Econ 111 - Principles of Economics - Accelerated Treatment - First Midterm Examination Fall 2013

Q1) Use a GRAPH where necessary & EXPLAIN if the statements are true or false:

a) A country that has the comparative advantage in the production of a good, always also has the absolute advantage in the production of that good.

b) Mary's marginal rate of substitution between apples and oranges MU_A/MU_O = 0.5, and the market price for apples is P_A = 2 and for oranges P_O = 1. Therefore, Mary is consuming the correct quantities of apples and oranges and she is maximizing her utility. (Graph)

c) The demand for low fat Colombo yogurt is more inelastic than the demand for yogurt in general because most people prefer low fat yogurt.

d) Mary's marginal rate of substitution between apples and oranges MU_A/MU_O = 0.5, and the market price for apples is P_A = 2 and for oranges P_O = 1. Therefore, Mary is consuming the correct quantities of apples and oranges and she is maximizing her utility. (Graph)

e) Bill and Paul run a tomato farm outside Iowa city. The two brothers produce 20,000 pounds of tomatoes per season and their total cost of production is $10,000 (per season). Their cousin Peter has his own smaller tomato farm. Peter's farm produces about 10,000 pounds of tomatoes every season and his total cost (per season) is $7,500. The "Red and Delicious" tomato farm is the largest one in the area. It produces 100,000 pounds of tomatoes per season at a total cost of $25,000. These data suggest that there are significant diseconomies of scale in the tomato production.

Q2) The short run price elasticity of supply for a farmer's corn is 0.3, while the long run price elasticity of supply is 2. If prices for corn fall by 30 %, what are the short run and long run changes in quantity supplied? What are the short and long run changes in quantity supplied if prices rise by 15 %? What happens to the farmer's revenues in each of these situations?

Q3) You are given the following information: The average total cost (ATC) for Helen's apple pie production reaches its minimum at a quantity of 50 pies per day and a price of $2 per pie. The marginal cost (MC) that Helen faces is decreasing for quantities smaller than 30 pies per day, but for larger quantities it begins to rise.

a) Sketch the average total cost (ATC) and marginal cost (MC) curves for Helen's apple pie production. (Hint: You have enough information to get basic shapes, but not to plot all points.)

b) Now assume that Helen can sell her pies in a perfectly competitive market at a price of $5 per pie. In the diagram you sketched for a) above, indicate the quantity Q* of apple pies that Helen will produce in equilibrium. Show her profits (or losses). (Hint: Again, you cannot give specific numbers but you can sketch and shade the appropriate rectangle.)

c) If the government were to pass a special tax of $100 a year on each apple pie maker explain what the effect would be in Helen's MC, and ATC curves, equilibrium quantity, profits (or losses). Add this information to the diagram you have for b) and explain.

Q4) Suppose a perfectly competitive firm faces a marginal product of labor (MP_L) curve equal to MP_L = 10 - 2q_L, where q_L is the quantity of labor used by the firm. The price of the firm's output is $2.

The labor market is also perfectly competitive, and the demand for labor is given by: Q_L=20-W, and the supply of labor is: Q_L = 4W, where W is the labor wage, and Q_L is the quantity of labor employed by the industry.

How many units of labor, q_L, will this firm choose to hire if the firm maximizes profits? (Show your work.).