Econ 111 - Principles of Economics - Accelerated Treatment - First Midterm Examination Fall 2014

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

a) Jesse and Bill produce tables and chairs at a constant rate (this means they have a linear PPF). Jesse can make more tables in 12 hours than Bill. Bill can make more chairs than Jesse in 12 hours. True or false: Given this information, Jesse must have the comparative advantage in making chairs and Bill must have the comparative advantage in making tables.

b) A professional football team raises its ticket prices by 10% and its sales revenue declines. True or false: This means that the demand for its tickets is elastic.

c) For a given firm MRP_L = $50, MRP_K - $100 while P_L = $10 and P_K = $20. True or false: This firm is maximizing profits and therefore should not increase or decrease the quantities of Capital or Labor used in the production process.

d) Oil prices have been very high recently. True or false: If labor is a substitutable input to oil we should expect that the high oil prices will increase the demand for labor.

Q2. Consider a downward slopping linear demand curve, and assume that at a price of $5, the price elasticity of demand is -1.

a) At a price P = $6, what can you say about the price elasticity of demand for this linear demand curve?

b) What is the slope of this linear demand curve, if the quantity demanded at P = $5 is Q = 10?

c) What is the quantity demanded at P = $6?

3 Use the following graph to answer the next three questions:

Note that the graph describes the situation where the price of Y went up. IC1 indicates the indifference curve before the price change and IC2 indicates the indifference curve after the price change. Also note that A is (6, 16), B is (18, 10), and C is (24, 4).

a) Using letter notation A, B, and C (from the graph above) specify which distance represents the income effect and which distance represents the substitution effect for good Y after this price change. Exactly how large are the income and substitution effects for good Y?

b) Using the information in the graph above, is either good X or Y normal or inferior? Why?

c) Assume that this individual has a budget of $240 and a linear demand curve for good Y. What is the demand function for Y for this consumer?

Q4. The short run total cost function of a representative firm in a perfectly competitive market is given by the equation TC=405+5q+5q², where q denotes the units of output produced. The implied short run marginal cost is therefore MC-5+10q. Suppose this short run cost function is the scale that minimizes the long run average cost function.

a) What is the long run equilibrium quantity produced by the representative firm?

b) What is the long run equilibrium price in the industry?