Principles of Microeconomics
Summer 2009
Exam I
Name:__________________________________
Mark which three sections you wish to be graded for your exam. Each section is worth 33
points. If you fail to mark three sections, sections one, two and three will be graded regardless
of completion.
____SECTION ONE
____SECTION TWO
____SECTION THREE
____SECTION FOUR
____SECTION FIVE
____SECTION SIX
SECTION ONE (3 pts. each)
1. Normal goods are those that people will purchase _____ when their income _______.
a. More, remains the same
b. Less, decreases
c. More, decreases
d. Less, increases
2. Darla has three options. Option A has a surplus of $10, option B has surplus of $15, and option C
has surplus of $20. If she chooses option C, her opportunity cost is
a. $10
b. $12.50
c. $15
d. $25
3. A reservation price is best defined as
a. The highest someone will pay
b. The least someone will pay
c. The highest someone will accept
d. The amount someone will pay for a meal at Shannon’s in St. Louis
4. Which of the following would not cause a demand change for dartboards?
a. Price of darts increases
b. Price of dartboards increases
c. Price of dartboards is expected to decrease
d. All of the above causes demand for dartboards to change
5. Necessities are more likely to be ________ in demand, while luxuries are more likely to be
_______ in demand.
a. Inelastic, elastic
b. Inelastic, inelastic
c. Elastic, inelastic
d. Elastic, elastic
6. At higher prices, goods tend to be more _______ in demand, while at lower prices goods tend to
be more _______ in demand.
a. Inelastic, elastic
b. Inelastic, inelastic
c. Elastic, inelastic
d. Elastic, elastic
7. As I purchase more cups of coffee, each additional cup is worth less to me. This illustrates which
of the following?
a. Income effect
b. Substitution effect
c. Law of diminishing marginal returns
d. None of the above
8. Which of the following is the most important determinant of price elasticity of demand?
a. Time horizon
b. Necessity/luxury
c. Availability of substitutes
d. Definition of market
9. Which of the following is the most likely figure for the cross-price elasticity between
automobiles and tires?
a. -0.1
b. -1
c. 1
d. 0.1
10. Inelastic supply curves tend to be ____________, while elastic supply curves tend to be
________.
a. Steeper, steeper
b. Steeper, flatter
c. Flatter, steeper
d. Flatter, flatter
11. Which of the following best describes equilibrium?
a. D = S
b. Qs = Qd
c. Only stable point in the market
d. All of the above
SECTION TWO (3 pts. each)
1. The Ford Pinto was notorious for exploding during collisions. If this causes a change in demand
(which is likely), which of the following is the most likely rationale?
a. Expectations of buyers
b. Tastes and preferences
c. Income
d. Price of related goods
2. The Ford Pinto was notorious for exploding during collisions. What would be the result of this
revelation?
a. Demand increase, price increase, quantity increase
b. Demand increase, price decrease, quantity decrease
c. Demand decrease, price increase, quantity increase
d. Demand decrease, price decrease, quantity decrease
3. What would be the reaction of sellers of the Ford Pinto due to the actions described in question
2?
a. Supply increase
b. Supply decrease
c. Quantity supplied decrease
d. Quantity supplied increase
4. Suppose that the price of steel increases dramatically. What effect will this have in the market
for Ford Pintos?
a. Supply increase, price decrease, quantity increase
b. Supply increase, price increase, quantity decrease
c. Supply decrease, price increase, quantity decrease
d. Supply decrease, price decrease, quantity increase
5. If the events of question 2 and question 4 occur at the same time, what is the net effect on price
and quantity?
a. Price increase, quantity change unknown
b. Price decrease, quantity change unknown
c. Price change unknown, quantity increase
d. Price change unknown, quantity decrease
6. An economist’s definition of rational is
a. Maximize benefit
b. Maximize surplus
c. Minimize costs
d. All of the above
7. If the average income decreases by 10% while the quantity demanded of computers decreases
by 15%, we know that the income elasticity of computers is
a. -0.67
b. -1.5
c. 0.67
d. 1.5
8. If the average income decreases by 10% while the quantity demanded of computers decreases
by 15%, we know that computers are
a. Normal
b. Inferior
c. Complements
d. Substitutes
9. If the average income decreases by 10% while the quantity demanded of computers decreases
by 15%, we would illustrate this graphically by
a. Shifting demand to the right
b. Shifting demand to the left
c. Moving up and to the left on the demand curve
d. Moving down and to the right on the demand curve
10. Suppose that the elasticity of supply is 1.2. From this information, we can say that to raise
revenue the price of the good should
a. Be increased
b. Be decreased
c. Remain the same
d. We don’t know from the information given
11. Which of the following is not a valid price elasticity of demand?
a. -1.2
b. 0.4
c. 0
d. All of the above are valid
SECTION THREE
The table below represents the beer market and its only two producers and only two consumers.
QDBudweiser
8
6
4
2
0
QDRolling Rock
10
8
6
4
2
QSRolling Rock
0
2
4
6
8
QSBudweiser
2
4
6
8
10
Qdmarket
18
14
10
6
2
Qsmarket
2
6
10
14
18
Price
$1.00
$2.00
$3.00
$4.00
$5.00
a. On the graph below, plot the market supply and market demand curves for beer. (9 pts.)
P
5.00
4.00
3.00
2.00
1.00
5
10
15
20
25
30
35
40
45
I had all kinds of problems getting the drawing in. The coordinates of the market curves are above in the
table.
b. What is the equilibrium price and quantity? Also label these on the graph as Pe and Qe. (4 pts.)
Pe = $3, Qe = 10
c. Using the point-slope formula, find the price elasticity of demand at equilibrium. (6 pts.)
3−2
1
𝐷𝑒𝑚𝑎𝑛𝑑 𝑠𝑙𝑜𝑝𝑒:
=
= −1⁄4 𝑜𝑟 − 0.25
10 − 14 −4
𝑃
1
3
1
12
𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑: 𝑥
=
𝑥
=
= −6⁄5 = −1.2
−1
𝑄 𝑠𝑙𝑜𝑝𝑒 10
⁄4 −10
d. Using the point-slope formula, find the price elasticity of supply at equilibrium. (6 pts.)
3−2
1
𝑆𝑢𝑝𝑝𝑙𝑦 𝑠𝑙𝑜𝑝𝑒:
= = 1⁄4 𝑜𝑟 0.25
14 − 10 4
𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑠𝑢𝑝𝑝𝑙𝑦:
𝑃
1
3
1
12 6
𝑥
=
𝑥
=
= ⁄5 = 1.2
1
𝑄 𝑠𝑙𝑜𝑝𝑒 10 ⁄
10
4
e. Is this the revenue maximizing price? If so, how do you know? If not, how do you know and
should price be increased or decreased? (8 pts.)
No, it’s not. The price elasticity of demand is -1.2, not -1. This is elastic, so if I wanted to raise
revenue I should lower the price.
If you mentioned supply elasticity or implied that equilibrium mattered for this question (except
of course beyond the fact that I asked you to find this at equilibrium), you will lose some credit.
SECTION FOUR
The Federal Bureau of Investigation constantly tries to “flip” members of organized crime families by
offering them immunity from prosecution as well as relocation and a fresh start in return for their
testimony. They demand informants so that they can make the best case possible.
Suppose the graph below represents the market for FBI informants.
Price
New Supply
Supply
Penew
Pe
Demand
Qenew Qe
Quantity
a. Illustrate the initial equilibrium price and quantity. Label them on the graph as Pe and Qe. (4
pts.)
b. A new website has started that makes public (for a fee) the names and locations of relocated
informants. This has made it more perilous and risky for people to come forward. Illustrate
graphically the effect this has on the market for FBI informants. Also show the new equilibrium
price and quantity. (5 pts.)
c. The effect of the website takes this market out of equilibrium. Explain in detail how the market
returns to equilibrium starting from the impact of the show to the new Pe and Qe. (9 pts.)
The shift causes a shortage. Upward pressure is exerted on price causing QD to fall and QS to rise
until they equate at Qenew.
Suppose the graph below represents the market for FBI informants.
Price
Supply
Penew
Pe
New Demand
Demand
Qe
Qenew
Quantity
d. Illustrate the initial price and quantity equilibrium. Label them as Pe and Qe respectively. (4 pts.)
e. The popularity of The Sopranos has increased the allure of being involved in organized crime.
This has led to an increase in crime which has put more pressure on the FBI to convict. Illustrate
graphically the effect this has on the market for FBI informants. Also show the new equilibrium
price and quantity. (5 pts.)
f.
What if both events occurred at the same time? What would be the overall effect on
equilibrium price and quantity? (6 pts.)
Price would increase, quantity change would be unknown.
SECTION FIVE
Demand curves are generally downsloping. Using a good of your own choosing as an example, fully
explain the three “effects” that cause the demand curve to take this shape. Continuing with the
example good of your choice, explain what changes would cause the demand curve to shift citing
examples.
SECTION SIX
Missouri has added a “safe zone” on Highway 40 between the Mason and Ballas Road exits. In this safe
zone, any moving violation will result in a fine that is double the normal fee. Using cost-benefit analysis
from the point of view of a driver on this road, analyze the effects. You are being asked to design your
own with respect to the costs and benefits as well as the numbers. Also list one possible unintended
consequence of this “safe zone” implementation.