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Econ 1110 - INTRODUCTORY MICROECONOMICSPRELIM #1 – Wissink – Spring 2019 – March 5

________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId: _____________________ Your Student Number: ________________________________

Brief Survey on Studying (2 points): Your answers to these questions have absolutely no impact on your exam score, and I will remove all your names before I analyze this data.

(1) We've had 11 classroom lectures so far this term. How many did you attend?

(2) Not including attending lectures, how much time have you spent on this class each week doing things like reading or working on problem sets?

a. less than one hourb. 1-2 hoursc. 3-4 hoursd. 5-6 hourse. 7+ hours

(3) How much time did you spend studying for this prelim?a. less than one hourb. 1-4 hoursc. 4-8 hoursd. 9+ hours

(4) Did you mostly study for this prelim by yourself or with other students in the class?

a. mostly by yourselfb. mostly with other students in the classc. about half by yourself and half with other students in the class

(5) When did you do most of your studying for this prelim?a. the night before and day of the examb. spread over multiple sessions over multiple days starting before the

night before the exam

(6) What did you do to study for this prelim? (Choose all that apply)a. Reviewed the lecture slides and/or your notes and/or Panopto videosb. Read the bookc. Identified areas or topics you are struggling with and got help (e.g.,

used office hours, sections, the ETC, the LSC)d. Studied the MEL quizzes and other MEL contente. Worked problems from the posted sample problem setsf. Worked problems from the posted sample prelimsg. Explained or taught the material to someone elseh. Used outside web based tutorials of content

One more time, please…Econ 1110 - INTRO MICRO - PRELIM #1 – Wissink – Spring 2019 – March 5

________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_____________________ Your Student Number:________________________________

Instructions and Exam Taking Policy:

There are two sections in this exam. Answer all questions.

Part I: 15 multiple choice/fill in the blank questions @ 3.2 points eachPart II: 2 problems @ 25 points eachTotal Points = 98 + 2 points for doing survey = 100, Total Time = 90 minutes

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If there is something troubling you about a question, write us a note on the exam somewhere and we will deal with it as we are grading. If you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you.

RESTROOM USE: If you absolutely need to use the restroom raise your hand and wait for the proctor. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, IPODS OR DEVICES WITH CALCULATOR “APPS” or large screens.NO GRAPHING CALCULATORS. NO BOOKS. NO NOTES. NO HELP SHEETS.NO TALKING TO EACH OTHER.

Check the DIS# you regularly attend - that is where you will pick up your graded prelim

Survey = ______________

MC/FIB =___________________

Q1 = __________________

Q2 = __________________

TOTAL: =_________________

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1. The post hoc, ergo propter hoc fallacy is

A. naively assuming something about the way the economic world ought to be.

B. the error of reasoning that concludes that if event A happened today and event B happens tomorrow, then event A necessarily caused event B.

C. an expression that means "other things being equal."D. the error of reasoning that concludes that what is true for one is

necessarily true for all.E. the error of reasoning that concludes that if A and B happen today

and are correlated, then event A caused event B.

2. The figure with wine and cars shows the production possibility frontier for an economy that produces only those two goods. Which one of the following statements is true?

A. The marginal opportunity cost of a car at point B is greater than the marginal opportunity cost of a car at point A.

B. Point A is more efficient than point E.C. Point A is better than point E.D. The marginal opportunity cost of wine is smaller at

point A than it is at point B.E. None of the statements above are true.

Max # Planesif 0 Hats

Max # Hatsif 0 Planes

Jim 13 planes 10 hatsPam 24 planes 20 hatsDwight 33 planes 30 hats

Kelly 10 planes 12 hats3. Jim, Pam, Dwight and Kelly are asked to spend 24 hoursmaking paper airplanes and paper hats for the upcoming company party. The table shows the maximum number of airplanes or hats that each employee can make during 24 hours. Workers can produce any linear combination of their extreme values. The group decides to assign the tasks efficiently. Suppose Dwight is making both airplanes and hats. Given that information, which one of the following statements is true?

Part I: Multiple Choice and Fill-In-The-Blank Questions. Do them ALL.Circle the letter for your answer or fill in your answer in the blank provided.

A. Jim is making only hats.B. Pam is making only planes.C. Jim, Pam and Kelly are also producing some of both.D. Kelly is not making hats.E. Everyone is making planes.

4. Consider only Japan and the U.K. Suppose the marginal opportunity cost of a tea bag in terms of sugar in Japan is 2 grams. Suppose the marginal opportunity cost of a gram of sugar in the U.K. is 3 tea bags. If the two countries trade without government restrictions, transportation costs are negligible, and markets are competitive, then the likely terms of trade for tea bags will fall in the range of

A. 4 to 5 grams of sugar per tea bag.B. 3 to 4 grams of sugar per tea bag.C. 2 to 3 grams of sugar per tea bag.D. 1/3 to 2 grams of sugar per tea bag.E. 1/4 to 1/2 grams of sugar per tea bag.

5. Which one of the following will increase the supply of popcorn at football games this fall?

A. A decrease in the price of hot pretzels, a substitute in consumption for popcorn.

B. A decrease in the price of popcorn popping oil, an input.C. A decrease in the number of companies making popcorn.D. An increase in the price of popcorn.E. An increase in the income of football fans.

6. Suppose that the demand function for cups of coffee at a local cafe in London is as follows: QD = 600 + 7F – 0.5J + 1.9G.Which one of the following statements is most true?

A. Variable G is most likely the price that the coffee shop owner paid for her coffee beans.

B. Variable J could not be the price of tea, which is a substitute for coffee.

C. The demand for coffee must be vertical.D. If coffee satisfies the “law of demand” then F is most likely the

price of coffee per cup.E. Variable F is most likely the price of donuts – since everyone in

London likes to eat a donut with their coffee.

7. Consider the following perfectly competitive market for oranges: QD = 60 – 5P (demand) and QS = 5P and (supply)Now suppose that demand for oranges increases by 20 units at each price. After the increase in demand, which of the following is correct?

A. The equilibrium price increases by $2, and the quantity traded increases by 10.

B. The equilibrium price increases to $8, and the quantity traded decreases to 40.

C. The equilibrium price increases by $2, and the quantity traded increases by 20.

D. The equilibrium price is unchanged, and the quantity traded increases by 20.

E. None of the above are correct.8. Suppose the government introduces a price ceiling on the milk market. Assume demand and supply are typically shaped. Assume that the price ceiling is set to be less than what the equilibrium price would be if there was no government intervention in the market. Based on our model we predict that

A. there will be a decrease in the quantity of milk traded.B. there will be no change in the price at which milk trades.C. there will be an increase in the value of net social surplus.D. there will be an increase in producers’ surplus.E. there will be excess supply in the milk market.

9. Consider the market for ground beef represented by the figure, which is initially in equilibrium at point J. Assume that ground beef is an inferior good. Which one of the following could explain a movement to a new equilibrium at point M?

A. A change in tastes away from hamburgers combined with an increased price for cattle feed.

B. An increase in buyers' incomes combined with a cost-saving technological improvement.

C. A decrease in the price of hot dogs combined with an increased price for labor.

D. A decrease in buyers' incomes combined with a decrease in the number of acres owned by cattle ranches.

E. A drop in the population combined with an increased price for an alternate form of packaged beef.

10. Computer hardware and software are complements. Both goods are traded in perfectly competitive markets. Suppose there is a fall in the price of inputs used to make microchips for computer hardware. Our model of demand and supply would predict which one of the following?

A. An increase in the equilibrium price of hardware, and decrease in the equilibrium quantity of software traded.

B. A decrease in the equilibrium price of hardware, and an increase in the equilibrium price of software.

C. An increase in the equilibrium quantity of hardware traded, and a decrease in the equilibrium quantity of software traded.

D. A decrease in the equilibrium quantity of hardware traded, and a decrease in equilibrium quantity of software traded.

E. A chronic shortage in the hardware market.

11. Consider the figure with Demand and Old and New Supply. The change in consumers’ surplus as a result of the increase in supply

A. is areas 5 + 6B. is areas 5 + 6 + 7 + 8C. is areas 2 + 3 + 4 D. is areas 5 + 6 - 2E. cannot be determined

from the information given.

Price ($/slice)

QuantityDemanded

(pizza slices)

QuantitySupplied

(pizza slices)$1.25 6000 0$1.50 5000 500$1.75 4000 1000$2.00 3000 1500$2.25 2000 2000$2.50 1500 3000$2.75 1000 4000$3.00 500 5000$3.25 0 6000

Demand

New Supply

Old Supply

QnQo

6Pn

Po

Quantity

Price

1

2

3

5

7 8 9

4

12. The table shows the daily demand and supply information for the pizza market at Florida’s Disney World. Suppose the current volume of trade is observed to be Q = 1000 slices? Which one of the following statements is true?

A. The market is in its natural equilibrium.B. There is a price floor equal to $1.75 in the market.C. There is a price ceiling of $1.75 in the market.D. There is a quantity quota of 500 slices in the market.E. None of the above.

13. Consider the demand and supply graphs for X, Y and Z as illustrated. In each market the initial market price is $30 and initial quantity traded is 30 units. The government plans to place a tax of $t/unit on one of these markets. In which market would this tax raise the most revenue?

A. Market XB. Market YC. Market ZD. We do not have enough information to know.E. The same amount of revenue would be raised in each market.

14. A change in the price of shampoo from $6 to $8 per bottle changes the quantity demanded from 14 to 10 bottles per month. Using the (midpoint) arc formula, and taking the absolute value, the own price elasticity of demand in this part of the demand curve is approximately equal to

A. 1B. 2/4C. 4/2D. 7/6E. 6/7

15. The government wants to reduce the consumption of electricity by 5 percent. If the own price elasticity of demand for electricity is -0.4, then the government should

A. raise the price of electricity by 0.125 percent.B. raise the price of electricity by 2 percent.C. raise the price of electricity by 0.08 percent.D. raise the price of electricity by 12.5 percent.E. lower the price of electricity by 0.4 percent.

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1. Cornell Graduation T-shirts are sold in a perfectly competitive market. All the suppliers of these T-shirts happen to operate from Finland. The supply and demand curves are characterized by:

QD = 100 - 10P (demand)QS = 0 + 15P (supply)

a) Carefully graph the supply and demand curves for T-shirts. For full credit, be sure to label both axes and both curves and label the numerical values at the price-intercepts and quantity-intercepts.

b) What are the equilibrium price and quantity in this market? Illustrate and label the values in the graph using P* and Q*, respectively.

c) Calculate the own price elasticity of demand at the market equilibrium using the point formula.d) Calculate consumers’ surplus at the market equilibrium and show where this is on your graph.e) Calculate producers’ surplus at the market equilibrium and show where this is on your graph.

Now suppose that the new Cornell president decides to impose a binding quantity quota on this market.

f) Why might she do that?g) Suggest a value for this quota, and then fully analyze the likely impact of this policy using your graph

and the stated demand and supply equations. Your answer must include a comparison of surplus measures.

h) In your opinion, is this policy a good or bad idea? Defend.

ANSWERS

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

ANSWERS

2. Recall our class discussion of England, Portugal and France making yards of cloth and barrels of wine. Suppose they have individual PPF’s as described in class.

a) If these three countries are the only ones making wine and cloth, determine and graph the “international” joint PPF. Make your graph large enough so the graders can easily see your work. Put barrels of wine on the vertical axis and yards of cloth on the horizontal. For full credit make sure you label the axes and the values of cloth and wine at end points and any kinks.

b) Determine and graph the “international” supply curve for wine. For full credit make sure you label your axes.

c) Suppose the demand curve for wine intersects your supply curve at 10 barrels of wine. What, evidently, is the current market price for wine?

d) At this market equilibrium, how much wine is each country making? How much cloth is each country making?

ANSWERS

ANSWERS

Answers, Prelim 1, 1110, Spring 2019

1. B

The error of reasoning that a first event causes a second event because the first event occurred before the second event.

2. EChoice A is false since there is no MOC at B since it’s inside the PPF, or one could argue the MOC is zero. Choice B is false since points A and E are equally efficient. Choice C is false since there is nothing to insist that A is better than E or vice versa, the PPF does not illustrate that. Choice D is false. Either there is no MOC at point B, or you could say the MOC at point B is 0. That said, no matter what the MOC is at point A, it is larger than the MOC at point B.

3. BDraw each person’s PPF and notice the following with respect to the marginal opportunity cost of hats in terms of planes: Kelly’s=5/6, Dwight’s=11/10, Pam’s = 12/10 = 6/5 and Jim’s=13/10. So, if Dwight is doing some of both, by now you have Pam and Jim doing only planes, and Kelly doing only hats.

4. DNote that the MOC for a tea bag in the U.K. is 1/3 a gram of sugar. So the U.K. has the C.A. in sugar and would need to cover its costs, but the U.K. could not charge higher than what Japan would incur to produce tea themselves. Therefore, the likely terms of trade for tea bags would fall in range of at least 1/3 a gram of sugar and not more than 2 grams of sugar per tea bag.

5. BA fall in the price of hot pretzels decreases popcorn demand - not supply. Popcorn popping oil getting cheaper will indeed increase supply! Decreasing the number of firms decreases supply. A changes in the price of popcorn changes quantity supplied, not supply. Increasing income of football fans will either increase or decrease demand for popcorn, depending on if popcorn is a normal or inferior good.

6. BLook at the algebraic signs in front of each variable and ask yourself if they make sense given the multiple-choice options. The answer is not A because this would affect supply, not demand. For C to be correct, we need to have that J is zero, and it is not. If law of demand is to be satisfied, then F should enter with a negative sign. E is wrong since if donuts and coffee are complements, then the sign should be negative in front of F.

7. AEquilibrium is where QD = QS, i.e. 5P = 60-5P; P* = $6 and Q* = 30. If demand increases by 20 units at each price, QD = 80-5P; new equilibrium at 5P = 80-5P; P* = $8 and Q* = 40. Therefore, P increases by $2 and Q increases by 10.

8. AA price ceiling set below the market equilibrium price will be binding, resulting in a decrease in quantity supplied and traded of milk.

9. DMoving from J to M requires a decrease in supply and increase in demand. A change in tastes away from hamburgers which use beef as an input will reduce demand for beef, so A is not the correct answer. An increase in buyers’ income will in fact, decrease demand for beef since in this this

setting, it is an inferior good, so choice B won’t work. Hot dogs can be considered to be substitutes to hamburgers which use ground beef, so a decrease in their price will reduce demand for burgers and therefore ground beef, so C is incorrect. Similarly for E. D is the correct answer: a decrease in buyers’ income given beef as an inferior good will increase demand, and a decrease in the number of land owned by cattle ranches will decrease supply.

10. BThe fall in the costs of production of microchips which are a factor of production for computer hardware would shift the hardware supply curve to the right, reducing the price of hardware. As software is a complement to hardware, a fall in the price of hardware will cause a shift in the demand curve for software to the right. This will cause an increase in the price of software.

11. CConsumer surplus before the shift is area 1. After the shift it is 1 + 2 + 3 + 4, so the change in consumer surplus is 2 + 3 + 4.

12. CQ* is 2000 and P* is $2.25. The price floor is not binding. The ceiling is! So trade will be truncated at Q=1000. If there was a quota at 500, it would bind and there could not be 1000 traded.

13. BMarket Y because after imposing the tax, the equilibrium quantity in both Market X and Z will decrease, while it won’t change in Market Y.

14. DSet it up as %change in quantity demanded divided by %change in price. [(14-10)/12] / [(6-8)/7] =14/12=7/6.

15. DElasticity = %change in QD ÷ %change in P. So just fill in equation with -0.4 = -.05 ÷ %change in P %change in P = +0.125 = 12.5%.