Download Solution sketches, Test 1

Econ 1
Test 1
Form A
John Hartman
February 9, 2009
Instructions:
You have 45 minutes to complete this test, unless you arrive late. Late arrival will lower
the time available to you, and you must finish at the same time as all other students.
Please bubble in your Perm # and test form letter on your
scantron. Failure to do so may lower your grade.
Each multiple-choice question is worth 1 point. Please fill in the bubbles on your
scantron correctly for multiple-choice questions, since this is how you will be graded.
Questions that require you to write out your answer will be answered on the back of
your scantron, on the side labeled “mini blue book.” Show all work for these
questions. Any work that is not legible will not receive credit.
There is no penalty for guessing, so answering every question is encouraged.
Cheating will not be tolerated during any test. Any suspected cheating will be reported to
the relevant authorities on this issue.
If the correct answer does not match with one of the five answers on a multiple-choice
question, pick the answer closest to the correct answer.
Unless otherwise specified, you can assume the following:
 Supply curves have positive slope and demand curves have negative slope.
 Negative quantities cannot be supplied or demanded.
You are welcome to keep this test when you leave, but you must turn in your scantron
before you leave. Note that any work and answers shown on this test will not be graded.
You are allowed to turn in your test early if there are at least 10 minutes remaining. As a
courtesy to your classmates, you will not be allowed to leave during the final 10 minutes
of the test.
For the next two questions, please use the following information:
Jillian’s demand for doughnuts is represented by the equation P = 50 – 5Q. Bob’s
demand for doughnuts is represented by the equation P = 50 – 2Q.
1. If Jillian and Bob are the only people with a positive willingness to pay for doughnuts,
then the market demand for doughnuts is a straight line with vertical intercept of ___ and
horizontal intercept of ___. (Note: Assume that price is on the vertical intercept and
quantity is on the horizontal intercept.)
A. 50; 10
B. 50; 25
C. 50; 35
D. 100; 35
E. None of the above
The vertical intercept of both individual demands is 50. If doughnuts were free, Jillian
demands 10 doughnuts; Bob, 25. With horizontal summation, the vertical intercept
remains at 25, and the horizontal intercept is the sum of individual demands when the
price is free.  Horizontal intercept is 35.
2. What is the combined consumer surplus for Jillian and Bob if the price of doughnuts is
30? (Pick the closest answer.)
A. 80
B. 140
C. 200
D. 260
E. 320
Jillian demands 4 doughnuts when the price is 30. Jillian’s CS is a triangle with length 4
doughnuts and height 50 – 30 = 20. Her CS is ½ * 4 * 20 = 40. Bob demands 10
doughnuts when the price is 30. Bob’s CS is a triangle with length 10 doughnuts and
height 20. His CS is ½ * 10 * 20 = 100. Total CS is 40 + 100 = 140.
3. In the market for brand name sunglasses, suppose that the supply is represented by the
equation P = Q + 4 and demand is represented by the equation P = 50 – Q. (Assume all
prices are in dollars.) What is the deadweight loss in this market if a $10 tax is imposed?
(Pick the closest answer.)
A. $20
B. $40
C. $60
D. $80
E. $100
Without the tax, set 50 – Q = Q + 4 to get Q = 23, then find P = 27.
The tax can be imposed on either buyers or sellers here. Suppose that it is
imposed on sellers. Then the new supply curve with the tax is represented by the
equation P = Q + 14. Set Q + 14 = 50 – Q to get Q = 18, price that consumers pay of
32, and price that sellers receive (after paying the tax) of 22. The DWL triangle has a
base of 5 (the loss in quantity after the tax is imposed) and a height of 10 (the amount of
the tax). The area is ½ * 5 * 10 = 25.
For the next three problems, assume the following information about tire production:
Number of
Output (tires
workers
produced)
0
0
1
200
2
450
3
650
4
800
5
850
6
875
7
885
8
890
You can also assume the following:
 The cost of materials to produce each tire is $6 each.
 Each worker that you hire today costs $100.
 You will receive $15 for each tire that you produce.
 You have no fixed cost.
4. What is the marginal cost per tire produced for the fifth worker hired? (Hint: You
need to account for all costs when finding the marginal cost.)
A. $2
B. $5
C. $6
D. $8
E. $11
For each tire produced, there are two components: Materials and labor. For the 5th
worker hired, 50 additional tires are produced, at an additional labor cost of $100. This
comes out to $2 in labor per tire. Materials are $6, leading to a total MC of $8 per tire.
5. How much profit is earned if you hire exactly three workers? (Pick the closest
answer.)
A. $5,500
B. $6,500
C. $7,500
D. $8,500
E. $9,500
If three workers are hired, TC is 3* $100 (from labor) + 650 * $6 (for materials) =
$4,200. TR is 650 * $15 = $9,750. Profit is TR – TC, or $5,550
6. How many workers will be hired in order to maximize profits?
A. 3 or less B. 4
C. 5
D. 6
E. 7 or more
There are many ways to do this problem. One way is to find the point where MC goes
from less than $15 per tire to more than $15 per tire. MC for the 6th worker is $10, while
for the 7th worker, MC is $16. So hire the 6th worker, but not the 7th.
7. If you owned a bond that paid $1 a year for each of the next 15 years (and nothing
after the 15 years), how much is the bond worth today? Assume that the interest rate is 5
percent. (Pick the closest answer.)
A. $5
B. $10
C. $15
D. $20
E. $25
Find the value first for years 1 to infinity  1/.05 = $20.
Then we have to take away the value of years 16 to infinity. To do this, we have
to discount $20 by 15 years  20/(1.05)15 = 9.62. Thus, the value of years 1 to 15 is 20
– 9.62 = 10.38
Suppose that your total benefit for slices of Lucy’s pizza is listed in the table below. Use
this information to answer the next two questions. (Note that you are not allowed to buy
more than eight slices.)
Number of slices of pizza
Total benefit
0
$0
1
$10
2
$18
3
$25
4
$30
5
$34
6
$36
7
$37
8
$37.50
8. If the price of pizza is $3 per slice, how many slices will you buy?
A. 2 or less B. 3
C. 4
D. 5
E. 6 or more
Continue to consume as long as MB is at least $3. MB is $4 for the 5th slice, but $2 for
the 6th  Consume 5 slices.
9. Suppose that Lucy’s pizza offers a different pricing structure. Instead of charging $3
per slice, $5.50 is charged for the first slice, and the price goes down by $0.25 for each
additional slice (i.e. the price is $5.25 for the second slice, $5 for the third slice, etc.).
How many slices will you buy?
A. 2 or less B. 3
C. 4
D. 5
E. 6 or more
You will definitely buy the first three slices, since MB is more than $5.50. 4th slice: MC
is $4.75, MB is $5 (buy it). 5th slice: MC is $4.50, MB is $4 (don’t buy it).
10. In the Beverly Hills apartment rental market, assume that the long-run supply of
apartments is fixed at 5,000. Demand for these apartments is represented by the equation
P = 10,000 – Q, where P is in dollars and Q is quantity of apartments. If rent control is
imposed in Beverly Hills, with a maximum rent of $2,000 per month, what is the excess
demand of apartments?
A. 2,000
B. 3,000
C. 4,000
D. 6,000
E. 8,000
At rent of $2,000, 5,000 apartments are supplied and 10,000 – 2,000, or 8,000,
apartments are demanded. Excess demand is the difference, which is 3,000.
11. In the blueberry market in Santa Ynez, when price is $4 per pound, 50 pounds of
blueberries are demanded. After a year of bad growing conditions, the price increases to
$4.50, and 45 pounds are demanded. The price elasticity of demand for blueberries is
closest to _____ (in absolute value).
A. 0.8
B. 1.2
C. 1.6
D. 2
E. 3
Elasticity (% change in Q)/(% change in P). Q decreases by 10%, and P increases by
12.5%. So elasticity is 10%/12.5%, or 0.8.
12. Assume for this problem that Elizabeth is required to buy a textbook, study guide,
workbook, scantron package, and CD for her Spanish 1 class. Her willingness to pay for
each of the five items is $200. She knows that the best price for each item is at a store
called Muy Bien. Elizabeth also has a coupon that gives her a $10 discount on the
textbook, an $8 discount on the study guide, a 20% discount on the workbook, a 100%
discount on the scantron package, or a 50% discount on the CD. She can receive a
discount on only one item, and she cannot sell the coupon to anybody else. The prices
(before any discount) are listed in the table below. What item should Elizabeth use the
coupon for?
Item
Price
Textbook
$100
Study guide
$30
Workbook
$45
Scantron package
$8
CD
$22
A. Textbook
B. Study guide
C. Workbook
D. Scantron package
E. CD
In order to solve this problem, you need to find the item that gives you the greatest dollar
saving. For the workbook, it is $9, $8 for the scantron package, and $11 for the CD. The
CD gives you the greatest dollar saving, so use the coupon on that product.
Please answer the following question in your mini blue-book, on the back of your
scantron. Make sure that you circle your answers, make clear what you are answering,
and write legibly. This question is worth 5 points: 1 point for each of four correct
answers, and one point for any correct work in your mini blue-book that is related to
solving this problem.
(Hint for this problem if it is not clear what you need to do: Recall the human
supply/demand curve example done in lecture.)
On a small island in the Pacific, there are five potential consumers of sweaters, and five
potential suppliers of sweaters. Each potential consumer will buy at most one sweater,
and each potential supplier will sell at most one sweater.
Each of the five potential consumers has a different willingness to pay (WTP) for a
sweater. The WTP for each of these five people is $50, $40, $30, $20, and $10.
Each of the five potential suppliers has a different marginal cost (MC) to produce a
sweater (with no fixed costs). The MC to produce a sweater for each of these five
suppliers is $5, $15, $25, $35, and $45.
(a) Is it possible to match suppliers and consumers such that each supplier and each
consumer has a positive surplus? If yes, then indicate one possible set of combinations of
how consumers are matched with suppliers such that each person could have a positive
surplus. (For instance, you could list the pairings between consumers and suppliers in a
table.)
Yes: Match $50 with $45, $40 with $35, $30 with $25, $20 with $15, and $10 with $5.
(b) What is the total surplus if five transactions take place?
Each transaction has $5 in total surplus, which means total surplus is $25.
(c) How many transactions are made when this market is most efficient?
Keep matching low cost suppliers with high value buyers until you can no longer do this.
You will get three transactions if you do this.
(d) What is the total surplus when this market is most efficient?
If you match $50 with $5, $40 with $15, and $30 with $25, you will get a total surplus of
$75.