Multiple Choice Questions (8 points each)

1. Your (inverse) demand function is given by D: P=100-Q. Your supply function is given by S: P=20+3Q. Your equilibrium price and quantity in this market will be at

• P=10; Q=90
• P=80; Q=20
• P=50; Q=50
• P=30; Q=70

1. Let’s assume that the city of Detroit has the resources to undertake one of the following projects for the current fiscal year: destroy blighted houses in a particular neighborhood at a cost of $100 million and an estimated benefit of $200 million; replace sewer lines in another neighborhood at a cost of $150 million and an estimated benefit of $300 million; improve public schools at a cost of $125 million and an estimated benefit of $250 million. The opportunity cost of destroying blighted houses is

• $300 million
• $550 million
• $100 million
• $150 million

1. A country has the choice between producing consumption goods and investment goods. The following combinations of consumption goods and investment goods are known to be on the production possibilities frontier for this country:

2. If the country was producing 20 consumption goods and 35 investment goods we can conclude that the country is

• Producing its output efficiently with full employment
• At an infeasible point
• At an inefficient point of production with perhaps unemployment
• Producing too much in terms of investment goods and not enough of consumption goods

3. Consider the market for wool carpets. Currently the market is in equilibrium. Now the price of wool is increasing. What is your prediction for the resulting equilibrium price and quantity in the market for wool carpets?

• P increases; Q increases
• P increases: Q decreases
• P decreases; Q increases
• P decreases; Q decreases

4. Consider the market for laptops. Currently the market is in equilibrium. Now the general income increases. What is your prediction for the resulting equilibrium price and quantity in the market for laptops?

• P increases; Q increases
• P increases: Q decreases
• P decreases; Q increases
• P decreases; Q decreases

5. Consider the market for printers. Currently the market is in equilibrium. Now the price of replacement printer cartridges has decreased and at the same time increased automation has decreased production costs of printers. What is your prediction for the resulting equilibrium price and quantity in the market for printers?

• P increases; Q increases
• P increases: change in Q uncertain
• Change in P uncertain; Q increases
• P decreases; Q decreases 

6. The market for sunglasses has supply and demand functions as illustrated below in Figure 1.

Figure 1

7. At a price of $90

• There is a surplus in the market
• There is a shortage in the market
• The market is in equilibrium
• There is a quantity constraint

1. The market for premium burgers is given by the demand and supply schedules in table 1

                                          Table 1

8. This market will be in equilibrium if the quantity of burgers supplied per month is

•    700.
•    800.
•    900.
•    1000.

9. Bob and Ann can produce paintings or carve birds out of wood. The respective number they can produce at most in any given week is given in table 2 below. To optimize total production

• Bob should specialize on paintings and Ann should specialize on birds.
• Ann should specialize on paintings and Bob should specialize on birds.
• Bob and Ann should both split their time between painting and carving
• Bob should type and solve, and Ann not do anything, because Bob is better at both activities.

10. The government decides to impose a price ceiling on chocolate. As a result, we would expect that

• Producers will gain and consumer will lose economic surplus
• Producers and consumers will gain economic surplus
• Producers will lose economic surplus and consumers may gain or lose economic surplus (i.e. it is unclear what will happen to consumer welfare)
• Nothing happens to producers, but consumers may be better off.

11. The US is currently a net importer of dark bread. Because a limited number of people in the US buy this bread, the US can safely be assumed to be a small country in the world for this product. There are some domestic producers that also produce dark bread that compete with the work market for domestic consumers. Imposing a tariff (basically a tax on imports) would result in

• an increase in consumer surplus, decrease in producer surplus, and a decrease in government revenue
• a decrease in consumer surplus, increase in producer surplus, and an increase in government revenue
• a decrease in consumer surplus, increase in producer surplus, and no change in government revenue
• an unchanged consumer surplus, increase in producer surplus, and increase in government revenue

12. Alcohol is addictive and detrimental to health. The government imposes a tax on alcohol and releases a statement that the purpose of this tax is to reduce health related costs to society. Based on the likely elasticity of the demand for alcohol you conclude that 

• the policy will achieve its objective while also raising significant revenue (and hence there are two “good” reasons for imposing the tax).
• instead of a significant reduction of consumption we should expect only a significant increase in government revenue (and hence this is more likely to be the true reason behind the tax)
• consumption of cigarettes will actually increase (and hence the policy is counterproductive).
• the policy will achieve its stated objective, but not raise significant revenue

13. Income ________ along the demand curve.

• increases
• decreases
• is held constant
• either increases or decreases

14. If the demand for macaroni and cheese decreases as income increases, macaroni and cheese is a(n)

• complementary good.
• normal good.
• substitute good.
• inferior good.

15. Which of the following statements indicates a situation of scarcity for good x?

• there is a lot of demand for good x
• there is little supply of good x
• there is a lot of demand and supply for/of good x
• people have to give up something else to get good x, i.e. face a trade-off

Short answer questions

Write legibly, what I cannot read I cannot grade. Please be concise. If you use a graph as part of your answer make sure that you label the graph completely and indicate all known information on the graph.

1. Consider the market for potatoes in Michigan. Currently, the equilibrium price for a bag of potatoes is at $3. The government needs to raise tax revenues and decides to impose a sales tax on potatoes.

a) Assuming standard supply and demand functions (i.e. neither perfectly elastic, nor perfectly inelastic), illustrate graphically the effect of this tax on equilibrium price and quantity and explain! 

b) Demonstrate graphically and explain in words the welfare consequences (i.e. in terms of economic surplus) of such a tax. 

c) The government reasoned that a tax on consumers would leave producers unaffected and hence would not deter producers from producing potatoes. Please comment on this reasoning in light of your analysis in a) and b). 

2. Consider the market for timber. 

a) Draw a supply and demand model that reflects that this market is in equilibrium. To receive credit, fully label all axes and functions, as well as the market equilibrium price and quantity. 

b) A new cutting technology allows companies to harvest timber at a much lower cost. At the same time, there is an increase in the construction of new houses, which uses timber as an essential input. Draw the impact of these two changes in the supply and demand model and indicate the new equilibrium quantity supplied and demanded in this market. Make sure to clearly label all axes and functions. Explain in words your prediction on the equilibrium price and quantity. 

c) The government decides to protect consumers of timber by putting into place an effective price ceiling. Please show this scenario in a new graph (i.e. not necessarily directly related to parts a) and b)) and indicate graphically the welfare consequences of such a price ceiling (i.e. producer surplus, consumer surplus, and dead weight loss). Make sure you label everything clearly. Explain in a few words your graph and in how far this policy indeed benefits consumers.

3. The following table shows the information collected on the willingness to pay for a black lotus, a collectible card from the game magic the gathering, by various people in a play group. 

a) Based on above information draw a demand function for this play group market. Please draw roughly to scale (does not have to be perfect) and use all the information provided. Make sure to label everything. (20 points)

b) If the playgroup won the lottery and each person got $1000000… what do you expect will happen to your demand function? Please explain. 

c) The government puts a price ceiling for collectible card games into place at $800. Explain briefly if anything (and if so what) happens to the demand function as a result of this regulation.