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3. (20 points)Draw a hypothetical supply and demand curve fbr Sonic Slushes in Norman. Sonic sells acertain quantity of slushes at a price that provides just as many Slushes as people arewilling and able to buy. Then, in April (I) the Eskimo Sno snocoae stand next door _c._sS'l-quT_.begins selling snocones at lower prices for the summer months. Meanwhile. (2) a tornado ,.b_"_

fullhitscapacity.theplant that produces the Sonic Slush mix. causing the plant to operate al less than %t_

Show graphically and explain ALL of the effects of these two developments on theSonic Slush market. What do we know about the price and quantity in the finalequilibrium?

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Multiple Choice: Please Place Your Answers On The Last Page.

5. (30 points)

I. Which of the following would NOT be expected to cause the supply curve ofwool to decrease? , .

(_A decrease in the price of wool. °b) A decrease in the number of wool producers.c) An increase in the cost of raising sheep.d) An increase in wages paid to workers in the wool industry.

2. A drop in the price of compact discs shifts the demand for prerecorded tapesleftward. From what you know compact discs and prerecorded tapes are:

a) Colnplements(_ Substitutes

c) Normal goodsd) Inferior goods

3. Price elasticity of demand is a measure of the:a) Shift in demand caused by a change in consumer taste.b) Slope of the demand curve.

(_esponsiveness of price to changes in quantity demanded.esponsiveness ofquantity demanded to price changes.

"4. Which of the following will not cause a shift in the supply curveofpersonalcoz_p41ters?

An increase in the number of consumers in the personal computer market.

b) A technological breakthrough that makes it less costly to producecomputer chips.c) A decrease in the wage paid to electrical engineers. ,/d) A technological breakthrough that makes it more costly to produce

computer chips, v"

Price

Supply

.... I I xnd

/ , :Quantity

60 120 160 210 300

5. Use the graph above. When an effective price ceiling at $3 is imposed, thequantity supplied:

(_Falls from 210 to 120.Falls from t20 to 60.

c) Increases from 120 to 210.d) Increases from 60 to 120.

6. The tendency for the magnitude of an indifference curve to decrease to the right is

known as:Rationality.

b(,_.._Principle of diminishing marginal rate of substitution.c) Principle of increasing marginal rate of substitution.d) Income effect.

7. As a consumer moves along the same budget line:a) Prices are held constant, but the budget changes.b) The budget is held constant, but prices change.

(_ Prices and the budget are held constant. ,/d) Total utility is held constant, but prices and budget change.

8. According to the law of demand, a decrease in the price of baseball trading cards

ca_: All increase ill tile quantit)' of trading cards demanded. / ___-b) A decrease in the quantit 5 of trading cards demanded.c) An increase in the scarcity of baseball trading cards.xd) A greater abundance of baseball trading cards. X

9. Which ofthe following is not held constant as you move alom the demand curve

lbr beef?. /A

the price of beef.b) The price of chicken.c) The incomeofconsumers.d) The preferences of consumers for beef and chicken.

Price Price

A B

Price Quantity price C.m__antity

°'>\\Quantity Quantity

10. Use tile graph above. If tile quantity demanded by consumers remains the sameeven when the price rises, then the demand curve would look like:

&aBc) Cd) D

11. Th/_.az_oresubstitutes available,@) The larger is tile price elasticity of demand, oa

b) The smaller is the income elasticity of demand.c) The smaller is tile price elasticity of demand.d) The larger is the income elasticity of demand.

12. T_ofdemand claims that there is an inverse relationship between: '_a_....&l._riceand quantity demanded.

b) Price and income.c) Income and quantity demanded.d) Price and consumers in a market.

I

13. "fhe existence of a market surplus indicates that price is: q_ _s lilt/,, p,('_Above equilibrium and intist fall to restore equilibrium"-'6) Above equilibrium and lntist rise to restore equilibrium.

c) Below equilibrium and must tall to restore equilibriumd) Below equilibrium and must rise to restore equilibrium

14. Total revenues from the sale of a good will decrease if:(_ Income increases and the good is normal.

The price rises and the demand is elastic.c) The price rises and the demand is inelastic.d) Income falls and the good is inferior.

15. An_ifference curve showsDifferent combinations oftx_o goods thai give equal levels of satisfaction.

b) Consumption possibilities that consumers face at different prices andincome.

c) Affordable combination of goods.d) Opportunity cost of one good relative to another.

ANSWERS:

i. 6 __. (_ 3. b 4. fi 5. _ 6. (_ 7. Q-- 8. 1°1.|

'7_.(_ 4. (20 points)Tobias has $200 each month to spend on personal enrichment, and cannot save any frommonth to month. He could buy a self-esteem enhancing hair conditioner, which is soldby the ounce at a unit price of $10 per ounce. He could also buy acting lessons from CarlWeathers at $50 per hour-long class. In his equilibrium, Tobias purchases 15 ounces ofconditioner.

a) Illustrate Tobias's equilibrium osing your knowledge of budget constraints andindifference curves.

b) Suppose the conditioner raises its price to $20 per ounce, while Carl Weather'slessons remain the same price. Tobias now purchases 2 acting classes in a month.

t_, "-'Zo ,,.,_ Derive Tobias's demand curve for hair conditioner through indifference curveL-_ analysis. Be sure to label graphs thoroughly, including all prices and quantities.

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C

!i_i" EXERCISE: UNIT I [_

"' LAB INST.

LABTIME _ IZ::::_O

J

Short Answer (Use graphs in your answers) ;_.

1. Draw a supply and demand curve and show the equilibrium price and quantity.Suppose that a relevant price ceiling were imposed by the government. Show theeffects on the quantity supplied and demanded.

2. Why would one expect that an increase in the price of movie tickets would cause an \',increase in the demand for VCR movie rentals? r"

MUltiple Choice: Please Place Your Answers On The Last Page.

5. (30 points)

1. The foregone income that the owner of a business could have made by spending timeworking in another job is called:

A) explicit cost. B) marginal cost.

C) total cost. _ opportunity cost.

2. Which of the following is an example of a short-run decision?A) An automobile manufacturing company is considering whether or not to invest

in robotic equipment.

_)An automobile manufacturing company is considering whether or not toexpand its existing workforce.

C) A business consulting firm is considering whether or not to open a new officein another city where many of its clients are based.

D) A business consulting firm is considering whether or not to hire newconsultants, move to a larger space, and purchase additional equipment.

Use the following to answer questions 3-4:Q

BO C

D_ TM\

Number of'workers ........................................L

3. Refer to the graph above. Marginal product is negative at point:_ A. B) B.C) C. D) D.

4. Refer to the graph above which shows total product. At point C:A) marginal product is minimum. B) marginal product is maximum._) marginal product is zero. D) average product is maximum.

Use the following to answer questions 5:Q

" " I lo%_

pNumber of workers L

5. Refer to the graph above. Within which section(s) of the production function ismarginal product decreasing?

A) A. B) B.C) AandB. _) BandC.

6. Rachel left her job as a graphic artist, where she earned $42,000 per year, to open herown graphic arts firm. Her total costs of the new business include:A) only the expenses incurred for office space, equipment, and supplies.

only her foregone salary of $42,000 per year.both the expenses incurred for office space, equipment, and supplies and herforegone salary of $42,000 per year.

D) neither the expenses incurred for office space, equipment, and supplies nor herforegone salary of $42,000 per year.

7. If a finn temporarily shuts down for a week:A) total cost is zero. _ total cost equals total fixed cost.C) total cost equals total D) total variable cost exceeds totalvariable-cost, fixed-cost:

8. Fixed costs exist only in the:A)-tong-mn-when-some-inputs-are-fi xed.B)-lon g-r_an_chon4d 1-inputs-are4".x-ed.C) short run when some inputs are fixed.D.)--short_o -inputs-are-f_xed.

9. In a perfectly competitive market the demand curve faced by an individual firm is:A) perfectly inelastic, B) relatively inelastic,_) perfectly elastic. D) relatively elastic.

,qUse the following to answer questions 14-15: "_

P $/Q

Supply _ Me¢J U

_" / ATC

P1 _' //MR1/_/L_.': MRO

PO /_ •

D1 _ i: : f_--> >

Q0 Q1 Q2 q0 ql q2Firm QuantityMarket Quantity

14. Refer to the graph above depicting a perfectly competitive market and firm. If marketdemand is DO, then:A) this market is in long-run equilibrium because the firm is earning positive

economic profit.B) this market is in long-run equilibrium because the firm is earning negative

economic profit.C) this market is in short-run equilibrium, but may not be in long-run

equilibrium.

the firm will raise the above P0 to increase profit.price.

15. Refer to the graph above depicting a perfectly competitive market and firm. If marketdemand increases from DO to D1, then the finn will:

................... _4,-)..ka_e__the_pricedt _charges-B,)-=ea_negative economic profit in the short run.

(QD_earn positive economic profit in the short run.earn positive economic profit in the long run.

Place answers below.

/'_, A ¢)"_(_H 1. 2. 3. _ 4. ____ 5.

6. C 7. _ 8. & 9. C 10. C

g

i than the selling priceC_ equal to the selling price. D) sometimes below and sometimes

above the selling price.

11. If the marginal revenue of the last widget the finn produces is $50 and its marginalcost is $35, a finn should:

A) reconsider past production decisions. B) decrease production.O increase production. D) hold production constant.

Use the following to answer question 12:

$/QMC

O

._ . C

B

It

Quantity Q

12. Refer to the graph above. The supply curve for the perfectly competitive finn is bestrepresented by the segment:

C) CE. D) DE.

13. The existence of economic losses-Tnducesfirms to: ........

_exit an industry, which shifts the market supply curve to the left and increasesmarket price.

industry, which shifts the market supply curve to the right anddecreases market price.

_dustry, which shifts the market supply curve to the left anddecreases market price.

D) exit an industry, which shi_s the market supply curve to the right anddecreases market price.

_./ ;WL:_3. (20 points) i_An ice cream store "Happy Katie" is locat_ near the cam-us come •13 r of west NormanUniversity. We assume "Happy Katie" is m a perfectly competitive market. Currently,At the minimum of"Happy Katie"s AVC curve, q=l 8 and AVC=$2.00; At the minimumof its ATC curve, q=30 and ATC=$5.00. The market price for an ice cream is$3.50. With all these information in mind, please answer the following questions:

Z a) Is "Happy Katie" making a positive profit? Why or why not?b) Based on the information in the question and your answer in (a), draw a graph

i showingthe cu_e_'tual_h bf _-Happy Katie": Use the _, MC,curves as well as label th_l, profit-maximizing output level and economicprofit / loss area.

c) What range of prices will cause "Harmv Katie' t'" " 'Short-run? rrJ ,_ eave the ice cream industry n the

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eo,l ty.sdisc.ssedi.,hscourseW..ret eund.yingassumptions required to develop the marginal product and marginal cost curves using thistool? Explain each assumption. Use appropriate graphs to illustrate your answer.

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ECON 1123

Exam 2 _3 Lab Instructor

Spring 2008 Lab day/time _ : 17-.'. 2j,.3Dr. Holmes

Must be completed: On my honor, I affirm that I have neither given nor receivedinappropriate aid in the completion of tkis exam.

Name: Date: _[ _l [ 0"0

Short Answer / Essay Questions: Explain using graphs. Don't forget to label.

( _ 1. (20points)Blockheads, LLC is a producer of wooden art mannequins in a perfectly competitivemarket. The firm is currently operating at too small a scale, and is thus making a (slight)economic loss_given the current price. The firm is currently making planning decisions /-\(..7_regar-_-di_guse of land, capital, etc, and would like your input.a) Is the firm facing a long-run or short-run problem? Justify your answer. Draw two

graphs, one showing the market for art mannequins and the other showingBlockheads, LLC in their current situation. Be sure to label the price and quantity inboth graphs.

b) On the same two graphs from (a), show both the market and the firm in equilibrium.To reach this equilibrium, what should Blockheads, LLC do to its scale of operation?What will be Blockheads, LLC's economic profit in this equilibrium?

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2. (15 points)The perfect competition model is based oll five core assumptions. Please concisely listeach assumption, explain in your own words what each assumption means and alsoexplain each assumption's implication in the graphical model of Perfect Competition.

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..................... ............

ECON 1123 Name• ¢

Exam I Lab Instructor "TX-/¢W'_CcLLq-

Fall 2007 Labday/time "T_VKS _'_.'.*_oDr. Hulmes

Must be completed: On my honor, I affirm that I have neither ,given nor received

Short Answer/Essay Questions: Explain using graphs. Don't forget to label.

1. (15 points)For the behavioral assumptions that form the basis of Consumer Choice Theory:

a) List four of the assumptions.

b) Explain each assumption in one or two sentences.c) For one of the assumptions, provide an illustration utilizing a graph.

_,.L_PcW b_: I_H_INISH_N,_ I_i:tP_C%II,Ir_L _.V_-X_: _2__-- %'J_%TITV'rlC31_:

_N_tPP_NC( CV {Lvq _; C_N igor lIJ,t e P--S__cT.

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2. (15 points)Consider tile market for music CDs. When the price of CDs is $30 per unit., a consumerbuys 5 per )'ear; when the price falls to $ t 5 per unit: consumer buy 10per year.

L_ a) Calculate the price elastic_ of CDs, indicate whether it is pr ceinelastic or price elastic anyhow vour formula _nd all )our work.b) Use a graph to show & describe the relationship between CDs' price elasticity of

demand and its Total Revenue.

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(,,_-v_ES AS TH'_ _g-_C__oqxt6.__S.

•- ' ' 4 _- I ; ,

1. State the principle of dualit'y and how in applies to production and cost analysis ineconomics•

2. Draw a marginal product and marginal cost curve (on different axes, of course)that :_do not demonstrate the assumption that specialization of labor effects production.

' I_.

1

,,,,:'_:.. EXERCISE: UNIT I _j NAI(

•" " LAB INST.

LABTIME_ 12-:_©

Short Answer (Use graphs in your answers) h . •

1. Draw a supply and demand curve and show the equilibrium price and quantity.Suppose that a relevant price ceiling were imposed by the government. Show the "effects on the quantity supplied and demanded.

_I_I C_ J_'c'_. ,__.s_,.3..__b_,-_

2. Why would one expect that an increase in the price of movie tickets would cause anincrease in the demand for VCR movie rentals?

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for good X will shift.and explain them.

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4. Draw a hypothetical demand and supply curve for wheat. Show on the graph al._lof _,the effects of a change in technology that reduces the need for pesticides.

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