May 2016 1econ1000 Open Campusworksheet #1 (Covers Units 1 To 5)

Question 1

Classify

Question

May 2016 1

ECON1000 Open Campus

Worksheet #1 (Covers Units 1 to 5)

Question 1

Classify

the following as microeconomics or macroeconomics and provide a justification

for your choice.

(a) Research into why the growth rate of total production increased.

(b) A theory of how consumers decide what to buy.

(c) An analysis of IBM’s share of the personal computer market.

(d) Research on why interest rates in a country was unusually high.

(a) The local pizza restaurant is advertising a special. If you buy one individual sized

pizza, you get the next one at 25% off, the third one for 50% off and the fourth

one for 75% off. Your marginal benefit from eating pizza is shown in the table

below:

# Pizzas Marginal Benefit (MB) Marginal Cost (MC)

0 0

1 7 6

2 4 4.5

3 2 3

4 1 1.5

(i) If the price of a pizza is $6 how many should you buy?

(ii) Provide an example to justify your choice.

(b) John Amaker owns orange groves and hires pickers for a two-week period. The

output from the orange groves are shown in the table below:

Pickers Oranges picked

1 1000

2 2000

3 3000

4 3900

5 4700

6 5400

(i) What is the marginal product of the 2nd picker? the 6th picker?

(ii) When does diminishing returns start to set in? Explain.

May 2016 2

Question 3

Suppose that in an hour an American worker can produce 100 shirts or 20 computers,

while a Chinese worker can produce 100 shirts or 10 computers. If each country has 4

hours available, (put shirts on horizontal axis)

a) Graph the production possibilities curve for the United States. (3 marks)

b) Suppose that without trade the labour in each country spend half their time

producing each good. Identify this point on your graph. (2 marks)

c) If these countries were open to trade, which country would export shirts? Explain.

(6 marks)

d) How will specialization and trade make America and China better off?

(4 marks)

Question 4 (26 marks)

(a) Answer True or False to the following and provide a justification for your choice.

(i) The price of a good X rises, causing the demand for good Y to fall. The

two goods are therefore substitutes. (2 marks)

(ii) A shift in supply causes the price of a good to fall. The shift must have

been an increase in supply. (2 marks)

(iii) An increase in income would likely lead to an increase in the prices of

both normal and inferior goods. (3 marks)

(iv) If demand increases and supply increases at the same time, price will

clearly rise. (4 marks)

(v) The price of good A falls. This causes an increase in the price of good B.

Goods A and B are therefore complements. (4 marks)

(b) Suppose the market demand for pizza is given by Qd = 300 – 20P and the market

supply for pizza is given by Qs = 20P – 100.

(i) Calculate the equilibrium price and quantity. (4 marks)

(ii) Calculate consumer surplus at equilibrium. (3 marks)

(iii) Calculate producer surplus at equilibrium. (3 marks)

(iv) Determine total economic surplus. (1 mark)

May 2016 3

Question 5 (10 marks)

The government has decided that the free-market price of cheese is too low. Suppose the

government imposes a binding price floor in the cheese market.

a) Use a supply-and demand diagram to show the effect of this policy on the price of

cheese and the quantity of cheese sold. (3 marks)

b) Is there a shortage or surplus of cheese? (1 mark)

c) Farmers complain that the price floor has reduced their total revenue. Is this

possible? Explain. (2 marks)

d) In response to farmers’ complaints, the government agrees to purchase all of the

surplus cheese at the price floor. Who benefits from this new policy? Who loses?

Explain. (4 marks)

Question 6 (28 marks)

There is currently a thriving, unregulated market in Smartphone protective cases. The

supply and demand equations for this market is given below:

QD = 5000 – 2P

QS = -600 + 12P

The government decides to tax sellers of this product by imposing a $100 tax.

a) Represent the equilibrium price and quantity on a demand and supply diagram.

(3 marks)

b) Calculate the consumer and producer surplus before the tax. (4 marks)

c) How is this proposed tax going to affect the market for Smartphone cases – that

is, how will it affect the price of the cases and the amount of cases that are sold?

Illustrate on the same diagram in part a. (10 marks)

d) Considering that the government will earn revenue, overall, do you think that the

society benefits from such a move? Explain. (3 marks)

e) Calculate the consumer and producer surplus after the tax. (6 marks)

f) Calculate the deadweight loss of the tax. (2 marks)

TOTAL MARKS = 100

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