Midterm I Lecture 1 (9:05-9:55) 50 minutes Econ 1101: Principles of Microeconomics Thomas Holmes October 15, Name: TA s Name: Section Number:

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1 Midterm I Lecture (9:-9:) minutes Econ : Principles of Microeconomics Thomas Holmes October, Name: TA s Name: Section Number: (TA s Name and Section Number are worth bonus points.) 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 should be pages including the cover sheet.

2 Question ( points): Consider the market for corn. For each of the following situations, determine what happens to the equilibrium price and equilibrium quantity of corn. Circle the correct answer. (a) There is no rain throughout the entire summer in the corn-growing regions. (b) The price of cars that use ethanol for fuel decreases. (Ethanol is made out of corn.) (c) Sugar prices fall. (Sugar and corn syrup are both used as sweeteners in beverages and candy.) (d) A new kind of corn is developed that is resistant to damage from insects. (e) Both (c) and (d) happen at the same time. Question ( points): Americans work more than Germans and the French. Ed Precott ( Nobel Laureate and former Minnesota faculty member) has argued that these differences are related to the differences in taxes between European countries and the U.S. (circle one)

3 Question ( points) Suppose you are given the following information about the demand for gas. P Quantity Demanded (dollars) (millions of gallons) (a) Write down the formula for the price elasticity of demand. Plug in the above data to calculate the value of the price elasticity of demand (OK to leave as a fraction). (b) From what you know about the demand for gasoline, is this elasticity more likely to be: (circle one) a short-run elasticity a long-run elasticity Question ( points) State the First Welfare Theorem of Economics

4 Question ( points) Circle the correct response. (a) Suppose a good is a normal good and that its supply is perfectly inelastic. An increase in income will then lead to an increase in the price but the equilibrium quantity will remain the same. (b) Suppose supply is perfectly elastic. An increase in the price of an input will lead to an increase in the price but the equilibrium quantity will remain the same. (c) Start with some feasible allocation. A Pareto Improvement is an alternative feasible allocation that makes at least one person better off and no one worse off. (d) The wholesale price of electricity in California is constant throughout the day (i.e. price at : a.m. = price at : p.m.) but does change from day to day as a result of the auction. Question 6 ( points): 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. (a) What price clears the market? (b) What is the quantity that clears the market? (c) Circle the sellers that produce and the buyers that consume in the market clearing allocation. Sellers Bid (Offer to sell in $ ) Buyers Bid (Offer to purchase in $) Arthur Alice 6 Brian 6 Beth Chuck Cindy Dale Dolly

5 Question ( points) Name of D Person Reservation Prices and Costs in Econland Reservation Cost to price for one make widget one widget (dollars) (dollars) D 9 S D S D S D 6 S D S D6 6 S6 D S D S D9 9 S9 D S Name of S Person None of the allocations below are Pareto efficient. In each case, propose a Pareto improvement. Calculate the change in welfare (in dollar terms) for those individuals affected by your proposed Pareto improvement. (a) An allocation where D consumes a widget but D does not. (b) An allocation where S produces a widget but S does not. (c) An allocation where S, S, S, S, S, S6, S, S, S9 each produce a widget and D, D, D, D, D, D6, D, D, D9 each consume a widget.

6 Question ( points) Determine the impact of a subsidy of $ in Econland by doing the following: (a) Complete the table below. (b) On Graph below, illustrate the ΔCS and the ΔPS from the subsidy. (c) On Graph below, illustrate the change in government surplus from the subsidy (i.e. the cost of the subsidy program) and the deadweight loss of the subsidy. (d) Which of the four efficiency conditions, if any, are violated in the allocation with the subsidy? Free Market Q $ Subsidy P D P S CS. PS. Gov't Surplus TS 9 $ 6 S D 9 $ 6 S D 6 9 Quantity 6 9 Quantity Graph : ΔCS and ΔPS Graph : ΔGS and ΔTS 6

7 Question 9 ( points) Lets leave Econland and go to a new place, Paretoville, where the main industry is the ridget industry. The graphs below illustrate the demand and supply for ridgets. 9 $ 6 D 6 9 Quantity Graph : Profit (or surplus) from holding Quota S 9 $ 6 D S 6 9 Quantity Graph : ΔTS from $ price ceiling with waiting lines (a) Suppose the government imposes a supply management policy in the ridget industry. Six quota units are issued and the quota are tradable. Under the supply management policy, the price p D that consumers pay is.. The price p S sellers receive, net of the opportunity cost of quota, is. The price of a quota unit is. Illustrate in graph the surplus (or profit) going to holders of quota. (b) Suppose instead the government of Paretoville imposes a price ceiling of $ on ridgets. There is excess demand. Suppose that waiting lines are used to allocate the ridgets. At the price ceiling of $, the amount of excess demand is In markets without a price ceiling, the dollar price of a good is bid up when there is excess supply. This can t happen here because of the ceiling. Instead, the full price of the good is bid up through time spent waiting in line. In the equilibrium with waiting lines, the full price p D of a ridget (including the value of the time spent waiting in line) is. If the value of time is $ per hour, how much time will people have to spend in line to buy a ridget?

8 The equilibrium with waiting lines violates two conditions needed for efficiency. What are these two conditions? Illustrate in graph the loss in total surplus from the price ceiling with waiting lines relative to the free-market allocation. The loss has two parts because two conditions are violated. Label the two parts. Bonus Question ( points) Circle the correct answer There is supply management in the dairy industry in Canada. A quota unit giving the holder the right to sell in Ontario the milk of the equivalent of one cow a day in perpetuity is currently selling for more than $, (Canadian).