MICROECONOMICS

INSTRUCTIONS:

Please use a word processor such as Microsoft Word, Apple Pages or OpenOffice for your answers. If you have trouble editing the graphs, you can also sketch them on paper, take pictures of them and then insert the pictures in your file. Please make sure that the graphs are readable. Also please also print your file to pdf and attach both files (e.g. the Word file and the pdf file, which is just a print of the Word file). PDF is more stable and readable independently from the source file. Make sure that your graphs are clearly readable as points will be deducted for hard to read graphs.

1) Assume the following table shows the yields per acre of wine grapes and olive oil in two different countries, country A and country Z. (Also assume that in each country the labor and other processing costs per acre are the same regardless of whether grape vines or olive trees are cultivated).

Suppose initially each country had erected high tariff barriers to keep out foreign wine and/or olive oil and was producing for its own needs only.

a) Which country has the lower opportunity cost of producing olive oil?

b) According to the principle of comparative advantage, which country would export olive oil after the elimination of trade barriers?

2)

a) Draw a supply-demand diagram representing Lowell's market for food services (restaurant meals, fast food meals etc.). Remember to label the axes.

b) Wang Laboratories was a famous computer company based in Lowell.It declared bankruptcy in 1992 and had to lay off 5,000 of its 13,000 employees at the time. Show on your graph what likely happened to the market for food services in Lowell after Wang's bankruptcy.

c) Explain how the Lowell market for food services adjusted from the old equilibrium to the new one after Wang's bankruptcy. For example, after Wang's bankruptcy, at the old equilibrium price, was there excess demand or excess supply? How was the new equilibrium price achieved?

3) Joe likes to maximize his utility. He is currently weighing two options for his meal, pizza or pasta. A pizza costs $9 while a dish of pasta costs $12. Is it correct to say that, if Joe opts for pasta, then Joe's marginal utility from pasta is larger than Joe's marginal utility from pizza?

4) The chart on the following page shows the average daily demand for tokens on a major urban rapid transit system.

a) What is the elasticity of demand at a fare of $2.50/token? (Show your calculations)

b) Is the revenue maximizing fare higher than, lower than or equal to $2.50/token Explain your reasoning using the concept of elasticity.