Dr. Stephen Miller Spring 2020 ECO 6655 Review Questions for Exam I 1. Suppose the demand for shoelace eyelets is represented by the equation: D = 60-p, where p is price, and that supply is represented by the equation S=10+2p-w, where w is the wage rate for eyelet factory workers. a) Assuming the market wage rate is $10/hour, what is the equilibrium price? What is the equilibrium quantity? b) What are the equilibrium price and quantity if the wage increases to $16/hr? c) Use the changes in price and quantity demanded above to calculate the price elasticity of demand. Interpret your result (i.e. what does the elasticity you calculate mean?). 2) In the last 100 years in the U.S. real incomes have risen while the number of children per family has decreased. Answer the following questions: a) Does this mean that children are inferior goods? Explain. b) Does this mean that the cost of having children is rising faster in the U.S. than real incomes? Explain. c) Offer an alternative explanation, using economic theory. 3) Draw a graph that indicates what happens in the market for hybrid cars when the price of gasoline increases from $2.50 to $5.00 per gallon. Answer the following questions: a) Does equilibrium output rise or fall? b) Does equilibrium price rise or fall? c) Suppose the supply of hybrid cars is perfectly inelastic. Draw a new graph and explain if and how the elasticity of supply changes your answers to parts “a” and “b”. 4) Peggy’s demand for ice cream sandwiches is as follows: Price $5.00 $2.50 $1.25 $.75 $.25 $0 Quantity Demanded (per week) 0 1 3 4 7 8 a) Graph Peggy’s demand for ice cream sandwiches. b) Assume the price is $1.25. Graphically shade and label Peggy’s consumer surplus. c) Suppose Peggy’s income increases. What happens to her demand for ice cream sandwiches? What does your answer to this question depend on? 5) Graph the effect of a minimum wage of $7.00/hour in a market where the equilibrium wage is $8.50/hour. Will there be a surplus or shortage of labor in such a market? Explain. What if the minimum wage were raised to $9.00/hour? 6) For you, what is the opportunity cost of going to graduate school? Explain in detail, both in terms of forgone income and forgone leisure. 7) Use the production possibilities below to answer this question Alpha’s production possibilities: Steel (tons) Wheat (tons) A 60 0 B 45 15 C 30 30 D 15 45 E 0 60 Omega’s production possibilities: Steel (tons) Wheat (tons) A 20 0 B 15 15 C 10 30 D 5 45 E 0 60 a. Draw domestic production possibilities for Alpha and Omega (hint: these are linear tradeoffs). b. Suppose each country specializes in its comparative advantage, and the terms of trade are 1 ton of steel for 2 tons of wheat. Can Alpha and Omega both achieve a level of consumption outside of their production possibilities? Use the graphs from Part a to explain your answer. c. Suppose in autarky (i.e. as a self-sufficient economy) both Alpha and Omega produce at point C on their respective production possibilities functions. Based on your answer to Part b, how much has total consumption increased for both Alpha and Omega? 8) Many supermarkets sell both branded and private-label merchandise. Suppose the demand for Publix-brand bread is less elastic than the demand for Wonder Bread. Should Publix-brand bread be priced higher? Why or why not?
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