Ag Econ 1041
Exam 2, 140 points
October 16, 2008
Name ______KEY________________________
8 a.m. Section
Short answer – five points each
1. At Mizzou, the number of parking spaces has increased and the price of parking has
also increased. Diagram the situation completely and accurately.
S0
$/Q
S1
P1
P0
D1
D0
0
Q0
Q1
Q
2. What is likely to happen to the market outcomes for jewelry if income declined?
P↓ Q↓
3. What is the goal of the consumer?
Maximize utility
1
4. Diagram the result in an industry where workers become more productive.
S
$/Q
S1
P0
P1
D
0
Q0
Q1
Q
5. The quantity supplied rises as a result of what?
Higher price
6. What determines an equilibrium or market clearing price?
D = S or Qd = Qs
7. Diagram the market for restaurant meals and then show on the same diagram the
impact of reduced income throughout the market. Be sure to show initial and new
market outcomes. Show the final producer surplus.
$/Q
S
P0
P1
PS
D1
0
Q1
Q0
D
Q/t
2
8. Show with a diagram how prices would remain the same when the quantity exchanged
increases.
$/Q
S
S1
P
D
D
0
Q0
Q1
Q
9. Using a demand schedule or graph, show the elastic and inelastic section of demand.
Also show the corresponding marginal revenue.
$/Q
Ep > 1, elastic
Ep = 1
Ep < 1, inelastic
Q
MR
3
10. Pork prices are lower and the same quantity of pork is still being sold. Diagram this
change. Name two determinants that could have changed to cause this price drop.
S
$/Q
S1
P0
P1
D
D1
0
Q0
Q1
Q
One determinant from each:
Demand – utility; income; P of other goods; expectations; # of buyers
Supply – input cost; technology/management; P of related goods; expectations: #
and size of sellers
11. The value of the stock market has been falling. This is caused almost exclusively by
either a decrease in demand or an increase in supply. Pick the correct reason and
explain why the shift is occurring.
D↓
lack of confidence or liquidity or utility
4
12. Hostess produces Cupcakes and Twinkies. How does the firm’s production situation
change if new technology improves its ability to produce Twinkies? Diagram this
production situation.
C
PPC
PPC1
T
13. On one graph show why a grocery store might be able to offer lower prices because of
lower input costs or more efficient inventory management.
S0
$/Q
S1
P0
P1
D
0
Q0
Q1
Q
5
14. In the fast food market, if price rises for tacos and burritos what would we expect to
happen in the market for hamburgers?
P ↑ and Q ↑
Multiple choice – two points each
__B___ 15. One of the consequences of a rent ceiling set below the equilibrium rent is
a.) decreased elasticity of demand
b.) shortage of apartments
c.) the establishment of landlord unions
d.) surpluses of apartments
e.) the elimination of the deadweight loss that would otherwise exist in the
housing market
__A___ 16. A price floor set above the equilibrium
a.) creates a surplus
b.) creates a shortage
c.) creates excess demand
d.) balances supply and demand
e.) has no effect
_A or B____ 17.
a.)
b.)
c.)
d.)
e.)
An effective price floor leads to inefficiency because
desired output is more than the efficient, equilibrium quantity
the marginal benefit of the last unit produced is larger than the marginal cost
the price charged is less than the equilibrium price
producer surplus is less than consumer surplus
producers must pay a subsidy to the government
__D___ 18. The phrase “tax incidence” refers to
a.) how easy it is to evade the tax
b.) how taxes redistribute income
c.) the degree of progressiveness or regressiveness of the tax
d.) who actually bears the burden of paying the tax
e.) how much the government collects in revenue from a tax
__D___ 19. An increase in input costs for breakfast cereal will cause what?
a.) an increase in demand
b.) an increase in supply
c.) a decrease in demand
d.) a decrease in supply
__A___ 20. When the percentage change in the quantity demanded is less than the percentage
change in price, then demand is
a.) inelastic
b.) unit elastic
c.) elastic
d.) irrelevant
e.) undefined
6
__A___ 21. If a good has many close substitutes, then its demand is most likely
a.) elastic
b.) inelastic
c.) unit elastic
d.) perfectly inelastic
e.) elastic or inelastic depending on whether the price of the good is increasing
or decreasing
__E___ 22. Which one of the following statements is correct?
a.) as a consumer consumes more of a good, marginal utility increases
b.) marginal utility is always positive
c.) consumer choice is limited by income
d.) consumer choice depends on the relative price of goods
e.) (c) and (d)
__A___ 23. Suppose the government imposes a $1 per gallon tax on the sellers of gasoline.
As a result, the
a.) supply curve shifts leftward
b.) supply curve shifts rightward
c.) demand curve shifts leftward
d.) demand curve shifts rightward
e.) demand and supply curves both shift leftward
7
The following questions are worth 10 points each
24. Diagram a per unit excise tax on gasoline. Be complete: show deadweight loss and
amount of tax collected.
What is the impact on producer surplus? ______reduced________________________
Why are consumers likely to eventually pay the majority of tax assessed?
___inelastic demand_____________________________
S1
$/Q
S0
Pt
P0
DWL
tax
D
0
Qt
Q0
Q
25. Thoroughly diagram the situation that exists when a government sets a price support
above equilibrium. Show the changes in welfare for all parties involved in the market.
$/Q
S
PS
PS
CS
P0
PS
CS
DWL also
PS
D
0
Qd
Q0
Qs
Q
8
True/False – one point each
T
F
T
T
T
F
F
F
F
F
F
F
F
T
T
F
T
T
F
T
T
F
F
F
T
F
T
T
T
F
T
T
26. If the consumption of one good increases the utility for another good, the two goods are
complements.
27. I always want to choose the alternative that leaves me the highest opportunity cost.
28. An equilibrium price is also called a market-clearing price because that is the one price
where buyers and sellers agree on the quantity to exchange.
29. Putting an elastic good on sale will increase the revenue of the good on sale.
30. “Ceteris paribus” is a Latin term that means “other things being equal.”
31. Consumer surplus is the difference between the price of an action and its cost
32. When you buy a battery you make the seller better off but you are not better off.
33. If Veronica has a comparative advantage in producing quilts, she should diversify into
something where she has a higher opportunity cost.
34. A movement along the demand curve is caused by a change in one of the determinants.
35. Demand is always positively sloped.
36. People in poverty have greater demand for food than those with high incomes.
37. More children are overweight since we began space travel so it must be the cause of
childhood obesity.
38. If you were willing to pay $40,000 for a stylish minivan but actually paid $30,000, you
received no consumer surplus.
39. Prices are a measure of relative value as well as signals to potential buyers and sellers.
40. Market demand is the various possible prices and matching quantities demanded at each of
those prices by all buyers in that market.
41. The demand for sunscreen will be increasing now that autumn has arrived.
42. Two goods are substitutes if an increase in the price of one raises the demand for the other.
43. Market equilibrium is a situation in which the quantity supplied equals the quantity
demanded.
44. The demand for pizza is more inelastic than the demand for gasoline.
45. A supply curve is the lowest opportunity cost facing sellers in terms of prices and quantities.
46. Market outcomes are the price and quantity that buyers and sellers agree upon.
47. If Microsoft decides to have Katie work on financial software instead of marketing software,
the opportunity cost is her salary.
48. The decision to build an additional parking garage on campus should be based on the average
number of parking spaces occupied per hour.
49. The supply of personal computers has increased as input costs have risen.
50. People make decisions at the margin rather than average.
51. Supply creates demand.
52. A change in price changes the quantity demanded.
53. A monitor and a computer are complementary goods.
54. Marginality refers to incremental change.
55. When demand is elastic, a price reduction will cause a decrease in the quantity of a good
demanded.
56. A reduction in the price of cell phones would be expected to increase the number of cell
phones purchased.
57. All production possibilities curves bow outward because of increasing opportunity costs that
result from producing a particular good.
9