Download Intro Micro Exam 2, Winter 2010

493724732
Dr. Eric R. Dodge
NAME:_______________
You may not attach additional paper to this exam. You may use the back page for additional space. If
something is unclear, please do not hesitate to ask for clarification.
1. The Venezuelan government has imposed a price ceiling on the retail price of roasted coffee beans.
a. In a well-labeled graph, show the impact of a price ceiling and clearly label (3 points each):
 The quantity of coffee beans demanded and the quantity of coffee beans supplied.
 Consumer surplus after the price ceiling.
 Producer surplus after the price ceiling.
 Deadweight loss after the price ceiling.
b. Discuss the various inefficiencies that would likely arise due to this price control. (14 points)
2. You have discovered that the cross-price elasticity of demand for pork with respect to the price of chicken is
Epork, chicken = .16. Interpret this value for someone completely unfamiliar with the concept. (6 points)
3. You have discovered that the income elasticity for butter is EI = .37. Interpret this value for someone completely
unfamiliar with the concept. (6 points)
493724732
Dr. Eric R. Dodge
4. What can you conclude about the price elasticity of demand in each of the following statements How does this
statement describe the general slope of the demand curves? Be sure to explain your responses.
“The pizza delivery business in this town is very competitive. I’d lose half my customers if I raised the price by as
little as 10%.” (6 points)
5. Suppose a person’s demand curve for subway tickets in Washington, DC is given by this equation:
P = 6 – ½ Qd. P is the price of a subway ticket and Qd is the number of tickets purchased each week.
a. If the price of a subway ticket is $1.50, compute the price elasticity of demand. (6 points)
b. Interpret the above price elasticity of demand for someone unfamiliar with the concept. (8 points)
6. What is the difference between marginal, and total utility of the consumption of some good (like candy)? Can
marginal utility from the consumption of candy be negative? Briefly explain with an example. (10 points)
7. Suppose that Maria spends her entire income on goods X and Y. The marginal utility of each good is
independent of the amount consumed of the other good. The price of X is $5 and the price of Y is $10.
# of units of good X
Marginal utility of
# of units of good Y
Marginal utility of
consumed
Good X
consumed
Good Y
1
10
1
20
2
7
2
18
3
6
3
14
4
5
4
10
5
4
5
8
6
3
6
6
7
2
7
5
8
1
8
4
If Maria has an income of $115 per month, and she maximizes her utility, how many units of each good should she
purchase? How much utility will Maria enjoy? (8 points)
493724732
Dr. Eric R. Dodge
7. The graph below shows the market for cigarettes. The current equilibrium price per pack is $4, and every day 40
million packs of cigarettes are sold. In order to recover some of the health care costs associated with smoking, the
government imposes a tax of $2 per pack. This will raise the equilibrium price to $5 per pack and reduce the
equilibrium quantity to 30 million packs.
The economist working for the tobacco lobby claims that this tax will reduce consumer surplus for smokers by $40
million per day, since 40 million packs now cost $1 more per pack. The economist working for the lobby for
sufferers of second-hand smoke argues that this is an enormous overestimate and that the reduction in consumer
surplus will be only $30 million per day, since after the imposition of the tax only 30 million packs of cigarettes will
be bought and each of these packs will now cost $1 more. They are both wrong. Why? What is each economist
missing? (14 points)
8. Jackie owns and operates a web-design business. Her computing equipment depreciates by $5,000 per year. She
runs the business out of a room in her home. If she didn’t use the room as her business office, she could rent it out
for $2,000 per year. Jackie knows that if she didn’t run her own business, she could return to her previous job at a
large software company that would pay her a salary of $60,000 per year. Jackie has no other expenses.
a. How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is,
how much total revenue would give Jackie an accounting profit of just zero? (5 points)
b. How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how
much total revenue would give Jackie an economic profit of just zero? (5 points)