EC#131#&Principles#of#Microeconomics Fall#2012 …

1 NAME: EC 131 - principles of MicroeconomicsFall 2012 final EXAMAll ques?ons should be answered in the following pages. Nothing here requires a very long answer. Graphs many ;mes help, as does have 75 minutes to complete this exam. Mark clearly your answers for the mul;ple choice ques;ons in their respec;ve leEers. If more than one alterna;ve is marked you will not get any point from that ques;on. You can use pencil, though if you do so you won t be able to dispute the grading for that ques;on aIerwards. You MUST return this exam. Each ques;on clearly states how many points it is worth. The exam is worth 220 points. The following defini;ons may be used throughout the exam:ATC - Average Total CostAFC - Average Fixed CostAVC - Average Variable CostMC - Marginal CostMR - Marginal RevenueQ - Quan;tyMarginal Cost (MC) is the deriva;ve of the total cost (TC) with respect to quan;ty (Q).

2 Example:TC = 300 + 5Q + 10Q2then:MC= 5 + 20 QMarginal Revenue (MR) is the deriva;ve of the total revenue with respect to quan;ty (Q). Example:TR = 100Q - Q2then:MR= 100 - 2 QUse your )me 1 of 18 Consider the following produc)vi)es for Orhan and Samson in producing Corn and Pork for ques)ons 1 and 2:Minutes needed to make 1 Minutes needed to make 1 Bushel of CornPound of PorkSamsonOrhan20121510 Ques?on 1 - (10 points) Suppose that Samson can work 6h per day and Orhan can work 8h per day. Fill the blank spaces below with an example of an efficient produc;on for each worker:Bushels of CornPounds of PorkSamsonOrhan9151624 Ques?on 2 - (10 points) Fill the following blank spaces:Samson has compara?

3 Ve advantage in the produc;on of ____Pork_____Orhan has compara?ve advantage in the produc;on of ____Corn_____In order to trade to be beneficial for both, the traded price of pork must be between: ___3/5_____ and _____2/3_____ bushels of corn. Ques?on 3 - (5 points) Suppose that the equilibrium price of French fries rises while the equilibrium quan;ty falls. The most consistent explana;on for these observa;ons is (mark the correct item): a - An increase in the price of onion rings (a subs?tute to french fries) b - A decrease in the price of onion rings c - An increase in the price of potato bread (a subs?tute in produc?on to french fries) d - A decrease in the price of potato bread Page 2 of 18 Ques?

4 On 4 - (5 points) The price elas;city of demand for good X is Mark the correct alterna; X may be a diamond the long- run the price elas?city of good X could be price elas;city given for good X must be a long- run elas; of the above is correctQues?on 5 - (5 points) You are the CEO of a bagel chain store, which has a monopoly in the sales of bagels, and your marke;ng department comes to you with an es;mate of for the price elas?city of demand for bagels. You can, based only on that informa?on, conclude that: (Mark the correct alterna;ve) you increase the unit price of your bagels, your total revenue will you increase the unit price of your bagels, your total revenue will you increase the unit price of your bagels, your total revenue will remain the don t have enough informa;on to answer this ques;onQues?

5 On 6 - (15 points) Consider the US market of donuts. For each scenario presented below, suppose that the market starts from the long- run equilibrium price and quan;ty, and write whether the price and quan;ty change will be INCREASE, DECREASE or AMBIGUOUS a. An european chain of donuts starts its opera;on in the US with 100 stores Price: Quan;ty: b. A federal law mandates the reduc;on of use of fat in donuts. As a consequence, costs of produc;on of donuts rise and many consumers subs;tute donuts for bagels Price: Quan;ty: c. The canadian government gives tax incen;ves for donut bakers to move to Canada, and as a result many leave the US market.

6 (Hint: what will happen to the wage paid to donut bakers in the US?) Price: Quan;ty:Page 3 of 18 AMBIGUOUSDECREASEDECREASEINCREASEINCREAS EDECREASEC onsider the following demand and supply curves for 3 different consumers and 3 different firms in the market of iPhone cases, which is perfectly compe11ve, for ques)ons 7 and 4 of 181501234567891011121314100123456789QP15 01234567891011121314100123456789QP150123 4567891011121314100123456789 QPConsumer 1 Consumer 2 Consumer 31501234567891011121314100123456789QP150 1234567891011121314100123456789QP1501234 567891011121314100123456789 QPFirm 1 Firm 2 Firm 3 Ques?on 7 - (5 points) Draw in the box below the market demand and market supply curves for the market for the market of iPhone cases.

7 Pay special a^en?on to the values of the intercepts. Indicate the market equilibrium price and quan? 8 - (5 points) Suppose that consumer 2 and firm 2 exit the market. Repeat ques;on 7 for this new 5 of 1830012345678910111213141516171819202122 2324252627282917012345678910111213141516 QP30012345678910111213141516171819202122 2324252627282917012345678910111213141516 QPQ*P*Q*P*Ques?on 9 - (5 points) The equilibrium price of cheese is $5 per lb. The price- elas;city of demand for cheese is The price elas;city of supply of cheese is Suppose that the government wants to impose a tax of $1 per lb of cheese, to be paid for by the sellers. Mark the incorrect alterna; tax will lead to a decrease in consump;on of the tax was levied on the consumers, the consump;on of cheese would be the same than if the tax was levied on the deadweight loss generated by the tax would be lower if the elas;ci;es were and (instead of and ) suppliers will pay a bigger share of the tax burdenWhile studying taxa)on, we saw the curve below, called the Laffer curve, that shows how tax revenue changes with the value of the tax levied.

8 Consider it when answering ques)on 10:Ques?on 10 - (5 points) One of the consequences of the Laffer curve is that in general it is possible to obtain the same tax revenue from two different tax rates. Let t and t be two such rates where t>t and both yield the same tax revenue. Mark the incorrect alterna;ve: consumer surplus under t is lower than under t deadweight loss under t is higher than under t producer surplus under t is lower than under t is necessary to know the elas?ci?es of supply and demand in order to determine the items abovePage 6 of 18 Tax rateTax RevenueUse the following graph of a market with its demand and supply curves in bold thick line for ques)ons :The following ques;ons should be answered directly in the boxes in front of them.

9 Write your welfare analysis answers as summa?ons of the le^ers in the graph above. No explana?ons are necessary. Example: A+B+C. If the answer is ZERO, indicate so by wri?ng ZERO .Page 7 of 1815012345678910111213141501234567891011 121314 QPABCDEFGHIJKLMNOPQRSTUVZXA2B2C2D2E2F2G2 H2I2J2K2L2 Ques?on 11 - (10 points) Suppose that markets are free, without taxes and closed to interna;onal trade. Indicate the areas corresponding to the following values:Consumer SurplusProducer SurplusA+B+I+J+KP+Q+S+R+X+F2 Ques?on 12 - (10 points) Suppose now that the government imposes a tax on producers of $5 per unit sold. Indicate the areas corresponding to the following values:Consumer SurplusProducer SurplusTax RevenueDeadweight LossA+BR+X+F2I+J+P+QK+SQues?

10 On 13 - (10 points) Suppose now that the government ins;tutes a price ceiling of $3. Answer the ques;on below and indicate the areas asked:Is the price ceiling binding? If so, will there be a surplus or a shortage? By how many units?Yes. There will be a shortage of 9 SurplusProducer SurplusDeadweight LossA+I+P+RF2B+J+Q+X+K+SPage 8 of 18 Ques?on 14 - (10 points) Suppose that the country opens to trade and the world price is PW=$ . Is this country going to import or export that good?ImportIndicate the areas corresponding to the following values:Consumer SurplusProducer SurplusGains from TradeA+B+I+J+K+P+Q+S+T+R+X+A2+B2+C2F2T+A 2+B2+C2 Ques?on 15 - (10 points) Suppose that aIer opening to trade as in ques;on 14 the government decides to impose an import quota of 5 units.