Microeconomics Final Exam-
Q1) In an article for Rolling Stone, Matt Taibbi argued that the oil price spike of 2008 could not have resulted from supply and demand:
"In the six months before prices spiked [Ed's note: he means the six months of run-up to the maximum oil price of $147 in summer 2008], according to the US Energy Information Administration, the world supply of oil rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling - which, in classic economic terms, should have brought prices at the pump down."
Using supply and demand theory, given the data he presents, what should have happened to prices of oil during the run-up to summer 2008? Circle your answer and explain in two to three sentences. Drawing a graph will probably help.
Supply and demand theory says that:
a) Prices should have risen and flattened out as summer approached
b) Prices should have risen faster and faster as summer approached
c) Prices should have fallen and flattened out as summer approached
d) Prices should have fallen faster and faster as summer approached
Q2) European dairy farmers have recently been lobbying governments in the EU to reduce the quota on milk production to counter slumping prices of milk. Working through an example, let's see why milk farmers would want this.
Milk demand is given by D(p) = 10,000,000 (4 - p) liters and milk supply is given by S(p) = 40,000,000 (p - 1.50) liters.
a) Suppose there is no quota on milk. What is price of milk in this market? What is producer surplus?
b) Suppose a quota is placed on milk production. Each farmer is given an amount of milk that she is allowed to produce and sell to the market. This quota limits total EU milk production to 15,000,000 liters. What is the price of milk? What is producer surplus?
c) Bad weather can be good or bad for farmers. When bad weather leads to low yields locally, farmers are hurt badly. When bad weather leads to bad yields over large areas or globally, farmers often do very well. Explain why in the context of what you have learned in this class and questions (a) and (b) above. Two to four sentences are sufficient.
Q3) For the following 10 questions, circle the correct answer. No work need be shown but feel free to write (plausible) assumptions beside the question.
a) True or False: Suppose we observe prices and sales of Gucci bags over 48 months and find more are sold in months with higher prices. This is evidence that demand for luxury goods is upward sloping.
b) A radical new technology allows ranchers to choose the sex of newborn calves. Before the technology is introduced, female calves sell for higher prices than male calves and half of newborn calves are males. After the technology is introduced:
a. The price of milk should decrease and the price of beef should decrease
b. The price of milk should decrease and the price of beef should increase
c. The price of milk should increase and the price of beef should decrease
d. The price of milk should increase and the price of beef should increase
c) True or False: When there are no transport costs, firms producing the same item at several plants should choose production at each plant so that marginal cost is the same at all plants.
d) True or False: Subsidies are always harmful.
e) True or False: The elasticity of demand for a firm's products is -3, marginal cost is $10 and the firm is charging $15. The firm is profit maximizing.
f) True or False: Pricing below average cost is never optimal unless a firm has multiple units/divisions selling in different countries.
g) A powerful new study shows that regularly eating corn can reduce cancer rates by 20%. We should expect that:
a. The price of corn and the quantity sold should increase over time to a permanently higher level.
b. Corn prices should rise quickly and then fall over time back toward the old price.
c. The quantity of corn sold should remain roughly constant but the price should increase over time to a permanently higher plateau.
h) True or False: Marginal revenue is often higher than marginal cost if the firm is producing at a capacity constraint.
i) True or False: Taxes sometimes increase deadweight loss and sometimes decrease deadweight loss.
j) True or False: Holding demand constant, a monopolistic firm should set higher prices when marginal cost is higher.
Q4) NOTE: NOT RELEVANT FOR CLASS ANYMORE. When I was recently in Mexico with my family, my aunt asked me why some things were much cheaper in Mexico while some weren't cheaper at all. Here is a list of goods that are cheaper and a list of goods that are not cheaper:
Cheaper Not Cheaper
Haircuts Gasoline
Restaurant food Rice, flour, beans and other staples
CDs Plastic beer cups
Blenders
Clothing at "Banana Republic"
Books
a) Some of these items are not imported. Why would these be cheaper in Mexico than the US? Two sentences should be sufficient.
b) Some of these items may be imported from other countries. Among the potentially imported goods, some are sold monopolistically (CDs, for example) and some are sold competitively (gasoline, for example). How does this affect whether a good would be cheaper in Mexico? Two sentences should be sufficient.
Q5) Barnaby's Books has two types of customer. Regulars come into the store every month and have monthly demand D(p) = 4 - p/5. Lookie Loos come into the store twice per year and have semi-annual demand D(p) = 10 - p/4. Marginal cost is $10.
a) Suppose Barnaby's could only set one price that applies to all book purchases all year. What is the optimal price to set?
b) Suppose Barnaby's offers a free discount card whereby customers who shop at the store more than twice per year receive $X off per book purchased. What is the optimal price for books and the optimal discount $X?
c) How much could Barnaby's charge for the card described in (b)?