [3 points]

Which combinations are unattainable? [3 points]

Identify the utility-maximizing combination. [3 points]
 Suppose Cletus is currently at point S. Explain whether he will remain at point S
using economic concepts related to the theory of consumer choice. [Use the back
of this page to write your answer.] [6 points]

Suppose: [1] The price of good B drops to $25/unit
[2] The price of good A remains $50/unit
Graphically indicate any or all changes in Cletus’ willingness to trade good A for
good B. You may indicate your answer by adding to the previous graph. [8
points]

Derive Cletus’ demand function for good B. Indicate your answer on the
previous graph. [10 points]