Microeconomics EC142 Exam 2019/2020

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Questions and Answers

All of the following shift the supply of watches to the right except:

An advance in the technology used to manufacture watches.

An increase in the price of watches. (correct)

A decrease in the wage of workers employed to manufacture watches.

Manufacturers' expectation of lower watch prices in the future.

None of the above.

If consumers think that there are very few substitutes for a good, then:

Supply would tend to be price elastic.

Demand would tend to be price elastic.

Supply would tend to be price inelastic.

Demand would tend to be price inelastic. (correct)

None of the above.

A price floor:

Sets a legal minimum on the price at which a good can be sold. (correct)

Always determines the price at which a good must be sold.

Sets a legal maximum on the price at which a good can be sold.

Is not a binding constraint if it is set above the equilibrium price.

None of the above.

An inferior good is defined as:

A good for which, other things equal, an increase in income leads to a decrease in demand. Signup and view all the answers

Suppose that the price of a new bicycle is 350. Natalie values a new bicycle at 400. It costs 100 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike?

250 Signup and view all the answers

When marginal costs are below average total costs,

Average total costs are falling. Signup and view all the answers

Which of the following is not a property of indifference curves?

Indifference curves reflect the income and price constraints. Signup and view all the answers

When people behave in ways that involve increased risk because they have insurance, this is known as:

Moral Hazard. Signup and view all the answers

A person with a history of serious illness will buy a lot of hospitalization insurance. This action is called:

Adverse Selection. Signup and view all the answers

A cost that has already been committed and cannot be recovered is best described as:

Fixed cost. Signup and view all the answers

What is the market equilibrium price and quantity for chocolates? Clearly show your answer.

The equilibrium price and quantity are found where the supply and demand equation intersect. Solving for the equilibrium, we get: Q = 250 - 10P (demand) Q = 40P (supply) Setting them equal: 250 - 10P = 40P Solving for the price (P), we get: 50P = 250 P = 5 Plugging the price back into either the supply or demand equation, we get: Q = 40 * 5 Q = 200 Therefore, the equilibrium price is 5/chocolate, and the equilibrium quantity is 200 chocolates. Signup and view all the answers

Sketch in a diagram the supply and demand for this market. The diagram does not have to be drawn to scale but is should illustrate your answer clearly.

The diagram would be a typical supply and demand curve, with price on the vertical axis and the quantity of chocolates on the horizontal axis. The demand curve slopes downwards, indicating that as the price increases, the quantity demanded decreases. The supply curve slopes upwards, indicating that as the price increases, the quantity supplied increases. The two curves would intersect at the equilibrium point, which is the equilibrium price and quantity you calculated previously. Signup and view all the answers

Suppose the government implements a price ceiling at P = 4. What will happen in this market (identify what will happen to the quantity demanded and the quantity supplied)? Is there a shortage or surplus in this market? Explain your answer clearly and show your answer in a graph.

There will be a shortage. Signup and view all the answers

Is Coca-Cola a substitute or complement for Pepsi-Cola?

Substitute Signup and view all the answers

Using a supply and demand diagram, show what happens in the market for Coca-Cola if Pepsi-Cola increases the price of its product.

If Pepsi-Cola increases its price, consumers may switch to Coca-Cola as a cheaper alternative, thereby increasing the demand for Coca-Cola. On the supply and demand graph, that would mean a shift to the right of the demand curve for Coca-Cola. This shift would lead to an increase in both the equilibrium price and quantity of Coca-Cola. Signup and view all the answers

Under what circumstances Demand tends to be more elastic?

When the good has many close substitutes. Signup and view all the answers

For each pair of goods listed below, which good would you expect to have the more inelastic demand? Support your choice with a short answer.

Insulin VS aspirin Signup and view all the answers

Yesterday, the price of smarties was 3 a box, and Debby was willing to buy 10 boxes. Today, the price has gone up to 4 a box, and Debby is now willing to buy 6 boxes. Calculate Debby's elasticity of demand using the midpoint method.

Elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. In other words, it measures how responsive quantity demanded is to changes in price. This can be calculated using the midpoint method. <ol> <li>Percentage change in quantity: ((6-10) / ((6+10)/2))*100 = -50%.</li> <li>Percentage change in price: ((4-3) / ((4+3)/2))*100 = 28.57%.</li> <li>Elasticity of demand: -50% / 28.57% = -1.75. The absolute value of the elasticity is 1.75.</li> </ol> Therefore, Debby's price elasticity of demand for smarties is 1.75. Signup and view all the answers

Is Debby's demand for smarties elastic or inelastic? Justify your answer.

Elastic Signup and view all the answers

Do you think that the price elasticity of demand for Mercedes sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain with a short answer.

Increase Signup and view all the answers

Write down John's budget constraint. Draw John's budget constraint, put burritos on the X-Axis and sodas on the Y-Axis.

John's weekly income is 200. The price of a burrito is 10. The price of a soda is 2. John's budget constraint can be expressed in a mathematical equation: 10B + 2S = 200 Where B is the quantity of burritos and S is the quantity of sodas. For the graph, the budget constraint line would intercept the Y-axis at 100 (when B=0, S=100, meaning 100 sodas can be bought). The line would intercept the X-axis at 20 (when S=0, B=20, meaning 20 burritos can be bought). The area formed by the budget line, the Y-axis and the X-axis would show all the possible combinations of burritos and sodas that John can buy with his weekly income. Signup and view all the answers

Calculate the slope of John's budget constraint. What does the slope tells us?

The slope of John's budget constraint is found by rearranging the budget constraint equation (10B + 2S = 200) to solve for S (quantity of sodas): 2S = 200 - 10B S = 100 - 5B The slope of this equation is -5. The slope of the budget constraint is the rate at which John can trade one good for another (in this case, burritos for sodas). It tells us that for every burrito John buys, he has to give up 5 sodas. The budget constraint has a negative slope because John needs to trade off one good for another to maintain his total expenditure within his budget. Signup and view all the answers

John's Utility Function (i.e. the function that we are able to calculate his satisfaction from consuming burritos and sodas) is U=BS. Calculate the Marginal Utility of consuming a burrito and the Marginal Utility of consuming a soda.

Marginal utility refers to the additional satisfaction gained from consuming one more unit of a good. The marginal utility of consuming a burrito is the extra satisfaction received from consuming one more burrito. The marginal utility of consuming a soda is the extra satisfaction received from consuming one more soda. In John's utility function U=BS, the marginal utility of consuming a burrito is the partial derivative of the utility function with respect to B, holding S constant. This is simply S. Similarly, the marginal utility of consuming a soda is the partial derivative of the utility function with respect to S, holding B constant, which is simply B. Therefore, the marginal utility of a burrito is equal to the number of sodas consumed (S), while the marginal utility of a soda is equal to the number of burritos consumed (B). Signup and view all the answers

Find John's optimum choice bundle of burritos and sodas and draw his indifference curve.

John's optimal choice bundle is the point where his budget constraint is tangent to his highest possible indifference curve. The indifference curve represents the different combinations of burritos and sodas that provide John with the same level of satisfaction. Given his utility function U=BS, any combination of burritos and sodas that results in the same product of B*S would be on the same indifference curve. For example, the bundle (2, 10), (4, 5) and (10, 2) will all result in a utility of 20 and will be on the same indifference curve. To find his optimal choice, we need to find the highest indifference curve that touches the budget line. This point represents the combination of burritos and sodas that maximizes John's satisfaction given his budget constraint. To maximize utility, John should consume burritos and sodas in a way that makes the marginal utility per dollar spent equal across both goods. The point of tangency between the indifference curve and the budget line will satisfy this condition. Signup and view all the answers

Fill in the column of marginal product. What pattern do you see? How might you explain it?

The marginal product is the change in output (desserts) from employing one additional worker. The marginal product should read: [0], 20, 40, 30, 20, 10, 5 As we can see, the marginal product is initially increasing, then decreases eventually becoming negative. This is the typical pattern of diminishing marginal returns. Diminishing marginal returns occurs when additional units of a factor of production lead to smaller increases in output. In this case, as more workers are employed, the additional output contributed by each additional worker is getting smaller. This could be because the kitchen space limits how many workers can efficiently work together, or perhaps there are not enough ingredients to fully capitalize on the added labor. Signup and view all the answers

A skilled patisserie chef costs 100 a day and the firm has fixed costs of 200. Use this information to fill in the column for total cost and for average total cost.

The total cost is the sum of fixed costs and variable costs. The variable costs, in this case, are the wages of the skilled patisserie chef. Average total cost is calculated by dividing the total cost by the quantity of output (desserts). The answer should read: Workers: 0 | Output: 0 | Marginal Product: 0 | Total Cost: 200 | Average Total Cost: N/A Workers: 1 | Output: 20 | Marginal Product: 20 | Total Cost: 300 | Average Total Cost: 15 Workers: 2 | Output: 60 | Marginal Product: 40 | Total Cost: 400 | Average Total Cost: 6.67 Workers: 3 | Output: 100 | Marginal Product: 30 | Total Cost: 500 | Average Total Cost: 5 Workers: 4 | Output: 130 | Marginal Product: 20 | Total Cost: 600 | Average Total Cost: 4.62 Workers: 5 | Output: 150 | Marginal Product: 10 | Total Cost: 700 | Average Total Cost: 4.67 Workers: 6 | Output: 160 | Marginal Product: 5 | Total Cost: 800 | Average Total Cost: 5 Workers: 7 | Output: 165 | Marginal Product: 5 | Total Cost: 900 | Average Total Cost: 5.45 The average total cost is first decreasing, then eventually starts increasing this is because initially, as the output increases, the average total cost decreases due to the fixed costs being spread over more units of output; however, as the marginal product (and therefore, output) starts decreasing, the fixed costs start to per unit of output, leading to an increase in the average total cost. The exact pattern of average total cost is due to the combination of diminishing marginal returns and fixed costs. Signup and view all the answers

Now fill in the column for marginal cost. What pattern do you see? How might you explain it?

Compare the column for average total cost and the column for marginal cost. Explain the relationship.

Initially, the average total cost is decreasing as output rises and is higher than the marginal cost. However, as the marginal cost continues to increase, eventually, it crosses the average total cost and becomes higher than it. When marginal cost is below average total cost, the average total cost decreases, and when marginal cost is above the average total cost, the average total cost increases. This is how these two costs are related: if the marginal cost is higher than the average total cost, it pulls the average up, but if it's lower than the average total cost, it pulls the average down. Signup and view all the answers