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1 ECON , FALL 2011 Principles of Microeconomics Homework 1 Instructor: Sung Ick Cho 1) In economics, choices must be made because we live in a world of A) unemployment. B) scarcity. C) greed. D) unlimited resources. Answer: B Diff: 1 Page Ref: 4/4 Topic: Scarcity Objective: LO1: Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. AACSB: Reflective Thinking Table 1-1 Total Hours Revenue Open (dollars) 1 \$

2 Eva runs a small bakery in the village of Roggerli. She is debating whether she should extend her hours of operation. Eva figures that her sales revenue will depend on the number of hours the bakery is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of \$12 per hour. 2) Refer to Table 1-1. Using marginal analysis, determine how many hours should Eva extend her bakery's hours of operations? A) 2 hours B) 3 hours C) 4 hours D) 5 hours E) 6 hours Answer: C Diff: 3 Page Ref: 7/7 Topic: Optimal Decisions Are Made at the Margin Objective: LO1: Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. 3) Refer to Table 1-1. What is Eva's marginal benefit if she decides to stay open for two hours instead of one hour? A) \$25 B) \$36 C) \$60 D) \$95 Answer: A Diff: 2 Page Ref: 7/7 Topic: Optimal Decisions Are Made at the Margin 2

3 Objective: LO1: Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. 4) Refer to Table 1-1. What is Eva's marginal cost if she decides to stay open for two hours instead of one hour? A) \$12 B) \$24 C) \$36 D) \$71 Answer: A Diff: 2 Page Ref: 7/7 Topic: Optimal Decisions Are Made at the Margin Objective: LO1: Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Figure 1-1 5) Refer to Figure 1-1. Using the information in the figure above, calculate the percentage change in sales of alcoholic beverages between 2006 and A) 23.8% 3

4 B) 40% C) 42.9% D) 73.3% Answer: A Diff: 1 Page Ref: 32/32 Topic: Formulas Objective: Appendix: Review the use of graphs and formulas Figure 1-4 6) Refer to Figure 1-4. Which of the following statements is true? A) The slope of the tangent at E is positive and the slope of the tangent at F is negative. B) The slope of the tangent at E is negative and the slope of the tangent at F is positive. C) The slope of the tangent at E and the slope of the tangent at F are negative. D) The slope of the tangent at E and the slope of the tangent at F are positive. Answer: A Diff: 1 Page Ref: 31/31 4

5 Topic: Slope Objective: Appendix: Review the use of graphs and formulas Figure 2-2 Figure 2-2 above shows the production possibilities frontier for Vidalia, a nation that produces two goods, roses and orchids. 7) Refer to Figure 2-2. What is the opportunity cost of one dozen orchids? A) 0.4 dozen roses B) 2.5 dozen roses C) 7.25 dozen roses D) 16 dozen roses Answer: B Diff: 2 Page Ref: 40/40 Topic: Opportunity Cost Objective: LO1: Use a production possibilities frontier to analyze opportunity costs and trade-offs. 5

6 Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Rosie's Boston Bakery 8) Refer to Figure 2-2. What is the opportunity cost of one dozen roses? A) 0.4 dozen orchids B) 2.5 dozen orchids C) 7.25 dozen orchids D) 16 dozen orchids Answer: A Diff: 2 Page Ref: 40/40 Topic: Opportunity Cost Objective: LO1: Use a production possibilities frontier to analyze opportunity costs and trade-offs. Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Rosie's Boston Bakery 9) Refer to Figure 2-2. Suppose Vidalia is currently producing 20 dozen orchids per period. How many roses is it also producing, assuming that resources are fully utilized? A) 30 dozen roses B) 50 dozen roses C) 100 dozen roses D) 150 dozen roses Answer: D Diff: 2 Page Ref: 40/40 Topic: Opportunity Cost Objective: LO1: Use a production possibilities frontier to analyze opportunity costs and trade-offs. 6

7 Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Rosie's Boston Bakery 10) Refer to Figure 2-2. The linear production possibilities frontier in the figure indicates that A) Vidalia has a comparative advantage in the production of orchids. B) Vidalia has a comparative disadvantage in the production of roses. C) the tradeoff between roses and orchids is constant. D) it is progressively more expensive to produce orchids. Answer: C Diff: 2 Page Ref: 40/40 Topic: Opportunity Cost Objective: LO1: Use a production possibilities frontier to analyze opportunity costs and trade-offs. Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Rosie's Boston Bakery Figure 2-7 Figure 2-7 shows the production possibilities frontiers for Costa Rica and Guatemala. Each country produces two goods, pineapples and coconuts. 11) Refer to Figure 2-7. What is the opportunity cost of producing 1 ton of coconuts in Costa Rica? 7

8 A) 3/8 of a ton of pineapples B) 2/3 of a ton of pineapples C) 1 1/2 tons of pineapples D) 100 tons of pineapples Answer: B Diff: 2 Page Ref: 46-47/46-47 Topic: Opportunity Cost Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. 12) Refer to Figure 2-7. What is the opportunity cost of producing 1 ton of coconuts in Guatemala? A) 1/2 of a ton of pineapples B) 1 1/3 tons of pineapples C) 2 tons of pineapples D) 90 tons of pineapples Answer: A Diff: 2 Page Ref: 46-47/46-47 Topic: Opportunity Cost Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. 13) Refer to Figure 2-7. What is the opportunity cost of producing 1 ton of pineapples in Costa Rica? A) 3/8 of a ton of coconuts 8

9 B) 2/3 of a ton of coconuts C) 1 1/2 tons of coconuts D) 100 tons of coconuts Answer: C Diff: 2 Page Ref: 46-47/46-47 Topic: Opportunity Cost Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. 14) Refer to Figure 2-7. What is the opportunity cost of producing 1 ton of pineapples in Guatemala? A) 1/2 of a ton of coconuts B) 1 1/3 tons of coconuts C) 2 tons of coconuts D) 180 tons of coconuts Answer: C Diff: 2 Page Ref: 46-47/46-47 Topic: Opportunity Cost Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. 15) Refer to Figure 2-7. Which country has a comparative advantage in the production of coconuts? A) Guatemala B) They have equal productive abilities. 9

10 C) Costa Rica D) neither country Answer: A Diff: 2 Page Ref: 46-47/46-47 Topic: Comparative Advantage Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. 16) Refer to Figure 2-7. Which country has a comparative advantage in the production of pineapples? A) Guatemala B) They have equal productive abilities. C) Costa Rica D) neither country Answer: C Diff: 2 Page Ref: 46-47/46-47 Topic: Comparative Advantage Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. 17) Refer to Figure 2-7. If the two countries have the same amount of resources and the same technological knowledge, which country has an absolute advantage in the production of both pineapples and coconuts? A) Guatemala B) neither country 10

11 C) Costa Rica D) cannot be determined Answer: B Diff: 2 Page Ref: 46-47/46-47 Topic: Absolute Advantage Objective: LO2: Understand comparative advantage and explain how it is the basis for trade. Table 3-1 Rest of Luke's Ravi's Market Kona Coffee Market Quantity Quantity Quantity Price per lb. Quantity Demanded Demanded Demanded (dollars) Demanded (lb.) (lb.) (lb.) (lb.) \$ ) Refer to Table 3-1. The table above shows the demand schedules for Kona coffee of two individuals (Luke and Ravi) and the rest of the market. At a price of \$6, the quantity demanded in the market would be A) 36 lb. B) 68 lb. C) 89 lb. D) 123 lb. 11

12 Answer: C Diff: 2 Page Ref: 66/66 Topic: Demand Schedules Objective: LO1: Discuss the variables that influence demand. 19) Refer to Table 3-1. The table above shows the demand schedules for Kona coffee of two individuals (Luke and Ravi) and the rest of the market. If the price of Kona coffee rises from \$4 to \$5, the market quantity demanded would A) decrease by 35 lb. B) increase by 115 lb. C) increase by 35 lb. D) decrease by 115 lb. Answer: A Diff: 2 Page Ref: 66/66 Topic: Demand Schedules Objective: LO1: Discuss the variables that influence demand. Figure

13 20) Refer to Figure 3-3. The figure above shows the supply and demand curves for two markets: the market for original Michelangelo sculptures and the market for Ray Ban sunglasses. Which graph most likely represents which market? A) Graph B represents the market for original Michelangelo sculptures and Graph A represents the market for Ray Ban sunglasses. B) Graph A represents the market for original Michelangelo sculptures and Graph B represents the market for Ray Ban sunglasses. C) Graph A represents both the market for original Michelangelo sculptures and Ray Ban sunglasses. D) Graph B represents both the market for original Michelangelo sculptures and Ray Ban sunglasses. Answer: A Diff: 2 Page Ref: 78/78 Topic: Market Equilibrium Objective: LO3: Use a graph to illustrate market equilibrium. AACSB: Reflective Thinking Figure

14 24) Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If the price of motorcycle engines increases, and the wages of motorcycle workers increase, how will the equilibrium point change? A) The equilibrium point will move from A to E. B) The equilibrium point will move from A to B. C) The equilibrium point will move from A to C. D) The equilibrium will first move from A to B, then return to A. Answer: B Diff: 3 Page Ref: 84/84 Topic: Shifts in Supply Objective: LO4: Use demand and supply graphs to predict changes in prices and quantities. 25) Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If there is a surplus of motorcycles how will the equilibrium point change? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) There will be no change in the equilibrium point. D) The equilibrium point will move from A to E. Answer: B Diff: 2 Page Ref: 84/84 Topic: Surplus Objective: LO4: Use demand and supply graphs to predict changes in prices and quantities. 14

15 26) Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D2 and S1 (point C). Which of the following changes would cause the equilibrium to change to point B? A) A positive change in the technology used to produce motorcycles and decrease in the price of motorcycle insurance, a complement to motorcycles. B) An increase in the wages of motorcycle workers and a decrease in the price of motorcycle insurance, a complement to motorcycles. C) An increase in the number of motorcycle producers and an increase in the number of consumers who prefer riding motorcycles. D) An increase in the wages of motorcycle workers and an increase in the price of motorcycle insurance, a complement to motorcycles. Answer: B Diff: 3 Page Ref: 84/84 Topic: Shifts in Demand and Supply Objective: LO4: Use demand and supply graphs to predict changes in prices and quantities. 27) Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If there is an increase in the wages of motorcycle workers and an increase in the price of motorcycle insurance, a complement to motorcycles, the equilibrium could move to which point? A) A B) B C) C D) E Answer: D 15

16 Diff: 3 Page Ref: 84/84 Topic: Shifts in Demand and Supply Objective: LO4: Use demand and supply graphs to predict changes in prices and quantities. Table 2-5 Digital Wheat (bushels) Camera China 100 hours 5 hours South Korea 90 hours 3 hours 28) Refer to Table 2-5. This table shows the number of labor hours required to produce a digital cameras and a bushel of wheat in China and South Korea. a. Which country has an absolute advantage in the production of digital cameras? b. Which country has an absolute advantage in the production of wheat? c. What is China's opportunity cost of producing one digital camera? d. What is South Korea's opportunity cost of producing one digital camera? e. What is China's opportunity cost of producing one pound of wheat? f. What is South Korea's opportunity cost of producing one pound of what? g. If each country specializes in the production of the product in which it has a comparative advantage, who should produce digital cameras? h. If each country specializes in the production of the product in which it has a comparative advantage, who should produce wheat? Answer: a. South Korea has an absolute advantage in the production of digital cameras. b. South Korea has an absolute advantage in wheat production. 16

17 c. China's the opportunity cost of producing one digital camera is 20 bushels of wheat. d. South Korea's opportunity cost of producing one digital camera is 30 bushels of wheat e. China's opportunity cost of one bushel of wheat is 0.05 units of a digital camera. f. South Korea's opportunity cost of one bushel of wheat is 0.03 units of a digital camera. g. China should specialize in producing digital cameras. h. South Korea should specialize in producing wheat. Diff: 3 Page Ref: 45/45 Topic: Specialization Objective: LO2: Understand comparative advantage and explain how it is the basis for trade Table 3-2 Quantity Quantity Price per Demanded Supplied Bushel (bushels) (bushels) \$3 30, ,000 4, ,000 9, ,000 12, ,000 15, ,000 22, ,000 28, ,000 36,000 17

18 29) Refer to Table 3-2. The table contains information about the corn market. Use the table to answer the following questions. a. What are the equilibrium price and quantity of corn? b. Suppose the prevailing price is \$9 per bushel. Is there a shortage or a surplus in the market? c. What is the quantity of the shortage or surplus? d. How many bushels will be sold if the market price is \$9 per bushel? e. If the market price is \$9 per bushel, what must happen to restore equilibrium in the market? f. At what price will suppliers be able to sell 22,000 bushels of corn? g. Suppose the market price is \$21 per bushel. Is there a shortage or a surplus in the market? h. What is the quantity of the shortage or surplus? i. How many bushels will be sold if the market price is \$21 per bushel? j. If the market price is \$21 per bushel, what must happen to restore equilibrium in the market? Answer: a. Equilibrium price = \$15; Equilibrium quantity = 15,000 bushels. b. There is a shortage. c. Shortage = 22,000-9,000 = 13,000 bushels. d. Quantity sold = 9,000 bushels. e. Price must rise. f. At \$9 per bushel. g. There is a surplus. h. Surplus = 28,000-8,000 = 20,000 bushels. i. Quantity sold = 8,000 bushels. j. Price must fall. Diff: 2 Page Ref: 79/79 Topic: Market Equilibrium Objective: LO3: Use a graph to illustrate market equilibrium. 18

19 30) In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is a normal good. a. The population increases and the price of inputs increase b. The price of a complement increases and technology advances c. The number of firms in the market increases and income increases d. Price is expected to increase in the future e. Consumer preference increases and the price of a substitute in production decreases Answer: a. Price increases; Quantity may increase or decrease b. Price decreases; Quantity may increase or decrease c. Quantity increases; Price may increase or decrease d. Price increases; Quantity may increase or decrease e. Quantity increases; Price may increase or decrease Diff: 3 Page Ref: 83/83 Topic: Shifts in Demand and Supply Objective: LO4: Use demand and supply graphs to predict changes in prices and quantities. 19

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