Econ 111 - Principles of Economics - Accelerated Treatment - Spring 2013 - First Midterm Examination
1) Use a GRAPH where necessary & EXPLAIN if the statements are true or false:
a) If bratwursts were an inferior good, an increase in the price of bratwursts would result in an income effect that reinforces the substitution effect. (Graph)
b) An increase in the cost of producing flashlights by $0.20 per flashlight will increase the price of flashlights by $0.20 per flashlight. (Graph)
2) You are given the following indifference curves and budget lines for Jim. The prices of cheese and milk are fixed.
a) If Jim's income goes down, his optimal consumption changes from point A to point B. What type of goods are cheese and milk for Jim? Briefly, why?
b) Jim's income is $12 when he consumes at A, and is $7 when he consumes at B. What are the prices of cheese and milk, respectively? Explain briefly (or show your work).
c) What is his marginal rate of substitution at point A and point B? Explain briefly.
Q3) Mike and Paul are two gardeners who plant trees and prune bushes. Their production possibility frontiers are linear and the table below gives us information about their productivity in a day.
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Bushes
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Trees
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Mike
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20
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X
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Paul
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10
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20
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How high or low does X have to be for Mike to have a comparative advantage in planting trees? Explain why!
Q4) Consider all information in the graphs below when answering all questions in this problem. Give your answer and very brief explanations. The left graph below gives you the market demand and supply curves of corn. The right graph gives the representative corn firm's short run marginal cost (SRMC), short run average cost (SRAC) and long run average cost (LRAC). Assume this perfectly competitive corn industry consists of a large number of identical firms.
a) If the market demand of corn is given by line D, how many (identical) firms are in this industry in the short run?
b) Now suppose that the demand for corn increases to D'. What is the new price that will prevail in the market in the short run, and how many firms will operate in the short run in this industry?
c) How many firms can the industry support in the long run with an aggregate demand D, and how many firms can the industry support in the long run with an aggregate demand D'?