Economics 2113: Microeconomics
Practice Questions for the Midterm
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1.1
Problem 1: Short Questions
Question a
: Henry produces 2 balloons and 6 marshmallows an hour. He could produce more balloons but
to do so he must produce fewer marshmallows. Is Henry producing inside, on, or outside his
production possibilities frontier? Explain your answer.
1.2
Question b
: When the price of an inferior good falls, how will the substitution effect change the quantity
purchased? How will the income effect change the quantity purchased?
1.3
Question c
: Assume Mary’s inverse demand curve for T-shirts is given by P = 10 2Q, where Q is the
quantity demanded and P is the price of T-shirt. What is the price elasticity of demand for T-shirt
when price of T-shirt changes from 4 to 6?
1.4
Question d
Under what conditions will the marginal social benefit curve be different from the demand curve?
Give an example.
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1.5
Question e
What is the tax incidence (how much tax is paid by the seller/buyer) in the above figure?
1.6
Question f
During 2005-2006 Europe imported more than $70 million worth of U.S. long-grain rice. In 2006,
the European Union threatened to restrict imports of long-grain rice because traces of genetically
modified rice were found mixed in to commercial supplies. What will happen to the European rice
market if U.S. imports were banned?
1.7
Question g
Frankie gains the same marginal utility from his current consumption of coffee and bagels. However, the price of a cup of coffee is twice the price of a bagel. Should Frankie consume more/less
on coffee? Explain your answer.
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Problem 2
Assume the supply and demand for electric cars are given by the following equations:
Demand for electric cars: Q = 240 P
Supply for electric cars: Q = 80 + P
where Q is the quantity of electric cars (in thousand units) and P is the price of electric cars (in
thousand dollars).
2.1
Question a
What is the equilibrium price and quantity of electric cars? What is the consumer surplus?
2.2
Question b
Suppose the government implements a subsidy program which provides 20 thousand dollars for
each unit of electric cars produced by the producers. What is the producer surplus? What is the
consumer surplus? What is the deadweight loss?
2.3
Question c
Suppose instead the government provides the same amount of subsidy to customers who purchase
the electric cars. What is the deadweight loss?
2.4
Question d
If each unit of electric car in use will generate positive externality of X in dollar value. What is the
range of X such that it is welfare-improving for the government to implement the subsidy policy?
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Problem 3
Assume the supply and demand for pizza in country A is given by the following equations:
Price
Quantity demanded Quantity supplied
(HKD per slice)
(million slices per year)
4
12
0
6
10
2
8
8
4
10
6
6
12
4
8
14
2
10
16
0
12
Assume the world price of pizza is 6.
3.1
Question a
What is the producer surplus, consumer surplus, and total surplus under Autarky?
3.2
Question b
Suppose country A opens to trade. Does country A have a comparative advantage or comparative disadvantage in producing pizza? How do consumer surplus and producer surplus change
comparing to the Autarky case? What is country A’s gain from trade?
3.3
Question c
Suppose country A imposes a tariff of 2 on pizza. How do consumer surplus and producer surplus
change comparing to the free trade case? What is the deadweight loss?
3.4
Question d
Suppose country A imposes an import quota of 2 on pizza. How do consumer surplus and producer
surplus change comparing to the free trade case? What is the deadweight loss?
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Problem 4
Anti-dumping (AD) duty is an import tariff imposed on the imports that are priced below the
“fair market value". Due to its non-market economy status (NMES), China has long been treated
differently from other countries in the EU’s AD regulation; In 2019, 51% (61 cases) of all EU
antidumping (AD) duties – the most frequently used trade defence instrument – in force were
directed against China.
A recent research (Antidumping duties, prices, and China: Free trade to the rescue!) studies
the effect of EU’s anti-dumping duties against China. The authors find that, in the ten countries
that joined the EU and adopted the Union’s AD duties in 2004, the prices and quantities of the
imports subject to the AD duties changed as shown in the figure below:
Is the finding consistent with what we learned in the class? Explain your answer.
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