Question 1: Solve for the equilibrium price (P*) and equilibrium quantity (Q*)
a) Demand = 750 - 5P Supply = 300 + 3P
b) Demand = 90 - 9P Supply = 60 + 10P
Question 2: Discuss what the concept of the production possibilities frontier is and how it relates to scarcity, tradeoffs, opportunity cost, and economic growth.
The production possibilities frontier is an economic model that shows the combinations of goods and services that an economy can produce in a given time period. The PPF is a valuable tool for illustrating the effects of scarcity and its consequences. When an economy is operating on the PPF curve it is efficient. It's not possible to make more of one good without decreasing the amount produced for the other good. Similarly, if the economy is operating below the PPF curve, it is inefficient. In this case, the economy can reallocate resources and produce more of both the goods. Also the PPF graph shows how resources must be shared among goods during the production process. The points of the graph show the trade-off that takes place between two goods. An economy can focus on producing all of the goods and services it needs to function, but this may lead to an inefficient allocation of resources and hinder future growth. By using specialization, a country can concentrate on the production of one thing that it can do best, rather than dividing up its resources. An opportunity cost will usually arise whenever an economic agent chooses between alternative ways of allocating scarce resources. The opportunity cost of such a decision is the value of the next best alternative use of scarce resources. Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, however powerful tool to illustrate the effects of making an economic choice. A PPF shows all the possible combinations of two goods, or two options available at one point in time. Economic growth of an economy already operating at its full productivity (on the PPF), which means that more of both outputs can be produced during the specified period of time without sacrificing the output of either good.
Question 3: Elasticity-
a) The price of good X goes up by 2.75%, the quantity demanded of good Y goes from 10,500 units to 25,000. What is the Exy? Explain what the coefficient means in numeric terms. What is the relationship between these two goods?
b) National incomes have gone from and average of $36,000 last year to $34,000 this year. We see that the amount of widgets has changed from 102,500 last year to 105,000 this year. What is the income elasticity of widgets? Explain what the coefficient means in numeric terms. What type of good is a widget?
c) Use arc elasticity to find the price elasticity of demand. Explain what the coefficient means in numeric terms. Is it in the elastic or inelastic range? What would be the dollar increase/decrease in total revenue with the price reduction?
d) Northern California Pro Bikes hired an economist to make predictions about the firm's sales and total revenue. The economist found that the price elasticity of demand for Pro Bikes is 0.8. Explain what the coefficient means. Should the firm increase or decrease the price of Pro Bikes? Why?
Question 4: Use the graph to answer the following questions. All labels have been removed, but you can assume that the supply and demand curves are the same ones that we have been working with for most of the semester, you can also assume that the axis are the ones that we typically have used. You do not need to create another graph.
In equilibrium, what are the letters and the total dollar amounts that correspond to the area for the...
i. Original Consumer Surplus?
ii. Original Producer Surplus?
iii. Total Market Surplus?
Assume an effective price floor has been placed on the market, changing the price $20. What are the letters and the total dollar amounts that now correspond to the...
iv. New Consumer Surplus?
v. New Producer Surplus?
vi. Area that was transferred?
vii. Dead Weight Loss?
viii. Remaining Surplus?
Question 5: Graph the following example and answer the questions: The United States and Japan only produce two goods. They have the same fixed resources and they are equally efficient, and both countries have constant opportunity costs between the two goods. In one month, the United States can make four hundred thousand units of fiber optic cable or 1.2 million flash drives. Japan can produce four hundred and thousand units of fiber optic cable or eight hundred thousand flash drives.
Answers:
Who has the Absolute Advantage in the production of Flash Drives? a)
Who has the Absolute Advantage in the production of Fiber Optic Cable? b)
What is the opportunity cost for the USA for Flash Drives? c)
What is the opportunity cost for the USA for Fiber Optic Cable? d)
What is the opportunity cost for Japan for Flash Drives? e)
What is the opportunity cost for Japan for Fiber Optic Cable? f)
**If both countries devote 50% of their resources to the production of both goods...
What would the USA's production of Flash Drives be? g)
What would the USA's production of Fiber Optic Cable be? h)
What would Japan's production of Flash Drives be? i)
What would Japan's production of Fiber Optic Cable be? j)
What would the combined production of Flash Drives be? k)
What would the combined production of Fiber Optic Cable be? l)
**If the two nations each specialize where they have a comparative advantage...
What would the USA's production of Flash Drives be? m)
What would the USA's production of Fiber Optic Cables be? n)
What would Japan's production of Flash Drives be? o)
What would Japan's production of Fiber Optic Cable be? p)
**Compared to when each nation was producing both goods...
What is the increased/decreased production of Flash Drives? q)
What is the increased/decreased production of Fiber Optic Cable? r)
Would these nations enter a trade agreement? s)
Why or why not? t)
Question 6: Use supply & demand graphs (one per problem) to predict the effect of these events on the market. Assume all goods are normal and all markets start out in equilibrium. Be sure to put what will happen to price and quantity in a solution box (highlight this box if you are taking this exam online, and make sure all original curves are done in blue and new curves are done in red).
a) decrease in the price of an input and increase in popularity
b) the price of a substitute has increased and the EPA has reduced the production of this good
c) consumers expect a recession to continue and producers expect wages to decrease in the future
d) 15% increase in supply, 10 % decrease in demand
e) there is an increase in the retail price of this good
You can do the EC only if you finish the rest of the exam.
Extra: In economics we make the claim that Gross Domestic Product (GDP) and Gross Domestic Income (GDI) should be equal, providing there are no "leakages" or injections.
1) Discuss what economists mean by this.
2) Give multiple examples of both leakages and injections and explain how they impact the flow of economic activity.