Ag Econ 1041
Second Exam, 130 points
October 14, 2010
Name _______KEY___________________
11 a.m. Section
True/False – one point each
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20.
“As I ate cake last night, the third slice did not satisfy me as much as the first
piece.” This is typical when consuming any good.
Consumer surplus is the net value created for consumers through the market for a
good.
If prices and quantity sold are increasing, supply must have increased.
A company may lower price because of its competitors or because it is pricing on
the elastic portion of the demand curve for its product.
Quaker Oats’ decision to reduce prices will likely not shift the demand for its
products but may shift the demand of other cereals.
If the demand and supply of apples increase this year by differing amounts, the
price will remain constant.
Governments can use subsidies when they want to change the behavior of some
citizens.
Making decisions at the margin means making an all or nothing choice.
The fallacy of composition suggests that there should be equal access to public
transportation.
The higher price of electricity caused by pollution controls are meant to correct the
under allocation of resources to electricity production.
The supply of cotton is the amount of cotton in storage today.
A shortage is the quantity demanded minus the quantity supplied at a specific price
below equilibrium.
Income elasticity measures the responsiveness of price to a change in income.
Arbitrage tends to add volatility to market prices.
An increase in the price of hunting or fishing licenses will shift the demand curve
to the left.
Own-price elasticity deals with demand shifts and cross-price elasticity deals with
movements along a demand curve.
If the consumption of one goods increases the utility for consuming another good,
the two goods are complements.
The demand for tacos is more inelastic than the demand for gasoline.
Own-price elasticity of demand shows the responsiveness of sellers to a price
change.
Putting an inelastic good on sale will increase the revenue of the good on sale.
1
Multiple choice – two points each
__E___ 21. An unusually large apple crop would
a) Increase the supply of apples
b) Reduce the price of apples
c) Increase the quantity consumed
d) Lower the price of bananas
e) All of the above
__D___ 22. A country has the comparative advantage for producing footballs when it has
a) A lower absolute cost of producing footballs
b) A higher absolute cost of producing footballs
c) Government regulation protecting domestic football producers
d) A lower opportunity cost of producing footballs
e) A higher opportunity cost of producing footballs
__B___ 23. If China has the comparative advantage for producing t-shirts, then under free trade
t-shirt production in the United States will
a) Increase
b) Decrease
c) Not change
d) Be taken over by the government
e) None of the above
__C___ 24. International trade benefits
a) The exporter
b) The importer
c) Both the importer and exporter
d) Either the importer or exporter, depending on government regulation
e) Neither the exporter or importer
__A___ 25. When the U.S. imports a good
a) Consumer surplus increases, producer surplus decreases and total surplus
increases
b) Consumer surplus increases, producer surplus decreases and total surplus
decreases
c) Consumer surplus decreases, producer surplus increases and total surplus
increases
d) Consumer surplus decreases, producer surplus increases, and total surplus
decreases
e) None of the above
2
The following questions are valued at 5 points each
26. Diagram the situation where you enjoy the second unit of consumable product more than the
first and diminishing marginal utility sets in with consumption of the fourth unit.
Mu or u/q
Mu
0
1
2
3
4
5
Q
27. Diagram enacting a minimum wage. Be complete.
P
Pf
S
CS
PS
Mw
DWL
D
Qd
Qs
Q
28. Use the decision rule to show why most students want to participate in an internship.
MU intern > MU no intern
MC
MC
3
29. Diagram what happens in the market for snow skiing equipment as winter approaches.
P
S
P1
P0
D0
0
Q0 Q1
D1
Q
30. Diagram the situation for the prescription drug market knowing only that income is
increasing substantially.
P
S
P1
P0
D
0
Q0 Q1
D1
Q
31. The supply of computers is increasing and prices are falling. Diagram completely, showing
price and quantity outcomes.
P
S
S1
P0
P1
D
0
Q0
Q1
Q
4
32. What happens to revenue if the price of a good rises and the good has inelastic demand?
Revenue increases
33. Diagram the impact and what caused the impact of increased lumber prices on the market for
furniture.
S1
P
S
P1
P0
D
0
Q1
Q0
Q0
34. What is the goal of consumers?
Maximize utility
35. Diagram what happens in the market for bicycles as gas prices rise and more bike paths are
created.
P
S
P1
P0
D
0
Q0
Q1
D1
Q
5
36. Show with a diagram why wheat prices rise when there is a widespread drought.
P
S1
S0
P1
P0
D
Q1
Q0
Q
37. Diagram the difference between an increase in quantity demanded and an increase in
demand.
P
Qd∆
P
P
D0
Qd
D1
Q
Qd∆
38. Diagram the market for personal computers showing an equilibrium price of $2000. What
will happen to price and quantity sold if supply increases? How would a seller determine if
total revenue would increase because of the supply change?
P
S
S1
2000
P1
D
0
Q0
Q1
Q
6
39. With an own-price elasticity of 2.0, what would be the result of a 10% price increase?
20% ↑ in Qd
The following questions are valued at ten points each
40. Diagram the change that occurs in the market for gasoline if there is an increase in the per
unit excise tax.
a) Show the tax incidence or who ultimately pays the tax.
P
St
S
P1
P0
Buyer Pays
Seller Pays
D
0
Q 1 Q0
Q
41. Using orange juice, cola of your choice and bottled water, rank your preference (i.e., which
would you buy first if the price were the same for a 12 oz. serving). Use the decision rule
format.
MU > MU > MU
any order
MC MC MC
Now rank them again assuming the prices are $2 for orange juice, $1 for cola and $0.50 for
water.
MU or MU or MU
price interchangeable
.50
1.00 2.00
Explain why your ranking did or did not change.
Same rank: utility relative to price did not change
Change rank: utility relative to price changed
7
42. Diagram the three panel trade model. The importing country experiences an increase in
domestic supply. Show changes in final production and consumption levels.
S
S1
ES
S
P
P1
P0
ED
D
Qd
Qs
D
ED1
Qt1
Qt
Qs Qs1
Qd Qd1
8