Midterm I Information and Sample Questions

Transcription

1 Midterm I Information and Sample Questions I recommend you review lecture notes (through October 5 th ), recitation notes, the relevant textbook chapters (chapters are listed on the lecture schedule), and homework. The test is closed book, closed note and only make sure to bring a calculator. (You may use a programmable calculators but calculators that can transmit messages- ie cellphones will not be allowed) Also, no headphones are permitted during the test, as a courtesy to your test-taking neighbors. The below midterms should only be taken as examples of possible questions, of course I can ask questions not listed here. Any questions on this midterm you may bring to office hours To allow you to take the test without a calculator, you can leave numerical answers as fractions. Specifically, consider an answer to some PED question: * The ideal answer would be or even However, we would also accept 175, because this is in fractional form, just not reduced. Be sure to clearly indicate the sign (positive or negative) An unacceptable answer would be: 2. You at least need to go to the next step (calculate the differences and the average). 1

2 Example Midterm I 75 minutes Econ 1101: Principles of Microeconomics Name: Section Number: (Section Number is worth 2 points, NOT bonus) On the following pages, please show all of your work. If you need more space, use the back of the page. Clearly state where your work/answer is. Clearly highlight/circle solutions. Calculators are NOT allowed. You may leave answers as fractions. Fully label all graphs. Read each question carefully and be sure to answer all parts of every question. 2

3 Question 1: Consider the market for corn. For each of the following situations, determine what happens to the equilibrium price and equilibrium quantity of corn. For each subsection, show two things: 1. The market supply and demand, and appropriate shifts in either one. 2. Circle the correct answer regarding the change in price and quantity. Be sure to correctly label all parts of your diagrams and state your assumptions. 3

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5 Question 2: Suppose you are given the following information on the demand for gas. Question 3: State the First Welfare Theorem of Economics. 5

6 Question 4: Circle the correct response. You may have to draw a graph to answer the question. Question 5: Suppose you are the Independent System Operator (ISO) in an electricity market. You have received the bid information in the table below for a double auction. Each seller s bid is an offer to sell one Mhw of electricity. Each buyer s bid is an offer to buy one Mhw of electricity. 6

7 Question 6: Determine the impact of a subsidy of $8 for each unit of wheat by doing the following: a) Complete the table below. b) On Graph 1 below, illustrate the change in Consumer Surplus and the change in Producer Surplus from the subsidy. c) On Graph 2 below, illustrate the change in Government Surplus from the subsidy (ie the cost of the subsidy program) and the deadweight loss of the subsidy. d) A subsidy is a tool of the government to increase the price producers receive for their products. Explain two other methods that could have been used to achieve this goal. 7

8 Question 7: Consider an industry for ridgets, illustrated in the diagrams below. a) Suppose the government imposes a supply management policy in the ridget industry. Six quota units are issued and the quota are tradable. b) Suppose the government imposes a price floor instead. What price would you recommend to ensure that producers benefit? Why? c) For the price ceiling you chose in b), illustrate in Graph 4 the loss in Total Surplus relative to the free-market allocation. Label this with the proper term. 8

9 Example Midterm I 75 minutes Econ 1101: Principles of Microeconomics Name: TA s Name: Section Number: (TA s Name and Section Number are worth 3 points, NOT bonus) On the following pages, please show all of your work. If you need more space, use the back of the page. Clearly state where your work/answer are. Clearly highlight/circle solutions. Calculators are NOT allowed. You may leave answers as fractions. Fully label all graphs. Read each question carefully and be sure to answer all parts of every question. There are a total of 100 points possible on this test. 9

10 Question 1 (12 points) Consider the market for Widgets. (a) Sketch a demand/supply diagram for the market for widgets, clearly labeling the equilibrium. You study survey data and observe that if Widgets cost $5, then 200 units of Widgets are demanded. You also observe that if Widgets cost $10, then 250 Cogs are demanded and if Widgets costs $8 then 150 Cogs are demanded. (b) Calculate the cross price elasticity of demand for Widgets and Cogs. (You need to pick out the relevant information from above.) (c) How are these two goods related (substitutes, complements, not related)? (d) Suppose the price of Cogs decreases. Draw and label the effects of this change on your diagram from part (a) (the market for widgets). Label the new equilibrium price and quantity. 10

11 Question 2 (15 points): Consider the market for cheese. The demand for cheese is given by 1 1 the equation P D ( Q) 25 2 Q. Supply is given by the equation P S ( Q) 2 Q. (a) Give the equilibrium price and quantity for this market. Sketch these curves (keeping in mind the intercepts on Price-axis and slopes). (b) The government implements a price floor of $10. Will it be binding? (c) The government implements a price ceiling of $10. Will it be binding? (d) Whichever policy is binding, illustrate this policy on the diagram above. Clearly label any surplus or shortage on your diagram. (e) Who benefits and who loses as a result of this policy (the binding one)? 11

12 Question 3 (8 points): Again consider the market for cheese. The demand for cheese is given 1 1 by the equation P D ( Q) 25 2 Q. Supply is given by the equation P S ( Q) 2 Q. (Same as in Question 2.) The government s goal is to implement a policy such that Q P, the quantity bought/sold after this policy, is equal to 20 units of cheese. In order to achieve this goal should the government implement a tax or a subsidy? (I do not need to know the size of the tax or subsidy, just which one the government should set.) Explain your reasoning. Question 5 (15 points): Consider the market for milk. We know that the demand curve has P.E.D. of Supply has P.E.S. of 1.9. (a) Using the information above illustrate the market for milk, clearly labeling equilibrium price and quantity. (b) On the market diagram, illustrate a per unit subsidy of size sub. Clearly label the quantity bought and sold after the subsidy: Q, the price consumers pay after the subsidy: P, the price producers receive after the subsidy: P S sub. D Sub sub 12

13 (c) Label distinct areas on your diagram above and then fill out the table below: Before Subsidy: After Subsidy: CS PS Gov t TS (d) What is the deadweight loss of the subsidy? (Either clearly draw/label it on diagram, or write down the labeled areas that describe it.) Question 6 (8 points): Define the following terms. (a) Inferior Good: (b) Economics: (c) Law of Demand: (d) Law of Supply: 13

14 Question 7 (16 points): Consider the market for wool socks in Minneapolis. For each of the following situations, give: 1. Is the effect a Supply or Demand Shifter. Specifically say which shifter. (If more than one effect, do this for each effect.) 2. Is the effect a positive or negative shifter. 3. What will be the effect on equilibrium price and quantity. Although it may help you to draw a picture, it is not required for full credit. State any assumptions that you need to make. (a) A number of stores that sell wool socks leave Minneapolis AND the price of cotton socks increases. State any assumptions. (b) Average income in Minneapolis decreases AND the price of wool increases. State any assumptions. (c) The price of boots decreases AND better automated knitting machines are produced. State any assumptions. 14