Micro

0

50

i. There is an increase in the price of coffee.

ii. There is an increase in the price of tea, which consumers view as a substitute for coffee.

iii. There is an increase in consumer incomes, assuming coffee is a normal good.

iv. There is a decrease in the number of consumers who buy coffee.

b. What effect will each of the following have on the SUPPLY of soybeans? (i.e. Increase Supply, Decrease Supply, or NO CHANGE)? You must include a brief explanation of approximately 50 words for each answer to receive full credit:

i. There is an increase in the amount of subsidies given to soybean producers.

ii. There is a decrease in the price of fertilizer, an input needed to produce soybeans.

iii. There is an increase in the price of corn, an alternative good that soybean producers could produce instead of soybeans (i.e. assume corn is a substitute in production for soybeans).

iv. Soybean producers expect the price of soybeans to substantially fall in the future.

2.
Markets, demand and supply, part 2 (10pts):

Given the following information about the market for gasoline (quantities in millions):

125

150

100

175

75

200

50

Graph the demand and supply curves for gasoline (You do NOT submit the graph for grading) and answer the following. You must include a brief explanation of approximately 50 words for each answer to receive full credit:

a. What is the equilibrium price (P*) of gasoline and what is the equilibrium quantity (Q*) of gasoline?

b. If the price of gasoline were $8 per gallon, using the table above, determine whether a surplus or a shortage would exist, and determine the amount (# of gallons) of this shortage or surplus.

c. Now, suppose the federal government imposes a price ceiling of $4 per gallon. What is the effect of this action on this market for gasoline?

d. Suppose that the supply of gasoline suddenly increases, while the demand for gasoline is held constant. How would this affect the equilibrium price and equilibrium quantity in the market? In other words, answer whether equilibrium price (P*) and equilibrium quantity (Q*) would rise, fall, or remain unchanged.

3.
Elasticity (10pts):

You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:

a.
Price elasticity of demand (6pts): Suppose you own a hot dog stand and find that if you raise the price of hot dogs from $3.00 to $3.20, the quantity demanded falls from 28,500 to 24,500.

i) Please calculate the price elasticity of demand (Ed) for hot dogs in this specific price range ($3.00 to $3.20). You must use the ‘midpoint formula’ we used in the text Please round your answer to the nearest hundreth (i.e. show at least two decimal points).

ii) Based on your answer above, is the price elasticity of demand for hot dogs elastic, inelastic, or unit elastic? How do you know?

iii) Please calculate the change in total revenue (TR) that would occur as a result of this price increase from $3 to $3.20. Be sure to indicate whether TR has increased or decreased in this scenario.
You must show all of your work.

b.
Cross elasticity (4pts):
Suppose that when the price of good X rises by 50%, the quantity of good Y demanded rises by

40

%.

i) calculate the cross elasticity between goods X and Y.

ii) Determine whether good X and Y are substitutes or compliments. How do you know?

4.
International Trade and Comparative Advantage (10pts):

You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:

Below is a hypothetical production possibilities table for Argentina and India. Each country can produce Beef and Cotton. Assume that
before

specialization and trade (i.e. if they are each self sufficient), Argentina produces 20 Beef and 40 Cotton and India produces 15 Beef and 1

80

Cotton:

Beef

0

30

20

60

40

0

60

0

Graph the PPF for each of the two countries separately (you do not need to submit the graph for grading) and using the information above, please answer the following:

a. Opportunity-cost ratios: Calculate the opportunity cost ratio for these two goods in Argentina. Calculate the opportunity cost ratio for these two goods in India.

b. Absolute vs. comparative advantage:
Which country has an absolute advantage in the production of Beef? Which country has an absolute advantage in the production of Cotton? Which country has a comparative advantage in the production of Beef? Which country has a comparative advantage in the production of Cotton?

Suppose that instead of being self sufficient, these two countries decide to each specialize in the good in which they have the comparative advantage and then trade for the other good. Assume that the country that specializes in Beef trades 17 Beef to the other country (which specializes in Cotton) for 51 Cotton.

c. What are the gains from specialization and trade for Argentina?

d. What are the gains from specialization and trade for India?

HINT: You may wish to construct a table like the one shown in the text to calculate your answers.